<PAGE>
Exhibit 99.1
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholder of ERISCO Managed Care Technologies, Inc.:
In our opinion, the accompanying statements of financial position and the
related statements of income, shareholder's equity and cash flows present
fairly, in all material respects, the financial position of ERISCO Managed Care
Technologies, Inc., a wholly owned subsidiary of IMS Health Incorporated, at
December 31, 1999 and 1998, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1999, 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 financial 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.
PRICEWATERHOUSECOOPERS LLP
New York, New York
June 30, 2000
F-1
<PAGE>
ERISCO MANAGED CARE TECHNOLOGIES, INC.,
A WHOLLY OWNED SUBSIDIARY OF IMS HEALTH INCORPORATED
STATEMENTS OF INCOME
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED SEPTEMBER 30, YEARS ENDED DECEMBER 31,
------------------- ------------------------------
2000 1999 1999 1998 1997
-------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue
Software Licenses........................................... $12,274 $10,994 $15,946 $12,539 $12,116
Software Maintenance........................................ 14,287 14,427 19,357 14,784 12,895
Services.................................................... 10,170 8,777 12,428 9,848 7,528
Other....................................................... 1,138 1,511 1,576 1,256 1,532
------- ------- ------- ------- -------
Total Revenue............................................. 37,869 35,709 49,307 38,427 34,071
Cost of Revenue............................................. 23,054 21,535 29,068 25,760 21,514
------- ------- ------- ------- -------
Gross Profit.............................................. 14,815 14,174 20,239 12,667 12,557
------- ------- ------- ------- -------
Operating Expenses:
Research and Development.................................... 2,952 1,935 2,496 1,514 888
Selling, General and Administrative......................... 7,191 6,001 7,481 6,567 5,267
Depreciation and Amortization............................... 885 552 1,239 912 769
------- ------- ------- ------- -------
Total Operating Expenses.................................. 11,028 8,488 11,216 8,993 6,924
------- ------- ------- ------- -------
Operating Income.......................................... 3,787 5,686 9,023 3,674 5,633
Related Party Interest Expense.............................. (1,712) (2,047) (2,875) (2,761) (2,044)
Other Income (Expense)...................................... 0 0 125 (64) (51)
------- ------- ------- ------- -------
Income before provision for Income taxes.................. 2,075 3,639 6,273 849 3,538
Income tax provision........................................ 969 1,568 2,704 389 1,507
------- ------- ------- ------- -------
Net Income................................................ $ 1,106 $ 2,071 $ 3,569 $ 460 $ 2,031
======= ======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-2
<PAGE>
ERISCO MANAGED CARE TECHNOLOGIES, INC.,
A WHOLLY OWNED SUBSIDIARY OF IMS HEALTH INCORPORATED
STATEMENTS OF FINANCIAL POSITION
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
AS OF AS OF AS OF
SEPTEMBER 30, 2000 DECEMBER 31, 1999 DECEMBER 31, 1998
------------------ ----------------- -----------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets
Cash and Cash Equivalents............................... $ 0 $ 0 $ 0
Accounts Receivable--Net................................ 3,382 2,924 2,322
Deferred Income Tax..................................... 125 213 231
Prepaid Expenses and Other Current Assets............... 737 2,002 2,830
Due From Parent......................................... 31,910 28,471 25,941
------- ------- --------
Total Current Assets................................ 36,154 33,610 31,324
------- ------- --------
Computer Software....................................... 7,060 7,267 7,176
Property and Equipment--Net............................. 4,517 4,413 1,430
------- ------- --------
Total assets............................................ $47,731 $45,290 $ 39,930
======= ======= ========
LIABILITIES AND SHAREHOLDER'S EQUITY
Current Liabilities
Accrued and Other Current Liabilities................... $ 4,675 $ 4,602 $ 3,960
Accounts Payable........................................ 617 337 404
Note Payable and Accrued Interest Related Party......... 0 53,319 50,444
Deferred Revenues....................................... 10,960 11,658 12,984
------- ------- --------
Total Current Liabilities........................... 16,252 69,916 67,792
------- ------- --------
Deferred Income Taxes................................... 2,010 2,197 2,472
Other Non-current Liabilities........................... 852 700 758
------- ------- --------
Total Liabilities....................................... 19,114 72,813 71,022
------- ------- --------
Commitments and Contingencies (notes 8, 9 and 10)
Shareholder's Equity:
Common stock, No Par Value; Authorized 200 shares;
issued 10 shares in all periods..................... 57,061 2,027 2,027
Retained Earnings..................................... (28,444) (29,550) (33,119)
------- ------- --------
Total Shareholder's Equity.............................. 28,617 (27,523) (31,092)
