UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
| x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2003
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 Incorporation or Organization) |
(I.R.S. Employer Identification Number) | |
| 567 San Nicolas Drive, Suite 360 Newport Beach, California |
92660 | |
| (Address of Principal Executive Offices) | (Zip Code) | |
Registrant’s telephone number, including area code: (949) 719-2200
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, $0.001 par value, and Series A Junior Participating Preferred Stock, $0.001 par value
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 ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨
Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes x No ¨
As of June 30, 2003, the aggregate market value of voting stock held by non-affiliates of the registrant, based upon the closing sales price for the registrant’s Common Stock, as reported in the Nasdaq National Market System, was $154.5 million. Shares of Common Stock held by each officer and director and by each person who owns 10% or more of the outstanding Common Stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for any other purpose.
The number of shares of the registrant’s Common Stock outstanding as of February 19, 2004 was 46,889,450.
Documents Incorporated by Reference
Part III of this Report incorporates by reference information from the definitive Proxy Statement for the registrant’s 2004 Annual Meeting of Stockholders.
THE TRIZETTO GROUP, INC.
ANNUAL REPORT ON
FORM 10-K
For the Fiscal Year Ended December 31, 2003
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CAUTIONARY STATEMENT
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 below 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.
PART I
OVERVIEW
We offer a broad portfolio of healthcare information technology products and services that can be provided individually or combined to create a comprehensive solution. Focused exclusively on healthcare, we offer: proprietary enterprise software, including Facets® and QicLink™; outsourced business services, including software hosting, business process outsourcing, and IT outsourcing; and consulting services. We provide products and services for three healthcare markets: health plans (payers), benefits administrators and physician groups (providers). In 2003, these markets represented 81%, 15%, and 4% of our total revenue, respectively. As of December 31, 2003, we served approximately 433 customers.
The TriZetto Group, Inc. was incorporated in Delaware in May 1997 with the merger of two organizations: System One, a provider of online electronic-funds transfer technology, and Margolis Health Enterprises, a provider of technology consulting to healthcare organizations. The combination created a company dedicated to healthcare information technology products and services.
We completed our initial public offering in October 1999 and since that time, we have completed six acquisitions: Novalis Corporation, Finserv Health Care Systems, Inc., Healthcare Media Enterprises, Inc., Erisco Managed Care Technologies, Inc. (“Erisco”), Resource Information Management Systems, Inc. (“RIMS”), and Infotrust Company.
Of the six acquisitions, the Erisco and RIMS acquisitions, completed in the fourth quarter of 2000, were the most significant. Erisco’s main product, Facets®, is the leading administrative system for managed health plans in the country. QicLink™, developed by RIMS, is the leading automated claims-processing system for benefits administrators. With these two acquisitions, TriZetto obtained a customer base with more than 100 million enrollees (40% of the U.S. insured population) and attained a leadership position in two of its target markets, payers and benefits administrators.
FINANCIAL INFORMATION
Please refer to Item 6, “Selected Financial Data,” and Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” for a review of revenue, net loss, and total assets for the last three years.
OUR STRATEGY
Rising healthcare costs are causing employers to shift more of the cost of healthcare benefits to employees. In turn, employees are demanding better service from their health plans, more information about doctors, hospitals and other providers, and more help navigating the healthcare delivery system. We believe that many health plans lack the technology and operational efficiency to operate in a more consumer-driven environment. Our strategy is to provide the healthcare expertise, technology and services that our customers need today and in the future. Key elements of our strategy include:
| • | Help customers anticipate change and migrate toward a successful future. In 2003, we continued to articulate our vision of the future for three customer segments: health plans, benefits administrators, and preferred provider organizations (PPOs). We named these “futures” Health Plan 5.0, Benefits Administrator 5.0, and PPO 5.0. “5.0” continues to be the centerpiece of our sales strategy, supported by TriZetto’s comprehensive portfolio of solutions and a clear migration path for customers. Over the course of 2003, we rolled out a series of products and services that provide our customers with the solution components to achieve “5.0.” |
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| • | Offer a compelling value proposition. We are focused on offering a quantified, compelling value proposition that includes such advantages as reduced or more predictable information technology costs, more cost effective business processes, lower administrative costs, and more rapid return on investment. Our internal estimates, based on industry benchmarks and customer data, show that return on investment increases with the use of our proprietary software in combination with one or more of our outsourced services. |
