<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported)
November 29, 1999
THE TRIZETTO GROUP, INC.
(Exact name of registrant as specified in its charter)
Delaware 000-27501 33-0761159
(State or other jurisdiction (Commission File Number) (IRS Employer
of incorporation) Identification No.)
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
<PAGE> 2
ITEM 2. - ACQUISITION OR DISPOSITION OF ASSETS
On November 29, 1999, The TriZetto Group, Inc., a Delaware corporation
(the "Registrant"), acquired all of the issued and outstanding capital stock of
Novalis Corporation, a Delaware corporation ("Novalis"), in accordance with the
terms and conditions of the Stock Purchase Agreement, dated as of November 29,
1999 (the "Agreement"), by and among the Registrant, Novalis, the Novalis
Noteholders described therein and the Novalis Stockholders described therein
(Novalis Noteholders together with Novalis Stockholders are collectively
referred to as the "Novalis Securityholders"). The acquisition was effected by a
stock purchase (the "Acquisition") whereby the Registrant purchased from the
Novalis Securityholders and the Novalis Securityholders sold to the Registrant,
all of the issued and outstanding stock of Novalis. As a result of the
Acquisition, Novalis became a wholly owned subsidiary of the Registrant.
Pursuant to the Acquisition, the Novalis Securityholders sold,
transferred and delivered to the Registrant, and the Registrant purchased from
the Novalis Securityholders, all of the issued and outstanding shares of capital
stock of Novalis (the "Novalis Stock") for an aggregate purchase price equal to
the sum of (a) $5,001,515.41 cash (the "Cash Portion of the Purchase Price") and
(b) 549,786 validly issued, fully paid and non-assessable shares of common
stock, $.001 par value, of the Registrant (the "Registrant Common Stock").
The number of shares of the Registrant Common Stock issued to the
Novalis Securityholders was calculated by dividing (a) $9,000,000 by (b) the
average of the closing sales prices of Registrant Common Stock for the five
trading days immediately preceding November 22, 1999 (the "Stock Portion of the
Purchase Price," and together with the Cash Portion of the Purchase Price, the
"Purchase Price"). Pursuant to the Agreement, a portion of the Cash Portion of
the Purchase Price and the Stock Portion of the Purchase Price were deposited
into separate escrow accounts and are each subject to possible adjustment as set
forth in the Agreement. The source of funds for the Cash Portion of the Purchase
Price was available cash. The Purchase Price and all other terms of the
Agreement were determined pursuant to arms-length negotiations between the
parties.
In connection with Agreement, the Registrant entered into a Registration
Rights Agreement dated as of November 29, 1999 ("Registration Rights Agreement")
with those certain holders of Registrant Common Stock party thereto (the
"Holders"). Pursuant to the terms of the Registration Rights Agreement, the
Registrant is required to use its commercially reasonable best efforts to
qualify the shares of Registrant Common Stock issued to the Holders under the
Agreement for registration on Form S-3 or, if Form S-3 is not available, then
subject to the availability of the audited consolidated financial statements of
Novalis and its subsidiaries, on Form S-1 or such other available form.
The foregoing description of the Acquisition does not purport to be
complete and is qualified in its entirety by reference to the Agreement, which
is incorporated herein by reference.
<PAGE> 3
ITEM 7. - FINANCIAL STATEMENTS AND EXHIBITS
(a) FINANCIAL STATEMENTS OF BUSINESS ACQUIRED
The following financial statements of Novalis are being filed
with this Report:
- Independent Auditors' Reports
- Audited Consolidated Balance Sheets as of December 31,
1998 and December 31, 1997
- Audited Consolidated Statements of Operations for the
years ended December 31, 1998 and 1997
- Audited Consolidated Statement of Stockholders' Equity
for the years ended December 31, 1998 and 1997
- Audited Consolidated Statements of Cash Flow for the
years ended December 31, 1998 and 1997
- Unaudited Consolidated Balance Sheets as of September
30, 1999
- Unaudited Consolidated Statements of Operations for the
nine months ended September 30, 1999
- Unaudited Consolidated Statement of Stockholders' Equity
for the nine months ended September 30, 1999
- Unaudited Consolidated Statements of Cash Flow for the
nine months ended September 30, 1999
(b) PRO FORMA FINANCIAL INFORMATION
The following pro forma financial statements of Novalis are
being filed with this Report.
- Pro forma condensed Balance Sheet as of September 30,
1999
- Pro forma condensed Statement of Operations for the year
ended December 31, 1998 and for the nine months ended
September 30, 1999
(c) EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ -----------
<S> <C>
2.1** Stock Purchase Agreement dated as of November 29, 1999
2.2** Offset Escrow Agreement dated as of November 29, 1999
2.3** Registration Rights Agreement dated as of November 29,
1999
2.4** Form of Promissory Note
2.5** Warrant and Warrant Assignment dated as of November
29, 1999
</TABLE>
- -----------
** Previously filed by the Registrant in its Current Report on Form 8-K as filed
with the Securities and Exchange Commission on December 14, 1999.
<PAGE> 4
<TABLE>
<S> <C>
2.6** Non-Competition Agreement dated as of November 29, 1999
2.7** Warrant Escrow Agreement dated as of November 29, 1999
2.8** Form of Stock Pledge Agreement
23.1 Consent of PricewaterhouseCoopers LLP with respect to
the financial statements of Novalis
99.1 Financial Statements of Novalis listed in Item 7(a)
above
99.2 Pro Forma Financial Statements listed in Item 7(b)
above
</TABLE>
- -----------
** Previously filed by the Registrant in its Current Report on Form 8-K as filed
with the Securities and Exchange Commission on December 14, 1999.
<PAGE> 5
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 hereunto duly authorized.
THE TRIZETTO GROUP, INC.
/s/ JEFFREY H. MARGOLIS
February 14, 2000 ---------------------------------
Jeffrey H. Margolis
Chief Executive Officer, President
and Chairman of the Board of
Directors
<PAGE> 6
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
<S> <C>
2.1 ** Stock Purchase Agreement dated as of November 29, 1999
2.2 ** Offset Escrow Agreement dated as of November 29, 1999
2.3 ** Registration Rights Agreement dated as of November 29, 1999
2.4 ** Form of Promissory Note
2.5 ** Warrant and Warrant Assignment dated as of November 29, 1999
2.6 ** Non-Competition Agreement dated as of November 29, 1999
2.7 ** Warrant Escrow Agreement dated as of November 29, 1999
2.8 ** Form of Stock Pledge Agreement
23.1 Consent of PricewaterhouseCoopers LLP with respect to the financial
statements of Novalis
99.1 Financial Statements of Novalis listed in Item 7(a) above
99.2 Pro Forma Financial Statements listed in Item 7(b) above
</TABLE>
- -----------------
** Previously filed by the Registrant in its Current Report on Form 8-K as
filed with the Securities and Exchange Commission on December 14, 1999.