------- ------- --------
Total Liabilities and Shareholder's Equity.............. $47,731 $45,290 $ 39,930
======= ======= ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-3
<PAGE>
ERISCO MANAGED CARE TECHNOLOGIES, INC.,
A WHOLLY OWNED SUBSIDIARY OF IMS HEALTH INCORPORATED
STATEMENTS OF CASH FLOWS
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEARS ENDED
SEPTEMBER 30, DECEMBER 31,
------------------- ------------------------------
2000 1999 1999 1998 1997
-------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income.................................................. $ 1,106 $ 2,071 $ 3,569 $ 460 $ 2,031
Adjustments to reconcile net income to cash provided by
operating activities:
Depreciation and Amortization............................. 2,592 2,784 3,796 3,741 3,465
Changes in Working Capital:
Accrued and Other Liabilities............................. 225 (87) 584 1,272 (116)
Deferred Revenues......................................... (698) 1,954 (1,326) 4,812 (549)
Accounts Receivable....................................... (458) 780 (602) 1,548 3,169
Accounts Payable.......................................... 280 (145) (67) 185 95
Accrued Interest, Related Party........................... 1,712 2,047 2,875 2,761 2,044
Deferred Income Taxes..................................... (99) (94) (257) 415 170
Other Current Assets...................................... 1,265 471 828 90 (2,571)
-------- -------- -------- -------- --------
Net Cash Provided By (Used In) Operating Activities......... 5,925 9,781 9,400 15,284 7,738
-------- -------- -------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital Expenditures........................................ (986) (3,803) (4,225) (1,018) (489)
Additions To Computer Software.............................. (1,500) (1,920) (2,645) (2,988) (2,764)
-------- -------- -------- -------- --------
Net Cash Used In Investing Activities....................... (2,486) (5,723) (6,870) (4,006) (3,253)
-------- -------- -------- -------- --------
NET CASH FLOWS FROM FINANCING ACTIVITIES:
Net Transfers (To) IMS HEALTH............................... (3,439) (4,058) (2,530) (9,556) (6,207)
Capital Contribution from Parent............................ 55,034 0 0 0 0
Repayment of Note Payable, Related Party.................... (55,034) 0 0 0 0
Short-Term Borrowings....................................... 0 0 0 0 2,232
Short-Term Debt Repayments.................................. 0 0 0 (1,722) (510)
-------- -------- -------- -------- --------
Net Cash Provided By (Used In) Financing Activities......... (3,439) (4,058) (2,530) (11,278) (4,485)
-------- -------- -------- -------- --------
Increase/(Decrease) In Cash................................. 0 0 0 0 0
Cash, Beginning Of Period................................... 0 0 0 0 0
-------- -------- -------- -------- --------
Cash, End Of Period......................................... $ 0 $ 0 $ 0 $ 0 $ 0
======== ======== ======== ======= ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-4
<PAGE>
ERISCO MANAGED CARE TECHNOLOGIES, INC.,
A WHOLLY OWNED SUBSIDIARY OF IMS HEALTH INCORPORATED
STATEMENTS OF SHAREHOLDER'S EQUITY
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARES)
<TABLE>
<CAPTION>
SHARES COMMON CAPITAL IN RETAINED
COMMON STOCK STOCK EXCESS OF PAR EARNINGS TOTAL
-------------- -------- ------------- -------- --------
<S> <C> <C> <C> <C> <C>
January 1, 1997.................................... 10 $0 $ 2,027 $(35,610) $(33,583)
Net Income......................................... 2,031 2,031
-- -- ------- -------- --------
December 31, 1997.................................. 10 0 $ 2,027 $(33,579) $(31,552)
Net Income......................................... 460 460
-- -- ------- -------- --------
December 31, 1998.................................. 10 0 $ 2,027 $(33,119) $(31,092)
Net Income......................................... 3,569 3,569
-- -- ------- -------- --------
December 31, 1999.................................. 10 0 $ 2,027 $(29,550) $(27,523)
Capital Contribution from Parent (Unaudited)....... 55,034 55,034
Net Income (Unaudited)............................. 1,106 1,106
-- -- ------- -------- --------
September 30, 2000 (Unaudited)..................... 10 $0 $57,061 $(28,444) $ 28,617
== == ======= ======== ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-5
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ERISCO MANAGED CARE TECHNOLOGIES, INC.
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARES)
NOTE 1. ORGANIZATION AND BASIS OF PRESENTATION
ERISCO Managed Care Technologies, Inc. ("Erisco" or the "Company") is a
wholly owned subsidiary of IMS HEALTH Inc. ("IMS HEALTH" or the "Parent").
Acquired in 1984 by The Dun & Bradstreet Corporation ("D&B"), Erisco has been
providing software-based application business solutions and services for over
thirty years. Erisco markets its applications to the healthcare insurance
industry, including managed care organizations (MCO's), preferred provider
organizations, Blue Cross/ Blue Shield organizations, managed-indemnity carriers
and specialized MCO's.
IMS HEALTH became a separate public company through a series of
transactions, as discussed below.
