1
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________________ TO ____________________
COMMISSION FILE NUMBER 0-27501
THE TRIZETTO GROUP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 33-0761159
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
567 SAN NICOLAS DRIVE, SUITE 360
NEWPORT BEACH, CALIFORNIA 92660
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES AND ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (949) 719-2200
----------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934, during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
As of April 30, 2001, 37,750,820 shares, $0.001 par value per share, of the
registrant's common stock were outstanding.
================================================================================
2
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2001
INDEX
PAGE
----
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements:
Unaudited Condensed Consolidated Balance Sheets - as of
March 31, 2001 and December 31, 2000............................ 3
Unaudited Condensed Consolidated Statements of Operations for
the three months ended March 31, 2001 and 2000 ................. 4
Unaudited Condensed Consolidated Statements of Cash Flows for
the three months ended March 31, 2001 and 2000.................. 5
Notes to Unaudited Condensed Consolidated
Financial Statements............................................ 6
Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations....................................... 8
Item 3 - Quantitative and Qualitative Disclosures about Market Risk...... 11
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings............................................... 12
Item 2 - Changes in Securities and Use of Proceeds....................... 12
Item 6 - Exhibits and Reports on Form 8-K................................ 12
SIGNATURES............................................................... 13
2
3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
THE TRIZETTO GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
(UNAUDITED)
MARCH 31, DECEMBER 31,
2001 2000
--------- ------------
ASSETS
Current assets:
Cash and cash equivalents .............................. $ 29,494 $ 23,865
Short-term investments ................................. -- 3,019
Restricted cash ........................................ 1,701 1,500
Accounts receivable, net ............................... 23,052 18,102
Notes receivable ....................................... 743 2,263
Notes receivable from related party .................... 124 277
Prepaid expenses and other current assets .............. 5,121 4,444
Income tax receivable .................................. 449 449
--------- ---------
Total current assets ................................. 60,684 53,919
Property and equipment, net .............................. 26,387 25,623
Notes receivable ......................................... 230 313
Note receivable from related party ....................... 25 25
Other assets ............................................. 3,850 2,264
Goodwill and other intangible assets, net ................ 264,441 281,607
--------- ---------
Total assets ......................................... $ 355,617 $ 363,751
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term notes payable and lines of credit ........... $ 13,813 $ 12,432
Capital lease obligations .............................. 2,292 2,123
Accounts payable ....................................... 7,871 9,502
Accrued liabilities .................................... 17,068 20,230
Income taxes payable ................................... 403 482
Deferred revenue ....................................... 34,310 16,991
--------- ---------
Total current liabilities ............................ 75,757 61,760
Long-term notes payable .................................. 234 264
Deferred taxes ........................................... 20,082 25,141
Capital lease obligations ................................ 3,377 3,303
Deferred revenue ......................................... 1,630 1,834
Other long-term liabilities .............................. 1,900 2,019
--------- ---------
Total liabilities .................................... 102,980 94,321
--------- ---------
Stockholders' equity:
Common stock ............................................. 37 35
Additional paid-in capital ............................... 330,804 330,061
Notes receivable from stockholders ....................... (41) (41)
Deferred stock compensation .............................. (8,864) (9,263)
Accumulated other comprehensive income ................... 5 8
Accumulated deficit ...................................... (69,304) (51,370)
--------- ---------
Total stockholders' equity ........................... 252,637 269,430
--------- ---------
Total liabilities and stockholders' equity ......... $ 355,617 $ 363,751
========= =========
See Notes to Unaudited Condensed Consolidated Financial Statements
3
4
THE TRIZETTO GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
---------------------
2001 2000
-------- --------
REVENUE:
Recurring revenue ............................... $ 30,323 $ 11,967
Non-recurring revenue ........................... 15,716 5,750
-------- --------
Total revenue ..................................... 46,039 17,717
-------- --------
COST OF REVENUE:
Recurring revenue (1) ........................... 24,271 11,365
Non-recurring revenue (2) ....................... 9,656 4,071
-------- --------
Total cost of revenue ............................. 33,927 15,436
-------- --------
GROSS PROFIT ...................................... 12,112 2,281
-------- --------
OPERATING EXPENSES:
Research and development (3) .................... 4,844 1,640
Selling, general and administrative (4) ......... 13,010 6,595
Amortization of goodwill and acquired intangibles 17,284 1,627
Write-off of acquired in-process technology ..... -- 536
-------- --------
Total operating expenses .......................... 35,138 10,398
-------- --------
LOSS FROM OPERATIONS .............................. (23,026) (8,117)
Interest income ................................... 408 263
Interest expense .................................. (334) (27)
-------- --------
LOSS BEFORE BENEFIT FROM INCOME TAXES ............. (22,952) (7,881)
Benefit from income taxes ......................... (5,018) --
-------- --------
NET LOSS .......................................... $(17,934) $ (7,881)
======== ========
Net loss per share:
Basic and diluted ............................... $ (0.50) $ (0.42)
======== ========
Shares used in computing net loss per share:
Basic and diluted ............................... 35,764 18,888
======== ========
- --------------
(1) Cost of recurring revenue includes $216 and $103 of amortization of
deferred stock compensation for the quarters ended March 31, 2001 and 2000,
respectively.
