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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 JUNE 30, 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
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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 July 31, 2001, 44,396,835 shares, $0.001 par value per share, of the
registrant's common stock were outstanding.
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FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2001
INDEX
PAGE
----
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements:
Unaudited Condensed Consolidated Balance Sheets - as of
June 30, 2001 and December 31, 2000.............................. 3
Unaudited Condensed Consolidated Statements of Operations
for the Three and Six Months Ended June 30, 2001 and 2000 ....... 4
Unaudited Condensed Consolidated Statements of Cash Flows
for the Six months Ended June 30, 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....... 13
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings................................................ 14
Item 2 - Changes in Securities and Use of Proceeds........................ 14
Item 4 - Submission of Matters to a Vote of Securityholders............... 14
Item 5 - Other Information................................................ 15
Item 6 - Exhibits and Reports on Form 8-K................................. 15
SIGNATURES................................................................ 16
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
THE TRIZETTO GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
(UNAUDITED)
JUNE 30, DECEMBER 31,
2001 2000
--------- -----------
ASSETS
Current assets:
Cash and cash equivalents ........................ $ 74,948 $ 23,865
Short-term investments ........................... -- 3,019
Restricted cash .................................. 1,606 1,500
Accounts receivable, net ......................... 31,418 18,102
Notes receivable ................................. 350 2,263
Notes receivable from related parties ............ 124 277
Prepaid expenses and other current assets ........ 4,869 4,444
Income tax receivable ............................ 449 449
--------- ---------
Total current assets ......................... 113,764 53,919
Property and equipment, net .......................... 29,845 25,623
Notes receivable ..................................... 35 313
Note receivable from related party ................... -- 25
Other assets ......................................... 5,235 2,264
Goodwill and other intangible assets, net ............ 255,510 281,607
--------- ---------
Total assets ................................. $ 404,389 $ 363,751
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term notes payable and lines of credit ..... $ 14,353 $ 12,432
Capital lease obligations ........................ 2,212 2,123
Accounts payable ................................. 6,049 9,502
Accrued liabilities .............................. 23,023 20,230
Income taxes payable ............................. 279 482
Deferred revenue ................................. 33,227 16,991
--------- ---------
Total current liabilities .................... 79,143 61,760
Long-term notes payable .............................. 202 264
Deferred taxes ....................................... 18,536 25,141
Capital lease obligations ............................ 3,015 3,303
Deferred revenue ..................................... 2,191 1,834
Other long-term liabilities .......................... 1,376 2,019
--------- ---------
Total liabilities ............................ 104,463 94,321
--------- ---------
Stockholders' equity:
Common stock ......................................... 44 35
Additional paid-in capital ........................... 392,112 330,061
Notes receivable from stockholders ................... (41) (41)
Deferred stock compensation .......................... (7,909) (9,263)
Accumulated other comprehensive income ............... 5 8
Accumulated deficit .................................. (84,285) (51,370)
--------- ---------
Total stockholders' equity ................... 299,926 269,430
--------- ---------
Total liabilities and stockholders' equity $ 404,389 $ 363,751
========= =========
See Notes to Unaudited Condensed Consolidated Financial Statements
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THE TRIZETTO GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------- ----------------------
2001 2000 2001 2000
-------- -------- -------- --------
REVENUE:
Recurring revenue ............................... $ 33,333 $ 12,377 $ 63,656 $ 24,344
Non-recurring revenue ........................... 19,986 5,382 35,702 11,132
-------- -------- -------- --------
Total revenue ....................................... 53,319 17,759 99,358 35,476
-------- -------- -------- --------
COST OF REVENUE:
Recurring revenue (1) ........................... 24,736 11,505 49,006 22,871
Non-recurring revenue (2) ....................... 11,473 3,827 21,129 7,898
-------- -------- -------- --------