On November 1, 1996, D&B distributed to its shareholders all of the
outstanding shares of common stock of Cognizant Corporation ("Cognizant"), then
a wholly-owned subsidiary of D&B (the "D&B Distribution"). In the D&B
Distribution, holders of D&B common stock received one share of Cognizant common
stock for every share of D&B common stock held.
In July 1998, Cognizant separated into two independent, publicly traded
companies--Nielsen Media Research, Inc. ("NMR"), and IMS HEALTH (the "Cognizant
Distribution"). The transaction was structured as a tax-free dividend of one
share of IMS HEALTH common stock for each share of Cognizant common stock.
Concurrent with the transaction, Cognizant changed its name to Nielsen Media
Research, Inc. The Cognizant Distribution created IMS HEALTH, a premier global
provider of information solutions to the pharmaceutical and healthcare
industries, and NMR, a leader in television audience measurement services.
The financial statements have been prepared using IMS's historical basis
in the assets and liabilities and historical results of operations related to
the Company's business. The financial statements generally reflect the
financial position, results of operations, and cash flows of the Company as
if it were a separate entity for all periods presented. The financial
statements include allocations of certain IMS Corporate and other expenses
(including cash management, legal, accounting, tax, employee benefits,
insurance services, data services and other corporate overhead) relating to
the Company's business for the years ended December 31, 1999, 1998, and 1997
(the "Respective Periods") and the (unaudited) nine months ended September
30, 2000 and 1999 period. Management believes these allocation methods are
reasonable. The financial information included herein may not necessarily
reflect the financial position, results of operations, and cash flows of the
Company in the future or what they would have been if they Company had been a
separate entity during the periods presented.
The financial statements are presented immediately prior to the divestiture
Agreement discussed in Note 13 and do not reflect any decisions that may be made
by the buyer.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
UNAUDITED INTERIM FINANCIAL INFORMATION: The accompanying interim
statement of financial position as of September 30, 2000 and the statements
of income and cash flows for the nine months ended September 30, 2000 and
1999, together with the related disclosures and amounts set forth in the
notes are unaudited. In management's opinion all adjustments of normal
recurring nature, which the Company considers necessary to present fairly, in
all material respects, its financial position, results of operations and cash
flows for the periods have been included. Unaudited results for the nine
months ended September 30, 2000 and 1999 are not necessarily indicative of
results for the entire year.
F-6
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
ERISCO MANAGED CARE TECHNOLOGIES, INC.
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARES)
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CASH AND CASH EQUIVALENTS: The Company participates in IMS HEALTH's cash
management program and as such, all cash is swept to IMS HEALTH daily. In
addition, IMS funds the Company's disbursement bank accounts as required. This
activity is included in Due from Parent.
PROPERTY AND EQUIPMENT: Machinery and Equipment are depreciated over their
estimated useful lives of 3 to 5 years, using the straight-line method.
Furniture and fixtures are depreciated on a straight-line basis over their
estimated useful life of 10 years. Leasehold improvements are amortized on a
straight-line basis over the shorter of the term of the lease or the estimated
useful life of the improvement. Maintenance and repairs are charged to expense
as incurred. Upon retirement or sale, the costs of the assets disposed and the
related accumulated depreciation are removed from the accounts and any resulting
gain or loss is included in the determination of operating results.
COMPUTER SOFTWARE: Direct costs incurred in the development of computer
software are capitalized in accordance with Statement of Financial Accounting
Standards ("SFAS") No. 86, "Accounting for the Costs of Computer Software to be
Sold, Leased or Otherwise Marketed". Research and development costs incurred to
establish technological feasibility of a computer software product are expensed
in the periods in which they are incurred and are included in cost of research
and development in the Statement of Income. Capitalization ceases and
amortization starts when the product is available for general release to
customers. Computer Software is being amortized, on a product by product basis,
over five years. At each balance sheet date the Company reviews the
recoverability of the unamortized capitalized costs of computer software by
comparing the carrying value of computer software with its estimated net
realizable value. Accumulated amortization of computer software was $7,455 and
$8,304 at December 31, 1999 and 1998, respectively.
COMPUTER SOFTWARE PURCHASED FOR INTERNAL USE: The Company follows SOP-98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use" to account for purchased computer software used in its operations.
REVENUE RECOGNITION: The Company generates revenue from several sources,
including the licensing of its software products, maintenance, performing
services related to the implementation, training and support and minor
modifications to these products, and other revenues principally from commissions
related to the reselling of hardware and third party software products. The
Company follows the provisions of AICPA Statement of Position ("SOP") 97-2
"Software Revenue Recognition," SOP 98-4 "Deferral of the Effective Date of
Certain Provisions of SOP 97-2", and SOP 98-9 "Modification of SOP 97-2,
Software Revenue Recognition, With Respect to Certain Transactions".