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
----------------------------------
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 of The TriZetto Group, Inc. of our report dated March 18,
1999, except for Note 15, as to which the date is November 29, 1999 relating to
the financial statements of Novalis Corporation, which appears in the Current
Report on Form 8-K of The TriZetto Group, Inc. dated February 14, 2000.
PricewaterhouseCoopers LLP
Albany, New York
February 14, 2000
<PAGE> 1
EXHIBIT 99.1
NOVALIS CORPORATION AND SUBSIDIARIES
FINANCIAL STATEMENTS
(AND REPORT OF INDEPENDENT ACCOUNTANTS)
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
<PAGE> 2
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
REPORT OF INDEPENDENT ACCOUNTANTS 1
Consolidated Balance Sheets 2
Consolidated Statements of Operations 3
Consolidated Statements of Stockholders' Equity (Deficit) 4
Consolidated Statements of Cash Flows 5
Notes to Consolidated Financial Statements 6-14
</TABLE>
<PAGE> 3
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Novalis Corporation and Subsidiaries
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, stockholders' equity (deficit) and cash
flows present fairly, in all material respects, the financial position of
Novalis Corporation and its subsidiaries at December 31, 1998 and 1997, and the
results of their operations and their cash flows for the years then ended in
conformity with accounting principles generally accepted in the United States.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States, which require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
As more fully described in Note 15, on November 29, 1999, the Trizetto Group,
Inc., acquired all of the outstanding capital stock of the Company.
PricewaterhouseCoopers LLP
March 18, 1999, except for Note 15,
as to which the date is November 29, 1999
1
<PAGE> 4
NOVALIS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
As of December 31, 1998 and 1997
and September 30, 1999 (unaudited)
<TABLE>
<CAPTION>
December 31,
------------------------------ September 30,
ASSETS 1998 1997 1999
------------ ------------ -------------
(unaudited)
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 950,000 $ 2,343,000 $ 1,601,000
Accounts receivable, less allowance for doubtful accounts
of $0 in 1998 and $27,000 in 1997 1,667,000 3,260,000 1,479,000
Prepaid expenses and other current assets 401,000 339,000 390,000
------------ ------------ ------------
Total current assets 3,018,000 5,942,000 3,470,000
------------ ------------ ------------
Investment in PHN - 964,000 0
Property and equipment, net 1,669,000 1,722,000 1,915,000
Capital leases, net 1,081,000 550,000 595,000
Intangible assets, net - 221,000 -
------------ ------------ ------------
Total assets $ 5,768,000 $ 9,399,000 $ 5,980,000
============ ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable $ 555,000 $ 1,060,000 $ 548,000
Accrued expenses 507,000 556,000 607,000
Deferred revenue - 474,000 -
Obligations under capital leases 468,000 252,000 286,000
State taxes payable 22,000 12,000 13,000
------------ ------------ ------------
Total current liabilities 1,552,000 2,354,000 1,454,000
Obligations under capital leases 304,000 109,000 139,000
Notes payable, related parties 6,682,000 6,167,000 9,211,000
------------ ------------ ------------
Total liabilities 8,538,000 8,630,000 10,804,000
------------ ------------ ------------
STOCKHOLDERS' EQUITY (DEFICIT):
Series A convertible preferred stock $1.00 par value; 1,186,559 shares
authorized, issued and outstanding,
liquidation preference $10 per share 1,187,000 1,187,000 1,187,000
Series B noncumulative convertible preferred stock, $1.00
par value; 235,000 shares authorized, issued and
outstanding, liquidation preference $20 per share 235,000 235,000 235,000
Common stock, $.01 par value; 16,000,000 shares
authorized; 938,519 shares issued and outstanding 9,000 9,000 9,000
Paid-in capital 15,322,000 15,322,000 15,322,000
Accumulated deficit (19,523,000) (15,984,000) (21,577,000)
------------ ------------ ------------
(2,770,000) 769,000 (4,824,000)
------------ ------------ ------------
Total liabilities and stockholders' equity $ 5,768,000 $ 9,399,000 $ 5,980,000
============ ============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
2
<PAGE> 5
NOVALIS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31, 1998 and 1997
and the Nine Months Ended September 30, 1999 (unaudited)
<TABLE>
<CAPTION>
December 31,
------------------------------ September 30,
1998 1997 1999
------------ ------------ -------------
(unaudited)
<S> <C> <C> <C>
Revenue $ 21,367,000 $ 19,644,000 $ 15,760,000
------------ ------------ ------------
Operating expenses:
Compensation 13,713,000 10,310,000 11,189,000
Systems consulting 1,077,000 4,452,000 512,000
Professional consulting 1,351,000 1,250,000 1,114,000
Travel, net of reimbursement 829,000 526,000 349,000
Data processing 1,749,000 1,186,000 1,452,000
Other 2,367,000 2,144,000 1,523,000
Depreciation and amortization 1,731,000 1,070,000 1,208,000
------------ ------------ ------------
Total operating expenses 22,817,000 20,938,000 17,347,000
------------ ------------ ------------
Operating loss (1,450,000) (1,294,000) (1,587,000)
------------ ------------ ------------
Other income (expense)
Net loss from unconsolidated subsidiary (1,745,000) (2,071,000) (85,000)
Reserve for uncollectible note receivable - (2,100,000) -
Interest income 319,000 345,000 245,000
Interest expense (593,000) (494,000) (585,000)
------------ ------------ ------------
Loss before income tax expense (3,469,000) (5,614,000) (2,012,000)
Income tax expense 70,000 68,000 (42,000)
------------ ------------ ------------
Net loss $ (3,539,000) $ (5,682,000) $ (2,054,000)
============ ============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
3
<PAGE> 6
NOVALIS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
For the Years Ended December 31, 1998 and 1997
and the Nine Months Ended September 30, 1999 (unaudited)
<TABLE>
<CAPTION>
PREFERRED COMMON PAID-IN ACCUMULATED
STOCK STOCK CAPITAL DEFICIT
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Balance, January 1, 1997 $ 1,187,000 $ 9,000 $ 10,857,000 $ (9,079,000)
Restatement of balance for
PHN (See note 2) - - - (1,223,000)
------------ ------------ ------------ ------------
Balance, restated, January 1, 1997 1,187,000 9,000 10,857,000 (10,302,000)
Issuance of Series B Preferred Stock 235,000 - 4,465,000 -
Net loss - - - (5,682,000)
------------ ------------ ------------ ------------
Balance, December 31, 1997 1,422,000 9,000 15,322,000 (15,984,000)
Net loss - - - (3,539,000)
------------ ------------ ------------ ------------
Balance, December 31, 1998 1,422,000 9,000 15,322,000 (19,523,000)
Net loss - - - (2,054,000)
------------ ------------ ------------ ------------
Balance, September 30,
1999 (unaudited) $ 1,422,000 $ 9,000 $ 15,322,000 $(21,577,000)
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
4
<PAGE> 7
NOVALIS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 1998 and 1997
and for the Nine Months Ended September 30, 1999 (unaudited)
<TABLE>
<CAPTION>
December 31,
----------------------------- September 30,