| • | Offer market-leading enterprise software for health plans. In 2003, we successfully launched Facets Extended Enterprise™(or Facets e2™) into the marketplace. Facets e2™ is a major expansion of our flagship Facets® software for health plans, enabling us to continue to maintain and expand our lead in the marketplace. Facets e2™ provides significant new business and technology enhancements aimed at helping health plans meet emerging market demands, including customer driven market requirements, integrated e-business functionality, regulatory compliance, and advanced open architecture and web services technologies. In the benefits administration market, we have made significant investments to extend the market leadership position of our QicLink™ product line. The new QicLink Extended Enterprise™ product, which is expected to be released in 2004, will address consumer market requirements and integration e-business and provide an updated user interface for improved useability. |
| • | Deliver our technology in concert with a continuum of services that can transform a customer’s business. In addition to offering leading enterprise software, TriZetto offers complementary services that assist customers in achieving business success, including: overall IT strategy, software hosting, business process re-engineering, transaction processing (including claims, billing, enrollment, member services, physician credentialing, accounts receivable and collections), and IT outsourcing. These services, in combination with TriZetto’s technology and delivery capabilities, can transform a customer’s business. |
| • | Organize products and services around the customer’s main business cycles. Our solutions are being aligned with the way our customers operate internally. We have products and services that address the main business cycles of a health plan, which are: product development, revenue management, reimbursement management, customer service, network management, care management, risk management, and general finance and administration. |
| • | Leverage our strategic relationships. We intend to leverage our current strategic relationships and enter into new relationships to expand our customer base and service offerings. We have established co-marketing and sales arrangements with third-party systems integrators and software vendors. As our customer base grows, we intend to expand and strengthen these relationships. |
| • | Selectively pursue acquisitions. We continually evaluate acquisitions of companies that could expand our market share, product offerings or our technical capabilities. Since our initial public offering in 1999, we have made six acquisitions. We may pursue additional acquisitions that create shareholder value. |
OUR PRODUCTS AND SERVICES
Outsourced Business Services
In 2003, we derived approximately 34% of our total revenue from outsourced business services. Our outsourced business services fall into three categories, described in more detail below: software hosting and management, business process outsourcing, and IT outsourcing.
Software Hosting. Software hosting includes integrating, hosting, monitoring and managing our proprietary Facets® and QicLink™ applications and other software applications from third party vendors. We deliver software on a cost-predictable subscription basis, through multi-year contracts that include guaranteed service levels.
Our hosted solutions free customers from capital investment in information technology, the operating costs associated with owning software and hardware, and the cost of managing their information infrastructure. Other advantages include rapid deployment, reliability, scalability, lower implementation risk and preservation of legacy systems.
Through our data centers in Colorado and Illinois, we host and maintain software for our customers on most of the widely used computing, networking and operating platforms. We provide access to our hosted applications across high-speed electronic communications channels, such as frame relay, virtual private networks or the Internet. Each center operates with state-of-the-art environmental protection systems to maintain high availability to host systems and wide area network access. Connection to our host application servers and services is provided using the industry standard TCP/IP protocol. We believe this provides the most efficient and cost-effective transport for information systems services, as well as simplified support
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and management. Our network connectivity infrastructure eliminates our customers’ need to manage and support their own computer systems, network and software.
Our hosted solutions provide complete, professionally managed information technology systems that include desktop and network connections, primary software applications that are essential to running the business, ancillary software, and information access and reporting capabilities to aid in data analysis and decision-making. Customers can choose the combination of our products and services to best meet their business requirements.
Vendor Partner Relationships. We have acquired rights to license and/or deploy numerous commercially available software applications from a variety of healthcare software vendors. These relationships range from perpetual, reusable software licenses and contracts to preferred installer agreements to informal co-marketing arrangements. We enter into relationships with software vendors in order to offer our customers a variety of solutions tailored to their unique information technology needs. Our relationships with our vendor partners are designed to provide both parties with numerous mutual benefits.
Business Process Outsourcing. To complement our software hosting services, we also provide payers and benefits administrators with transaction processing services for typical back office functions, including claims, billing and enrollment. Customers typically outsource to us for the following reasons: to improve or maintain service, for more predictable costs, to take advantage of our larger scale, to reduce risk through our performance guarantees, to gain access to our technical and healthcare business expertise, and to become HIPAA compliant.
