UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB/A
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended: March 31, 2004
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT
Commission File Number: 0-30275
I-TRAX, INC.
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(Exact name of small business issuer as specified in its charter)
Delaware
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(State or other jurisdiction of incorporation or organization)
23-3057155
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(I.R.S. Employer Identification No.)
4 Hillman Drive, Suite 130
Chadds Ford, Pennsylvania 19317
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(Address of principal executive offices)
(610) 459-2405
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(Issuer's telephone number)
One Logan Square, 130 N. 18th Street, Suite 2615
Philadelphia, Pennsylvania 19103
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(Former name, former address and former fiscal year, if changed since last
report)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No [ ]
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: As of April 30, 2004, the number of
outstanding shares of common stock, par value $.001 per share, was 28,448,121.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
Explanatory Statement
This amendment amends I-trax, Inc.'s Quarterly Report on Form 10-QSB
for the quarter ended March 31, 2004, filed with the Securities and Exchange
Commission on May 14, 2004, and previously amended by Form 10-QSB/A filed on
August 11, 2004. This amendment:
o Amends the pro forma financial information, which gives effect
to the acquisition of CHD Meridian Healthcare by I-trax as
though the transaction had occurred on January 1, 2003 and is
presented in Management's Discussion and Analysis of Financial
Condition and Results of Operations, to reflect an accounting
change as a result of which all pharmaceutical pass-through
contracts of CHD Meridian Healthcare are reported on a net
basis and pharmaceutical performance incentives, previously
recorded as reductions of operating expense, are reclassifed
to revenue.
o Amends the supplemental disclosure of consolidated financial
statements of CHD Meridian Healthcare and subsidiaries for the
quarters ended March 31, 2004 and 2003 to also reflect an
accounting change as a result of which all pharmaceutical
pass-through contracts of CHD Meridian Healthcare are reported
on a net basis and pharmaceutical performance incentives,
previously recorded as reductions of operating expense, are
reclassifed to revenue.
Except as described above, no other changes have been made to our
Quarterly Report on Form 10-QSB for the quarter ended March 31, 2004 filed on
May 14, 2004 and amended on August 11, 2004.
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
I-TRAX, INC.
INDEX TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Page No.
Report of Independent Registered Public Accounting Firm 4
Condensed Consolidated Balance Sheets at March 31, 2004 (unaudited) and December 31, 2003 5
Condensed Consolidated Statements of Operations
for the three months ended March 31, 2004 and 2003 (unaudited) 6
Condensed Consolidated Statement of Stockholders' Equity
for the three months ended March 31, 2004 (unaudited) 7
Condensed Consolidated Statements of Cash Flows
for the three months ended March 31, 2004 and 2003 (unaudited) 8
Notes to Condensed Consolidated Financial Statements 10
3
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders
of I-trax, Inc.
We have reviewed the accompanying condensed consolidated balance sheet of
I-trax, Inc. (a Delaware corporation) and Subsidiaries as of March 31, 2004, and
the related condensed consolidated statements of operations, stockholders'
equity and cash flows for the three-month periods ended March 31, 2004 and 2003.
These financial statements are the responsibility of the company's management.
We conducted our reviews in accordance with the standards of the Public Company
Accounting Oversight Board (United States). A review of interim financial
information consists principally of applying analytical procedures and making
inquiries of persons responsible for financial and accounting matters. It is
substantially less in scope than an audit conducted in accordance with generally
accepted auditing standards, the objective of which is the expression of an
opinion regarding the condensed financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that should
be made to the condensed financial statements referred to above for them to be
in conformity with U.S. generally accepted accounting principles.
We have previously audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the balance sheet as of
December 31, 2003, and the related consolidated statements of operations,
stockholders' equity and cash flows for the year then ended (not presented
herein); and in our report dated February 16, 2004, we expressed an unqualified
opinion on those financial statements. In our opinion, the information set forth
in the accompanying condensed consolidated balance sheet as of December 31,
2003, is fairly stated, in all material respects, in relation to the
consolidated balance sheet from which it has been derived.
GOLDSTEIN GOLUB KESSLER LLP
New York, New York
May 4, 2004
4
I-TRAX, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(in thousands, except share data)
ASSETS
March 31, 2004 December 31,
(unaudited) 2003
---------------- ----------------
Current assets
Cash and cash equivalents $ 9,989 $ 574
Accounts receivable, net 14,027 549
Income tax receivable 274 --
Other current assets 1,170 188
---------------- ----------------
Total current assets 25,460 1,311
---------------- ----------------
Property and equipment, net 4,903 1,675
Goodwill 45,238 8,424
Customer list, net 29,775 769
Other intangible assets, net 2,431 1,400
Other long term assets 61 24
---------------- ----------------
Total assets $ 107,868 $ 13,603
================ ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 6,870 $ 606
Accrued expenses 4,575 361
Due to officers and related parties -- 280
Notes payable 2,000 --
Net liabilities of discontinued operations 1,299 --
Other current liabilities 6,224 355
---------------- ----------------
Total current liabilities 20,968 1,602
---------------- ----------------
Common stock warrants -- 2,760
Note payable 10,000 --
Other long term liabilities 2,530 856
---------------- ----------------
Total liabilities 33,498 5,218
---------------- ----------------
Commitments and contingencies -- --
Stockholders' equity
Preferred stock - $.001 par value, 2,000,000 shares authorized,
1,200,000 and -0- issued and outstanding, respectively 1 --
Common stock - $.001 par value, 100,000,000 shares authorized,
24,581,421 and 13,966,817 shares issued and outstanding, respectively 24 14
Additional paid in capital 131,774 47,276
Accumulated deficit (57,429) (38,905)
---------------- ----------------
Total stockholders' equity 74,370 8,385
---------------- ----------------
Total liabilities and stockholders' equity $ 107,868 $ 13,603
================ ================
See accompanying notes to consolidated financial statements (unaudited).
5
I-TRAX, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2004 AND 2003
(UNAUDITED)
(in thousands, except share data)
Three months Three months
ended ended
March 31, 2004 March 31, 2003
------------------ ------------------
Net revenue $ 1,447 $ 1,616
------------------ ------------------
Costs and expenses:
Operating expenses 697 561
General and administrative expenses 2,021 1,004
Depreciation and amortization 435 437
------------------ ------------------
Total costs and expenses 3,153 2,002
------------------ ------------------
Operating loss (1,706) (386)
------------------ ------------------
Other expenses:
Interest expense 613 321
Amortization of financing costs 35 57
Other expenses 350 200
------------------ ------------------
Total other expenses 998 578
------------------ ------------------
Net loss (2,704) (964)
Less deemed dividends applicable to preferred stockholders 15,820 --
------------------ ------------------
Net loss applicable to common stockholders $ (18,524) $ (964)
------------------ ------------------
Loss per common share:
Basic and diluted (1.20) (.10)
================== ==================
Weighted average number of shares outstanding: 15,405,353 9,372,727
================== ==================
See accompanying notes to consolidated financial statements (unaudited).
6
I-TRAX, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 2004
(UNAUDITED)
(in thousands, except share data)
Preferred Stock Common Stock Additional Total
------------------------ ------------------------ Paid-in Accumulated Stockholders'
Shares Amount Shares Amount Capital Deficit Equity
----------- ----------- ----------- ------------ ------------- ------------- ----------------
Balances at January 1, 2004 -- $ -- 13,966,817 $ 14 $ 47,276 $ (38,905) $ 8,385
Reclassification of common
stock warrants to paid in
capital -- -- -- -- 3,110 -- 3,110
Issuance of common stock in
connection with conversion
of promissory note and other
settlement, net of costs -- -- 63,012 -- 71 -- 71
Issuance of common stock for
conversion of debenture
and accrued interest -- -- 427,106 -- 747 -- 747
Issuance of common stock for
exercise of warrants -- -- 124,486 -- 30 -- 30
Sale of preferred stock, net of
costs 1,000,000 1 -- -- 23,509 -- 23,510
Issuance of preferred stock for
acquisition of CHD
Meridian 400,000 -- -- -- 10,000 -- 10,000
Redemption of preferred stock (200,000) -- -- -- (5,000) -- (5,000)
Issuance of common stock for
acquisition of CHD
Meridian -- -- 10,000,000 10 36,290 -- 36,300
Beneficial conversion feature
in connection with
issuance of preferred stock -- -- -- -- 15,820 (15,820) --
Preferred stock dividend -- -- -- -- (79) -- (79)
Net loss for the three months
ended March 31, 2004 -- -- -- -- -- (2,704) (2,704)
----------- ----------- ------------ ------------ ------------- ------------- ----------------
Balances at March 31, 2004 1,200,000 $ 1 24,581,421 $ 24 $ 131,774 $ (57,429) $ 74,370
=========== =========== ============ ============ ============= ============= ================
See accompanying notes to consolidated financial statements (unaudited).
7
I-TRAX, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2004 AND 2003
(UNAUDITED)
(in thousands, except share data)
Three months Three months
ended ended
March 31, 2004 March 31, 2003
----------------- ------------------
Operating activities:
Net loss $ (2,704) $ (964)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization 435 437
Accretion of discount on notes payable charged to interest expense
and beneficial conversion value of debenture 573 253
Increase in fair value of common stock warrants 350 --
Amortization of debt issuance costs 34 58
Write-off of deposit on cancelled acquisition -- 200
Other non-cash items -- (29)
Changes in operating assets and liabilities, net of acquisition:
Decrease (increase) in accounts receivable (668) 104
Decrease (increase) in other current assets 20 (80)
(Decrease) increase in accounts payable (102) 80
Increase in accrued expenses 70 217
(Decrease) increase in other current liabilities 236 (852)
----------------- ------------------
Net cash used in operating activities (1,756) (576)
----------------- ------------------
Investing activities:
Purchases of property, plant and equipment (169) (191)
Acquisition of CHD Meridian, net of acquired cash (18,134) --
----------------- ------------------
Net cash used in investing activities (18,303) (191)
----------------- ------------------
Financing activities:
Principal payments on capital leases (18) (1)
Repayment to/proceeds from related parties (280) 440
Repayment of note payable (618) --
Proceeds from exercise of warrants 30 --
Proceeds from bank credit facility, net of issuance costs 11,850 --
Proceeds from sale of preferred stock, net of issuance costs 23,510 --
Redemption of preferred stock (5,000) --
----------------- ------------------
Net cash provided by financing activities 29,474 439
----------------- ------------------
Net increase (decrease) in cash and cash equivalents 9,415 (328)
Cash and cash equivalents at beginning of period 574 360
----------------- ------------------
Cash and cash equivalents at end of period $ 9,989 $ 32
================= ==================
Supplemental disclosure of non-cash flow information: Cash paid during the year
for:
Interest $ 209 $ 16
================= ==================
(Continues on following page.)