Total cost of revenue ............................... 36,209 15,332 70,135 30,769
-------- -------- -------- --------
GROSS PROFIT ........................................ 17,110 2,427 29,223 4,707
-------- -------- -------- --------
OPERATING EXPENSES:
Research and development (3) .................... 4,721 1,575 9,564 3,215
Selling, general and administrative (4) ......... 13,571 8,021 26,583 14,614
Amortization of goodwill and acquired intangibles 16,985 1,670 34,269 3,298
Write-off of acquired in-process technology ..... -- -- -- 536
-------- -------- -------- --------
Total operating expenses ............................ 35,277 11,266 70,416 21,663
-------- -------- -------- --------
LOSS FROM OPERATIONS ................................ (18,167) (8,839) (41,193) (16,956)
Interest income ..................................... 450 346 858 609
Interest expense .................................... (364) (156) (698) (183)
-------- -------- -------- --------
LOSS BEFORE BENEFIT FROM INCOME TAXES ............... (18,081) (8,649) (41,033) (16,530)
Benefit from income taxes ........................... (3,100) -- (8,118) --
-------- -------- -------- --------
NET LOSS ............................................ $(14,981) $ (8,649) $(32,915) $(16,530)
======== ======== ======== ========
Net loss per share:
Basic and diluted ............................... $ (0.40) $ (0.43) $ (0.90) $ (0.85)
======== ======== ======== ========
Shares used in computing net loss per share:
Basic and diluted ............................... 37,298 20,225 36,535 19,557
======== ======== ======== ========
- ----------------
(1) Cost of recurring revenue for the three months ended June 30, 2001 and
2000, includes $216 and $111 of amortization of deferred stock
compensation, respectively. Cost of recurring revenue for the six months
ended June 30, 2001 and 2000, includes $431 and $215 of amortization of
deferred stock compensation, respectively.
(2) Cost of non-recurring revenue for the three months ended June 30, 2001 and
2000, includes $190 and $71 of amortization of deferred stock compensation,
respectively. Cost of recurring revenue for the six months ended June 30,
2001 and 2000, includes $273 and $142 of amortization of deferred stock
compensation, respectively.
(3) Research and development for the three months ended June 30, 2001 and 2000,
includes $64 and $9 of amortization of deferred stock compensation,
respectively. Cost of recurring revenue for the six months ended June 30,
2001 and 2000, includes $127 and $18 of amortization of deferred stock
compensation, respectively.
(4) Selling, general and administrative for the three months ended June 30,
2001 and 2000, includes $442 and $237 of amortization of deferred stock
compensation, respectively. Cost of recurring revenue for the six months
ended June 30, 2001 and 2000, includes $950 and $517 of amortization of
deferred stock compensation, respectively.
See Notes to Unaudited Condensed Consolidated Financial Statements
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THE TRIZETTO GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
SIX MONTHS ENDED
JUNE 30,
--------------------
2001 2000
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ................................................... $(32,915) $(16,530)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Provision for doubtful accounts ....................... 926 440
Reserve for sales returns ............................. 305 --
Amortization of deferred stock compensation ........... 1,781 892
Amortization of deferred stock warrants ............... 121 --
Write-off of acquired in-process technology ........... -- 536
Depreciation and amortization of property and equipment 4,395 2,198
Amortization of goodwill and acquired intangibles ..... 34,269 3,298
Gain on sale of property and equipment ................ (20) --
Loss on disposal of property and equipment ............ 5 151
Forgiveness of note receivable ........................ 30 --
Deferred taxes ........................................ (8,158) --
CHANGES IN OPERATING ASSETS AND LIABILITIES:
Restricted cash ....................................... (106) --
Accounts receivable ................................... (12,039) (1,276)
Income tax receivable ................................. -- (14)
Prepaid expenses and other current assets ............. (368) 90
Notes receivable ...................................... 1,872 (22)
Other assets .......................................... (2,266) (224)
Accounts payable ...................................... (3,566) (842)
Accrued liabilities ................................... 2,994 1,397
Deferred revenue ...................................... 16,574 38
-------- --------
Net cash provided by (used in) operating activities ........ 3,834 (9,868)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Sale of short-term investments, net ........................ 3,019 3,753
Purchase of property and equipment and software licenses ... (3,710) (3,015)
Issuance of long-term note receivable ...................... -- (214)