Our processing services include:
| • | Benefit and Provider Configuration Rule Set-Up: We configure the customer’s software according to the customer’s specific benefit plans and provider payment arrangements. |
| • | Document Imaging/Electronic Data Interchange (EDI) Processing. We process claim forms, enrollment documents and other documents submitted via paper or EDI, and scan all images for electronic retrieval. |
| • | Medical, Dental, and Specialty Claims Processing. We process claims submitted for services under a variety of products and lines of business, adjust payments and coordinate benefits. We also generate, print and distribute claims payment checks and remittance notices to appropriate claimants. |
| • | Membership and Enrollment Processing. We set up employer group and individual membership information and process transactions regarding benefit plan selection, assignment of primary care physicians, and membership changes. We also issue member identification cards and perform other related administrative tasks. |
| • | Premium Billing. We generate, print and mail invoices, post payments received on behalf of the health plan, and reconcile employer group and individual member accounts against billed amounts. |
| • | Broker Commissions and Provider Capitation. We configure our customer’s software to ensure that insurance brokers and capitated provider groups are paid according to their contracts. We also print and distribute commission checks and capitation payments. |
| • | Print and Mailing Services. We print and mail functional area output documents such as claims payment checks, remittance notices, premium invoices, broker commission checks and capitation payments along with supporting documentation. |
These business processing services can be provided at the customer site or in our centralized processing locations. Approximately 244 employees are located at our various processing sites, providing services for customers using Facets® and third-party systems.
IT Outsourcing. We provide a full range of IT management services to free clients from the responsibility of managing their technology infrastructure and staff. The four major parts of IT outsourcing are:
| • | Outsourced Management Services—the basic services provided to every customer. This includes managing the IT staff, processes, and technology. |
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| • | Information Technology Services—PC desktop support and service, telecommunications, basic systems security and centralized internal help desk operations. |
| • | Infrastructure Management Services—managing and operating the core technology infrastructure that supports a customer’s business. These services may be provided at our central connectivity center, at the customer site or at a third party location. |
| • | Software Management Services—managing, operating and supporting all or part of a set of software applications used by a customer. This service also includes data warehousing and reporting. |
Enterprise Software
In 2003, we derived approximately 37% of our total revenue from proprietary software license and maintenance fees. We offer enterprise software on a licensed basis to healthcare payers and benefits administrators. The Facets®, Facts™ and QicLink™ applications are widely recognized in their respective markets for providing advanced solutions that create operational efficiencies and reduce costs. Our HealthWeb® modules allow customers to conduct electronic commerce over the Internet. Our NetworX™ suite of products allows electronic claims re-pricing across multiple provider networks for health plans and PPOs, as well as automated contract modeling. ClaimsExchange™ allows for the electronic exchange of information between health plans and PPOs. At December 31, 2003, our health plan software served approximately 123 customers, and our software for benefits administrators and PPOs served approximately 282 customers.
Out of our total revenue in 2003, 2002, and 2001, we spent 13%, 13% and 10%, respectively, on software development (expensed and capitalized), primarily for our proprietary software products.
Facets®. Facets® is a widely implemented, scalable client/server solution for healthcare payers. Facets® allows payers to select from a variety of modules to meet specific business requirements—including claims processing, claims re-pricing, capitation/risk fund accounting, premium billing, provider network management, group/membership administration, referral management, hospital and medical pre-authorization, case management, customer service and electronic commerce.
Facets® can also be combined with complementary software to address the enterprise-wide needs of a managed care organization. Facets® has been expanded through alliances with complementary solutions for physician credentialing, document imaging, workflow management, data warehousing, decision support, provider profiling, and Health Plan Employer Data Information set (HEDIS) reporting.
Facets® is available to customers on a license or hosted basis. In June 2003, we released a new product called Facets Extended Enterprise™(or Facets e2™), which was a major expansion of Facets®. Facets e2™ includes the following features and benefits for health plans:
| • | Flexible, integrated technology to support multiple lines of business and new consumer-oriented products, such as defined-contribution plans and healthcare spending accounts; |
| • | Simplified entry of benefit plan information; |
| • | Enhanced views of customer service data; |
| • | Integrated HIPAA functionality to address standard electronic transactions and privacy regulations; |
| • | Full suite of e-business applications to facilitate online business transactions with plan members, physicians, employers and brokers; |
| • | New functions to support complex provider contracts and automated pricing of claims; |
| • | N-tiered, open architecture with a Web service layer and industry-standard protocols (e.g., SOAP, XML) to simplify integration of third-party applications; and |
| • | Choice of leading databases — Oracle, Microsoft SQL and Sybase. |
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Facts™. Introduced in 1980, Facts™ is designed for the indemnity insurance market, specifically managed indemnity and group insurance. Facts™ software, which we acquired in our acquisition of Erisco, is used for the essential administrative transactions of an indemnity plan, including enrollment, rathing and premium calculation, billing and claims processing.
QicLink™. We believe that QicLink™ is the nation’s most widely-used automated claims processing technology for benefits administrators. QicLink™ automates and simplifies the claims adjudication, re-pricing and payment process, and is available to customers on a licensed or hosted basis.