See accompanying notes to consolidated financial statements (unaudited).
8
I-TRAX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2004 AND 2003
(Continues from previous page.)
Three months Three months
ended ended
March 31, 2004 March 31, 2003
----------------- ------------------
Schedule of non-cash financing activities:
Reclassification of common stock warrants to paid in capital $ 3,110 --
----------------- ------------------
Issuance of common stock in connection with conversion of promissory
note and other settlement $ 71 --
================= ==================
Issuance of common stock in connection with conversion of debenture
payable $ 747 --
----------------- ------------------
Beneficial conversion feature in connection with issuance of preferred
stock $ 15,820 --
================= ==================
Issuance of common and preferred stock in connection with the
acquisition of CHD Meridian $ 46,300 --
================= ==================
Preferred stock dividend $ 79 --
================= ==================
Purchase of all capital stock of CHD Meridian and assumption of liabilities
in the acquisition as follows:
Fair value of non-cash tangible assets acquired $ 17,257 --
Goodwill 36,814 --
Customer list 29,184 --
Other intangibles 1,167 --
Cash paid, net of cash acquired (includes $85 of transaction costs
incurred in a prior period) (18,219) --
Common stock issued (36,300) --
Preferred stock issued (10,000) --
----------------- ------------------
Liabilities assumed $ (19,903)
================= ==================
See accompanying notes to consolidated financial statements (unaudited).
9
I-TRAX, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1--ORGANIZATION
I-trax, Inc. (the "Company") was incorporated in the State of Delaware on
September 15, 2000. On March 19, 2004, the Company consummated a merger with
Meridian Occupational Healthcare Associates, Inc., a private company, which does
business as CHD Meridian Healthcare ("CHD Meridian"). (See Note 3--Business
Combination.)
Following the merger, the Company offers two categories of services: (1) on-site
services such as occupational health, primary care, corporate health and
pharmacy and (2) personalized health management programs.
The Company conducts its on-site services through CHD Meridian Healthcare, LLC,
a Delaware limited liability company ("CHD Meridian LLC"), and its subsidiary
companies, and its personalized health management programs through I-trax Health
Management Solutions, LLC, a Delaware limited liability company, and I-trax
Health Management Solutions, Inc., a Delaware corporation.
Physician services at the Company's on-site locations are provided under
management agreements with affiliated physician associations, which are
organized professional corporations that hire licensed physicians who provide
medical services (the "Physician Groups"). The Physician Groups provide all
medical aspects of the Company's on-site services, including the development of
professional standards, policies and procedures. The Company provides a wide
array of business services to the Physician Groups, including administrative
services, support personnel, facilities, marketing, and non-medical services.
NOTE 2--INTERIM RESULTS AND BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in accordance
with accounting principles generally accepted in the United States of America
for interim financial information, the instructions to Form 10-QSB and Item
310(b) of Regulation S-B promulgated under the Securities Exchange Act of 1934.
In the opinion of management, the unaudited financial statements have been
prepared on the same basis as the annual financial statements and reflect all
adjustments necessary to present fairly the financial position as of March 31,
2004 and the results of the operations and cash flows for the three months ended
March 31, 2004. The results for the three months ended March 31, 2004 do not
include the operations of CHD Meridian even though the merger was consummated on
March 19, 2004 because the Company and CHD Meridian agreed for accounting
purposes to consolidate results of operations effective as of April 1, 2004.
Accordingly, the results for the quarter ended March 31, 2004 are not indicative
of the results to be expected for any subsequent quarter or the fiscal year
ending December 31, 2004. The balance sheet at December 31, 2003 has been
derived from the audited financial statements of I-trax at that date.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with accounting principles generally accepted
in the United States of America have been condensed or omitted pursuant to the
Securities and Exchange Commission's rules and regulations.
Loss per common share is computed pursuant to SFAS No. 128, "Earnings Per
Share." Basic loss per share is computed as net income (loss) available to
common stockholders divided by the weighted average number of common shares
outstanding for the period. Diluted loss per share reflects the potential
dilution that could occur from common shares issuable through stock options,
warrants and convertible preferred stock. As of March 31, 2004 and 2003,
5,822,929 and 3,863,604 shares issuable upon exercise of options and warrants,
respectively, were excluded from the diluted loss per share computation, because
their effect would be anti-dilutive.
10
I-TRAX, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 2--INTERIM RESULTS AND BASIS OF PRESENTATION (continued)
These unaudited financial statements should be read in conjunction with the
Company's audited financial statements and the financial statements of CHD
Meridian and notes thereto for the year ended December 31, 2003 included in the
Company's annual report on Form 10-KSB for the year ended December 31, 2003.
For comparability, certain 2003 amounts have been reclassified and combined,
where appropriate, to conform to the financial statement presentation used in
2004.
As stated above, the consolidated financial statements include the balance sheet
of CHD Meridian LLC, its wholly owned subsidiaries, and the Physician Groups.
The financial statements of the Physician Groups are consolidated with CHD
Meridian LLC in accordance with the nominee shareholder model of EITF 97-2,
"Application of FASB Statement No. 94 and APB Opinion No. 16 to Physician
Practice Management Entities and Certain Other Entities with Contractual
Management Arrangements." CHD Meridian LLC has unilateral control over the
assets and operations of the Physician Groups.
Consolidation of the Physician Groups with CHD Meridian LLC, and consequently,
the Company, is necessary to present fairly the financial position and results
of operations of the Company. Control of the Physician Groups is perpetual and
other than temporary because of the nominee shareholder model and the management
agreements between the entities. The net tangible assets of the Physician Groups
were not material at March 31, 2004. All significant intercompany accounts and
transactions have been eliminated in consolidation.
NOTE 3--BUSINESS COMBINATION
On March 19, 2004, the Company merged with CHD Meridian, a privately held
company and a leading provider of outsourced, employer-sponsored healthcare
services to Fortune 1,000 companies.
Pursuant to the merger agreement, the Company, (1) issued 10,000,000 shares of
common stock valued at $36,300,000 utilizing $3.63 per share, (2) issued 400,000
shares of convertible preferred stock (with each share convertible into 10
shares of common stock at a price of $2.50 per share or 4,000,000 shares in the
aggregate) at $25 per share or $10,000,000 in the aggregate, and (3) paid
approximately $25,508,000 to the CHD Meridian stockholders. Immediately
following the closing of the merger, the Company also redeemed from former CHD
Meridian stockholders that participated in the merger, pro rata, an aggregate of
200,000 shares of convertible preferred stock at its original issue price of $25
per share or $5,000,000. The Company has filed a registration statement with the
Securities and Exchange Commission to register the common stock issued in the
merger and issuable upon conversion of convertible preferred stock issued in the
merger.
The former CHD Meridian stockholders will also receive additional shares of the
Company's common stock if CHD Meridian, continuing its operations following the
closing of the merger as CHD Meridian LLC, achieves calendar 2004 milestones for
earnings before interest, taxes, depreciation and amortization (or EBITDA) as
follows: If EBITDA equals or exceeds $8,100,000, the number of such additional
common shares payable will be 3,473,280; the number of such shares increases
proportionately up to a maximum of 3,859,200 additional shares of the Company's
common stock if EBITDA equals or exceeds $9,000,000. In connection with this
earn-out, the Company placed 3,859,200 shares in escrow.
11
I-TRAX, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 3--BUSINESS COMBINATION (continued)
The Company funded the cash portion of the merger consideration by (1) selling
1,000,000 shares of convertible preferred stock at $25 per share (with each
share convertible into 10 shares of common stock at a price of $2.50 per share),
for gross proceeds of $25,000,000, and (2) drawing $12,000,000 under a new
$20,000,000 senior secured credit facility with a national lender. (See Note 6 -
Long Term Debt.)
In connection with the sale and issuance of the convertible preferred stock, the
Company reported $15,820,000 as a deemed dividend to preferred stockholders
representing the beneficial conversion value for the underlying common stock.
The beneficial conversion value is the benefit realized by the preferred
stockholder and is treated as a dividend on the convertible preferred stock
solely for the purpose of computing earnings per share. The dividend is computed
by multiplying (1) the difference between the value of the underlying common
stock calculated using average closing price for the three days prior and three
days after the announcement of the merger ($3.63 per share) and the conversion
price ($2.50 per share) by (2) the number of shares of common stock into which
the convertible preferred stock outstanding at the merger's effective time was
convertible (14,000,000 shares).
The aggregate purchase price of $72,977,000 for this transaction is summarized
as follows:
Fair value of tangible assets acquired (includes $ 25,715,000
cash of $8,444,000)
Liabilities assumed (19,903,000)
Goodwill 36,814,000
Customer list 29,184,000
Other intangibles 1,167,000
-------------------
$ 72,977,000
===================
The acquisition was accounted for using the purchase method of accounting. The
accompanying condensed consolidated financial statements, therefore, include
only the closing balance sheet of CHD Meridian as of March 31, 2004.
The Company incurred acquisition costs of $1,169,000 that are included in the
purchase price. In addition, $832,000 of transaction related bonuses and
termination pay are included in the general and administrative expense item on
the condensed consolidated statement of operations.