Acquisitions, net of cash acquired ......................... 846 (1,281)
Payment of acquisition-related costs ....................... (1,645) (3,017)
-------- --------
Net cash used in investing activities ...................... (1,490) (3,774)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on notes payable .................................. (462) (600)
Proceeds from line of credit ............................... -- 2,756
Proceeds from revolving line of credit, net ................ 1,961 --
Proceeds from equipment line of credit ..................... -- 1,164
Payments on capital leases ................................. (1,066) (517)
Payments on line of credit ................................. -- (75)
Payments on equipment line of credit ....................... (430) (187)
Proceeds from issuance of common stock, net ................ 690 515
Proceeds from exercise of employee stock options ........... 472 172
Proceeds from issuance of common stock, net ................ 47,577 --
-------- --------
Net cash provided by financing activities .................. 48,742 3,228
-------- --------
Net increase (decrease) in cash and cash equivalents ....... 51,086 (10,414)
Effect of exchange rate changes on cash and cash equivalents (3) (2)
Cash and cash equivalents, beginning of period ............. 23,865 18,849
-------- --------
Cash and cash equivalents, end of period ................... $ 74,948 $ 8,433
======== ========
See Notes to Unaudited Condensed Consolidated Financial Statements
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THE TRIZETTO GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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/A 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 and six months ended June 30,
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/A as
filed with the SEC on June 11, 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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------- ----------------------
2001 2000 2001 2000
-------- -------- -------- --------
BASIC AND DILUTED:
Net loss ................................. $(14,981) $ (8,649) $(32,915) $(16,530)
-------- -------- -------- --------
Weighted average common shares outstanding 37,298 20,225 36,535 19,557
-------- -------- -------- --------
Net loss per share ....................... $ (0.40) $ (0.43) $ (0.90) $ (0.85)
-------- -------- -------- --------
ANTIDILUTIVE SECURITIES:
Shares held in escrow .................... 676 535 676 535
Options to purchase common stock ......... 6,278 3,495 6,278 3,495
Unvested portion of restricted stock ..... 372 -- 372 --
Warrants ................................. 300 -- 300 --
-------- -------- -------- --------
7,626 4,030 7,626 4,030
======== ======== ======== ========
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 $14,981 and $8,651 for the three months
ended June 30, 2001 and 2000, respectively, and $32,918 and $16,532 for the six
months ended June 30, 2001 and 2000, respectively, which includes the net loss
for each period and the foreign currency translation.
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THE TRIZETTO GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. SUPPLEMENTAL CASH FLOW DISCLOSURES
SIX MONTHS ENDED
JUNE 30,
------------------
2001 2000
------- ------
SUPPLEMENTAL DISCLOSURES FOR CASH FLOW INFORMATION (IN THOUSANDS)
Cash paid for interest .................................................... $ 718 $ 236
Cash paid for income taxes ................................................ 191 38
NONCASH INVESTING AND FINANCING ACTIVITIES (IN THOUSANDS)
Assets acquired through capital lease ................................... 979 175
Assets acquired through debt financing .................................. 328 --
Deferred stock compensation ............................................. 429 --
Common stock issued for acquisition of Healthcare Media Enterprises, Inc. -- 3,500
Common stock issued to Healthcare Media Enterprises, Inc. for 2000
revenue commitment .................................................... 188 --
Common stock issued for acquisition of Infotrust Company ................ 12,890 --
5. ACQUISITION
On April 12, 2001, the Company acquired all of the issued and outstanding
shares of Infotrust Company ("Infotrust") from Trustco Holdings, Inc. Infotrust
serves healthcare payers, providing hosted applications services and outsourcing
of essential administrative processes. The purchase price of approximately $14.9
million consisted of 923,077 shares of common stock with a value of $13.96 per
share, assumed liabilities of $1.9 million, which includes $1.6 million of
deferred tax liability resulting from the difference between the book and tax
basis of the intangible assets arising as a result of the acquisition, and
acquisition costs of $100,000. Of the 923,077 shares of common stock which have
been issued in connection with this acquisition, 138,462 shares of the common
stock are held in escrow and are scheduled to be released in April 2002.