HealthWeb®. HealthWeb® allows health plans to exchange information and conduct business with physician groups, members, employers and brokers on a secure basis over the Internet. HealthWeb® is installed on the health plan’s web servers or offered on a hosted basis and then configured according to customer preferences.
HealthWeb® provides an effective way for health plans to reduce administrative costs and increase resources for medical services or other uses. Through its e-Service and e-Enroll modules, HealthWeb® creates an on-line “self-service” vehicle, reducing delays and phone calls and increasing customer satisfaction with prompt access to key information. HealthWeb®’s business-to-business transaction capabilities improve workflow and reduce costs throughout the healthcare system.
HealthWeb®’s electronic desktop is easy to use and personalized for each customer, providing access to the business applications and content needed to perform typical healthcare tasks. HealthWeb® modules are designed to manage online eligibility, authorizations, referrals, benefit verification, claims status, claims adjudication and many other transactions benefiting physician offices. The modules also support enrollment, demographic changes, primary care physician selection, identification card requests and other transactions for employers, brokers and health plan members.
Several new HealthWeb® modules have recently been released, including e-Quote, which automates rate quotes and proposals, and eBill, which automates premium billing and reconciliation. All HealthWeb® modules are being offered on a standalone basis. They will also be integrated with and offered as part of Facets Extended Enterprise™.
NetworX™. NetworX™ was the first enterprise-wide management system and claims re-pricing solution for preferred provider organizations. The NetworX™ product line has been expanded to include a suite of products that addresses the re-pricing needs of not only PPOs, but also the requirements of health plans for automated re-pricing of complex facility claims and modeling of contracts. The NetworXPricer™ product for healthplan claims re-pricing is sold as a separate application that can be interfaced to legacy administration systems, as well as to Facets Extended Enteprise™. The NetworXModeler™ product is a standalone application to support the automated modeling and analysis of provider contracts. NetworX™ complements ClaimsExchange™, which provides Internet connections that allow preferred provider organizations and healthcare claims payers to exchange information online. ClaimsExchange™ allows access to electronic transaction routing between physician groups and payers 24 hours a day, seven days a week, such as exchange of re-priced claims, claims tracking and reporting capabililities.
Consulting Services
We derived 28% of our revenue from consulting services in 2003, mainly from implementations associated with our proprietary software, software hosting and other outsourcing contracts. As of December 31, 2003, we had approximately 255 consultants. Our consultants:
| • | Analyze customers’ information technology capabilities and business strategies and processes and assist customers in achieving competitive advantage by managing information and data electronically. |
| • | Assist customers in installing and implementing software applications and technology products through systems analysis and planning, selection, design, construction, data conversion, testing, business process development, training and systems support. |
| • | Design, develop and implement healthcare management programs using a combination of business intelligence software and consulting to reduce medical costs, improve the quality of care delivered and increase member satisfaction. |
| • | Apply a proprietary methodology to assist customers in identifying deficiencies in complying with the Health Insurance Portability and Accountability Act of 1996 (“HIPAA”) and develop and implement solutions that assist customers in complying with HIPAA. |
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| • | Assist customers in designing and implementing an effective electronic commerce strategy, including Internet portals, web sites, intranets and extranets that allow business-to-business and business-to-consumer transactions. |
| • | Assist customers in designing and implementing a business intelligence and data warehousing capability for the purpose of improving access to and organization of information required for management decision-making. |
| • | Assist customers in designing an effective customer relationship management (CRM) strategy and implementing software applications focused on enhancing customer acquisition, retention and expansion. |
| • | Through the Virtual Information Officer program, provide senior-level management services for customers who either do not employ their own information technology management or wish to supplement it. |
SALES AND MARKETING
Our sales and marketing approach is to promote TriZetto as the single source for comprehensive healthcare information technology products and services. As of December 31, 2003, we had approximately 54 sales and marketing employees throughout the United States. Our professional sales force, comprised of experienced sales executives with established track records, sells our entire range of offerings to current and prospective customers, including enterprise software, outsourced business services, and consulting services. Separate sales teams have been established for the payer and benefits administration markets. The sales team for the payer market is divided into national and middle-market accounts. We have payer sales support teams for enterprise software and for outsourced business services. The support teams are responsible for providing in-depth technical information to the customer or prospect, providing product demonstrations, and for negotiating customer contracts. To support the sales process, multi-disciplinary pursuit teams are established for each major prospect, spearheaded by a member of executive management.
Our marketing organization is organized by target market and is closely aligned with the sales force to provide market specific campaigns and lead generation initiatives for our enterprise software, outsourced business services, and consulting services. These initiatives include direct mail campaigns, marketing collateral, trade shows, seminars and events. The marketing organization also develops and supports our corporate positioning and branding, coordinates market research, and handles all tradeshows, customer conferences and events.