NOTE 4--GOODWILL AND INTANGIBLE ASSETS
The changes in the carrying amount of goodwill for the quarter ended March 31,
2004 is as follows:
Total
---------------
Balance as of January 1, 2004 $ 8,424,000
Goodwill acquired during the quarter 36,814,000
---------------
Balance as of March 31, 2004 $ 45,238,000
===============
12
I-TRAX, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 4--GOODWILL AND INTANGIBLE ASSETS (continued)
The components of identifiable intangible assets, which are included in the
consolidated balance sheet as of March 31, 2004, are as follows:
Gross Carrying Accumulated Net Carrying
Amount Amortization Amount
--------------- -------------- ---------------
Amortized intangible assets:
Customer lists $ 36,492,000 $ 6,717,000 $ 29,775,000
Other intangibles 5,261,000 2,830,000 2,431,000
-------------- -------------- ---------------
Total $ 41,753,000 $ 9,547,000 $ 32,206,000
============== ============== ===============
Customer lists are amortized on a straight-line basis over the expected periods
to be benefited, generally 12 - 15 years. Other intangible assets represents
technology and deferred marketing costs, which are amortized on a straight-line
basis over the expected periods to be benefited, generally 3 - 5 years.
NOTE 5--CONVERTIBLE DEBENTURE
During the first quarter of 2004, Palladin Opportunity Fund LLC converted the
remaining balance of the debenture payable and accrued interest into common
stock. Accordingly, the Company issued 427,106 shares of common stock for the
conversion of principal and accrued interest amounting to $747,000.
Interest expense associated with the convertible debenture amounted to $368,000
for the three months ended March 31, 2004. This amount includes $362,000 that
represents the accretion to interest expense for the discount of the value
assigned to the warrants issued to the debenture holder and the beneficial
conversion value at date of issuance.
NOTE 6--LONG TERM DEBT
On March 19, 2004, in connection with the CHD Meridian acquisition, the Company
obtained a $20,000,000 senior secured credit facility from a national lender
that expires on April 1, 2007. The credit facility has a $6,000,000 term loan
commitment with a $14,000,000 revolving credit commitment, which is reduced by
letter of credit liabilities.
The credit facility is secured by substantially all of the Company's assets. At
any time prior to June 1, 2004, the borrowings under the revolving credit
commitment may not exceed $10,000,000. From June 1, 2004 until November 1, 2005,
the borrowings under the revolving credit commitment may not exceed 80% of
eligible receivables plus 50% of eligible fixed assets. Borrowings, at the
Company's election, may be either Base rate or Eurodollar rate loans. Base rate
loans bear interest at the prime rate as published from time to time, plus up to
0.75% per annum depending on the Company's debt service coverage ratios.
Eurodollar rate loans bear interest at the Eurodollar rate plus up to 3.0% per
annum likewise depending on the Company's debt service coverage ratios.
As of March 31, 2004, the Company had outstanding $6,000,000 under the term
loan, $2,000,000 of which is classified as short term and $4,000,000 of which is
classified as long term, and $6,000,000 under the revolving credit commitment,
which is classified as long term, and an aggregate of $3,250,000 under letters
of credit.
13
I-TRAX, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 6--LONG TERM DEBT (continued)
The credit facility includes certain financial covenants customary for the
amount and duration of this commitment. As of the date of this filing, the
Company was in compliance with all such covenants. The Company is required to
make twelve principal installment payments of $500,000 each quarter beginning on
July 1, 2004.
In addition to funding the merger and related costs, a portion of the proceeds
from the credit facility was used by the Company to repay $280,000 in related
party loans and $944,000 in principal and interest for all other outstanding
promissory notes.
NOTE 7--COMMITMENTS AND CONTINGENCIES
Litigation
CHD Meridian is a defendant in two lawsuits seeking a return of approximately
$920,000 in payments received in the ordinary course of business from two
clients that filed for protection under bankruptcy laws during 2002 and 2003.
The Company believes that amounts received are rightfully the Company's
property; however, the outcome of these lawsuits cannot be determined.
CHD Meridian is also involved in certain legal actions and claims on a variety
of matters related to the normal course of business. Management believes that
such legal actions will not have a material effect on the results of operations
or the financial position of the Company.
Healthcare Regulations
The healthcare industry is subject to numerous laws and regulations of Federal,
state, and local governments. These laws and regulations include, but are not
necessarily limited to, matters such as licensure, accreditation, government
healthcare program participation requirements, reimbursement for patient
services, and Medicare and Medicaid fraud and abuse. Recently, government
activity has increased with respect to investigations and allegations concerning
possible violations of fraud and abuse statutes and regulations by healthcare
providers. Violations of these laws and regulations could result in expulsion
from government healthcare programs together with the imposition of significant
fines and penalties, as well as significant repayments for patient services
previously billed. Management believes that the Company is in compliance with
fraud and abuse statutes as well as other applicable government laws and
regulations. Compliance with such laws and regulations can be subject to future
government review and interpretation as well as regulatory actions unknown or
unasserted at this time.
Significant Customers
As of March 31, 2004, three customers of CHD Meridian represented 39% of CHD
Meridian's and the Company's accounts receivable as reflected on the Company's
condensed consolidated balance sheets.
For the three months ended March 31, 2004, one customer of the Company accounted
for 33% of the Company's revenue as reflected on the Company's condensed
consolidated statement of operations (which exclude any CHD Meridian revenue).
For the three months ended March 31, 2003, one customer of the Company accounted
for 43% of the Company's revenue as reflected on the Company's condensed
consolidated statements of operations (which exclude any CHD Meridian revenue).
14
I-TRAX, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 7--COMMITMENTS AND CONTINGENCIES (continued)
Significant Customers (continued)
For the three months ended March 31, 2004, one customer of the Company accounted
for 15% of the Company's revenue on a pro forma basis as if the merger had been
effective as of January 1, 2004.
Risk Sharing Contracts
The Company enters into risk sharing contracts with some customers in certain
disease management arrangements. These contracts are generally for terms of
three to five years and provide that a percentage of the Company's fees may be
refunded to the customer if the Company does not save the customer a
pre-determined percentage of the expenses incurred by individuals whose health
is managed by the Company. As of March 31, 2004, the Company was a party to one
such contract, but no risk revenue was generated during the quarter.
NOTE 8--STOCKHOLDERS' EQUITY
Preferred Stock
The Company has 2,000,000 authorized shares of preferred stock. As of March 31,
2004, the Company had issued and outstanding 1,200,000 shares of Series A
Convertible Preferred Stock. The Series A Convertible Preferred Stock is
convertible into common stock at a conversion price of $2.50 per share. Holders
of Series A Convertible Preferred Stock may convert such shares into common
stock at any time. The Series A Convertible Preferred Stock has a liquidation
preference of $25 per share (the original purchase price). The Series A
Convertible Preferred Stock accrues, from issuance, dividends at a rate of 8%
per year on the $25.00 per share original issue price. Dividends will only be
payable upon the Company's liquidation or conversion of the Series A Convertible
Preferred Stock into common stock and will be payable, at the Company's option,
in cash or common stock. For the three months ended March 31, 2004, the Company
recorded approximately $79,000 in accrued dividends.
The placement agents of the Series A Convertible Preferred Stock sold to fund
the acquisition of CHD Meridian received a commission of $1,490,000 and warrants
to acquire 492,000 shares of common stock exercisable at $2.50 per share. Such
warrants were valued at $1,506,000 utilizing the Black-Scholes valuation model.
The amount of the cash paid and the value of the warrants have been classified
as a cost of equity in the condensed consolidated statement of stockholders'
equity.
Common Stock
The Company has 100,000,000 authorized shares of common stock. As of March 31,
2004, the Company had issued and outstanding 24,581,421 shares, which excludes
3,859,200 shares held in escrow for the CHD Meridian earn out.
Warrants
Under the terms of a private placement completed during October 2003, the
Company filed a registration statement under the Securities Act of 1933, as
amended, covering the resale of the common stock and the common stock underlying
warrants issued in the private placement. The Securities and Exchange Commission
declared the registration statement effective on February 17, 2004.
15
I-TRAX, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 8--STOCKHOLDERS' EQUITY (continued)
Warrants (continued)
In accordance with EITF 00-19, "Accounting for Derivative Financial Instruments
Indexed To, and Potentially Settled In a Company's Own Stock," upon issuance of
the warrants, the Company recorded a liability in the amount of the fair value
of $2,459,000 for warrants to acquire 890,000 shares of common stock. The
Company recorded an additional liability, with a corresponding charge to
operations, of $301,000 and $350,000 on December 31, 2003 and February 17, 2004,
respectively, associated with the increase in fair value of the warrants. The
warrants were accounted for as a liability, with an offsetting reduction to
additional paid-in capital received in the private placement. The warrant
liability has been reclassified to equity as of February 17, 2004, the effective
date of the registration statement, evidencing the non-impact of these
adjustments on the Company's financial position and business operations.
The fair value of the warrants was estimated using the Black-Scholes valuation
model with the following assumptions: no dividends; risk-free interest rate of
4%; the contractual life of 5 years and volatility of 112%. The fair value of
the warrants was estimated to be $2,760,000 and $3,110,000 at December 31, 2003
and February 17, 2004, respectively.
The adjustments required by EITF 00-19 were triggered by the terms of the
private placement subscription agreement, which imposed penalties if the Company
did not timely register the common stock underlying the warrants issued in the
private placement. The Securities and Exchange Commission declared the related
registration statement effective within the contractual deadline and the Company
incurred no penalties. The adjustments for EITF 00-19 had no impact on the
Company's working capital, liquidity or business operations.
The following table summarizes the Company's activity as it relates to its
warrants for the three months ended March 31, 2004:
Shares Underlying
Warrants
-----------------
Balance outstanding at January 1, 2004 3,351,372
Quarter ended March 31, 2004:
Granted 492,000
Exercised (179,278)
-----------------
Balance outstanding at March 31, 2004 3,664,094
=================
Warrants issued during the three months ended March 31, 2004 are exercisable at
$2.50 per share. Such warrants were valued at $1,506,000 and recorded as a cost
of equity because they were granted to placement agents in connection with sales
of convertible preferred stock.