The acquisition was accounted for using the purchase method of accounting
and accordingly, the purchase price was allocated to the tangible and intangible
assets acquired and liabilities assumed on the basis of their estimated fair
market values on the acquisition date. The excess of the purchase price over the
estimated fair market value of the assets purchased and liabilities assumed was
$3.8 million and was allocated to goodwill.
6. STOCKHOLDERS' EQUITY
COMMON STOCK
In June 2001, the Company completed a secondary offering of 5,520,000
shares of common stock, at a price of $9.25 per share, that raised approximately
$47.6 million, net of underwriting discounts, commissions and other offering
costs. In connection with the offering, an additional 480,000 shares of common
stock of the Company were sold by selling stockholders at $9.25 per share, for
which the Company received no proceeds.
In July 2001, in connection with the exercise of the underwriters'
over-allotment option relating to the secondary offering, the Company issued
828,000 shares of common stock, at a price of $9.25 per share, that raised
approximately $7.3 million, net of underwriting discounts, commissions and other
offering costs. In connection with the exercise of the underwriters'
over-allotment option, an additional 72,000 shares of common stock of the
Company were sold by selling stockholders at $9.25 per share, for which the
Company received no proceeds.
7. NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board approved for
issuance SFAS No. 142, Goodwill and Intangible Assets, which will become
effective for the Company in fiscal year 2002. SFAS 142 establishes new
accounting standards for purchased goodwill and intangible assets. The Company
is currently amortizing its goodwill but will cease its amortization under SFAS
142. The Company has not yet determined the full impact of adopting SFAS No.
142.
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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/A UNDER THE CAPTION "RISK
FACTORS." THESE FACTORS MAY CAUSE OUR ACTUAL RESULTS TO DIFFER MATERIALLY FROM
ANY FORWARD-LOOKING STATEMENTS. WE DO NOT UNDERTAKE TO UPDATE ANY
FORWARD-LOOKING STATEMENTS.
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. As of June 30, 2001, we served over 500 customers,
including managed care organizations, preferred provider organizations,
third-party administrators, provider groups and physician practice management
companies.
We offer three sets of complementary products and services: Application
Services Provider ("ASP") solutions, HealtheWare and HealthWeb. ASP solutions
offer pre-integrated, remotely hosted third-party and proprietary applications
and related services to healthcare payer organizations, benefits administrators
and providers on a monthly subscription fee basis. As part of our ASP solutions,
we also offer outsourcing of business processes and consulting services,
including information technology assessment and software development and
implementation. HealtheWare offers premium packaged software applications to the
payer and benefits administration markets on a licensed basis. HealthWeb is our
Internet platform, which facilitates information exchange and commerce over the
Internet between health plans and providers, employers and health plan members.
Our three sets of products and services allow us to offer comprehensive
integrated solutions to our customers while providing the opportunity to
cross-sell our services and diversify our sources of revenue.
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 center 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
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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.
RESULTS OF OPERATIONS
QUARTER ENDED JUNE 30, 2001 COMPARED TO THE QUARTER ENDED JUNE 30, 2000.
REVENUE. Total revenue in the second quarter of 2001 increased $35.5
million, or 200%, to $53.3 million from $17.8 million for the same period in
2000. Of this increase, $29.7 million was due to the acquisitions of Erisco
Managed Care Technologies, Inc. ("Erisco") and Resource Information Management
Systems, Inc. ("RIMS") that occurred in the fourth quarter of 2000 and the
acquisition of Infotrust Company ("Infotrust") that occurred in the second
quarter of 2001. The remaining increase of $5.8 million primarily represented
net growth in our Application Services Provider ("ASP") solutions business.
Recurring revenue in the second quarter of 2001 increased $20.9 million, or
169%, to $33.3 million from $12.4 million for the same period in 2000. Of this
increase, $16.9 million was generated by our acquisitions of Erisco, RIMS and
Infotrust. The remaining increase of $4.0 million primarily represented growth
in our ASP solutions business.