1998 1997 1999
----------- ----------- -------------
(unaudited)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(3,539,000) $(5,682,000) $ (2,054,000)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization
Property and equipment 1,510,000 776,000 1,208,000
Excess of cost over net assets acquired 680,000 1,149,000 -
Other intangible assets 221,000 294,000 -
Loss on disposal of property and equipment 77,000 - (1,000)
Equity in losses of unconsolidated subsidiary 1,423,000 1,012,000 85,000
Provision for uncollectible note receivable - 2,100,000 -
Changes in operating assets and liabilities
Accounts receivable, net 1,593,000 (916,000) 188,000
Prepaid expenses and other assets (62,000) (173,000) 11,000
Accounts payable (505,000) (60,000) (7,000)
Accrued expenses 466,000 528,000 629,000
Deferred revenue (474,000) 6,000 -
Income taxes payable 10,000 (14,000) (9,000)
----------- ----------- -----------
Net cash provided by (used in) operating activities 1,400,000 (980,000) 50,000
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in PHN - (1,600,000)
Purchase of property and equipment (897,000) (1,065,000) (967,000)
Issuance of note receivable (1,139,000) - (85,000)
----------- ----------- -----------
Net cash used in investing activities (2,036,000) (2,665,000) (1,052,000)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payment on capital lease obligation (757,000) (210,000) (347,000)
Proceeds from issuance of capital stock 4,700,000 2,000,000
----------- ----------- -----------
Net cash provided by (used in) financing
activities (757,000) 4,490,000 1,653,000
----------- ----------- -----------
(Decrease) increase in cash and cash equivalents (1,393,000) 845,000 651,000
Cash and cash equivalents, beginning of year 2,343,000 1,498,000 950,000
----------- ----------- -----------
Cash and cash equivalents, end of year $ 950,000 $ 2,343,000 $1,601,000
=========== =========== ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 50,000 $ 16,000 $ 56,000
Income taxes $ 91,000 $ 55,000 $ 53,000
Noncash investing and financing activities
Acquisition of assets through capital leases $ 1,168,000 $ 391,000 $ -
Additional investment in PHN and corresponding
deferred revenue - 569,000 -
</TABLE>
The accompanying notes are an integral part of the financial statements.
5
<PAGE> 8
NOVALIS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION
Novalis Corporation, incorporated in September 1995, holds all the common
stock of Novalis Development & Licensing Corporation (NDLC) (formerly
known as Health Networks of America, Inc.), Digital Insurance Systems
Corporation (DISCorp), Novalis Development Corporation (NDC) and Novalis
Services Corporation (NSC) (collectively referred to as the Company). NSC
was incorporated in April 1997 to administer a management and
administrative services agreement with an affiliate.
2. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation:
The accompanying consolidated financial statements of the Company
have been prepared in conformity with generally accepted accounting
principles. The consolidated financial statements include the
accounts of Novalis Corporation and its wholly-owned subsidiaries.
All significant intercompany accounts and transactions have been
eliminated in consolidation.
Principal business activities:
The Company is a health information technology company that develops
and licenses a comprehensive managed care business model for the
managed care industry. It also provides management, administrative
and other related support services to the managed care industry.
Unaudited interim results:
The accompanying interim consolidated financial statements as of and
for the nine months ended September 30, 1999 are unaudited. The
unaudited interim financial statements have been prepared on the
same basis as the annual financial statements and, in the opinion of
management, reflect all adjustments, which include only normal
recurring adjustments, necessary to present fairly the Company's
financial position at September 30, 1999 and results of their
operations and their cash flows for the nine months ended September
30, 1999.
Use of estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amount of assets and
liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results
could differ from those estimates.
Cash and cash equivalents:
For the purpose of the statement of cash flows, the Company defines
cash and cash equivalents as cash and investments with original
maturities of three months or less.
Investment in PHN:
During 1997, the Company increased its ownership in Preferred Health
Network of Maryland, Inc. (PHN) from approximately 14% (264,945
shares) to 22% (514,784 shares). The PHN shareholders' agreement
restricts transfer of PHN stock under certain terms and conditions.
In 1997, the Company also entered into a management and
administrative services agreement with PHN (see note 4).
Accordingly, the Company changed its method of accounting for its
investment in PHN from the cost method to the equity method and
retroactively restated its 1997 financial statements. The excess of
investment cost over PHN's equity at the time of the respective
purchases is being amortized over a two year period and is included
in the caption "Investment in PHN". The unamortized portion of the
investment at December 31, 1998 and 1997 was $0 and $680,000,
respectively. Amortization expense for 1998 and 1997 was $680,000
and $1,149,000, respectively and is included in the caption "net
loss from unconsolidated subsidiary".
6
<PAGE> 9
NOVALIS CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS, CONTINUED
2. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
Property and equipment:
Property and equipment is stated at cost. Depreciation and
amortization are calculated using the straight-line method over the
estimated useful lives of the assets (three to seven years) for
financial reporting purposes. When assets are sold, retired, or
otherwise disposed of, the applicable costs and accumulated
depreciation and amortization are removed from the accounts and the
resulting gain or loss is recognized.
Intangible assets:
Licenses, goodwill and technology are being amortized over three
years, using the straight-line method. The Company continually
evaluates the existence of intangible asset impairment on the basis
of whether the intangible asset is fully recoverable from projected,
undiscounted net cash flows.
Revenue recognition:
Program fees - revenue from the license of the "Novalis Program" is
recognized on a monthly basis either on a percentage of the client's
adjusted gross revenues or on a fee based on the client's member
enrollment (as defined by the license agreement).
Management and administrative services - revenue for management and
administrative services, as defined by the client contract, is
recognized monthly based on the client's member enrollment.
Software licenses - revenue from license fees is recognized upon the
later of shipment of product or completion of significant
obligations to customers, if collectibility of the resulting
receivable is probable. Upon the recognition of revenue, all costs
associated with insignificant obligations are accrued.