(2) Cost of non-recurring revenue includes $82 and $71 of amortization of
deferred stock compensation for the quarters ended March 31, 2001 and 2000,
respectively.
(3) Research and development includes $63 and $9 of amortization of deferred
stock compensation for the quarters ended March 31, 2001 and 2000,
respectively.
(4) Selling, general and administrative includes $508 and $281 of amortization
of deferred stock compensation for the quarters ended March 31, 2001 and
2000, respectively.
See Notes to Unaudited Condensed Consolidated Financial Statements
4
5
THE TRIZETTO GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
--------------------
2001 2000
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ................................................... $(17,934) $ (7,881)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Provision for doubtful accounts ....................... 373 203
Reserve for sales returns ............................. 126 --
Amortization of deferred stock compensation ........... 869 464
Amortization of deferred stock warrants ............... 61 --
Amortization of capitalized research and development .. 42 --
Write-off of acquired in-process technology ........... -- 536
Depreciation and amortization of property and equipment 2,022 1,101
Amortization of goodwill and acquired intangibles ..... 17,284 1,627
Gain on sale of equipment ............................. (20) --
Deferred taxes ........................................ (5,059) --
CHANGES IN OPERATING ASSETS AND LIABILITIES:
Restricted cash ....................................... (201) --
Accounts receivable ................................... (5,317) (465)
Prepaid expenses and other current assets ............. (1,552) 280
Other assets .......................................... (808) (157)
Notes receivable ...................................... 1,737 (13)
Accounts payable ...................................... (1,631) (760)
Accrued liabilities ................................... (2,080) 611
Deferred revenue ...................................... 17,115 74
-------- --------
Net cash provided by (used in) operating activities ........ 5,027 (4,380)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Sale of short-term and long-term investments, net .......... 3,019 1,979
Purchase of property and equipment and software licenses ... (2,002) (1,111)
Acquisitions, net of cash acquired ......................... -- (1,281)
Payment of acquisition-related costs ....................... (1,025) (1,767)
-------- --------
Net cash used in investing activities ...................... (8) (2,180)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on notes payable .................................. (193) (523)
Proceeds from line of credit ............................... -- 75
Proceeds from revolving line of credit, net ................ 1,260 --
Payments on equipment line of credit ....................... (212) (71)
Payments on capital leases ................................. (511) (258)
Proceeds from exercise of employee stock options ........... 269 40
-------- --------
Net cash provided by (used in) financing activities ........ 613 (737)
-------- --------
Net increase (decrease) in cash and cash equivalents ....... 5,632 (7,297)
Effect of exchange rate changes on cash and cash equivalents (3) --
Cash and cash equivalents, beginning of period ............. 23,865 18,849
-------- --------
Cash and cash equivalents, end of period ................... $ 29,494 $ 11,552
======== ========
See Notes to Unaudited Condensed Consolidated Financial Statements
5
6
THE TRIZETTO GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
1. BASIS OF PREPARATION
The accompanying unaudited condensed consolidated financial statements have
been prepared by The TriZetto Group, Inc. (the "Company") in accordance with
generally accepted accounting principles for interim financial information that
are consistent in all material respects with those applied in the Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 2000 and
pursuant to the instructions to Form 10-Q and Article 10 promulgated by
Regulation S-X of the Securities and Exchange Commission (the "SEC").