Non-recurring revenue in the second quarter of 2001 increased $14.6
million, or 271%, to $20.0 million from $5.4 million for the same period in
2000. Of this increase, $12.8 million was generated by our acquisitions of
Erisco, RIMS and Infotrust. The remaining increase of $1.8 million resulted
primarily from an increase in consulting revenues and one-time software licenses
of $2.6 million, offset by a decrease of $800,000 due primarily to the signing
of long-term contracts by two customers, which resulted in classification as
recurring revenues.
COST OF REVENUE. Cost of revenue in the second quarter of 2001 increased
$20.9 million, or 136%, to $36.2 million from $15.3 million for the same period
in 2000. Of this increase, $16.7 million represented incremental costs
associated with our acquisitions of Erisco, RIMS and Infotrust. The remaining
increase of $4.2 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 68% in the second quarter of 2001 and 86%
in the second quarter of 2000.
Cost of recurring revenue in the second quarter of 2001 increased $13.2
million, or 115%, to $24.7 million from $11.5 million for the same period in
2000. Of this increase, $10.7 million represented incremental costs associated
with our acquisitions of Erisco, RIMS and Infotrust. The remaining increase of
$2.5 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 74% in the second quarter of
2001 and 93% in the second quarter of 2000.
Cost of non-recurring revenue in the second quarter of 2001 increased $7.7
million, or 200%, to $11.5 million from $3.8 million for the same period in
2000. Of this increase, $6.0 million was generated by our acquisitions of
Erisco, RIMS and Infotrust. The remaining increase of $1.7 million was primarily
due to the costs incurred to support the increased consulting revenues and
one-time software license sales. As a percentage of non-recurring revenue, cost
of non-recurring revenue approximated 57% in the second quarter of 2001 and 71%
in the second quarter of 2000.
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RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses in the
second quarter of 2001 increased $3.1 million, or 200%, to $4.7 million from
$1.6 million for the same period in 2000. The increase represented incremental
research and development costs associated with our acquisitions of Erisco and
RIMS. As a percentage of total revenue, research and development expenses
approximated 9% in the second quarter of 2001 and 9% in the second quarter of
2000.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses in the second quarter of 2001 increased $5.6 million, or
69%, to $13.6 million from $8.0 million for the same period in 2000. Of this
increase, $4.2 million represented incremental costs associated with our
acquisitions of Erisco, RIMS and Infotrust. The remaining increase of $1.4
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 26% in the second quarter of 2001 and 45% in the second quarter of
2000.
AMORTIZATION OF GOODWILL AND ACQUIRED INTANGIBLES. Amortization of goodwill
and acquired intangibles in the second quarter of 2001 increased $15.3 million,
or 917% to $17.0 million from $1.7 million for the same period in 2000. The
increase represented incremental costs associated with our acquisitions of
Erisco, RIMS and Infotrust.
INTEREST INCOME. Interest income in the second quarter of 2001 increased
$104,000, or 30%, to $450,000 from $346,000 for the same period in 2000. The
increase was due to the investment of the $47.6 million of net proceeds from the
secondary offering of common stock completed in June 2001.
INTEREST EXPENSE. Interest expense in the second quarter of 2001 increased
$208,000, or 133%, to $364,000 from $156,000 for the same period in 2000. The
increase was primarily due to borrowings under our revolving line of credit and
additional borrowings on new capital lease agreements.
BENEFIT FROM INCOME TAXES. Benefit from income taxes was $3.1 million in
the second 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 relating to the Erisco, RIMS and Infotrust acquisitions.
SIX MONTHS ENDED JUNE 30, 2001 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 2000.
REVENUE. Total revenue in the first six months of 2001 increased $63.9
million, or 180%, to $99.4 million from $35.5 million for the same period in
2000. Of this increase, $56.3 million was generated by the acquisitions of
Erisco, RIMS and Infotrust. The remaining increase of $7.6 million primarily
represented net growth in our ASP solutions business.