Maintenance and support services - maintenance revenue is deferred
and recognized ratably over the term of the agreement. All
maintenance contracts expired on or before December 31, 1998 with
the cessation of DISCorp (see Note 14). Revenue from support
services is recognized as the related services are performed.
Research and development:
Research and development costs (R&D) are expensed as incurred.
During the years ended December 31, 1998 and 1997, the Company
incurred approximately $2.8 million and $5.4 million of research and
development costs. These expenses are included in compensation and
systems consulting expenses in the consolidated statements of
operations.
Income taxes:
The Company accounts for income taxes according to Financial
Accounting Statement No. 109 (FAS 109). This Statement requires the
use of the asset and liability method of accounting for income
taxes. Under this method, deferred taxes are recognized for the tax
consequences of temporary differences by applying enacted statutory
tax rates applicable to future years for the differences between the
financial statement and tax basis of existing assets and
liabilities.
7
<PAGE> 10
NOVALIS CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS, CONTINUED
3. NOTE RECEIVABLE
The Company has a note agreement with a client in which it advanced $2.1
million to be used by the client to invest in a newly formed subsidiary.
Due to the continued net losses of the client and its' subsidiary, the
Company recorded a reserve for the entire principal amount of the loan
receivable in 1997. Principal on the note is due July 30, 2001. On
November 29, 1999, the maturity date of the Note was extended to December
31, 2004. Interest, which is at prime plus 1%, is payable to the Company
monthly. Interest income earned in 1998 and 1997 was $196,000 and
$198,000, respectively.
4. INVESTMENT IN PHN
Condensed financial information of PHN for the years ended December 31,
1998 and 1997 is as follows:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Revenues $87,600,000 $87,942,000
=========== ===========
Net loss $ 3,302,000 $ 5,299,000
=========== ===========
Current assets $21,262,000 $18,747,000
Other assets 343,000 395,000
----------- -----------
Total assets $21,605,000 $19,142,000
=========== ===========
Current liabilities $19,068,000 $17,885,000
Long-term liabilities 4,000,000 -
Shareholders' equity (deficit) (1,463,000) 1,257,000
----------- -----------
Total liabilities and shareholders' equity $21,605,000 $19,142,000
=========== ===========
</TABLE>
In March 1997, the Company entered into a management and administrative services
agreement with PHN whereby primarily all of the employees of PHN became
employees of the Company. The Company receives a monthly management fee based on
a per member per month amount for providing to PHN all management,
administrative and information system services not specifically excluded per the
agreement. The agreement is in effect through December 31, 2001 and shall renew
automatically for one year periods until otherwise terminated. Company revenue
generated under this agreement in 1998 and 1997 approximated $8,000,000 and
$6,300,000, respectively.
Under a separate agreement with PHN which expired March 1, 1997, the Company
generated revenue of approximately $260,000 for performing service bureau type
services for the period January 1, 1997 through February 28, 1997.
In March 1997, the Company acquired an additional 184,242 shares of PHN stock
for $1,600,000.
8
<PAGE> 11
NOVALIS CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS, CONTINUED
4. INVESTMENT IN PHN (CONTINUED)
In June 1997, the Company and certain shareholders of PHN guaranteed a
letter of credit obtained from a bank by PHN. The letter of credit
supports a surplus note arrangement between PHN and PHN's subsidiary. The
surplus note arrangement is required to maintain the minimum statutory
surplus of PHN's subsidiary as set forth by the State of Maryland
Insurance Administration. The Company's portion of the guaranteed letter
of credit was approximately $1,139,000. For entering into the guarantee
arrangement with PHN, PHN issued 65,597 shares of its common stock to the
Company at no cost, which had a fair value of $8.68 per share ($569,000).
This transaction resulted in an increase in Novalis' investment in PHN and
a corresponding increase in deferred revenue.
In December 1998, the Company and certain shareholders of PHN loaned PHN
the aggregate amount of $4,000,000 in lieu of PHN calling the guarantee of
the letter of credit. The principal amount of the Company's promissory
note is approximately $1,139,000. The note bears interest at 3% and is
payable quarterly. The principal amount may only be repaid to the extent
that funds are available in excess of the required surplus of PHN's
subsidiary as determined by its board of directors and as permitted under
the State of Maryland insurance laws. In addition, under a Surplus
Maintenance Agreement, Novalis and certain other shareholders of PHN have
agreed to make additional loans to PHN in the aggregate amount of
$1,600,000, (bearing interest at 3% per annum) of which Novalis has
committed to approximately $455,000. Such funding will be required in the
event PHN is unable to meet the State of Maryland statutory surplus
requirements in 1999 or 2000.
The caption "net loss from unconsolidated subsidiary" includes the
Company's equity interest losses in PHN of $1,423,000 and $1,012,000 and
related goodwill amortization of $322,000, and $1,059,000, for years ended
December 31, 1998 and 1997, respectively.
The Company's "Investment in PHN" which includes the original investment,
its excess of investment cost over PHN's equity, deferred revenue
(referred to above) and loan receivable has been written off in full.
5. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Purchased computer software $ 562,000 $ 601,000
Office equipment and hardware 2,676,000 2,409,000
Leasehold improvements 28,000 -
Accumulated depreciation and amortization (1,597,000) (1,288,000)
----------- -----------
$ 1,669,000 $ 1,722,000
=========== ===========
</TABLE>
Depreciation and amortization expense for 1998 and 1997 was $872,000 and
$638,000.
9
<PAGE> 12
NOVALIS CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS, CONTINUED
5. PROPERTY AND EQUIPMENT, CONTINUED
Assets acquired through capital leases during 1998 and 1997 consist of:
<TABLE>
<CAPTION>
1998 1997
---------- --------
<S> <C> <C>
Capital lease $1,904,000 $735,000
Accumulated amortization (823,000) (185,000)
---------- --------
$1,081,000 $550,000
========== ========
</TABLE>
Amortization expense for 1998 and 1997 was $638,000 and $138,000.
6. INTANGIBLE ASSETS
Intangible assets consist of the following:
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Goodwill $ 709,000 $ 709,000
Licenses and completed technology 174,000 174,000
Accumulated amortization (883,000) (662,000)
--------- ---------
$ - $ 221,000
========= =========
</TABLE>
Amortization expense for 1998 and 1997 was $221,000 and $294,000.