Accordingly, they do not include all of the information and notes to financial
statements required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three months ended March 31, 2001 are
not necessarily indicative of the results that may be expected for the year
ending December 31, 2001, or for any future period. The financial statements and
notes should be read in conjunction with the consolidated financial statements
and notes thereto included in the Company's Form 10-K as filed with the SEC on
April 2, 2001.
2. COMPUTATION OF LOSS PER SHARE
Basic earnings per share ("EPS") is computed by dividing net loss by the
weighted average number of common shares outstanding for the period. Diluted EPS
reflects the potential dilution that could occur from common shares issuable
through stock options, warrants and other convertible securities. The following
is a reconciliation of the numerator (net loss) and the denominator (number of
shares) used in the basic and diluted EPS calculations (in thousands, except per
share data):
THREE MONTHS ENDED
MARCH 31,
---------------------
2001 2000
-------- --------
BASIC AND DILUTED:
Net loss ................................. $(17,934) $ (7,881)
-------- --------
Weighted average common shares outstanding 35,764 18,888
-------- --------
Net loss per share ....................... $ (0.50) $ (0.42)
-------- --------
ANTIDILUTIVE SECURITIES:
Shares held in escrow .................... 538 535
Options to purchase common stock ......... 6,228 3,479
Unvested portion of restricted stock ..... 378 --
Common stock subject to repurchase ....... -- 1,699
Warrants ................................. 300 --
-------- --------
7,444 5,713
======== ========
3. COMPREHENSIVE INCOME
The Company has adopted the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 130, "Comprehensive Income." SFAS 130 establishes
standards for reporting and display of comprehensive income and its components
for general-purpose financial statements. Comprehensive income is defined as net
income plus all revenues, expenses, gains and losses from non-owner sources that
are excluded from net income in accordance with generally accepted accounting
principles. Total comprehensive loss was $17,937 and $7,881 for the three months
ended March 31, 2001 and 2000, respectively, which includes the net loss for
each period and the foreign currency translation.
6
7
THE TRIZETTO GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
4. SUPPLEMENTAL CASH FLOW DISCLOSURES
THREE MONTHS ENDED
MARCH 31,
------------------
2001 2000
----- ----
SUPPLEMENTAL DISCLOSURES FOR CASH FLOW INFORMATION
Cash paid for interest ............................ 357 70
NONCASH INVESTING AND FINANCING ACTIVITIES
Assets acquired through capital lease ............. 809 87
Deferred stock compensation ....................... 474 --
Common stock issued for acquisition of Healthcare
Media Enterprises ............................... -- 3,500
Common stock issued to Healthcare Media Enterprises
for 2000 revenue commitment ..................... 188 --
5. SUBSEQUENT EVENT
On April 12, 2001, the Company consummated an Agreement and Plan of Merger
(the "Merger Agreement") among the Company, Imare Acquisition Corp. ("Imare"), a
wholly owned subsidiary of the Company, Trustco Holdings, Inc. ("Trustco"), and
Infotrust Company ("Infotrust"), a wholly owned subsidiary of Trustco, pursuant
to which Imare merged with and into Infotrust resulting in Infotrust becoming a
wholly owned subsidiary of the Company. The purchase price consisted of 923,077
shares of the Company's common stock, 138,462 shares of which are held in escrow
and are scheduled to be released in April 2002. In the event that the fair
market value of the common stock as of the one-year and two-year anniversaries
is less than $13.00, the Company shall issue additional shares of common stock,
not to exceed an aggregate of 138,462 additional shares, based on the difference
between $13.00 and the fair market value, as defined in the Merger Agreement, of
the Company's common stock for the five days prior to each anniversary date.