Our consulting services group works closely with the sales organization to provide a consultative, executive selling approach that complements our sales program. This team of healthcare information technology professionals is trained in a proprietary assessment methodology that allows a quick and comprehensive analysis of a customer’s information technology capabilities and requirements. In conjunction with their consulting responsibilities, our consulting services group identifies opportunities to introduce customers to the broad range of applications and technology solutions available to them, including those that we offer.
CUSTOMER SERVICE
We believe that a high level of support is necessary to maintain long-term relationships with our customers. An account manager is assigned to each of our customers and is responsible for proactively monitoring customer satisfaction, providing customers with additional training and process-improvement opportunities, and coordinating issue resolution. We employ functional and technical support personnel who work directly with our account management team and customers to resolve technical, operational and application problems or questions. Our service desk provides a wide range of customer support functions. Our customers may contact the service desk through a toll-free number 24 hours a day, seven days a week. For non-urgent issues, customers can also enter incidents directly into the customer support system via the Internet.
Because we support multiple applications and technology solutions, our functional and technical support staff are grouped and trained by specific application and by application type. These focused staff groups have concentrated expertise that we can deploy as needed to address customer needs. We cross-train employees to support multiple applications and technology solutions to create economies-of-scale in our support staff.
We further leverage the capabilities of our support staff through the use of sophisticated software that tracks solutions to common computer and software-related problems. This allows our support staff to learn from the experience of other people within the organization and reduces the time it takes to solve problems. In addition, we provide customer support for our business process outsourcing services.
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COMPETITION
The market for healthcare information technology services is intensely competitive, rapidly evolving, highly fragmented and subject to rapid technological change. By using proprietary technologies and methods, we develop, integrate and deliver packaged software applications, Internet connections, electronic communications infrastructure and IT consulting services. Our competitors provide some or all of the services that we provide. Our competitors can be categorized as follows:
| • | information technology and outsourcing companies, such as Perot Systems Corporation, IBM, Affiliated Computer Services, Computer Sciences Corporation, and Electronic Data Systems Corporation; |
| • | healthcare software application vendors, such as Quality Care Solutions, Inc., Amisys Synertech Inc. and deNovis, Inc.; |
| • | healthcare information technology consulting firms, such as First Consulting Group, Inc., Superior Consultant Holdings Corporation and the consulting divisions or former affiliates of the major accounting firms, such as Deloitte Consulting and Accenture; |
| • | healthcare e-commerce and portal companies, such as WebMD Corporation, NaviMedix and HealthTrio; and |
| • | enterprise application integration vendors such as Vitria, SeeBeyond, TIBCO, Fuego and M2. |
Each of these types of companies can be expected to compete with us within various segments of the healthcare information technology market. Furthermore, major software information systems companies and other entities, including those specializing in the healthcare industry that are not presently offering applications that compete with our products and services, may enter our markets. In addition, some of our third-party software vendors compete with us from time to time by offering their software on a licensed or hosted basis.
We believe companies in our industry primarily compete based on performance, price, software functionality, customer awareness, ease of implementation and level of service. Although our competitive position is difficult to characterize due principally to the variety of current and potential competitors and the evolving nature of our market, we believe that we presently compete favorably with respect to all of these factors. While our competition comes from many industry segments, we believe no single segment offers the integrated, single-source solution that we provide to our customers.
To be competitive, we must continue to enhance our products and services, as well as our sales, marketing and distribution channels to respond promptly and effectively to:
| • | changes in the healthcare industry, including consolidation; |
| • | constantly evolving standards and government regulation affecting healthcare transactions; |
| • | the challenges of technological innovation and adoption; |
| • | evolving business practices of our customers; |
| • | our competitors’ new products and services; |
| • | new products and services developed by our vendor partners and suppliers; and |
| • | challenges in hiring and retaining information technology professionals. |
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BACKLOG
Our total backlog is defined as the revenue we expect to generate in future periods from existing customer contracts. Our 12-month backlog is defined as the revenue we expect to generate from existing customer contracts over the next 12 months. Most of the revenue in our backlog is derived from multi-year recurring revenue contracts (including software hosting, business process outsourcing, IT outsourcing, and software maintenance). We classify revenue from software license and consulting contracts as non-recurring. Such revenue is included in the backlog when the term of the software license or consulting contract exceeds 12 months.