Software license revenue is recognized upon the execution of a license
agreement, when the licensed product has been delivered, fees are fixed and
determinable, collectibility is probable and when all other significant
obligations have been fulfilled. For software license agreements in which
customer acceptance is a condition of earning the license fees, revenue is
not recognized until acceptance occurs. For arrangements containing multiple
elements, such as software license fees, consulting services and maintenance,
and where vendor-specific objective evidence ("VSOE") of fair value exists
for all undelivered elements, the Company accounts for the delivered elements
in accordance with the "residual method" prescribed by SOP 98-9. For
arrangements in which VSOE does not exist for each element, including
specified upgrades, revenue is deferred and not recognized until delivery of
the element without VSOE has occurred.
F-7
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
ERISCO MANAGED CARE TECHNOLOGIES, INC.
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARES)
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Software maintenance and support revenues are deferred and recognized
ratably over the contract period.
Service revenue includes consulting fees for implementation, installation,
data conversion, and training related to the use of the Company's licensed
products. The Company recognizes revenues for these services as they are
performed, as they are principally contracted for on a time and material basis.
Also included in services is revenue generated through the Company's service
bureau operation and through the development of modifications for clients.
Service bureau revenue is earned and recognized based on actual usage, as the
service is performed. Revenue from minor modifications is recognized upon
delivery.
Other revenue consists primarily of commissions earned from the reselling of
hardware and third party software products.
DEFERRED REVENUES: Deferred revenues arise primarily as a result of annual
billings of software maintenance fees at the beginning of maintenance terms and
billings of software license fees in accordance with contractual terms that may
not directly correlate with the delivery of the product or services. In
addition, upfront and other annual fees are deferred and recognized over the
service period. The amount of deferred revenue will change based on the timing
of actual billings and related recognition of software license and maintenance
revenues.
Unbilled accounts receivable arise as a result of revenue earned under
contractual arrangements for products delivered or services rendered prior to
the related billings to customers. The Company generally bills the customer
within a quarter.
INCOME TAXES: The results of the Company have been included in the Federal
and certain state tax returns of IMS and Cognizant for the Respective Periods.
The provision for income taxes in the Company's financial statements has been
calculated on a separate-company basis. Income taxes deemed paid on behalf of
the Company by IMS HEALTH for the Respective Periods are included in Due from
Parent.
Income taxes are provided using the asset and liability method in accordance
with SFAS No. 109. Deferred tax assets and liabilities are recognized based on
the estimated realizable differences between the book and tax bases of assets
and liabilities using presently enacted tax rates. The provision for income
taxes is the sum of the amount of income tax paid or payable for the year, as
determined by applying the provisions of enacted tax laws to taxable income for
that year and the net changes during the year in the Company's deferred tax
assets and liabilities.
ESTIMATES: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets, liabilities,
revenues and expenses and the disclosure of contingent assets and liabilities.
Actual results could differ from those estimates. Estimates are used for, but
not limited to, the accounting for: allowance for uncollectible accounts
receivable, depreciation and amortization periods, capitalized software, income
taxes, and allocations of IMS Corporate and other costs.
F-8
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
ERISCO MANAGED CARE TECHNOLOGIES, INC.
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARES)
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
COMPREHENSIVE INCOME (LOSS): The Company adopted SFAS No. 130, REPORTING
COMPREHENSIVE INCOME effective January 1, 1998. SFAS No. 130 establishes
standards for the reporting and disclosure of comprehensive income (loss) and
its components. Comprehensive income (loss) includes all changes in equity
during a period except those resulting from investments by or distributions to
owners.
For the years ended December 31, 1999, 1998, and 1997, the Company had no
other significant components of other comprehensive income (loss). Accordingly,
comprehensive income and net income were the same for these periods.
RECENTLY ISSUED ACCOUNTING STANDARDS: In March 2000, the Financial
Accounting Standards Board issued Interpretation No. 44 "Accounting for Certain
Transactions Involving Stock Compensation, an interpretation of APB Opinion
No. 25" ("FIN No. 44"). The interpretation provides guidance for certain issues
relating to stock compensation, involving employees that arose in applying
Opinion 25. The provisions of FIN No. 44 are effective July 1, 2000. The
adoption of FIN No. 44 will have no effect on the Company's financial
statements.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101 "Revenue Recognition in Financial Statements"
("SAB No. 101"). SAB No. 101 summarizes certain of the SEC staff's views in
applying generally accepted accounting principles to revenue recognition in
financial statements. On June 26, 2000, the SEC staff issued SAB 101B to provide
registrants with additional time to implement guidance contained in SAB 101. SAB
101B delays the implementation date of SAB No. 101 until no later than the
fourth fiscal quarter of fiscal years beginning after December 15, 1999. The
Company believes its revenue recognition policies are compliant with the SEC
staff's views.
NOTE 3. FINANCIAL INSTRUMENTS
FAIR VALUE OF FINANCIAL INSTRUMENTS
At December 31, 1999, the Company's financial instruments included
receivables, accounts payable and related party notes and accounts. At
December 31, 1999, the fair values of these instruments approximated carrying
values due to their short-term nature.