The acquisition will be accounted for using the purchase method of
accounting, and accordingly, the purchase price will be allocated to the
tangible and intangible assets acquired and liabilities assumed on the basis of
their estimated fair values on the acquisition date. The excess of the purchase
price over the estimated fair value of the tangible and intangible assets
purchased and liabilities assumed will be allocated to goodwill upon completion
of an independent valuation of the intangible assets.
7
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS THAT HAVE BEEN MADE PURSUANT
TO THE PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. THESE
STATEMENTS RELATE TO FUTURE EVENTS OR OUR FUTURE FINANCIAL PERFORMANCE. IN SOME
CASES, YOU CAN IDENTIFY FORWARD-LOOKING STATEMENTS BY TERMINOLOGY SUCH AS "MAY",
"WILL", "SHOULD", "FORECASTS", "EXPECTS", "PLANS", "ANTICIPATES", "BELIEVES",
"ESTIMATES", "PREDICTS", "POTENTIAL", OR "CONTINUE" OR THE NEGATIVE OF SUCH
TERMS AND OTHER COMPARABLE TERMINOLOGY. THESE STATEMENTS ARE ONLY PREDICTIONS.
ACTUAL EVENTS OR RESULTS MAY DIFFER MATERIALLY. IN EVALUATING THESE STATEMENTS,
YOU SHOULD SPECIFICALLY CONSIDER VARIOUS FACTORS, INCLUDING THE RISKS OUTLINED
IN OUR FORM 10-K UNDER THE CAPTION "RISK FACTORS." THESE FACTORS MAY CAUSE OUR
ACTUAL EVENTS TO DIFFER MATERIALLY FROM ANY FORWARD-LOOKING STATEMENT. WE DO NOT
UNDERTAKE TO UPDATE ANY FORWARD-LOOKING STATEMENT.
OVERVIEW
We provide industry-leading information technology solutions and services to
the healthcare industry, including remotely hosted applications, packaged,
proprietary software, an Internet platform, and consulting and business
outsourcing services. Our customers include managed care organizations,
preferred provider organizations, third-party administrators, provider groups
and physician practice management companies.
Our revenue is classified into two categories: (i) recurring or multi-year
contractually-based revenue and (ii) revenue generated from non-recurring
agreements.
Recurring revenue from application services is subscription-based and billed
monthly over a contract term of typically three to seven years. The amount
billed monthly is based on units of volume, such as numbers of physicians,
members or desktops covered by each contract. Recurring software maintenance
revenue is typically based on one-year renewable contracts. Recurring revenue is
recognized ratably over the term of the contract. Non-recurring revenue from
consulting services is billed principally on either a time and materials or a
fixed fee basis and is recognized as the services are performed. Non-recurring
revenue from software license sales is recognized when revenue recognition
criteria have been satisfied. Cash received in excess of revenue recognized is
recorded as deferred revenue.
Cost of revenue are those costs related to the products and services we
provide to our customers and costs associated with the operation and maintenance
of our customer connectivity centers. These costs include salaries and related
expenses for consulting personnel, customer connectivity centers personnel,
customer support personnel, application software license fees, amortization of
capitalized software development costs, telecommunications costs and maintenance
costs.
Research and development expenses are salaries and related expenses
associated with the development of software applications prior to establishment
of technological feasibility and include compensation paid to engineering
personnel and fees to outside contractors and consultants. Costs incurred
internally in the development of our software products are expensed as incurred
as research and development expenses until technological feasibility has been
established, at which time any future production costs are properly capitalized
and amortized to cost of revenue based on current and future revenue over the
remaining estimated economic life of the product.
Selling, general and administrative expenses consist primarily of salaries
and related expenses for sales, account management, marketing, administrative,
finance, legal, human resources and executive personnel, commissions, expenses
for marketing programs and trade shows and fees for professional services.
8
9
RESULTS OF OPERATIONS
QUARTER ENDED MARCH 31, 2001 COMPARED TO THE QUARTER ENDED MARCH 31, 2000.
REVENUE. Total revenue in the first quarter of 2001 increased $28.3 million,
or 160%, to $46.0 million from $17.7 million for the same period in 2000. Of
this increase, $26.5 million was generated by the acquisitions of Erisco Managed
Care Technologies, Inc. ("Erisco") and Resource Information Management Systems,
Inc. ("RIMS") in the fourth quarter of 2000. The remaining increase of $1.8
million primarily represented net growth in our ASP solutions business.