Our total backlog at December 31, 2003, was approximately $496.2 million. The 12-month backlog at December 31, 2003, was approximately $170.0 million. We recently received Altius’ notice to terminate our services agreement effective May 31, 2004. Included in our twelve-month backlog and total backlog is recurring revenue of $10.4 million related to Altius. For a breakout of total and 12-month backlog by recurring and non-recurring revenue, see Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
Backlog can change due to a number of factors, including unforeseen changes in implementation schedules, contract cancellations (subject to penalties paid by the customer), or customer financial difficulties. Unless we enter into new customer agreements that generate enough revenue to replace or exceed the revenue that is recognized in any given quarter, our backlog will decline. Our backlog at any date may not indicate demand for our products and services and may not reflect actual revenue for any period in the future.
INTELLECTUAL PROPERTY
Our intellectual property is important to our business. We rely on certain developed software assets and internal methodologies for performing customer services. Our consulting services group develops and utilizes information technology life-cycle methodology and related paper-based and software-based toolsets to perform customer assessments, planning, design, development, implementation, and support services. We rely primarily on a combination of copyright, trademark and trade secret laws, confidentiality procedures and contractual provisions to protect our intellectual property.
Our efforts to protect our intellectual property may not be adequate. Our competitors may independently develop similar technology or duplicate our products or services. Unauthorized parties may infringe upon or misappropriate our products, services or proprietary information. In addition, the laws of some foreign countries do not protect proprietary rights as well as the laws of the United States. In the future, litigation may be necessary to enforce our intellectual property rights or to determine the validity and scope of the proprietary rights of others. Any such litigation could be time consuming and costly.
We could be subject to intellectual property infringement claims as we expand our product and service offerings and the number of competitors increases. Defending against these claims, even if not meritorious, could be expensive and divert our attention from operating our company. If we become liable to third parties for infringing upon their intellectual property rights, we could be required to pay a substantial damage award and be forced to develop non-infringing technology, obtain a license or cease using the applications that contain the infringing technology or content. We may be unable to develop non-infringing technology or content or obtain a license on commercially reasonable terms, or at all.
We also rely on a variety of technologies that are licensed from third parties to perform key functions. These third-party licenses are an essential element of our hosted solutions business. These third-party licenses may not be available to us on commercially reasonable terms in the future. The loss of or inability to maintain any of these licenses could delay the introduction of software enhancements and other features until equivalent technology can be licensed or developed. Any such delay could materially adversely affect our ability to attract and retain customers.
SIGNIFICANT CUSTOMERS
As of December 31, 2003, we served approximately 433 customers. Blue Cross Blue Shield of Michigan, Altius Health Plans, Inc., UnitedHealth Group, Inc., and QualChoice of Arkansas, Inc. represented approximately 8%, 8%, 7% and 5%, respectively, of our total revenue for the twelve months ended December 31, 2003.
EMPLOYEES
As of December 31, 2003, we had approximately 1,774 employees. Our employees are not subject to any collective bargaining agreements, and we generally have good relations with our employees.
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AVAILABLE INFORMATION
Our website is located at www.trizetto.com. We make available free of charge through this website all of our SEC filings including our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports, as soon as reasonably practicable after those reports are electronically filed with the SEC.
RISK FACTORS
Our business is changing rapidly, which could cause our quarterly operating results to vary and our stock price to fluctuate.
Our quarterly operating results have varied in the past, and we expect that they will continue to vary in future periods. Our quarterly operating results can vary significantly based on a number of factors, such as our mix of non-recurring and recurring revenue, our ability to add new customers, renew existing accounts, sell additional products and services to existing customers, meet project milestones and customer expectations, and the timing of new customer sales. The variation in our quarterly operating results could affect the market price of our common stock in a manner that may be unrelated to our long-term operating performance.
We expect to increase activities and spending in substantially all of our operational areas. We base our expense levels in part upon our expectations concerning future revenue, and these expense levels are relatively fixed in the short-term. If we record lower revenue, we may not be able to reduce our short-term spending in response. Any shortfall in revenue would have a direct impact on our results of operations. For these and other reasons, we may not meet the earnings estimates of securities analysts or investors, and our stock price could decline.
Our sales cycles are long and unpredictable.
We have experienced long and unpredictable sales cycles, particularly for contracts with large customers, or customers purchasing multiple products and services. Enterprise software typically requires significant capital expenditures by customers, and the decision to outsource IT-related services is complicated and time-consuming. Major purchases by large payer organizations typically range from 9 to 12 months or more from initial contact to contract execution. There can be no assurance that the prospects currently in our pipeline will sign contracts within a reasonable period of time or at all.
In addition, our implementation cycle has ranged from 12 to 24 months or longer from contract execution to completion of implementation. During the sales cycle and the implementation cycle, we will expend substantial time, effort and financial resources preparing contract proposals, negotiating the contract and implementing the solution. We may not realize any revenue to offset these expenditures, and, if we do, accounting principles may not allow us to recognize the revenue during corresponding periods, which could harm our future operating results. Additionally, any decision by our customers to delay implementation may adversely affect our revenues.