7. RELATED PARTIES
Notes payable:
Under a Capital Stock and Note Purchase Agreement dated as of
October 4, 1995, the Company issued promissory notes (the Notes) in
the aggregate principal amount of $5,298,000 to certain holders of
Series A Convertible Preferred Stock. Interest in the amount of
$393,000 accrued through December 31, 1996 was converted to
principal on January 1, 1997. The principal amount of the Notes and
interest accrued thereon are payable on terms set forth in such
Agreement and Notes. Generally, the Notes accrue interest at 8% per
annum. Interest is payable quarterly in arrears until final
maturity, beginning January 1, 2000. The unpaid principal balance is
payable on January 2, 2000. Such maturity date is extendible at the
option of the holders of the Notes for one-year terms but to a date
no later than January 2, 2001. At December 31, 1998 and 1997,
accrued interest of $991,000 and $476,000 is included in the caption
"Notes payable -- related parties" (see Note 15). The Company
incurred related party interest expense of $515,000 and $476,000
during the years ended December 31, 1998 and 1997, respectively.
Other:
Certain officers of the Company are on the Boards of Directors of
various clients.
10
<PAGE> 13
NOVALIS CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS, CONTINUED
8. STOCKHOLDERS' EQUITY
The Company is authorized to issue 2,000,000 shares of Preferred Stock
(par value $1.00) of which 1,186,559 of authorized shares have been
designated as Series A Convertible Preferred Stock (Series A Stock). This
preferred stock is noncumulative. The Series A Stock is convertible into
common stock at an initial conversion ratio of 10 shares of common stock
for each share of Series A Stock. The holders of Series A Stock have the
right to vote on an as converted basis together with the holders of common
stock and have the right to vote separately as a class on certain matters.
Furthermore, Series A stockholders shall receive a $10 per share
liquidation preference upon liquidation, dissolution or winding up of the
Company.
In February 1997, the Company sold 235,000 shares of Company Series B
Convertible Preferred Stock (Series B Stock) for $4,700,000. The Series B
Stock (par value $1.00) is convertible into common stock at an initial
conversion ratio of 10 shares of common stock for each share of Series B
Stock. The Series B Stock has a liquidation preference of $20 per share.
The remaining 578,441 of authorized preferred stock shares are
undesignated and unissued (see Note 15).
9. INCOME TAXES
Current income tax expense was $70,000 and $68,000 in 1998 and 1997,
respectively. There was no deferred tax expense in either year. The
difference between the Company's effective tax rate and the federal
statutory rate is primarily attributable to the change in the valuation
allowance.
The significant components of deferred tax assets (liabilities) are as
follows:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Note receivable $ 840,000 $ 840,000
Investments 740,000 264,000
Intangibles - (17,000)
Property and equipment 40,000 7,000
Other (70,000) 259,000
Net operating loss carryovers 2,990,000 2,208,000
Research and development credit carryovers 498,000 364,000
----------- -----------
Net deferred tax assets 5,038,000 3,925,000
Valuation allowance (5,038,000) (3,925,000)
----------- -----------
$ - $ -
=========== ===========
</TABLE>
The Company has recorded a full valuation allowance against its net deferred tax
assets totaling $5,038,000 at December 31, 1998. The valuation allowance
increased approximately $1,113,000 from December 31, 1997. The valuation
allowance was established because, based upon the information available at
December 31, 1998, it is more likely than not that the Company's net deferred
tax assets will not be realized in the future.
11
<PAGE> 14
NOVALIS CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS, CONTINUED
9. INCOME TAXES, CONTINUED
The Company has available as of December 31, 1998, approximately
$7,475,000 of net operating loss carryforwards which begin to expire in
2010 and approximately $498,000 of research and development credits which
begin to expire in 2011. The use of the operating loss carryforwards and
research and development credits may be limited on an annual basis,
pursuant to the Internal Revenue Code, due to changes in ownership (see
Note 15).
10. LEASE AGREEMENTS
The following is a schedule by years of future minimum rental payments
required under operating leases that have initial or remaining
noncancelable lease terms in excess of one year as of December 31, 1998:
<TABLE>
<CAPTION>
YEARS ENDING
DECEMBER 31,
------------
<S> <C>
1999 $599,000
2000 587,000
2001 451,000
2002 150,000
2003 0
</TABLE>
Total rent expense for 1998 and 1997 was approximately $453,000 and
$390,000.
The following is a schedule by years of future minimum payments (exclusive
of interest) required under capital leases that have initial or remaining
noncancelable lease terms in excess of one year as of December 31, 1998:
<TABLE>
<CAPTION>
YEARS ENDING
DECEMBER 31,
------------
<S> <C>
1999 $468,000
2000 268,000
2001 36,000
</TABLE>
11. SAVINGS AND INVESTMENT PLANS
The Company has savings and investment plans which cover substantially all
employees who have met certain service requirements. Employees may
contribute up to 16% of their annual salary (up to the maximum established
by the IRS each year) to the plan. The Company contributes 50% of the
first 6% contributed by each employee to the plan. The Company made
contributions of approximately $249,000 and $181,000 during 1998 and 1997.
12
<PAGE> 15
NOVALIS CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS, CONTINUED
12. STOCK OPTIONS
On November 21, 1995, the Board of Directors approved the 1995 Stock
Option Plan (the Plan). Under the Plan and related incentive stock option
agreements, options have been granted to purchase shares of common stock
of the Company with an exercise price not less than the fair value of a
share of such common stock at the date of the grant (as determined by the
Board of Directors) and vest over a three-year period.
During the years ended December 31, 1998 and 1997, the Company granted
options (with an exercise price equal to fair value as determined by
management and approved by the Board of Directors) to various employees to
purchase 402,650 and 137,600 shares of Company common stock, respectively.
During 1998 and 1997, options to acquire 68,650 and 81,900 shares,
respectively, were forfeited. At December 31, 1997, options to acquire
394,400 shares were outstanding, of which 178,267 shares were exercisable.
At December 31, 1998, options to acquire 728,400 shares were outstanding,
of which 309,250 were exercisable (see Note 15).
The Company applies Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," in accounting for the stock
option plans. Accordingly, no compensation cost has been recognized in the
accompanying consolidated statements of operations. The pro forma
disclosure information required by Statement of Financial Accounting
standards No. 123 "Accounting for Stock-Based Compensation" has not been
presented since it is immaterial to the consolidated financial statements
taken as a whole and as a result of the stock purchase agreement (see Note
15) all options have been subsequently cancelled.
13. CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of cash and cash
equivalents and trade receivables.
The Company maintains its cash accounts in commercial banks. Accounts at
each bank are guaranteed by the Federal Deposit Insurance Corporation
(FDIC) up to $100,000. At December 31, 1998, the Company had approximately
$706,000 in banks in excess of insured limits. The Company mitigates its
credit risk by reviewing the creditworthiness of the financial
institutions with which they do business.
During the years ended December 31, 1998 and 1997, two customers
represented 38% and 10% of total revenue (or 48% in the aggregate) and 3
customers represented 34%, 11% and 11% of total revenues (or 56% in the
aggregate).