Recurring revenue in the first six months of 2001 increased $39.4 million,
or 162%, to $63.7 million from $24.3 million for the same period in 2000. Of
this increase, $31.5 million was generated by our acquisitions of Erisco, RIMS
and Infotrust. The remaining increase of $7.9 million primarily represented
growth in our ASP solutions business.
Non-recurring revenue in the first six months of 2001 increased $24.6
million, or 221%, to $35.7 million from $11.1 million for the same period in
2000. Of this increase, $24.9 million was generated by our acquisitions of
Erisco, RIMS and Infotrust. The remaining decrease of $274,000 resulted
primarily from the signing of long-term contracts by two customers of $2.3
million resulting in classification as recurring revenues, which was partially
offset by an increase of $2.0 million in consulting revenues and one-time
software licenses.
COST OF REVENUE. Cost of revenue in the first six months of 2001 increased
$39.3 million, or 128%, to $70.1 million from $30.8 million for the same period
in 2000. Of this increase, $30.3 million represented incremental costs
associated with our acquisitions of Erisco, RIMS and Infotrust. The remaining
increase
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of $9.1 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 71% in the first six months of 2001 and 87% in the first
six months of 2000.
Cost of recurring revenue in the first six months of 2001 increased $26.1
million, or 114%, to $49.0 million from $22.9 million for the same period in
2000. Of this increase, $18.9 million represented incremental costs associated
with our acquisitions of Erisco, RIMS and Infotrust. The remaining increase of
$7.2 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 77% in the first six months of
2001 and 94% in the first six months of 2000.
Cost of non-recurring revenue in the first six months of 2001 increased
$13.2 million, or 168%, to $21.1 million from $7.9 million for the same period
in 2000. Of this increase, $11.4 million was generated by our acquisitions of
Erisco, RIMS and Infotrust. The remaining increase of $1.8 million was primarily
due to the costs incurred to support the increased consulting revenues and
one-time software license sales. As a percentage of non-recurring revenue, cost
of non-recurring revenue approximated 59% in the first six months of 2001 and
71% in the first six months of 2000.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses in the
first six months of 2001 increased $6.4 million, or 198%, to $9.6 million from
$3.2 million for the same period in 2000. Of this increase, $6.8 million
represented incremental research and development costs associated with our
acquisitions of Erisco and RIMS, which was partially offset by a decrease of
$410,000 in development expenses related to our declining development of
in-house Novalis products. As a percentage of total revenue, research and
development expenses approximated 10% in the first six months of 2001 and 9% in
the first six months of 2000.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses in the first six months of 2001 increased $12.0 million,
or 82%, to $26.6 million from $14.6 million for the same period in 2000. Of this
increase, $7.9 million represented incremental costs associated with our
acquisitions of Erisco, RIMS and Infotrust. The remaining increase of $4.1
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 27% in the first six months of 2001 and 41% in the first six months
of 2000.
AMORTIZATION OF GOODWILL AND ACQUIRED INTANGIBLES. Amortization of goodwill
and acquired intangibles in the first six months of 2001 increased $31.0
million, or 939% to $34.3 million from $3.3 million for the same period in 2000.
Of this increase, $30.6 million represented incremental costs associated with
our acquisitions of Erisco and RIMS. The remaining increase of $372,000 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 six months of 2001 and $536,000 for
the same period in 2000. Our acquisition of Healthcare Media Enterprises, Inc.
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 six months of 2001 increased
$249,000, or 41%, to $858,000 from $609,000 for the same period in 2000. The
increase was due to the investment of $32.0 million cash received from our
Erisco acquisition and the investment of $47.6 million net proceeds from the
secondary offering of common stock completed in June 2001.
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INTEREST EXPENSE. Interest expense in the first six months of 2001
increased $515,000, or 281%, to $698,000 from $183,000 for the same period in
2000. The increase was primarily due to borrowings under our revolving line of
credit and additional borrowings on new capital lease agreements.
BENEFIT FROM INCOME TAXES. Benefit from income taxes was $8.1 million in
the first six months of 2001 compared to zero for the same period in 2000. The
benefit was primarily generated from the net reduction of deferred tax
liabilities relating to the Erisco, RIMS and Infotrust 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 June 30, 2001, we had approximately $76.6 million of cash and cash
equivalents which includes $1.6 million in restricted cash.