CREDIT CONCENTRATIONS
The Company generates all its revenues and maintains accounts receivable
balances principally from customers in the healthcare insurance industry. The
Company's trade receivables do not represent significant concentrations of
credit risk at December 31, 1999 due to the high quality of its customers. These
receivable balances are unsecured. The Company believes its allowance for
doubtful accounts is sufficient to provide for any risk of credit losses.
NOTE 4. PENSION AND POSTRETIREMENT BENEFITS
Certain eligible employees of the Company participate in IMS HEALTH's
defined benefit pension plan. The plan is a cash balance pension plan under
which 6% of creditable compensation plus interest is credited to eligible
employee's retirement accounts on a monthly basis. At the time of retirement,
the vested employee's account balance is actuarially converted into an annuity.
The Company accounts for
F-9
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
ERISCO MANAGED CARE TECHNOLOGIES, INC.
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARES)
NOTE 4. PENSION AND POSTRETIREMENT BENEFITS (CONTINUED)
the plan as a multi-employer plan. Accordingly, the Company has recorded pension
expense related to its employees participation in the IMS HEALTH plan, as
allocated, totaling $258, $225, and $212 for the years 1999, 1998, and 1997,
respectively.
All Company employees are eligible to participate in IMS HEALTH-sponsored
defined contribution plans. Under the plan, the sponsoring employer makes a
matching contribution equal to 50% of the employee's contribution up to
specified limits of the employee's salary. The Company's expense related to
these plans was $477, $414, and $356 for the years 1999, 1998 and 1997,
respectively.
Since 1999, certain Erisco employees have been eligible to participate in
IMS HEALTH's various healthcare and life insurance plans for retired
employees. Eligibility is measured based on service after January 1, 1996.
Employees become eligible for benefits or participation under these plans if
they work 10 years with the Company after attaining age 45. The Company
accounts for its participation in IMS HEALTH's plan as a multi-employer plan.
The cost of postretirement benefit plans in 1999 as allocated by IMS HEALTH,
was $100. There was no previously sponsered Erisco postretirement benefit
plan.
NOTE 5. EMPLOYEE STOCK PLANS
IMS HEALTH has an Employee Stock Incentive Plan, which provides for the
grant of IMS HEALTH stock options, restricted stock and restricted stock
units to eligible Erisco employees. In addition, it provides an opportunity
for the purchase of stock options with a prepayment equal to ten percent of
the exercise price, with the remaining payment due when the options are
exercised. Options have a life of ten years, vest proportionally over three
to four years and have an exercise price equal to the fair market value of
the common stock on the grant date.
Pursuant to restricted stock units granted to Erisco employees, the Company
recognized compensation expense of $12, $12 and $4 for years 1999, 1998, and
1997, respectively.
IMS HEALTH adopted an Employee Stock Purchase Plan in 1998 which allows
eligible Erisco employees to purchase a limited amount of IMS HEALTH common
stock at the end of each quarter at a price equal to the lesser of 90% of
fair market value on (a) the first trading day of the quarter, or (b) the
last trading day of the quarter. Fair market value is defined as the average
of the high and low prices of the shares on the relevant day. There is no
compensation cost associated with this plan.
SFAS No. 123, "Accounting for Stock-Based Compensation" requires that
companies with stock-based compensation plans either recognize compensation
expense based on the fair value of options granted or continue to apply the
existing accounting rules and disclose pro forma net income and earnings per
share assuming the fair value method had been applied. IMS HEALTH continues to
apply Accounting Principles Board Opinion No. 25 and related interpretations in
accounting for its plans. Accordingly, no compensation cost has been recognized
for the fixed stock option plans in the Respective Periods. Had the Company's
compensation cost for the employees participation in IMS HEALTH's stock-based
compensation plans been determined based on the fair value at the grant dates
F-10
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
ERISCO MANAGED CARE TECHNOLOGIES, INC.
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARES)
NOTE 5. EMPLOYEE STOCK PLANS (CONTINUED)
for awards under those plans, consistent with the method of SFAS No. 123, the
Company's net income would have been reduced to the pro forma amounts indicated
below:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER
31,
------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Net Income (loss)
As reported................................................. $3,569 $ 460 $2,031
Pro forma................................................... $1,964 $(129) $1,532
</TABLE>
------------------------------
NOTE: THE PRO FORMA DISCLOSURES ABOVE MAY NOT BE REPRESENTATIVE OF THE EFFECTS
ON NET INCOME.
On January 3, 2000, IMS HEALTH reduced the vesting period on substantially
all options previously granted with a six-year vesting period to four years. As
a result, 529,039 previously unvested options became exercisable at January 3,
2000. The impact of the change in vesting will accelerate the pro forma fair
value charge for previously vested options reflected in the pro forma
disclosures required by SFAS No. 123, thereby significantly increasing the 2000
pro forma SFAS No. 123 earnings charge when compared to the actual reported
amount in prior periods. Under APB No. 25, there will be no charge to the
Statement of Income for this change.