16
I-TRAX, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 8--STOCKHOLDERS' EQUITY (continued)
Stock Options
The table below summarizes the activity in the Company's stock option plans for
the quarter ended March 31, 2004:
Non-Qualified Non-Plan
Incentive Options Options Non-Qualified Total
Options
------------------------ -------------------- ------------------- ------------------- -------------------
Outstanding as of
January 1, 2004 652,941 795,973 669,000 2,117,914
Granted 70,921 -- -- 70,921
Exercised -- -- -- --
Forfeited/Expired -- (30,000) -- (30,000)
-------------------- ------------------- ------------------- -------------------
Outstanding as of
March 31, 2004 723,862 765,973 669,000 2,158,835
==================== =================== =================== ===================
Vesting Dates:
December 31, 2004 172,045 170,998 177,496 520,539
December 31, 2005 153,618 82,665 101,665 337,948
December 31, 2006 98,728 50,004 75,006 223,738
December 31, 2007 5,912 -- -- 5,912
December 31, 2008 -- -- 20,000 20,000
Thereafter -- -- -- --
As of March 31, 2004, an aggregate of 1,050,698 of exercisable plan and non-plan
options, with exercise prices ranging from $.005 to $10.00, were outstanding.
The weighted average fair value of options granted during the quarter ended
March 31, 2004 amounted to $4.42.
The Company accounts for its employee incentive stock option plans using the
intrinsic value method in accordance with the recognition and measurement
principles of Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees," as permitted by SFAS No. 123. The adoption of the
disclosure requirements of SFAS No. 148 did not have a material effect on the
Company's financial position or results of operations.
17
I-TRAX, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 8--STOCKHOLDERS' EQUITY (continued)
Had the Company determined compensation expense based on the fair value at the
grant dates for those awards consistent with the method of SFAS 123, the
Company's net loss per share would have been increased to the following pro
forma amounts:
For the three For the three
months ended months ended
March 31, 2004 March 31, 2003
-------------------- ------------------
Net loss as reported $ (2,704,000) $ (964,000)
Add back intrinsic value of the options issued to
employee and charged to operations -- --
Deduct total stock based employee compensation
expense determined under fair value based methods
for all awards (3,586,318) (710,000)
-------------------- ------------------
Pro forma net loss $ (6,290,318) $ (1,674,000)
==================== ==================
Basic and diluted net loss per share as reported $ (2.41) $ (.10)
Pro forma basic and diluted net loss per share $ (2.64) $ (.18)
The above pro forma disclosure may not be representative of the effects on
reported net operations for future years as options vest over several years and
the Company may continue to grant options to employees.
The fair market value of each option grant is estimated at the date of grant
using the Black-Scholes valuation model with the following weighted-average
assumptions:
Dividend yield 0.00%
Expected volatility 112%
Risk-free interest rate 4%
Expected life 5 years
Securities and Exchange Commission Registration
Pursuant to the terms of the merger agreement between the Company and CHD
Meridian, on April 19, 2004 the Company filed a registration statement under the
Securities Act of 1933, as amended, covering the resale of (1) the common stock
issued in the merger, (2) the common stock underlying the convertible preferred
stock issued in the merger and the related financing, and (3) the common stock
issuable upon exercise of warrants issued to the placement agents in connection
with the merger.
NOTE 9--SUBSEQUENT EVENTS
During the first quarter of 2004, CHD Meridian formed a Risk Retention Group
("RRG") licensed in the State of Vermont for the purposes of self insuring a
portion of the merged companies' professional and general liability insurance.
RRG was capitalized with $2,000,000 in cash and a $1,000,000 letter of credit
under the Company's credit facility. RRG expects to begin issuing policies to
the Company in May 2004.
18
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following Management's Discussion and Analysis of Financial
Condition and Results of Operations of I-trax, Inc. and its subsidiaries should
be reviewed in conjunction with our financial statements and related notes
appearing on the preceding pages as well as our audited financial statements and
related notes incorporated in our Annual Report on Form 10-KSB for the fiscal
year ended December 31, 2003.
I-trax is a combination of two companies that merged on March 19, 2004:
I-trax, Inc. and Meridian Occupational Healthcare Associates, Inc., which does
business as CHD Meridian Healthcare. Accordingly, this quarterly report on Form
10-QSB describes the business of the merged companies. Nonetheless, for
accounting purposes, the consolidation of results of operations of the two
constituent companies was effective April 1, 2004. As a result, the results for
the three months ended March 31, 2004 do not include the operations of CHD
Meridian Healthcare and, therefore, are not indicative of the results to be
expected for subsequent quarters or the fiscal year ending December 31, 2004.
The financial statements included herein and discussed below do, however,
include the combined balance sheets of both companies.
The following discussion also contains forward-looking statements,
which are based upon current expectations and involve a number of risks and
uncertainties. In order for I-trax to utilize the "safe harbor" provisions of
the Private Securities Litigation Reform Act of 1995, investors are hereby
cautioned that these statements may be affected by important factors, which are
set forth below and in our Annual Report on Form 10-KSB for the fiscal year
ended December 31, 2003, and consequently, actual operations and results may
differ materially from those expressed in such forward-looking statements. The
most important of these factors is our ability successfully to integrate our
operations and health management programs with the operations and services of
CHD Meridian Healthcare and successfully introduce to our marketplace our
combined products and services.
The accompanying unaudited financial statements have been prepared in
accordance with accounting principles generally accepted in the United States of
America for interim financial information, the instructions to Form 10-QSB and
Item 310(b) of Regulation S-B. In our opinion, the unaudited financial
statements have been prepared on the same basis as the annual financial
statements and reflect all adjustments necessary to present fairly the financial
position as of March 31, 2004 and the results of the operations and cash flows
for the three months ended March 31, 2004. The preparation of these financial
statements requires us to make estimates and judgments that affect the reported
amounts of assets and liabilities and the reported amounts of revenues and
expenses during the covered periods. We base our estimates and judgments on our
historical experience and on various other factors that we believe are
reasonable under the circumstances. We evaluate our estimates and judgments,
including those related to revenue recognition, bad debts, and goodwill and
other intangible assets on an ongoing basis. Notwithstanding these efforts,
there can be no assurance that actual results will not differ from the
respective amount of those estimates.
I-trax and CHD Meridian Healthcare Business Description
As a merged company, we offer two categories of services, which can be
integrated or blended as necessary or appropriate based on each client's needs.
The first category includes on site services such as occupational health,
primary care, corporate health and pharmacy, which were historically offered by
CHD Meridian Healthcare. The second category includes personalized health
management programs, which were historically offered by I-trax. Each of these
services is described in greater detail below.
As the result of the merger, we are the nation's largest provider of
corporate health management services. Our health management services are
designed to allow employers to contract directly for a wide range of employee
healthcare needs. We can deliver these services at or near the client's work
site by opening, staffing and managing a clinic or pharmacy dedicated to the
client and its employees, or remotely by using the Internet and our
state-of-the-art Care Communications Center staffed with trained nurses and
other healthcare professionals 24 hours per day, 7 days per week. Our array of
services provides each client with flexibility to meet its specific pharmacy,
primary care, occupational health, corporate health, wellness, lifestyle
management or disease management needs. Pursuant to multi-year agreements, our
clients can offer their employees, dependents and retirees any combination of
our
19
various services which integrate seamlessly, through on-site or off-site
delivery platforms, or as a component of or complement to existing health plan
options.
Our primary target market is large and mid-sized self-insured employers
and business consortia. These entities are more likely to derive immediate and
meaningful financial benefit from our services because of their scale and focus
on controlling healthcare costs.
We currently operate approximately 160 locations in 32 states. We also
maintain contracts with approximately 150 clients, including many leading
employers. Our clients pay us directly for our services and include automotive
and automotive parts manufacturers, consumer products manufacturers, large
financial institutions, health plans, integrated delivery networks, and third
party administrators. Our client retention rate is high because we establish
strong client relationships, which are supported by the critical nature of our
services, the benefits achieved by employer and employee constituents, and the
utilization of multi-year service contracts.
CHD Meridian Healthcare's Historic Business - Services Delivered At or
Near the Work Site
Occupational Health Services. We provide professional staffing and
management of on-site health facilities that address the occupational health,
workers' compensation injuries, and minor illness needs of the employer's
workforce. These programs are designed to operate across the entire array of
occupational health regulatory environments and emphasize work-related injury
cost-reduction, treatment, medical surveillance or testing, disability
management, case management, return-to-work coordination, medical community
relations or oversight, on-site physical therapy, injury prevention, and
ergonomic assessment and intervention. Our health programs improve compliance
with treatment protocols and drug formularies, enhance employee productivity,
and allow for greater employer control of occupational health costs. We
currently operate 77 occupational health facilities.
Primary Care Services. We operate employer-sponsored health centers
designed to integrate with the employer's existing healthcare plans. In such
arrangements, employers contract with us directly for primary care health
services and in the process regain control of costs, quality and access. Each
health center generally services a single employer and offers health management
programs addressing the primary care needs of the employee base, including
optometry services and limited prevention and disease management programs. A
significant number of our clients also combines our health centers with a
dedicated pharmacy. We also offer customized solutions by establishing and
managing healthcare provider networks and absence management, including non-work
related case management and disability management. Our physicians, nurses, and
other staff are dedicated to the customer's employee population, allowing
employees, retirees, and their dependents to receive cost-effective, high
quality, accessible and convenient care. We currently operate 17 primary care
centers.
Pharmacy Services. We operate employer-sponsored pharmacies that offer
prescription services exclusively to the client's covered population. By
leveraging prescription volume across our client base and procuring
pharmaceuticals as a captive class of trade, we purchase products at
considerable savings for our clients, thus significantly and positively
affecting what we understand is one of our clients' fastest-growing healthcare
cost categories. Our pharmacy services also use sophisticated information
technologies. These technologies may be integrated with each client's existing
pharmacy management programs and plans, and improve employees' prescription
fulfillment convenience. We currently operate 24 pharmacies, including those
operating in conjunction with our primary care centers.