Cash provided by operating activities for the six months ended June 30,
2001 was $3.8 million. Cash provided during this period was primarily
attributable to net losses of $32.9 million, which was more than offset by
depreciation and amortization, provision for doubtful accounts, reserve for
sales returns, amortization of deferred stock compensation, amortization of
goodwill and acquired intangibles, deferred taxes and other changes in operating
assets and liability accounts.
Cash used in investing activities of $1.5 million for the six months ended
June 30, 2001 was primarily the result of our purchase of $3.7 million in
property and equipment and software licenses, $1.6 million of payments of
acquisition-related costs resulting from our acquisitions of Erisco, RIMS and
Infotrust, which was offset by the net sales of $3.0 million in short-term
equity investments and $846,000 cash acquired from the Infotrust acquisition.
Cash provided by financing activities of $48.7 million for the six months
ended June 30, 2001 was primarily the result of the investment of $2.0 million
of net proceeds from our revolving line of credit, $1.2 million in proceeds from
the issuance of common stock related to employee exercise of stock options and
employee purchase of common stock, and net proceeds of $47.6 million from the
secondary offering of common stock completed in June 2001. 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 $2.1
million.
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 in the loan documents, 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 June 30, 2001, we had
outstanding borrowings on the revolving credit facility of $13.4 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 ability to borrow under the lease line of
credit, which had a limit of $2.0 million, expired as scheduled in December
2000. Borrowings under the lease line of credit at June 30, 2001 totaled
approximately $1.2 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.
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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 0.5% 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 June 30, 2001, there were no outstanding borrowings
on the line of credit.
As of June 30, 2001, we have outstanding eight standby letters of credit in
the aggregate amount of $1.6 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.
In June 2001, we completed a public offering of 5,520,000 shares of common
stock, at a price of $9.25 per share, that raised approximately $47.6 million,
net of underwriting discounts, commissions and other offering costs. In
connection with the offering, an additional 480,000 shares of our common stock
were sold by selling stockholders at $9.25 per share, for which we received no
proceeds.
In July 2001, in connection with the exercise of the underwriters'
over-allotment option relating to the June public offering, we sold 828,000
shares of common stock, at a price of $9.25 per share, that raised approximately
$7.3 million, net of underwriting discounts, commissions and other offering
costs. In connection with the exercise of the underwriters' over-allotment
option, an additional 72,000 shares of our common stock were sold by selling
stockholders at $9.25 per share, for which we received no proceeds.
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 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 June 30,
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 June
30, 2001, we had outstanding borrowings on the revolving line of credit of $13.4
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.
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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
On April 12, 2001, we issued 923,077 shares of our common stock to Trustco
Holdings, Inc., a wholly-owned subsidiary of Trustmark Insurance Company
("Trustmark"), in connection with our acquisition of Infotrust Company.
Trustmark has more than $5,000,000 in assets and is both an accredited investor
and sophisticated investor. Thus, the shares were issued pursuant to the
exemption provided by Section 4(2) of the Securities Exchange Act of 1933, as
amended, and Rule 506 of Regulation D promulgated thereunder.
On June 13, 2001, our registration statement for shares of common stock was
declared effective by the SEC (File No. 333-58982). We completed the secondary
offering of 5,520,000 shares of common stock at $9.25 per share on June 19,
2001, raising net proceeds of $47.6 million. On July 11, 2001, we completed the
issuance of 828,000 additional shares at $9.25 per share in connection with the
exercise of the underwriters' over-allotment option, raising additional net
proceeds of $7.3 million. The selling stockholders sold 552,000 shares in the
secondary offering, including 72,000 shares in connection with the exercise of
the underwriters' over-allotment option, at a price of $9.25 per share, for
which we received no proceeds. We incurred $3.5 million in connection with the
issuance and distribution of securities registered for underwriting discounts
and commissions, legal and accounting expenses and other expenses. Bear, Stearns
& Co. Inc. and UBS Warburg LLC served as lead managing underwriters in the
offering and Salomon Smith Barney, Inc. served as co-managing underwriter.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
TriZetto's annual meeting of stockholders was held on May 16, 2001. Of the
36,781,593 shares of common stock issued and outstanding and entitled to vote at
the meeting, there were present at the meeting, in person or by proxy, the
holders of 28,964,723 common shares, representing 79% of the total number of
shares entitled to vote at the meeting. This percentage represents a quorum. The
following three proposals were presented and voted on at the stockholders'
meeting:
Proposal One: The two nominees to the Board of Directors, William E. Fisher
and David M. Thomas, were elected to serve three-year terms by the stockholders.