The fair value of IMS HEALTH's stock options used to compute pro forma net
income, as disclosed above, is the estimated present value at grant date using
the Black-Scholes option-pricing model. The following weighted-average
assumptions were used by IMS HEALTH for 1999: dividend yield of 0.3%; expected
volatility of 35%; a risk-free interest rate of 4.8%; and an expected term of
3 years. The following weighted average assumptions were used for 1998: dividend
yield of 0.3%; expected volatility of 25%; a risk-free interest rate of 5.5%;
and an expected term of 3 years. The following weighted average assumptions were
used for 1997: dividend yield of 0.3%; expected volatility of 25%; a risk-free
interest rate of 6.1%; and an expected term of 4.5 years. The weighted average
fair value (per stock option) of the IMS HEALTH's stock options granted in the
Respective Periods are $9.85, $7.14 and $6.62, respectively. These assumptions
are based on circumstances and factors associated with IMS HEALTH, particularly
expected volatility. They may not be indicative of those that Erisco would have
had if it was a separate company.
Immediately following the spin-off of IMS HEALTH by Cognizant in July of
1998, outstanding awards under Cognizant's Key Employees Stock Incentive Plan
and other option plans were adjusted to maintain their then intrinsic value of
the existing awards. In addition, as a result of the Gartner spin-off by IMS
HEALTH in 1999, outstanding awards under the IMS HEALTH's Employee Stock
Incentive Plan and other option and equity plans were adjusted to maintain their
then intrinsic value of the existing awards.
At December 31, 1999, outstanding options for IMS HEALTH common stock held
by Company employees, including the substitute awards mentioned above, totaled
2,751,332, of which 912,149 had vested and were exercisable. The option prices
range from $14.15 to $31.15 per IMS HEALTH share and are exercisable over
periods ending no later than 2009. At December 31, 1998, outstanding options for
IMS HEALTH common stock (pre-Gartner conversion) held by Company employees
totaled 2,167,292, of which 511,232 had vested and were exercisable. The option
prices ranged from $12.15 to $30.17 per IMS HEALTH share.
F-11
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
ERISCO MANAGED CARE TECHNOLOGIES, INC.
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARES)
NOTE 5. EMPLOYEE STOCK PLANS (CONTINUED)
IMS HEALTH option activity for stock options granted to Company employees is
as follows:
<TABLE>
<CAPTION>
IMS WEIGHTED
HEALTH AVERAGE
SHARES EXERCISE PRICE
---------- --------------
<S> <C> <C>
IMS HEALTH Options Outstanding, January 1, 1997............. 1,887,584 $16.54
Granted..................................................... 548,500 $21.35
Exercised................................................... (33,952) $13.56
Expired..................................................... (5,000) $16.69
----------
IMS HEALTH Options Outstanding, December 31, 1997........... 2,397,132 $17.68
NMR Conversion Adjustment................................... (130,060) --
Granted..................................................... 189,950 $29.43
Exercised................................................... (283,730) $17.30
Expired/Terminated.......................................... (6,000) $24.64
----------
IMS HEALTH Options Outstanding, December 31, 1998........... 2,167,292 $19.80
Gartner Conversion Adjustment............................... 296,496 --
Granted..................................................... 430,437 $34.09
Exercised................................................... (99,193) $17.76
Expired..................................................... (43,700) $22.79
----------
IMS HEALTH Options Outstanding, December 31, 1999........... 2,751,332 $19.95
----------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1999
------------------------- WEIGHTED-AVERAGE
RANGE OF REMAINING OPTION EXERCISE PRICES
EXERCISE NUMBER NUMBER CONTRACTUAL -------------------------
PRICES OUTSTANDING EXERCISABLE LIFE OUTSTANDING EXERCISABLE
--------------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
$14.15 - $15.79 1,542,433 687,738 6.9 years $15.78 $15.77
$16.70 - $18.39 148,991 68,652 7.1 years $17.57 $17.27
$20.07 - $21.03 388,345 97,876 7.9 years $20.87 $21.03
$23.50 - $26.99 209,767 57,883 8.6 years $26.68 $26.88
$27.40 - $31.15 461,796 0 9.1 years $30.81 --
---------- -------
2,751,332 912,149
</TABLE>
NOTE 6. SHAREHOLDER'S EQUITY
COMMON STOCK
The Company has authorized for issuance 200 shares of common stock with no
par value. At December 31, 1999 and 1998 the Company had 10 shares outstanding
and held by IMS HEALTH.
NOTE 7. INCOME TAXES
The provision for U.S. Federal, State and Local income taxes consisted of:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Current..................................................... $3,067 $ (26) $1,337
Deferred.................................................... $ (363) $ 415 $ 170
------ ----- ------
Total....................................................... $2,704 $ 389 $1,507
====== ===== ======
</TABLE>
F-12
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
ERISCO MANAGED CARE TECHNOLOGIES, INC.