Recurring revenue in the first quarter of 2001 increased $18.3 million, or
153%, to $30.3 million from $12.0 million for the same period in 2000. Of this
increase, $14.5 million was generated by our acquisitions of Erisco and RIMS.
The remaining increase of $3.8 million primarily represented growth in our ASP
solutions business from one customer of $2.8 million and $1.0 million resulted
from the signings of long-term contracts by two customers.
Non-recurring revenue in the first quarter of 2001 increased $10.0 million,
or 173%, to $15.7 million from $5.7 million for the same period in 2000. Of this
increase, $12.0 million was generated by our acquisitions of Erisco and RIMS,
which was offset in part by a decrease of $2.0 million of consulting services
revenue provided by our transformation services group to a payer customer as
part of its monthly, recurring fee under a long-term contract.
COST OF REVENUE. Cost of revenue in the first quarter of 2001 increased
$18.5 million, or 120%, to $33.9 million from $15.4 million for the same period
in 2000. Of this increase, $13.6 million represented incremental costs
associated with our acquisitions of Erisco and RIMS. The remaining increase of
$4.9 million was primarily due to the costs incurred to support the overall
expansion of our ASP solutions business. As a percentage of total revenue, cost
of revenue approximated 74% in the first quarter of 2001 and 87% in the first
quarter of 2000.
Cost of recurring revenue in the first quarter of 2001 increased $12.9
million, or 114%, to $24.3 million from $11.4 million for the same period in
2000. Of this increase, $8.1 million represented incremental costs associated
with our acquisitions of Erisco and RIMS. The remaining increase of $4.8 million
was primarily due to additional expenses for personnel and facilities to support
our growing ASP solutions business, as well as increased network operation
costs, software license fees, and other costs required to support our increased
consulting services revenue. As a percentage of recurring revenue, cost of
recurring revenue approximated 80% in the first quarter of 2001 and 95% in the
first quarter of 2000.
Cost of non-recurring revenue in the first quarter of 2001 increased $5.6
million, or 137%, to $9.7 million from $4.1 million for the same period in 2000.
The increase was primarily due to incremental costs associated with our
acquisitions of Erisco and RIMS. As a percentage of non-recurring revenue, cost
of non-recurring revenue approximated 61% in the first quarter of 2001 and 71%
in the first quarter of 2000.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
increased $3.2 million, or 195%, to $4.8 million from $1.6 million for the same
period in 2000. Of this increase, $3.6 million represented incremental research
and development costs associated with our acquisitions of Erisco and RIMS which
was offset in part by a decrease in development expense related to our declining
development of in-house Novalis products. As a percentage of total revenue,
research and development expenses approximated 11% in the first quarter of 2001
and 9% in the first quarter of 2000.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses in the first quarter of 2001 increased $6.4 million, or
97%, to $13.0 million from $6.6 million for the same period in 2000. Of this
increase, $3.6 million represented incremental costs associated with our
acquisitions of Erisco and RIMS. The remaining increase of $2.8 million was due
primarily to growing our sales force and expanding our market presence while
introducing new products and integrated solutions to the market. As a percentage
of total revenue, selling, general and administrative expenses approximated 28%
in the first quarter of 2001 and 37% in the first quarter of 2000.
9
10
AMORTIZATION OF GOODWILL AND ACQUIRED INTANGIBLES. Amortization of goodwill
and acquired intangibles in the first quarter of 2001 increased $15.7 million,
or 962% to $17.3 million from $1.6 million for the same period in 2000. Of this
increase, $15.3 million represented incremental costs associated with our
acquisitions of Erisco and RIMS. The remaining increase of $358,000 was due
primarily to the increase of amortization of goodwill from other acquisitions.
WRITE OFF OF ACQUIRED IN-PROCESS TECHNOLOGY. Write off of acquired
in-process technology was zero in the first quarter of 2001 and $536,000 for the
same period in 2000. Our acquisition of HME in January 2000 resulted in an
excess of purchase price over the fair market value of the net assets acquired
of $6.8 million. Of this amount, $536,000 was allocated to acquired in-process
technology and was written off in January 2000.