The voting results for William E. Fisher were: For 28,401,452; Withheld 563,271.
The voting results for David M. Thomas were: For 28,424,452; Withheld 540,271.
The Class II directors, William E. Fisher and David M. Thomas, shall serve until
the annual meeting of stockholders in 2004.
Proposal Two: Amendment of our 1998 Stock Option Plan to increase the
number of shares authorized under the plan by 1,800,000 to a total of 9,000,000.
The voting results were: For 27,358,920; Against 1,454,658; Abstain 151,145;
Broker Non-Votes Zero.
Proposal Three: To ratify the appointment of PricewaterhouseCoopers LLP as
independent auditors for the fiscal year ending December 31, 2001. The voting
results were: For 28,500,380; Against 463,069; Abstain 1,274; Broker Non-Votes
Zero.
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ITEM 5. OTHER INFORMATION
Effective August 7, 2001, our Board of Directors approved the engagement of
Ernst & Young LLP as its independent accountants for the year ending December
31, 2001 to replace the firm of PricewaterhouseCoopers LLP ("PWC"), which was
dismissed as our independent accountants effective August 7, 2001. The Audit
Committee of our Board of Directors recommended the change of our independent
accountants to our Board of Directors, also effective August 7, 2001.
PWC's reports on our consolidated financial statements for fiscal years
ended December 31, 1999 and 2000 did not contain an adverse opinion, disclaimer
of opinion, and were not qualified or modified as to uncertainty, audit scope or
accounting principles. During the fiscal years ended December 31, 1999 and 2000
and subsequent interim periods through August 7, 2001, there were no
disagreements with PWC on any matters of accounting principles or practices,
financial statement disclosure, or auditing scope and procedures which, if not
resolved to the satisfaction of PWC, would have caused PWC to make reference to
the matter in its reports. In addition, there were no reportable events during
this period, as described in Item 304(a)(1)(v) of the SEC's Regulation S-K,
except that PWC's Letter of Recommendations on Internal Controls for the year
ended December 31, 2000 identified a material weakness related to the resources
within our corporate accounting and finance department and recommended that the
Company hire new staff and establish additional procedures to facilitate the
proper recognition of revenue. We have hired additional staff and implemented
new policies and procedures that adequately address the issues raised in PWC's
letter.
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 Second Amended and Restated Stock Option Plan
(Incorporated by reference to Exhibit 4.1 of TriZetto's
Form S-8 as filed with the SEC on June 26, 2001, File
No. 333-63902)
16.1 Letter regarding Change in Certifying Accountants
(b) Reports on Form 8-K.
On June 11, 2001, we filed a Form 8-K/A-2 (Item 5) containing revised
financial statements for Resource Information Management Systems, Inc. On June
12, 2001, we filed a Form 8-K/A-3 (Item 5) containing a revised consent of KPMG
LLP with respect to such financial statements.
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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: August 14, 2001 By: /s/ MICHAEL J. SUNDERLAND
---------------------------------
Michael J. Sunderland
Chief Financial Officer
(Principal Financial Officer
and Duly Authorized Officer)
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EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
------- -----------
10.1 Second Amended and Restated Stock Option Plan (Incorporated
by reference to Exhibit 4.1 of TriZetto's Form S-8 as filed
with the SEC on June 26, 2001, File No. 333-63902)
16.1 Letter regarding Change in Certifying Accountants