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARES)
NOTE 7. INCOME TAXES (CONTINUED)
The following table summarizes the significant differences between applying
the U.S. Federal statutory income tax rate to the Company's income before
provision for income taxes, and the Company's reported provision for income
taxes.
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Tax Expense at Statutory Rate............................... $2,196 $297 $1,238
State and Local Income Taxes, net of federal tax benefit.... 455 29 238
Other; Net.................................................. 53 63 31
------ ---- ------
Total Taxes................................................. $2,704 $389 $1,507
====== ==== ======
</TABLE>
The Company's deferred tax assets (liabilities) as of December 31, are
comprised of the following:
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Deferred Tax Assets:
Depreciation.............................................. $ 811 $ 681
Bad Debt Reserve.......................................... 213 143
Accrued Liabilities....................................... 0 87
------- -------
1,024 911
Deferred Tax Liabilities:
Computer Software......................................... (3,008) (2,968)
Other Current Assets...................................... 0 (184)
------- -------
Sub-Total............................................... (3,008) (3,152)
------- -------
Net Deferred Tax Liability................................ ($1,984) ($2,241)
======= =======
</TABLE>
The Company has established a full valuation allowance attributable to
deferred tax assets, primarily net operating losses, in certain U.S. state and
local tax jurisdictions where, based on available evidence, it is more likely
than not that such assets will not be realized. Such amounts are not material.
NOTE 8. LEASE COMMITMENTS
Certain of the Company's operations are conducted from leased facilities
under operating leases. Rental expense under real estate operating leases for
the years 1999, 1998 and 1997 was $2,019, $2,074, and $1,953, respectively.
Included in the Company's operating leases of certain facilities are escalating
rent payments and construction credits, which are amortized over the life of the
lease. The approximate minimum annual rental expense for real estate operating
leases that have remaining noncancelable lease terms in excess of one year, at
December 31, 1999 was: 2000--$1,722; 2001--$1,748; 2002--$1,766; 2003--$1,792;
2004--$1,845; thereafter- $6,575.
The Company also leases or participates in leases of certain computer and
other equipment under operating leases, principally on a short-term basis.
Rental expense under computer and other equipment leases was $260, $159, and $97
for 1999, 1998 and 1997, respectively.
NOTE 9. RELATIONSHIPS WITH IMS HEALTH AND AFFILIATES
IMS HEALTH uses a centralized cash management system to finance their
operations. Cash deposits from most of the Company's businesses are transferred
to IMS HEALTH on a daily basis.
F-13
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
ERISCO MANAGED CARE TECHNOLOGIES, INC.
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARES)
NOTE 9. RELATIONSHIPS WITH IMS HEALTH AND AFFILIATES (CONTINUED)
IMS funds the Company's disbursement bank accounts as required. No interest has
been charged on these transactions.
In addition to the retirement benefit programs discussed in Note 4, IMS
HEALTH provides certain centralized services (see Note 1) to the Company.
Expenses related to these services were allocated to the Company based on
utilization of centralized services or, where not estimable, based on revenue of
the Company in proportion to IMS HEALTH's consolidated revenue. Management
believes these allocation methods are reasonable. Allocations based on
utilization of centralized services were $1,239, $334, and $348 in 1999, 1998,
and 1997, respectively. Erisco entered the IMS HEALTH healthcare plan in 1999
and received an allocation for the first time. Allocations based on revenue of
the Company in proportion to the consolidated IMS HEALTH revenue were $219,
$254, and $257 in 1999, 1998, and 1997 respectively. All allocations were
included in the operating expenses of the Company. Allocations are not
necessarily representative of the costs the Company would incur as a stand-alone
entity. Amounts due to IMS HEALTH for these allocated expenses are included in
Due from Parent.
In 1997, the Company entered into a demand promissory note payable to
Spartan Leasing Corporation, a controlled subsidiary of IMS. Interest is
compounded quarterly. Through 1999, no interest payments have been made. The
interest rate is reset every 90 days, based on the higher of either the
commercial paper rate one business day prior to 1st day of the interest period,
or the LIBOR rate three business days prior to first day of the interest period,
plus .05%. As of December 31, 1999 principal and accrued interest of $45,639 and
$7,680, respectively and included in Note Payable, Related Party in the
Statement of Financial Position. This note has been guaranteed by IMS HEALTH.
See footnote 13 to these financial statements regarding the subsequent repayment
of this note.
In 1999, the Company entered into an agreement with Cognizant Technology
Solutions (CTS), whose majority shareholder is IMS HEALTH. The agreement sets
forth a cross-marketing relationship between the two entities. Erisco generates
commissions for revenue earned by CTS as a result of the agreement. No
commissions were accrued to Erisco as a result of this agreement in 1999. As a
result, in the opinion of management it is remote that a loss may occur in
conjuction with these matters.
IMS HEALTH has agreed to indemnify ERISCO for certain contingencies where
joint and several liability exist that may arise under the agreements entered
into in connection with the 1996 spin-off of Cognizant Corporation from The
Dun & Bradstreet Corporation and the 1998 spin-off with Nielsen Media
Research Inc.