Corporate Health Services. We offer non-industrial clients that do not
experience significant physical injury rates, but that nonetheless maintain
large workforces that require general and specialized medical services, custom
designed workplace programs that combine preventative care, occupational health,
medical surveillance or testing, travel medicine and health education. Clients
for which we provide corporate health services include financial service,
advertising and consulting firms. We currently operate 47 corporate healthcare
facilities.
I-trax's Historic Business - The Health-e-LifeSM Program
We enable individuals to obtain better healthcare through our
personalized Health-e-LifeSM Program. The program is designed to deliver
lifestyle and wellness management, and disease and risk reduction interventions
to a
20
client's entire population, across multiple locations and irrespective of
population size, by using predictive science, sophisticated proprietary computer
software, clinical expertise, and personal care coordination. We currently have
approximately 37 clients, which include self-insured employers, health plans,
and integrated delivery networks, using various components of our
Health-e-LifeSM Program. Self-insured employers, health plans, hospital and
health systems, and governmental agencies continue to be prime consumers of
lifestyle and wellness management, and disease and risk reduction programs, and
we are actively marketing to these potential clients.
We believe the Health-e-LifeSM Program enables our clients to evolve
from fragmented care management practices into a cohesive and efficient system
of healthcare. The Health-e-LifeSM Program is fully integrated, uses a
single-data platform that allows all caregivers to share records, and enables
our clients to provide true coordination of care. We believe that by
facilitating real-time secure communication between our client, the patient, the
doctor, the care coordinator and the insurer within today's complex healthcare
system, the Health-e-LifeSM Program reduces costs and enables improved delivery
of care.
Predictive Science. Our Health-e-LifeSM Program incorporates predictive
science to analyze our clients' medical claims and pharmacy and clinical data to
predict future healthcare costs. We believe this is an essential step to
effective disease and lifestyle management. Experts agree that predictive
science provides a comprehensive advantage to health plans, employers and
providers, and leads to cost effective medical management and greater
profitability for the ultimate payor. Using predictive science, we analyze our
clients' entire populations to predict our clients' future healthcare costs,
including avoidable costs, the health conditions that will drive those costs and
the people within our clients' populations who are at risk for those conditions.
Armed with this information, we target our resources to achieve for each client
the best value for the amount the client will invest in providing healthcare
and, consequently, savings.
Technology Solutions. All technology components of our Health-e-LifeSM
Program use a single data platform--Medicive(R) Medical Enterprise Data
System--a proprietary software architecture developed to collect, store, sort,
retrieve and analyze a broad range of information used in the healthcare
industry.
Furthermore, our web accessible software includes portals for key
stakeholders in the care delivery process--consumers, physicians and care
managers--and permit real-time sharing of information and support the adherence
to our health and disease intervention programs. The key technology we use for
effective care coordination include:
o Health-e-Coordinator(TM), a web-based care management
application;
o MyFamilyMD(TM), a consumer health management portal;
o CarePrime(R), a clinical care application for physicians and
clinicians; and
o I-talk(TM), interactive smart voice technology.
Interventions and Clinical Expertise. The Health-e-LifeSM Program
includes personalized health and disease interventions for individuals who
suffer from, or are at high risk for, active or chronic disease and tailored
programs for individuals who are at low risk. Depending on the individual's
level of risk, our custom tailored interventions include self-help programs
available through the web or person-assisted programs administered through our
Care Communications Center. All interventions include lifestyle and risk
reduction programs that follow evidence-based clinical guidelines to optimize
health, fitness, productivity and quality of life.
The Health-e-LifeSM Program currently includes interventions for a
number of specific chronic conditions, including congestive heart failure,
coronary artery disease, asthma, diabetes, cancer management, cystic fibrosis,
lower back pain, and chronic obstructive pulmonary disease.
Care Communications Center. A vital component of our program is our
Care Communications Center, which is staffed with trained nurses and other
healthcare professionals 24 hours per day, 7 days per week. Through the Care
Communications Center, we effect targeted interventions to improve the health
management of the populations we serve. The Care Communications Center helps
each member or employee of our client make
21
informed decisions about his or her health and provides ongoing support for
those with chronic diseases. Our demand management and nurse triage services
incorporate nationally recognized, evidence-based clinical guidelines to
increase compliance by caregivers and consumers with best practices.
I-trax and CHD Meridian Healthcare Joint Market Opportunity
To change the health status of a defined population and manage the
upward claim trend experienced by employers and employees, self-insured
employers are seeking programs that promote health, manage disease and
disability and complement existing health initiatives and benefits. Self-insured
employers invest in such health programs because they reduce later need for
critical care and related costs, maximize health, increase productivity, reduce
absenteeism, improve health status of both active employees and retirees, and
reduce overall costs.
We believe that I-trax and CHD Meridian Healthcare offer a complete
solution to meet this need. We service each segment of a self-insured employer's
population and achieve the desired clinical and financial outcomes. CHD Meridian
Healthcare is the leader in on-site healthcare for Fortune 1,000 companies. Its
programs reduce healthcare costs of the defined population it serves.
Complementing the CHD Meridian Healthcare services, I-trax's personalized health
management solutions for focused disease and lifestyle/wellness management
improve the health of the entire population, achieving the same result. The
service offering of the merged companies responds to a specific and frequent
request of large employers, including many historic CHD Meridian Healthcare
clients, for the most comprehensive range of health management services.
We also believe that with a nominal increase in variable costs, the
merged companies can offer to CHD Meridian Healthcare's historic clients the
value added benefit of our Health-e-LifeSM Program and, with respect to certain
of these clients, can successfully negotiate participation in future medical
cost savings that may result from the merged companies' services.
Put more specifically, we currently serve approximately 650,000 lives
through our on-site clinics, which represent only approximately 25% of our
clients' employees, dependents and retirees. We charge these clients for our
services on a "cost plus" basis to manage these lives. We believe that the
merged companies' suite of products will allow us several opportunities with
respect to those of our clients that elect to expand their relationship with us.
These include:
o Because our services now encompass on-site facilities, which
offer high quality, better access and lower costs, and
Internet and telephone care delivery capabilities, we have
access to a larger portion of our clients' populations, which
affords us an opportunity to expand substantially our services
within our existing client base.
o We price our population-based service on a "per member per
month" basis. This model enables us to direct resources to
those of our clients' employees, dependents and retirees that
represent the greatest potential future costs. Because in
certain instances we participate in savings our programs
generate, when properly deployed in new business
opportunities, management believes the merged companies' suite
of products will afford us increasing gross margin
opportunities for incremental, integrated business.
o We are one vendor for predictive modeling, primary care,
pharmacy, occupational health, lifestyle and wellness
management, and disease management, and as such our inherent
efficiency leads to savings.
o Our combined services offer multiple entry points for employer
customers to meet their budget restrictions and specific
needs. This available menu of services could shorten our
current sales cycle and provide us with an opportunity to
build a more comprehensive program as the relationship grows
with each client over time.
22
I-trax and CHD Meridian Healthcare - Risks Inherent in Our Business
As we pursue the opportunities outlined above, we face numerous and
significant challenges specific to our company and the healthcare industry in
general. Challenges specific to our company include:
o Our ability to integrate I-trax and CHD Meridian Healthcare,
which prior to the merger operated independently and focused
on different delivery methods within the corporate health
management solutions market. If we are not able to integrate
successfully, we are not going to realize the benefits we
anticipate from selling our combined services.
o The long and complex sales cycle inherent in our business. If
we cannot shorten the sales cycle for our services, we will
not realize the benefit of quick revenue growth.
o Increasing competition in our industry. We are competing with
numerous companies offering services that may be construed as
similar to ours. Such additional competition could reduce the
number of new clients we obtain and could cause us to reduce
our pricing and, consequently, our gross margins.
o We may not succeed in deploying the merged companies' combined
services. If we do not, we will not realize the growth in
revenue we anticipate from the merger.
Challenges specific to our industry include:
o In recent years, healthcare costs have grown significantly and
as a result the healthcare industry is under significant price
pressure. Although this has increased interest in our services
as they are designed to contain costs, we are nonetheless
subject to this general trend. It is conceivable that new and
potential clients will continue to pressure us to reduce our
prices and if we do, our revenues growth will slow and our
gross margins will decrease.
o We are subject to extensive state and Federal regulation,
which grows more complex each year. As such, compliance
efforts have also increased in complexity. We may need
additional resources to incur compliance, which will increase
our expenses and decrease our gross margins.
Corporate Overview; Acquisition of CHD Meridian Healthcare
I-trax was incorporated in Delaware on September 15, 2000 at the
direction of the board of directors of I-trax Health Management Solutions, Inc.,
or Health Management, I-trax's then parent company. On February 5, 2001, I-trax
became the holding company of Health Management at the closing of a
re-organization. The holding company structure has allowed us greater
flexibility in our operations as well as expansion and diversification plans,
including the acquisition of CHD Meridian Healthcare and WellComm Group, Inc.
On March 19, 2004 we finalized the acquisition of CHD Meridian
Healthcare pursuant to a merger agreement dated as of December 26, 2003, as
amended, by and among CHD Meridian Healthcare, I-trax and two I-trax
subsidiaries. Under the merger agreement, we delivered to CHD Meridian
Healthcare stockholders 10,000,000 shares of I-trax common stock, 400,000 shares
of I-trax Series A Convertible Preferred Stock, each of which is convertible
into 10 shares of I-trax common stock, and paid $25,508,000 in cash. Immediately
prior to the merger, CHD Meridian Healthcare also redeemed certain of its then
outstanding shares of common stock and options to purchase common stock for
which it paid approximately $9,492,000 in the aggregate. Further, if CHD
Meridian Healthcare, continuing its operations following the closing of the
merger as a subsidiary of I-trax, achieves calendar 2004 milestones for earnings
before interest, taxes, depreciation and amortization, or EBITDA, additional
common shares will be payable as follows: If EBITDA equals or exceeds $8.1
million, the number of such additional I-trax common shares payable will be
3,473,280; the number of such shares increases proportionately up to a maximum
of 3,859,200 such additional I-trax common shares if EBITDA equals or exceeds
$9.0 million. Any escrowed shares
23
that are not released will be returned to I-trax for cancellation. Further, the
escrowed shares are not deemed outstanding for accounting purposes until
released.