Revenue contracts with two customers expired as of the end of 1998 and
were not renewed. Revenue in the aggregate related to these contracts in
1998 and 1997 was approximately $3,500,000 each year.
With respect to trade receivables, the Company's customers are primarily
concentrated in one line of business and are located throughout the United
States. The Company establishes allowances for doubtful accounts based
upon factors surrounding the credit risk of specific customers, historical
trends and other information.
13
<PAGE> 16
NOVALIS CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS, CONTINUED
14. DISCONTINUED OPERATIONS
Digital Insurance Systems Corporation ceased operations as of December 31,
1998. There is no material impact on consolidated results of operations as
a result of this cessation. All assets were liquidated prior to December
31, 1998. Results of operations are as follows:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Revenues $1,871,000 $1,976,000
Net Income 195,000 125,000
</TABLE>
15. SUBSEQUENT EVENTS
On January 19, 1999, the Company was loaned $2,000,000 from certain
holders of Series A Convertible Preferred Stock.
In November 1999, the Board of Directors authorized the issuance of up to
93,000 shares of Series C Preferred Stock, par value $1.00 per share (the
"Series C Stock"). The Series C Stock shall have preferred rights to
dividends and distributions from Novalis that are senior to the rights of
all other classes of stock of Novalis and shall have a preference to the
rights of all other classes of stock of Novalis in liquidation.
On November 29, 1999, just prior to Novalis signing the stock purchase
agreement referred to below, the Novalis noteholders exchanged their notes
with outstanding principal and accrued interest balances aggregating
$9,274,902 for 92,749.03 shares of Series C Stock (see Note 7).
On November 29, 1999 the Company entered into a Stock Purchase agreement
with the TriZetto Group, Inc. (TriZetto) whereby TriZetto acquired all of
the outstanding capital stock of Novalis for approximately $5,000,000 in
cash and $9,000,000 in Trizetto common stock (see Notes 8 and 9).
In connection with the Stock Purchase Agreement, all issued and
outstanding stock options under the Novalis 1995 Stock Option Plan were
cancelled (see Note 12).
14
<PAGE> 17
NOVALIS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 1999 AND DECEMBER 31, 1998
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,601,000 $ 950,000
Accounts receivable 1,479,000 1,667,000
Prepaid expenses and other current assets 390,000 401,000
------------ ------------
Total current assets 3,470,000 3,018,000
Investment in PHN 0 0
Property and equipment, net 1,915,000 1,669,000
Capital leases, net 595,000 1,081,000
------------ ------------
Total assets $ 5,980,000 $ 5,768,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 548,000 $ 555,000
Accrued expenses 607,000 507,000
Obligations under capital leases 286,000 468,000
State taxes payable 13,000 22,000
------------ ------------
Total current liabilities 1,454,000 1,552,000
Obligations under capital leases 139,000 304,000
Notes payable - related parties 9,211,000 6,682,000
------------ ------------
Total liabilities 10,804,000 8,538,000
------------ ------------
Stockholders' equity (deficit):
Series A convertible preferred stock, $1.00 par value;
1,186,559 shares authorized, issued and outstanding,
liquidation preference $10 per share 1,187,000 1,187,000
Series B noncumulative convertible preferred stock, $1.00 par value;
235,000 shares authorized, issued and outstanding,
liquidation preference $20 per share 235,000 235,000
Common stock, $.01 par value; 16,000,000 shares authorized;
938,519 shares issued and outstanding 9,000 9,000
Paid-in capital 15,322,000 15,322,000
Accumulated deficit (21,577,000) (19,523,000)
------------ ------------
(4,824,000) (2,770,000)
------------ ------------
Total liabilities and stockholders' equity $ 5,980,000 $ 5,768,000
============ ============
</TABLE>
<PAGE> 18
NOVALIS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE PERIODS ENDED SEPTEMBER 30, 1999 AND DECEMBER 31, 1998
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------- ------------
<S> <C> <C>
Revenue $ 15,760,000 $ 21,367,000
------------ ------------
Operating expenses
Compensation 11,189,000 13,713,000
Systems consulting 512,000 1,077,000
Professional consulting 1,114,000 1,351,000
Travel, net of reimbursement 349,000 829,000
Data processing 1,452,000 1,749,000
Other 1,523,000 2,367,000
Depreciation and amortization 1,208,000 1,731,000
------------ ------------
Total operating expenses 17,347,000 22,817,000
------------ ------------
Operating loss (1,587,000) (1,450,000)
------------ ------------
Other income (expense)
Net income (loss) from unconsolidated subsidiary (85,000) (1,745,000)
Interest income 245,000 319,000
Interest expense (585,000) (593,000)
------------ ------------
Loss before income tax expense (2,012,000) (3,469,000)
Income tax (expense) benefit (42,000) (70,000)
------------ ------------
Net loss $ (2,054,000) $ (3,539,000)
============ ============
</TABLE>
<PAGE> 19
NOVALIS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE PERIODS ENDED SEPTEMBER 30, 1999 AND DECEMBER 31, 1998
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------ ------------
<S> <C> <C>
Cash Flows From Operating Activities:
Net loss $(2,054,000) $(3,539,000)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization:
Property & equipment 1,208,000 1,510,000
Excess of cost over net assets acquired 0 680,000
Other intangible assets 0 221,000
(Gain) loss on disposal of property and equipment (1,000) 77,000
Equity in losses of unconsolidated subsidiary 85,000 1,423,000
Changes in operating assets and liabilities:
Accounts receivable 188,000 1,593,000
Prepaid expenses and other assets 11,000 (62,000)
Accounts payable (7,000) (505,000)
Accrued expenses 629,000 466,000
Deferred revenue 0 (474,000)
Income taxes payable (9,000) 10,000
----------- -----------
Net cash provided by operating activities 50,000 1,400,000
----------- -----------
Cash Flows From Investing Activities:
Purchase of property and equipment (967,000) (897,000)
Issuance of note receivable (85,000) (1,139,000)
----------- -----------
Net cash used in investing activities (1,052,000) (2,036,000)
----------- -----------
Cash Flows From Financing Activities:
Principal payment on capital lease obligation (347,000) (757,000)
Proceeds from issuance of indebtedness 2,000,000 0
----------- -----------
Net cash provided by (used in) financing activities 1,653,000 (757,000)
----------- -----------
Increase (decrease) in cash and cash equivalents 651,000 (1,393,000)
Cash and cash equivalents, beginning of period 950,000 2,343,000
----------- -----------
Cash and cash equivalents, end of period $ 1,601,000 $ 950,000
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 56,000 $ 50,000
Income taxes $ 53,000 $ 91,000
Noncash investing and financing activities
Acquisition of assets through capital leases $ 0 $ 1,168,000
</TABLE>
<PAGE> 1
EXHIBIT 99.2
UNAUDITED PRO FORMA COMBINED CONDENSED CONSOLIDATED
STATEMENTS OF OPERATIONS
Effective November 29, 1999, The TriZetto Group, Inc. (the "Company" or
"TriZetto") acquired all of the outstanding shares of Novalis Corporation
("Novalis"). 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 fair
market values on the acquisition date.