NOTE 10. CONTINGENCIES
The Company has from time to time been involved in legal proceedings and
litigation arising in the ordinary course of business, however, no such
proceedings or litigation are currently pending.
F-14
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
ERISCO MANAGED CARE TECHNOLOGIES, INC.
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARES)
NOTE 11. SUPPLEMENTAL FINANCIAL DATA
ACCOUNTS RECEIVABLE--NET:
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Trade....................................................... $ 3,020 $ 2,113
Unbilled Revenue............................................ 428 540
Other....................................................... 19 20
Less: Allowance for Doubtful Accounts....................... (543) (351)
------- -------
$ 2,924 $ 2,322
======= =======
</TABLE>
PROPERTY AND EQUIPMENT:
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Furniture and Fixtures...................................... $ 1,343 $ 395
Machinery and Equipment..................................... 5,275 3,994
Less: Accumulated Depreciation.............................. (4,201) (3,389)
Leasehold Improvements, less: Accumulated Amortization of
$1,673 and $1,368......................................... 1,782 246
Internal Use Software, less: Accumulated Amortization of
$662 and $540............................................. 214 184
------- -------
$ 4,413 $ 1,430
======= =======
</TABLE>
ACCRUED AND OTHER CURRENT LIABILITIES:
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Salaries, Wages, Bonuses and Other Compensation............. $1,917 $2,010
Other....................................................... 2,685 1,950
------ ------
$4,602 $3,960
====== ======
</TABLE>
NOTE 12. INFORMATION ON PRODUCTS AND SERVICES
In June 1997, the FASB issued SFAS No. 131, DISCLOSURES ABOUT SEGMENTS OF AN
ENTERPRISE AND RELATED INFORMATION. SFAS No. 131 establishes standards for the
way that companies report information about operating segments in annual
financial statements. It also establishes standards for related disclosures
about products and services, geographic areas, and major customers. The adoption
of SFAS 131 did not have a material effect on the Company's financial
statements.
The Company generates substantially all of its revenues through software
sales and services under a common management team, and therefore the Company has
only one reportable segment. All revenues are generated from domestic sources.
All of the Company's long-lived assets are physically located within the United
States.
Total operating expenses are controlled centrally based on established
budgets by operating department. Operating departments include product
development, sales and marketing, account management and customer service, and
finance and administration. Assets, technology, and personnel resources of the
Company are shared and utilized for all of the Company's service offering. These
resources are allocated based on contractual requirements, the identification of
enhancements to the
F-15
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
ERISCO MANAGED CARE TECHNOLOGIES, INC.
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARES)
NOTE 12. INFORMATION ON PRODUCTS AND SERVICES (CONTINUED)
current service offerings, and other non-financial criteria. The Company does
not prepare operating statements by revenue source. The Company does not account
for, and does not report to management, its assets or capital expenditures by
revenue source.
NOTE 13. SUBSEQUENT EVENTS (UNAUDITED)
DIVESTITURE AGREEMENT
On May 16, 2000, Erisco entered into an Agreement and Plan of
Reorganization (the "Divestiture Agreement") with the Trizetto Group, Inc.
("Trizetto"), Elbejay Acquisition Corp. ("Elbejay") a wholly owned subsidiary
of Trizetto, and, IMS Health Incorporated ("IMS HEALTH") pursuant to which
Elbejay would merge with and into the Company, resulting in Erisco becoming a
wholly owned subsidiary of Trizetto (the "Merger Agreement".) On October 2,
2000, the Company consummated the transaction, and the Company became a wholly
owned subsidiary of Trizetto. The purchase price of approximately $211.9
million consisted of 12,142,857 shares of common stock with a value of $15.89
per share, assumed liabilities of approximately $9.4 million and acquisition
costs of approximately $9.5 million. The Divestiture Agreement supercedes the
merger of the two companies previously announced March 29, 2000, which has
been terminated by the consent of both Boards of Directors.
Pursuant to the Divestiture Agreement, IMS HEALTH has indemnified
TriZetto of all taxes, including sales taxes, and other contingencies that
may exist prior to the closing of the transaction. IMS HEALTH has also agreed
to indemnify TriZetto for breaches of representation and warranties made in
the agreement.
For purposes of governing certain of the ongoing relationships between the
Company and IMS HEALTH after the closing and to provide for an orderly
transition, the Company and IMS HEALTH may enter into various business service
arrangements, including, providing Accounting operations, providing other
Corporate or Operational resources.
EQUITY FINANCING
On June 30, 2000, IMS HEALTH made a capital contribution of $55,034 to
Erisco, which was recorded as Capital In Excess of Par in the Statement of
Financial Position. On the same date, Erisco repaid the principal and accrued
interest on its note payable to Spartan Leasing Corporation of $45,639 and
$9,392, respectively, extinguishing its obligation under this note.
F-16