Immediately following the closing of the merger, I-trax redeemed from
former CHD Meridian Healthcare stockholders that participated in the merger, pro
rata, an aggregate of 200,000 shares of Series A Convertible Preferred Stock at
their original issue price of $25 per share.
We obtained the cash portion of the merger consideration by selling
1,000,000 shares of Series A Convertible Preferred Stock at a purchase price of
$25.00 per share for gross proceeds of $25,000,000 and by borrowing $12 million
on a new $20 million senior secured debt facility from a national lender.
In connection with the sale and issuance of Series A Convertible
Preferred Stock, we reported $15,820,000 as a dividend to preferred stockholders
representing the beneficial conversion value for the underlying common stock.
The beneficial conversion value is the benefit realized by the preferred
stockholder and is treated as a dividend on the convertible preferred stock
solely for the purpose of computing earnings per share. The dividend is computed
by multiplying (1) the difference between the market value of the underlying
common stock calculated using average closing price for the three days prior and
three days after the announcement of the merger ($3.63 per share) and the
conversion price ($2.50 per share) by (2) the number of shares of common stock
into which the convertible preferred stock outstanding at the merger's effective
time was convertible (14,000,000 shares).
The estimated purchase price we paid for CHD Meridian Healthcare,
valuing our common stock at $3.63 per share as of March 19, 2004, the date of
acquisition, and before the issuance of any of the earn-out shares, is
approximately $72,977,000, including $1,169,000 in transaction costs recorded as
goodwill. The acquisition was accounted for as a purchase. As such, the purchase
price has been preliminarily allocated to the estimated fair values of the
assets acquired and liabilities assumed. If the escrow shares are paid to former
CHD Meridian Healthcare in accordance with the terms of the merger agreement,
the purchase price of the acquisition will increase, and the additional purchase
price will also be allocated to the estimated fair values of the assets acquired
and liabilities assumed. We have obtained an independent third-party preliminary
valuation of the acquired intangible assets.
Key Trends and Analytical Points
The following is a summary of key trends and analytical points covered
in greater detail in management's discussion and analysis:
o CHD Meridian Healthcare Acquisition: On March 19, 2004, we
finalized the acquisition of CHD Meridian Healthcare. We will
commence reporting financial results that include CHD Meridian
Healthcare operations beginning as of April 1, 2004. When we
begin to report CHD Meridian Healthcare revenue, operational
expenses, general and administration expenses, depreciation
and amortization expenses and interest expense will also
increase.
o Revenue: Revenue decreased modestly from the quarter ended
March 31, 2003 to the quarter ended March 31, 2004 as we shift
our sales to population health management solutions from
technology sales. In accordance with management's expectation,
we continued to increase our service revenue and decrease our
technology revenue.
o Operating Expenses: Operating expenses increased from the
quarter ended March 31, 2003 to the quarter ended March 31,
2004, reflecting added costs associated with delivering our
population health management solutions.
o General and Administrative Expenses. General and
administrative expenses increased substantially from the
quarter ended March 31, 2003 to the quarter ended March 31,
2004. The increase represents bonus payments and termination
pay associated with the CHD Meridian Healthcare merger.
24
o Other Income and Expenses: Interest expense and financing
costs increased from the quarter ended March 31, 2003 to the
quarter ended March 31, 2004.
o Working Capital: We finished the quarter ended March 31, 2004,
with working capital of $4,492,000. We believe that we have
access to sufficient working capital to run our business and
continue to expand our client base.
I-trax Results of Operations
The following discussion of results of operations is limited to the
historical business of I-trax in effect as of March 31, 2004. We will commence
reporting financial results that include CHD Meridian Healthcare operations
beginning as of April 1, 2004. When we begin to report CHD Meridian Healthcare
revenue, operational expenses, general and administration expenses, depreciation
and amortization expenses and interest expense will also increase.
Three Months ended March 31, 2004 Compared to Three Months ended March
31, 2003
Revenue for the three months ended March 31, 2004 was $1,447,000, a
decrease of $169,000 or 10% from $1,616,000 for the three months ended March 31,
2003. The decrease is directly related to a change in our business model from
technology sales to total population health management solutions. Technology
revenue decreased from $915,000 for the three months ended March 31, 2003 to
approximately $500,000 for the three months ended March 31, 2004, but the
decrease was partially offset by a service revenue increase from $701,000 for
the three months ended March 31, 2003 to $947,000 for the three months ended
March 31, 2004.
Operating expenses, which represent our call center costs, amounted to
$697,000 for the three months ended March 31, 2004, an increase of $136,000 or
24% from $561,000 for the three months ended March 31, 2003. The increase is
primarily attributable to the ramp-up of personnel required to service our
prevention and care services contracts.
General and administrative expenses, which represent our corporate
costs, increased from $1,004,000 for the three months ended March 31, 2003 to
$2,021,000 for the three months ended March 31, 2004. The increase of $1,017,000
is primarily attributable to expenses related to the CHD Meridian Healthcare
acquisition, including approximately $498,000 for bonuses granted to certain
individuals instrumental in completing the CHD Meridian Healthcare acquisition
and a one-time charge of approximately $334,000 for termination pay associated
with two departing executives. The balance of the increase of $185,000 includes
general corporate expenses comprised of professional fees, exchange listing and
investor relations fees and costs associated with business development travel.
Depreciation and amortization expenses were $435,000 for the three
months ended March 31, 2004, as compared to $437,000 for the three months ended
March 31, 2003.
Interest expense for the three months ended March 31, 2004 was
$613,000, representing an increase of $292,000 or 91% from $321,000 for the
three months ended March 31, 2003. For the three months ended March 31, 2004,
interest expense includes a charge of $573,000 attributable to the unamortized
portion of the discount and beneficial conversion value associated with the
convertible debenture and certain other promissory notes. The discount amount is
expensed because the convertible debenture was converted into common stock and
the promissory notes were repaid during March 2004.
Amortization of financing costs for the three months ended March 31,
2004 was $35,000 representing a decrease of $22,000 or 39% from $57,000 for the
three months ended March 31, 2003. As of March 31, 2004, these financing costs
are fully amortized.
Other expense for the three months ended March 31, 2004, represents a
one-time non-cash charge of $350,000 associated with the warrants to acquire
common stock issued in a private placement completed during October 2003. The
charge represents the increase in the value of the common stock underlying the
warrants up until the effective time of a registration statement we filed with
the Securities and Exchange Commission to register the underlying shares. The
initial value of the warrants was recorded as a liability and any fluctuation in
the value was passed through the statement of operations. Once the registration
became effective, any balance in the liability
25
account was reclassified to equity. The registration became effective during
February 2004, and accordingly, we reclassified $3,110,000 of liability into
equity. Other expense for the three months ended March 31, 2003, reflects a
charge of $200,000 in connection with the termination in January 2003 of our
agreement to acquire DxCG, Inc., a Boston-based predictive modeling company.
This sum was paid to DxCG following DxCG's termination of the merger agreement
because certain conditions to closing, including third party financing for the
cash portion of the purchase price, were not satisfied.
For the three months ended March 31, 2004, our net loss was $2,704,000,
as compared to a net loss of $964,000 for the three months ended March 31, 2003.
Net loss for the three months ended March 31, 2004, however, includes non-cash
and merger related expenses of $1,755,000, comprised of: (1) $573,000 in
non-cash interest expense attributable to the unamortized discount and
beneficial conversion value of a previously outstanding convertible debenture
and certain other promissory notes which were converted into common stock in
March 2004; (2) $350,000 of non-cash charges related to an increase in the fair
market value of common stock underlying warrants issued in a private placement
completed during October 2003; and (3) $832,000 of merger related costs, which
were included in general and administrative expense.
I-trax and CHD Meridian Healthcare Pro Forma Results of Operations
The following are our unaudited pro forma results of operations giving
effect to the acquisition of CHD Meridian Healthcare as though the transaction
had occurred on January 1, 2003, excluding transaction costs of $1,938,000 and
$832,000 included in the CHD Meridian Healthcare and I-trax statements of
operations, respectively.
Three months Three months
ended ended
March 31, 2004 March 31, 2003
------------------ ------------------
Net revenue $ 24,802,000 $ 23,824,000
------------------ ------------------
Operating income (264,000) 573,000
------------------ ------------------
Net loss $ (1,413,000) $ (349,000)
================== ==================
Loss per common share $ (.06) $ (.02)
================== ==================
Liquidity and Capital Resources
Working Capital
As of March 31, 2004, we had working capital of $4,492,000. We believe
that we have sufficient working capital to run our business and continue to
expand our client base.
On March 19, 2004, in connection with the CHD Meridian Healthcare
acquisition, we obtained a $20,000,000 senior secured credit facility from a
national lender that expires on April 1, 2007. The credit facility has a
$6,000,000 term loan commitment with a $14,000,000 revolving credit commitment,
which is reduced by letter of credit liabilities.
The credit facility is secured by substantially all of our assets. At
any time prior to June 1, 2004, the borrowings under the revolving credit
commitment may not exceed $10,000,000. From June 1, 2004 until November 1, 2005,
the borrowings under the revolving credit commitment may not exceed 80% of
eligible receivables plus 50% of eligible fixed assets. Borrowings, at our
election, may be either Base rate or Eurodollar rate loans. Base rate loans bear
interest at the prime rate as published from time to time, plus up to 0.75% per
annum depending on our debt service coverage ratios. Eurodollar rate loans bear
interest at the Eurodollar rate plus up to 3.0% per annum likewise depending on
our debt service coverage ratios.
26
As of March 31, 2004, we had outstanding $6,000,000 under the term
loan, $2,000,000 of which is classified as short term and $4,000,000 of which is
classified as long term, and $6,000,000 under the revolving credit commitment,
which is classified as long term, and an aggregate of $3,250,000 under letters
of credit. We are required to make twelve principal installment payments of
$500,000 each quarter beginning on July 1, 2004.