INTEREST INCOME. Interest income in the first quarter of 2001 increased
$145,000, or 55%, to $408,000 from $263,000 for the same period in 2000. The
increase was due to the increase in cash available for investing which resulted
primarily from the $32.0 million of cash received from our acquisition of
Erisco.
INTEREST EXPENSE. Interest expense in the first quarter of 2001 increased
$307,000, or 1,137%, to $334,000 from $27,000 for the same period in 2000. The
increase was primarily due to borrowings under our revolving line of credit, as
well as additional borrowings on new capital lease agreements.
BENEFIT FROM INCOME TAXES. Benefit from income taxes was $5.0 million in the
first quarter of 2001 compared to zero for the same period in 2000. The benefit
was primarily generated from the net reduction of deferred tax liabilities,
primarily resulting from the amortization of intangible assets relating to the
Erisco and RIMS acquisitions.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, we have financed our operations primarily through a
combination of cash from operations, private financings, an initial public
offering of our common stock and cash obtained from our acquisition of Erisco.
As of March 31, 2001, we had approximately $31.2 million of cash, cash
equivalents and short-term investments, which includes $1.7 million in
restricted cash.
Cash provided by operating activities in the first quarter of 2001 was $5.0
million. Cash provided during this period was primarily attributable to net
losses of $17.9 million, which was more than offset in part by depreciation and
amortization, provision for doubtful accounts, reserve for sales returns,
amortization of deferred stock compensation, amortization of goodwill and
acquired intangibles, write off of in-process technology, deferred taxes and
other changes in operating assets and liability accounts.
The cash used in investing activities of $3.0 million in the first quarter
of 2001 was primarily the result of our purchase of $2.0 million in property and
equipment and software licenses and $1.0 million of payments of
acquisition-related costs resulting from our acquisitions of Erisco and RIMS.
This decrease was offset by the net sales of $3.0 million in short-term equity
investments.
The cash provided by financing activities of $613,000 in the first quarter
of 2001 was primarily the result of $1.3 million of net proceeds from our
revolving line of credit and $269,000 in proceeds from the issuance of common
stock related to employee exercise of stock options. The increase in cash from
these proceeds was reduced by payments made on the line of credit as well as
principal payments on notes payable and capital lease obligations of $916,000.
10
11
In the third quarter of 2000, we entered into a revolving credit facility
with a maximum principal amount of $15.0 million which was amended in the fourth
quarter of 2000 to include Erisco and RIMS as additional borrowers. The
revolving credit facility is collateralized by all of our receivables and
expires in September 2002. Borrowings under the revolving credit facility are
limited to and shall not exceed 80% of qualified accounts as defined in the loan
documents. Interest on the revolving credit facility is prime rate plus 1.5%.
Interest is payable monthly in arrears on the first business day of the month.
The revolving credit facility contains certain covenants, including minimum
tangible net worth as defined, the generation of specified monthly net earnings
before interest, depreciation and amortization, and minimum cash balances. Our
current credit facilities prohibit us from paying cash dividends without our
lender's prior consent. As of March 31, 2001, we had outstanding borrowings on
the revolving credit facility of $12.7 million.
In December 1999, we entered into a lease line of credit with a financial
institution. This lease line of credit was specifically established to finance
computer equipment purchases. The lease line of credit had a limit of $2.0
million and expired as scheduled in December 2000. Borrowings under the lease
line of credit at March 31, 2001 totaled approximately $1.4 million, and are
secured by the assets under lease. In accordance with the terms of the lease
line of credit, the outstanding balance is being repaid in monthly installments
of principal and interest through June 2003.
In March 1999, we entered into a revolving line of credit agreement with a
financial institution. In October 1999, we entered into a subsequent agreement
which increased the amount available under the line of credit. The line of
credit has a total capacity of $3.0 million and expires in December 2001.
Borrowings under the line of credit bear interest at prime plus 0.50% and are
collateralized by compensating cash balances on deposit. Interest is payable
monthly as it accrues. The line of credit agreement contains covenants that we
must adhere to during the term of the agreement including restrictions on the
payment of dividends. As of March 31, 2001, there were no outstanding borrowings
on the line of credit.