We have a history of operating losses and cannot predict when, or if, we will achieve positive net income.
We have generated net losses in 18 of our past 20 quarters (through December 31, 2003). Although our revenue has grown in recent periods, we cannot assure you that our revenue will be maintained at the current level or increase in the future. In addition, we have a limited operating history and it is difficult to evaluate our business. Our stockholders must consider the risks, uncertainties, expenses and difficulties frequently encountered by companies in their early stages of development, particularly companies in rapidly evolving markets. We cannot assure you that we will achieve or sustain positive earnings on either a quarterly or annual basis.
We currently derive our revenue primarily from providing hosted solutions, software licensing and maintenance, and other services such as consulting. We depend on the continued demand for healthcare information technology and related services. We plan to continue investing in administrative infrastructure, research and development, sales and marketing, and acquisitions. As a result, we may never sustain positive net income.
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Revenue from a limited number of customers comprises a significant portion of our total revenue, and if these customers terminate or modify existing contracts or experience business difficulties, it could adversely affect our earnings.
As of December 31, 2003, we were providing services to approximately 433 customers. Four of our customers, Blue Cross Blue Shield of Michigan, Altius Health Plans, Inc., UnitedHealth Group, Inc., and QualChoice of Arkansas, represented an aggregate of approximately 28% of our total revenue for the twelve months ended December 31, 2003.
Although we typically enter into multi-year customer agreements, a majority of our customers are able to reduce or cancel their use of our services before the end of the contract term, subject to monetary penalties. We also provide services to some hosted customers without long-term contracts. In addition, many of our contracts are structured so that we generate revenue based on units of volume, which include the number of members, number of physicians or number of users. If our customers experience business difficulties and the units of volume decline or if a customer ceases operations for any reason, we will generate less revenue under these contracts and our operating results may be materially and adversely impacted.
Our operating expenses are relatively fixed and cannot be reduced on short notice to compensate for unanticipated contract cancellations or reductions. As a result, any termination, significant reduction or modification of our business relationships with any of our significant customers could have a material adverse effect on our business, financial condition, operating results and cash flows.
We are growing rapidly, and our inability to manage this growth could harm our business.
We have rapidly and significantly expanded our operations and expect to continue to do so. This growth has placed, and is expected to continue to place, a significant strain on our managerial, operational, and financial resources and information systems. As of December 31, 2003, we had grown to approximately 1,774 employees, from approximately 75 employees and independent contractors in December 1997. If we are unable to manage our growth effectively, it could have a material adverse effect on our business, financial condition, operating results and cash flows.
Our acquisition strategy may disrupt our business and require additional financing.
Since inception, we have made several acquisitions and may continue to seek strategic acquisitions as part of our growth strategy. We compete with other companies to acquire businesses, making it difficult to acquire suitable companies on favorable terms or at all.
We may be unable to successfully integrate companies that we have acquired or may acquire in the future in a timely manner. If we are unable to successfully integrate acquired businesses, we may incur substantial costs and delays or other operational, technical or financial problems. In addition, the failure to successfully integrate acquisitions may divert management’s attention from our existing business and may damage our relationships with our key customers and employees.
To finance future acquisitions, we may issue equity securities that could be dilutive to our stockholders. We may also incur debt and additional amortization expenses related to goodwill and other intangible assets as a result of acquisitions. The interest expense related to this debt and additional amortization expense may significantly reduce our profitability and have a material adverse effect on our business, financial condition, operating results and cash flows.
Our need for additional financing is uncertain as is our ability to raise capital if required.
If we continue to incur losses, we may need additional financing to fund operations or growth. We cannot assure you that we will be able to raise additional funds through public or private financings, at any particular point in the future or on favorable terms. Future financings could adversely affect your ownership interest in comparison with those of other stockholders.
Our business will suffer if our software products contain errors.