The credit facility includes certain financial covenants customary for
the amount and duration of this commitment. As of the date of this filing, we
were in compliance with all such covenants.
Sources and Uses of Cash
Cash used for operations was $1,756,000 and $576,000 for the three
months ended March 31, 2004 and March 31, 2003, respectively. This increase in
use of cash for operations is partially the result of the increase in accounts
receivable related to a single customer. The full balance owed by such customer
was collected in April 2004. Effective April 1, 2004, with the inclusion of CHD
Meridian Healthcare's operations, we expect to generate positive cash flows from
operations.
During the three months ended March 31, 2004, we received funds from
selling 1,000,000 shares of Series A Convertible Preferred Stock for
$25,000,000, before commission expenses and other transaction costs, which
amounted to approximately $2,575,000 in the aggregate. We also received funds
from borrowings of $12,000,000 from our newly established senior secured credit
facility with a national lender. These funds were primarily used to fund
$30,508,000 required for the cash portion of the CHD Meridian Healthcare
acquisition, including the $5,000,000 redemption of preferred stock issued
directly to the CHD Meridian Healthcare stockholders and for working capital.
In addition to funding the merger and related costs, we used a portion
of the proceeds from the credit facility to repay $280,000 in related party
loans and $944,000 in principal and interest for all other outstanding
promissory notes.
During the first quarter of 2004, Palladin Opportunity Fund LLC
converted the remaining balance of the debenture payable and accrued interest
into common stock. Accordingly, the Company issued 427,106 shares of common
stock for the conversion of principal and accrued interest amounting to
$747,000.
Material Commitments
The following schedule summarizes the contractual lease obligations of
I-trax and CHD Meridian Healthcare by the indicated period as of December 31,
2003:
For the year ending I-trax CHD Meridian Total
December 31: Healthcare
------------------------- ---------------- --------------- --------------
2004 $ 206,000 $ 1,217,000 $ 1,423,000
2005 119,000 909,000 1,028,000
2006 56,000 850,000 906,000
2007 24,000 735,000 759,000
2008 -- 651,000 651,000
Thereafter -- 574,000 574,000
---------------- --------------- --------------
Total future payments $ 405,000 $ 4,936,000 $ 5,341,000
================ =============== ==============
27
Critical Accounting Policies
The following critical accounting policies concern the business of
I-trax at March 31, 2004. The policies will be reassessed effective as of April
1, 2004 when we begin to report revenue, expenses and other financial
information concerning CHD Meridian Healthcare.
Impairment of Goodwill and Intangible Assets
We operate in an industry that is rapidly evolving and extremely
competitive. It is reasonably possible that our accounting estimates, with
respect to the useful life and ultimate recoverability of our carrying basis of
goodwill and intangible assets, could change in the near term and that the
effect of such changes on the financial statements could be material.
Revenue Recognition
Technology Revenue. We derive our revenue pursuant to different
contract types, including perpetual software licenses, subscription licenses and
custom development services, all of which may include support services revenue
such as licensed software maintenance, training, consulting and web hosting
arrangements. As described below, significant management judgments and estimates
must be made and used in connection with the revenue recognized in any
accounting period. Material differences may result in the amount and timing of
our revenue for any period if our management made different judgments or
utilized different estimates.
We license our software products for a specific term or on a perpetual
basis. Most of our license contracts also require maintenance and support. We
apply the provisions of Statement of Position 97-2, "Software Revenue
Recognition," as amended by Statement of Position 98-9 "Modification of SOP
97-2, Software Revenue Recognition, With Respect to Certain Transactions" to all
transactions involving the sale of software products and hardware transactions
where the software is not incidental. For hardware transactions where software
is not incidental, we do not unbundle our fee and, accordingly, do not apply
separate accounting guidance to the hardware and software elements. For hardware
transactions where software is not involved, we apply the provisions of Staff
Accounting Bulletin 101 "Revenue Recognition." In addition, we apply the
provisions of Emerging Issues Task Force Issue No. 00-03 "Application of AICPA
Statement of Position 97-2 to Arrangements that Include the Right to Use
Software Stored on Another Entity's Hardware" to our hosted software service
transactions.
We recognize revenue from the sale of software licenses when persuasive
evidence of an arrangement exists, the product has been delivered, the fee is
fixed and determinable, and collection of the resulting receivable is reasonably
assured. Delivery generally occurs when the product is delivered to a common
carrier.
We assess collection based on a number of factors, including past
transaction history with the customer and the creditworthiness of the customer.
We do not request collateral from our customers. If we determine that collection
of a fee is not reasonably assured, we defer the fee and recognize revenue at
the time collection becomes reasonably assured, which is generally upon receipt
of cash.
For technology arrangements with multiple obligations (for example,
undelivered software maintenance and support), we allocate revenue to each
component of the arrangement using the residual value method based on the fair
value of the undelivered elements. Accordingly, we defer technology revenue in
the amount equivalent to the fair value of the undelivered elements.
We recognize revenue for maintenance services ratably over the contract
term. Our training and consulting services are billed based on hourly rates, and
we generally recognize revenue as these services are performed. However, upon
execution of a contract, we determine whether or not any services included
within the arrangement require us to perform significant work either to alter
the underlying software or to build additional complex interfaces so that the
software performs as the customer requests. If these services are included as
part of an arrangement, we recognize the fee using the percentage of completion
method. We determine the percentage of completion based on our estimate of costs
incurred to date compared with the total costs budgeted to complete the project.
28
Services Revenue. We recognize service revenue as services are
rendered. We contract with our customers to provide services based on an agreed
upon monthly fee, a per-call charge or a combination of both.
Upon execution of a contract for services, we assess whether the fee
associated with our revenue transactions is fixed and determinable and whether
or not collection is reasonably assured. We assess whether the fee is fixed and
determinable based on the payment terms associated with such contract. If a
significant portion of a fee is due after our normal payment terms, which are
generally 30 to 90 days from invoice date, we account for such fee as services
are provided.
We also enter into risk-sharing contracts. These contracts are
generally for a term of three to five years, provide for automatic renewal, and
may provide that a percentage of our fee is refundable ("performance based")
based on achieving a targeted percentage reduction in a customer's healthcare
costs.
Material Equity Transactions
In the quarter ended March 31, 2004, we executed equity transactions
with unrelated parties in connection with the CHD Meridian Healthcare merger and
related financing. We believe that we have valued all such transactions pursuant
to the various accounting rules and that they ultimately represent the economic
substance of each transaction. Please refer to "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Corporate Overview;
Acquisition of CHD Meridian Healthcare," "Liquidity and Capital Resources -
Sources and Uses of Cash" and Part II, "Item 2-Changes in Securities."
29
Supplemental Disclosure of Consolidated Financial Statements of Meridian
Occupational Healthcare Associates, Inc. and Subsidiaries for the Quarters ended
March 31, 2004 and 2003
Introductory Note
On March 19, 2004, Meridian Occupational Healthcare Associates, Inc.
("Meridian") was acquired by I-trax, Inc. based in Philadelphia, Pennsylvania.
The effective date of the transaction for purposes of consolidating the results
of operations of the two companies was April 1, 2004. However, the balance sheet
for Meridian was combined with the consolidated financial statements of I-trax
for the period ended March 31, 2004. The merger and its terms are described
above in Note 3 - Business Combination to the Condensed Consolidated Financial
Statements of I-trax and in I-trax's Management's Discussion and Analysis of
Financial Condition and Results of Operations. We are now presenting below
Meridian's "stand alone" consolidated financial statements of operations and
cash flows for the quarters ended March 31, 2004 and 2003 to supplement other
disclosure made in this report.
Meridian Occupational Healthcare Associates, Inc.
and Subsidiaries (d/b/a CHD Meridian Healthcare)
(Unaudited)
Consolidated Financial Statements
Quarters ended March 31, 2004 and 2003
Contents
Consolidated Financial Statements
Consolidated Statements of Operations........................................31
Consolidated Statements of Cash Flows........................................32
Notes to Consolidated Financial Statements...................................33
30
Meridian Occupational Healthcare Associates, Inc.
and Subsidiaries (d/b/a CHD Meridian Healthcare)
(Unaudited)
Consolidated Statements of Operations
(in thousands)
Quarter ended Quarter ended
March 31, March 31,
2004 2003
-----------------------------------
Net revenues $ 23,355 $ 22,208
Costs and expenses:
Operating expenses 18,028 17,072
General and administrative expenses 5,832 3,360
Depreciation and amortization 388 382
-----------------------------------
Total costs and expenses 24,248 20,814
-----------------------------------
Operating income (893) 1,394
Other (income) expense:
Interest, net (29) (23)
-----------------------------------
Total other (income) expense (29) (23)
-----------------------------------
Income from continuing operations before income taxes (864) 1,417
Provision for income taxes -- 187
-----------------------------------
-----------------------------------
Net income (loss) $ (864) $ 1,230
===================================
See accompanying notes to consolidated financial statements(unaudited).
31
Meridian Occupational Healthcare Associates, Inc.
and Subsidiaries (d/b/a CHD Meridian Healthcare)
(Unaudited)
Consolidated Statements of Cash Flows
(in thousands, except share data)
For the Three For the Three
Months Ended Months Ended
March 31, March 31,
---------------------------------
2004 2003
---------------------------------
Operating activities
Net income from continuing operations $ (864) $ 1,230
Adjustments to reconcile net income from continuing operations to
net cash provided by operating activities:
Depreciation and amortization 388 382
Loss on disposal of fixed assets - -
Changes in operating assets and liabilities, net of effects of
acquisitions:
Accounts receivable 4,510 2,992
Other current assets 846 (20)
Accounts payable 367 (1,030)
Other accruals and liabilities (1,845) (1,681)
Other long-term liabilities (150) (82)
---------------------------------
Net cash provided by operating activities 3,252 1,791
---------------------------------
Investing activities
Purchase of property and equipment, net (506) (208)
Increase in intangible assets (68) -
Cash paid for acquisitions - -
---------------------------------
Net cash used in investing activities (574) (1,309)
---------------------------------
Financing activities
Proceeds from exercise of stock options 2,277 (100)
Proceeds from notes receivable 1,682 -
Repurchase of common stock (9,492) -
---------------------------------
Net cash used in financing activities (5,533) (100)
---------------------------------
Net change in cash and cash equivalents (2,855) 1,483
Cash and cash equivalents at beginning of year 11,299 7,621
---------------------------------
Cash and cash equivalents at end of quarter $ 8,444 $ 9,104
=================================
Supplemental cash flow information:
Cash paid for interest $ - $ -
=================================
Cash paid for income taxes $ 117 $ 55
=================================
See accompanying notes to consolidated financial statements (unaudited).