The purchase price of approximately $18.7 million consisted of cash in the
amount of approximately $5.0 million, 549,786 shares of common stock with a
value of $16.37 per share, assumed liabilities of $1.9 million, and acquisition
costs of approximately $2.8 million. Of the total purchase price, $923,000 has
been allocated to in-process technology and the remainder of the purchase price
was allocated to assets acquired and liabilities assumed.
The following unaudited pro forma balance sheet is based on the
consolidated balance of the Company and Novalis at September 30, 1999, assuming
the transaction was consummated on September 30, 1999. The unaudited pro forma
combined condensed consolidated statements of operations are derived from the
historical consolidated financial statements of the Company and Novalis. The
unaudited pro forma combined condensed statements of operations for the year
ended December 31, 1998 and for the nine months ended September 30, 1999, give
effect to the acquisition of Novalis as if it occurred on January 1, 1998. For
purposes of the unaudited pro forma combined condensed consolidated statements
of operations for the year ended December 31, 1998 and nine months ended
September 30, 1999, the Company's results of operations have been combined with
Novalis' results of operations for such respective periods.
The unaudited pro forma combined condensed consolidated financial
statements have been prepared in accordance with the rules and regulations of
the Securities and Exchange Commission and do not purport to represent what the
Company's results of operations would have been or what operations would be if
the transactions that give rise to the pro forma adjustments had occurred on the
dates assumed and are not necessarily indicative of future results. The
unaudited pro forma combined condensed consolidated statements of operations
should be read in conjunction with the historical consolidated financial
statements and related notes of TriZetto and Novalis.
<PAGE> 2
The TriZetto Group, Inc.
Unaudited Pro Forma Combined Condensed
Consolidated Balance Sheet
As of September 30, 1999
(in thousands)
<TABLE>
<CAPTION>
Historical
---------------------------
ASSETS TriZetto Novalis Adjustments Total
------------ ------------ ------------ --------
<S> <C> <C> <C> <C> <C>
Current assets
Cash and cash equivalents $ 1,834 $ 1,601 $ 3,435
Accounts receivable, net 4,984 1,479 6,463
Prepaid expenses and other current assets 1,697 390 2,087
-------- -------- --------- --------
Total current assets 8,515 3,470 -- 11,985
Property and equipment, net 6,025 1,915 7,940
Other Assets 87 595 682
Goodwill and other intangible assets, net 4,592 -- 12,901 (A) 17,493
-------- -------- --------- --------
Total assets $ 19,219 $ 5,980 $ 12,901 $ 38,100
======== ======== ========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 1,235 $ 548 $ 1,783
Accrued expenses 4,676 607 2,809 (B) 8,092
Short term obligations 1,537 286 1,823
Taxes payable 77 13 90
-------- -------- --------- --------
Total current liabilities 7,525 1,454 2,809 11,788
Long term obligations 1,544 139 1,683
Deferred taxes 362 -- 362
Notes payable - related parties 390 9,211 9,601
-------- -------- --------- --------
Total liabilities 9,821 10,804 2,809 23,434
-------- -------- --------- --------
Mandatorily redeemable convertible preferred stock 10,932 10,932
Stockholders' equity (deficit):
Preferred stock -- 1,422 (1,422) (C) --
Common stock 10 9 (8) (C),(D) 11
Paid-in capital 8,791 15,322 (9,132) (C),(D) 14,981
Notes receivable from stockholders (41) -- (41)
Deferred stock compensation (6,213) -- (6,213)
Accumulated deficit (4,081) (21,577) 20,654 (C),(E) (5,004)
-------- -------- --------- --------
(1,534) (4,824) 10,092 3,734
-------- -------- --------- --------
Total liabilities and stockholders' equity (deficit) $ 19,219 $ 5,980 $ 12,901 $ 38,100
======== ======== ========= ========
</TABLE>
<PAGE> 3
The TriZetto Group, Inc.
Unaudited Pro Forma Combined Condensed
Consolidated Statement of Operations
Twelve Months Ended December 31, 1998
(in thousands)
<TABLE>
<CAPTION>
Historical
------------------------
TriZetto Novalis Adjustments Totals
-------- -------- ----------- --------
<S> <C> <C> <C> <C>
Revenues:
Recurring revenue $ 5,300 $ 8,185 $ 13,485
Consulting revenue 6,131 13,182 19,313
-------- -------- --------
Total revenues 11,431 21,367 32,798
-------- -------- --------
Cost of revenues:
Recurring revenue 3,967 7,219 11,186
Consulting revenue 3,490 7,692 11,182
-------- -------- --------
Total cost of revenues 7,457 14,911 22,368
-------- -------- --------
Gross profit 3,974 6,456 10,430
-------- -------- --------
Operating expenses:
Research and development 1,083 2,800 3,883
Selling, general and administrative 2,885 5,106 3,507 (F) 11,498
Amortization of deferred stock compensation 22 -- 22
-------- -------- -------- --------
Total operating expenses 3,990 7,906 3,507 15,403
-------- -------- -------- --------
Income (loss) from operations (16) (1,450) (3,507) (4,973)
-------- -------- -------- --------
Net loss from unconsolidated subsidiary -- 1,745 1,745
Interest income 210 319 529
Interest expense 52 593 645
-------- -------- -------- --------
Income (loss) before provision for
(benefit of) income taxes 142 (3,469) (3,507) (6,834)
Provision for (benefit of) income taxes 82 70 152
-------- -------- -------- --------
Net income (loss) $ 60 $ (3,539) $ (3,507) $ (6,986)
======== ======== ======== ========
Net income (loss) per share:
Basic $ 0.01 $ (1.42)
======== ========
Diluted $ -- $ (1.42)
======== ========
Shares used in computing net income (loss) per share:
Basic 4,937 4,937
======== ========
Diluted 12,783 4,937
======== ========
Pro forma net income (loss) per share:
Basic $ 0.01 $ (1.27)
======== ========
Diluted $ -- $ (1.27)
======== ========
Shares used in computing pro forma net income
(loss) per share:
Basic 5,487 5,487
======== ========
Diluted 13,333 5,487
======== ========
</TABLE>
<PAGE> 4
THE TRIZETTO GROUP, INC.