The proprietary and third party software products we offer are inherently complex. Despite testing and quality control, we cannot be certain that errors will not be found in current versions, new versions or enhancements of our products. Significant technical challenges also arise with our products because our customers purchase and deploy those products across a variety of computer platforms and integrate them with a number of third-party software applications and databases. If new or existing customers have difficulty deploying our products or require significant amounts of customer support, our
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costs would increase. Moreover, we could face possible claims and higher development costs if our software contains undetected errors or if we fail to meet our customers’ expectations. As a result of the foregoing, we could experience:
| • | loss of or delay in revenue and loss of market share; |
| • | loss of customers; |
| • | damage to our reputation; |
| • | failure to achieve market acceptance; |
| • | diversion of development resources; |
| • | increased service and warranty costs; |
| • | legal actions by customers against us which could, whether or not successful, increase costs and distract our management; and |
| • | increased insurance costs. |
Our software products contain components developed and maintained by third-party software vendors, and we expect that we may have to incorporate software from third-party vendors in our future products. We may not be able to replace the functions provided by the third-party software currently offered with our products if that software becomes obsolete, defective or incompatible with future versions of our products or is not adequately maintained or updated. Any significant interruption in the availability of these third-party software products or defects in these products could harm the sale of our products unless and until we can secure or develop an alternative source. Although we believe there are adequate alternate sources for the technology currently licensed to us, such alternate sources may not be available to us in a timely manner, may not provide us with the same functions as currently provided to us or may be more expensive than products we currently use.
We could lose customers and revenue if we fail to meet the performance standards and other obligations in our contracts.
Many of our service agreements contain performance standards. If we fail to meet these standards or breach other material obligations under our agreements, our customers could terminate their agreements with us or require that we refund part or all of the fees charged under those agreements. The termination of any of our material services agreements and/or any associated refunds could have a material adverse effect on our business, financial condition, operating results and cash flows.
If our ability to expand our network infrastructure is constrained in any way, we could lose customers and damage our operating results.
We must continue to expand and adapt our network and technology infrastructure to accommodate additional users, increased transaction volumes and changing customer requirements. We may not be able to accurately project the rate or timing of increases, if any, in the use of our hosted solutions or be able to expand and upgrade our systems and infrastructure to accommodate such increases. We may be unable to expand or adapt our network infrastructure to meet additional demand or our customers’ changing needs on a timely basis, at a commercially reasonable cost or at all. Our current information systems, procedures and controls may not continue to support our operations while maintaining acceptable overall performance and may hinder our ability to exploit the market for healthcare applications and services. Service lapses could cause our users to switch to the services of our competitors.
Performance or security problems with our systems could damage our business.
Our customers’ satisfaction and our business could be harmed if we, or our customers experience any system delays, failures or loss of data.
Although we devote substantial resources to meeting these demands, errors may occur. Errors in the processing of customer data may result in loss of data, inaccurate information and delays. Such errors could cause us to lose customers and be liable for damages. We currently process substantially all of our customers’ transactions and data at our data centers in Colorado and Illinois. Although we have safeguards for emergencies and we have contracted backup processing for our customers’ critical functions, the occurrence of a major catastrophic event or other system failure at any of our facilities could interrupt data processing or result in the loss of stored data. In addition, we depend on the efficient operation of telecommunication providers that have had periodic operational problems or experienced outages.
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A material security breach could damage our reputation or result in liability to us. We retain confidential customer and patient information in our data centers. Therefore, it is critical that our facilities and infrastructure remain secure and that our facilities and infrastructure are perceived by the marketplace to be secure. Despite the implementation of security measures, our infrastructure may be vulnerable to physical break-ins, computer viruses, programming errors, attacks by third parties or similar disruptive problems.
Our services agreements generally contain limitations on liability, and we maintain insurance with coverage limits of $25 million for general liability and $10 million for professional liability to protect against claims associated with the use of our products and services. However, the contractual provisions and insurance coverage may not provide adequate coverage against all possible claims that may be asserted. In addition, appropriate insurance may be unavailable in the future at commercially reasonable rates. A successful claim in excess of our insurance coverage could have a material adverse effect on our business, financial condition, operating results and cash flows. Even unsuccessful claims could result in litigation or arbitration costs and may divert management’s attention from our existing business.
Our success depends on our ability to attract, retain and motivate management and other key personnel.
Our success will depend in large part on the continued services of management and key personnel. Competition for personnel in the healthcare information technology market is intense, and there are a limited number of persons with knowledge of, and experience in, this industry. We do not have employment agreements with most of our executive officers, so any of these individuals may terminate his or her employment with us at any time. The loss of services from one or more of our management or key personnel, or the inability to hire additional management or key personnel as needed, could have a material adverse effect on our business, financial condition, operating results and cash flows. Although we currently experience relatively low rates of turnover for our management and key personnel, the rate of turnover may increase in the future. In addition, we expect to further grow our operations, and our needs for additional management and key personnel will increase. Our continued ability to compete effectively in our business depends on our ability to attract, retain and motivate these individuals.
We depend on our software application vendor relationships, and if our software application vendors terminate or modify existing contracts or experience business difficulties, or if we are unable to establish new relationships with additional software application vendors, it could harm our business.
We depend, and will continue to depend, on our licensing and business relationships with third-party software application vendors. Our success depends significantly on our ability to maintain our existing relationships with our vendors