As of March 31, 2001, we have outstanding seven standby letters of credit in
the aggregate amount of $1.7 million which serve as security deposits for our
capital leases. We are required to maintain a cash balance equal to the
outstanding letters of credit, which is classified as restricted cash on the
balance sheet.
Based on our current operating plan, we believe existing cash, cash
equivalents and short-term investments balances, cash forecasted by management
to be generated by operations and borrowings from existing credit facilities
will be sufficient to meet our working capital and capital requirements for at
least the next twelve months. However, if events or circumstances occur such
that the we do not meet our operating plan as expected, we may be required to
seek additional capital and/or to reduce certain discretionary spending, which
could have a material adverse effect on our ability to achieve our intended
business objectives. We may seek additional financing, which may include debt
and/or equity financing or funding through third party agreements. There can be
no assurance that any additional financing will be available on acceptable
terms, if at all. Any equity financing may result in dilution to existing
stockholders and any debt financing may include restrictive covenants.
ITEM 3 -- QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk represents the risk of loss that may impact our financial
position, operating results, or cash flows due to adverse changes in financial
and commodity market prices and rates. We are exposed to market risk due to
changes in United States interest rates. This exposure is directly related to
our normal operating and funding activities. Historically, and as of March 31,
2001, we have not used derivative instruments or engaged in hedging activities.
The interest rate on our $15.0 million revolving credit facility is prime
plus 1.5%. The revolving credit facility expires in September 2002. As of March
31, 2001, we had outstanding borrowings on the revolving line of credit of $12.7
million. Changes in interest rates have no impact on our other debt as all of
our other notes have fixed interest rates between 8% and 14%.
We manage interest rate risk by investing excess funds in cash equivalents
and short-term investments bearing variable interest rates, which are tied to
various market indices. As a result, we do not believe that near-term changes in
interest rates will result in a material effect on our future earnings, fair
values or cash flows.
11
12
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time, we may be involved in litigation relating to claims
arising out of our operations in the normal course of business. As of the date
of this report, we are not a party to any legal proceedings, the adverse outcome
of which, in management's opinion, individually or in the aggregate, would have
a material adverse effect on our results of operations or financial position.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
RECENT SALES OF UNREGISTERED SECURITIES
On January 4, 2001, we issued 11,687 shares of our common stock to former
shareholders of Healthcare Media Enterprises, Inc. On February 23, 2001, we
issued 53,117 restricted shares of our common stock to three employees in
connection with performance bonuses.
No cash proceeds were received from any of the stock sales referred to
above.
We did not employ any underwriters, brokers or finders in connection with
any of the transactions set forth above.
The sales of the securities listed above were deemed to be exempt from
registration under the Securities Act in reliance on Section 4(2) of the
Securities Act, or Regulation D promulgated thereunder. The recipients of
securities in each such transaction represented their intentions to acquire the
securities for investment only and not with a view to or for sale in connection
with any distribution thereof and appropriate legends were affixed to the
instruments representing such securities issued in such transactions. All
recipients had adequate access, through their relationships with us, to
information about us.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits. The following exhibits are filed as a part of this report:
EXHIBIT
NUMBER DESCRIPTION
------- -----------
10.1 Amendment to Bank One Credit Facility, dated March 29, 2001
(including Business Loan Agreement)
(b) Reports on Form 8-K
On February 14, 2001, we filed a Form 8-K/A containing financial statements
of the business acquired and pro forma financial information relating to our
acquisition of Resource Information Systems, Inc., as previously reported on a
Form 8-K filed on December 18, 2000.
There were no other items to be reported under Part II of this report.
12
13
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE TRIZETTO GROUP, INC.
Date: May 14, 2001 By: /s/ MICHAEL J. SUNDERLAND
--------------------------------
Michael J. Sunderland
Chief Financial Officer
(Principal Financial Officer
and Duly Authorized Officer)
13
14
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
------- -----------
10.1 Amendment to Bank One Credit Facility, dated March 29, 2001
(including Business Loan Agreement)