Unaudited Pro Forma Combined Condensed
Consolidated Statement of Operations
Nine Months Ended September 30, 1999
(in thousands)
<TABLE>
<CAPTION>
TRIZETTO NOVALIS ADJUSTMENTS TOTALS
-------- -------- --------- --------
<S> <C> <C> <C> <C>
Revenues:
Recurring revenue $ 11,841 $ 7,905 $ 19,746
Consulting revenue 9,894 7,855 17,749
-------- -------- --------
Total revenues 21,735 15,760 37,495
-------- -------- --------
Cost of revenues:
Recurring revenue 10,366 6,689 17,055
Consulting revenue 6,723 5,310 12,033
-------- -------- --------
Total cost of revenues 17,089 11,999 29,088
-------- -------- --------
Gross profit 4,646 3,761 8,407
-------- -------- --------
Operating expenses:
Research and development 1,181 2,760 3,941
Selling, general and administrative 5,373 2,673 2,630 (F) 10,676
Amortization of deferred stock compensation 627 -- 627
Write-off of acquired in-process technology 484 -- 0
-------- -------- --------- --------
Total operating expenses 7,665 5,433 2,630 15,244
-------- -------- --------- --------
Income (loss) from operations (3,019) (1,672) (2,630) (6,837)
-------- -------- --------- --------
Interest income 120 245 365
Interest expense 177 585 762
-------- -------- --------- --------
Income (loss) before provision for (benefit of) income taxes (3,076) (2,012) (2,630) (7,234)
Provision for (benefit of) income taxes (181) 42 (139)
-------- -------- --------- --------
Net income (loss) $ (2,895) $ (2,054) $ (2,630) $ (7,095)
======== ======== ========= ========
Net income (loss) per share:
Basic $ (0.42) $ (1.04)
======== ========
Diluted $ (0.42) $ (1.04)
======== ========
Shares used in computing net income (loss) per share:
Basic 6,848 6,848
======== ========
Diluted 6,848 6,848
======== ========
Pro forma net income (loss) per share:
Basic $ (0.39) $ (0.96)
======== ========
Diluted $ (0.39) $ (0.96)
======== ========
Shares used in computing pro forma net income (loss) per share:
Basic 7,398 7,398
======== ========
Diluted 7,398 7,398
======== ========
</TABLE>
<PAGE> 5
THE TRIZETTO GROUP, INC.
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED
CONSOLIDATED STATEMENTS OF INCOME
NOTE 1 SUMMARY OF TRANSACTION
In connection with TriZetto's acquisition of Novalis, TriZetto exchanged
approximately $5.0 million of cash, 549,786 shares of common stock, and assumed
liabilities of $1.9 million for all of the outstanding shares of Novalis and
incurred acquisition related expense of approximately $2.8 million.
The allocation of the purchase price was as follows (in thousands):
<TABLE>
<S> <C>
Allocation of purchase price:
Total current assets...................................... $ 2,726
Property and equipment and other noncurrent assets........ 2,434
Goodwill(a)............................................... 3,165
Acquired workforce(b)..................................... 1,078
Core technology(c)........................................ 4,527
Customer lists(d)......................................... 3,821
Acquired in-process technology(e)......................... 923
-------
Total purchase price...................................... $18,674
=======
</TABLE>
- ---------------
(a) Goodwill represents the excess of the purchase price over the fair
value of the net assets acquired and will be amortized over 5 years.
(b) Acquired workforce was valued on a replacement cost basis and will be
amortized over a two year period, the period of time TriZetto
estimates it would benefit from the workforce.
(c) Core technology is being amortized on a straightline basis over three
years.
(d) Customer lists are being amortized on a straightline basis over five
years.
(e) The valuation of the purchased in-process research development of
$923,000 was based on the result of an independent appraisal using the
relief from royalty methodology. Under this method, the value of the
intangible asset is estimated by quantifying the royalties saved due
to the Company's ownership of the software. Future royalties are
discounted to the present value under a discounted cash flow analysis.
The valuation analysis considered the contribution of the core
technology as well as the percent complete of the in-process research
and development. The purchased in-process technology was not
considered to have reached technological feasibility and had no
alternatives future use.
NOTE 2 -- UNAUDITED PRO FORMA COMBINED NET INCOME (LOSS) PER SHARE:
Basic net income (loss) per share and shares used in computing the net
income (loss) per share for the year ended December 31, 1998 and the nine months
ended September 30, 1999 are based upon the historical weighted average common
shares outstanding. Dilutive net income (loss) per share reflects the potential
dilution that could occur from common shares issuable through stock options,
warrants and other convertible securities. Potential common stock has been
excluded from the computation of net loss per share as their effect would be
anti-dilutive.
The 550 shares of common stock issued in connection with the acquisition
has been included in the calculation of pro forma basic and diluted net loss
per share as follows:
<TABLE>
<CAPTION>
Nine Months
Year Ended Ended
December 31, September 30,
1998 1999
------------------- ------------------
Basic Diluted Basic Diluted
------ -------- ------ --------
<S> <C> <C> <C> <C>
Shares used in computing basic and diluted
net loss per share....................... 4,937 12,783 6,848 6,848
Adjustment to reflect common stock issued
in acquisitions.......................... 550 550 550 550
----- ------ ----- ------
Shares used in computing pro forma basic
and diluted net loss per share
attributable to common stockholders...... 5,487 13,333 7,398 7,398
===== ====== ===== =====
</TABLE>
<PAGE> 6
NOTE 3 -- PRO FORMA ADJUSTMENTS:
The following pro forma adjustments are based upon management's
preliminary estimates of the value of the tangible and intangible assets
acquired. These estimates are subject to finalization.
(A) Represents $12,901 of goodwill and other intangible assets, summarized
as follows:
<TABLE>
<S> <C>
Goodwill...................................................... $ 3,165
Core technology............................................... 4,527
Acquired workforce............................................ 1,078
Customer lists................................................ 3,822
Other......................................................... 309
-------
$12,901
=======
</TABLE>
(B) Represents accrued transaction costs associated with the acquisitions.
(C) Represents the elimination of equity accounts of the acquired
companies.
(D) Represents the common stock issued in connection with the
acquisitions.
(E) Represents $923,000 of acquired in-process research and development.
Management concluded that technological feasibility of the acquired
in-process technologies was not established and that the in-process
technology had no alternative future use. Such amounts are reflected
as a charge to accumulated deficit in the unaudited pro forma balance
sheet at September 30, 1999.
(F) Represents amortization of goodwill and other intangible assets over
two to five years.