32
Meridian Occupational Healthcare Associates, Inc.
and Subsidiaries (d/b/a CHD Meridian Healthcare)
(Unaudited)
Notes to Consolidated Financial Statements
1. Reporting Entity and Principles of Consolidation
Reporting Entity
Effective January 1, 2000, Meridian Occupational Healthcare Associates, Inc.
("Meridian") acquired Corporate Health Dimensions, based in Latham, New York. In
conjunction with the acquisition, Meridian began doing business as CHD Meridian
Healthcare ("CHD Meridian"), also referred to herein as the "Company".
CHD Meridian Healthcare is a provider of outsourced health care services to the
employer-sponsored market. The Company's model allows employers to contract
directly for a wide range of health care services on behalf of employees,
dependents, and retirees that are delivered through facilities located at or
near the work site. CHD Meridian develops and manages custom designed facilities
that address the pharmacy, primary care, occupational health, and corporate
health demands of its clients. CHD Meridian currently provides
employer-sponsored services to 90 clients at 160 locations in 31 states.
Physician services are provided at CHD Meridian's locations under management
agreements with affiliated physician associations (the Physician Groups), which
are organized professional corporations that hire licensed physicians who
provide medical services.
Pursuant to the service agreements, the Physician Groups provide all medical
aspects of CHD Meridian's services, including the development of professional
standards, policies, and procedures for a fee. CHD Meridian provides a wide
array of business services to the Physician Group, including administrative
services, support personnel, facilities, marketing, and non-medical services in
exchange for a management fee.
Principles of Consolidation
The consolidated financial statements include accounts of Meridian Occupational
Healthcare Associates, Inc., its wholly owned subsidiaries, and the Physician
Groups. The financial statements of the Physician Groups are consolidated with
CHD Meridian in accordance with the nominee shareholder model of EITF 97-2,
"Application of FASB Statement No. 94 and APB Opinion No. 16 to Physician
Practice Management Entities and Certain Other Entities with Contractual
Management Arrangements". CHD Meridian has unilateral control over the assets
and operations of the Physician Groups. Consolidation of the Physician Groups
with CHD Meridian is necessary to present fairly the financial position and
results of operations of CHD Meridian. Control of the Physician Groups is
perpetual and other than temporary because of the nominee shareholder model and
the management agreements between the entities. The net tangible assets of the
Physician Groups were not material at March 31, 2004 and 2003. All significant
intercompany accounts and transactions have been eliminated in consolidation.
33
Meridian Occupational Healthcare Associates, Inc.
and Subsidiaries (d/b/a CHD Meridian Healthcare)
(Unaudited)
Notes to Consolidated Financial Statements
2. Interim Results and Basis of Presentation
The accompanying unaudited financial statements have been prepared in accordance
with accounting principles generally accepted in the United States of America.
In the opinion of management, the unaudited financial statements have been
prepared on the same basis as the annual financial statements and reflect all
adjustments, which include only normal recurring adjustments, necessary to
present fairly the results of the operations and cash flows for the three months
ended March 31, 2004 and 2003. The results for the three months ended March 31,
2004 are not necessarily indicative of the results to be expected for any
subsequent quarter or the entire fiscal year ending December 31, 2004.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with accounting principles generally accepted
in the United States of America have been condensed or omitted pursuant to the
Securities and Exchange Commission's rules and regulations.
These unaudited financial statements should be read in conjunction with the
Company's audited financial statements and notes thereto for the year ended
December 31, 2003 included in I-trax, Inc.'s Current Report on Form 8-K/A filed
on November 10, 2004.
The Company records pass-through pharmaceutical purchases on a net basis in
compliance with Emerging Issues Task Force Issue No. 99-19, Reporting Gross
Revenue as a Principal vs. Net as an Agent. The table below shows the amounts of
pass through pharmaceutical purchases by period presented.
Quarter Ended Quarter Ended
March 31, 2004 March 31, 2003
---------------------------- --------------------------
$23,222,604 $20,016,770
3. Long-Term Debt
Effective May 15, 2000, the Company obtained a permanent $7.5 million credit
facility from Bank of America, which expired on November 15, 2002. Effective
November 15, 2002, the Company amended the permanent $7.5 million credit
facility from Bank of America. The permanent credit facility was reduced to $6.5
million and extended to November 15, 2005. The credit facility has a $3.25
million letter of credit portion with the remainder being a term loan revolver.
34
Meridian Occupational Healthcare Associates, Inc.
and Subsidiaries (d/b/a CHD Meridian Healthcare)
(Unaudited)
Notes to Consolidated Financial Statements
3. Long-Term Debt (Continued)
The credit facility is secured by substantially all of the Company's assets. At
no time may the borrowings on the credit facility exceed 75% of the Company's
assets. Borrowings, at the Company's election, may be either base rate loans or
LIBOR loans. Base rate loans bear interest at the federal funds rate plus 5% per
annum. The LIBOR loans bear interest at the LIBOR rate plus a range of 1.5% to
3.0% based on the Company's leverage ratio. At March 31, 2003, the Company had
no debt outstanding on the term loan. The credit facility was terminated as of
March 19, 2004, the date of the merger with I-trax, Inc..
The credit facility includes certain financial covenants customary for the
amount and duration of this commitment.
A letter of credit of $2 million has been issued for the benefit of The
Lexington Group, the Company's medical malpractice carrier. An additional $1.0
million letter of credit has been issued for the benefit of the Commissioner of
Insurance, State of Vermont for a Risk Retention Group to be formed and licensed
in 2004 for the Company's professional and general liability insurance.
4. Stockholders' Equity
Capital Stock
The Company has 93,500 authorized shares of Series A preferred stock and 60,000
authorized shares of Series B preferred stock. Through March 19, 2004, the date
of the merger with I-trax, Inc., the Company has not issued any of the preferred
series stock.
Stock Option Plan
The Company's 1997 Stock Incentive Plan (the "Plan") provides for qualified and
non-qualified incentive stock option grants that may be granted to key employees
as designated by the Board of Directors. The options are exercisable commencing
on dates specified in the option agreements and generally vest ratably over a
four-year period. The options expire at the earlier of ten years from the date
of grant or three months after the termination of the holder's employment with
the Company.
35
Meridian Occupational Healthcare Associates, Inc.
and Subsidiaries (d/b/a CHD Meridian Healthcare)
(Unaudited)
Notes to Consolidated Financial Statements
4. Stockholders' Equity (Continued)
Stock Option Plan (Continued)
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure" ("Statement 148"), which amends SFAS No.
123, "Accounting for Stock-Based Compensation" ("Statement 123"). Statement 148
provides alternative methods of transition for a voluntary change to the fair
value-based method of accounting for stock-based employee compensation and
amends the disclosure requirements of Statement 123 to require more prominent
and more frequent disclosures in financial statements about the effects of
stock-based compensation. Statement 148 is effective for financial statements
issued for fiscal years ending after December 15, 2002. The Company has elected
to account for stock-based compensation plans under the intrinsic value-based
method of accounting prescribed by APB 25 that does not utilize the fair value
method.
All options have been granted with exercise prices equal to or greater than
management's estimate of the fair value of the Company's common stock on the
date of grant. As a result, no compensation cost has been recognized. If the
alternative method of accounting for stock option plans prescribed by Statement
123 and Statement 148 had been followed, the Company's net income (loss) would
not have been materially different for the quarters ended March 31, 2004 and
2003, respectively.
The following is a summary of option transactions during 2004 and 2003:
Weighted Average
Number of Shares Exercise Price
--------------------- -------------------
--------------------- -------------------
Outstanding at December 31, 2002 36,092 $ 112
Granted -- --
Canceled (625) 143
Exercised (12,300) 137
--------------------- -------------------
Outstanding at December 31, 2003 23,167 $ 98
===================== ===================
Granted -- --
===================== ===================
Canceled -- --
===================== ===================
Exercised (23,167) 98
===================== ===================
Outstanding at March 19, 2004 -- $ --
===================== ===================
Available for future grant --
=====================
36
Meridian Occupational Healthcare Associates, Inc.
and Subsidiaries (d/b/a CHD Meridian Healthcare)
(Unaudited)
Notes to Consolidated Financial Statements
5. Employee Benefit Plan
The Company has a defined-contribution employee benefit plan that was
established under provisions of Section 401(k) of the Internal Revenue Code.
Substantially all full-time regular employees of the Company are eligible to
participate in the plan. Under the plan's provisions, an employee may
contribute, on a tax-deferred basis, up to 15% of total cash compensation, not
to exceed, within a calendar year, subject to Internal Revenue Code limitations.
The Company can make matching contributions and discretionary contributions. The
Company made matching contributions of $151,000 and $128,000 for the quarters
ended March 31, 2004 and 2003, respectively.
6. Commitments and Contingencies
Litigation
The Company has been named as a defendant in two lawsuits seeking refund of
approximately $920,000 in payments received in the ordinary course of business
from two clients that filed for protection under bankruptcy laws during 2002 and
2003. The Company believes that amounts received are rightfully the Company's
property. The outcome of these lawsuits cannot be determined, but could have a
material adverse impact on the Company.
The Company is also involved in certain legal actions and claims on a variety of
matters related to the normal course of business. It is the opinion of
management that such legal actions will not have a material effect on the
results of operations or the financial position of the Company.
Healthcare Regulations
The healthcare industry is subject to numerous laws and regulations of Federal,
state, and local governments. These laws and regulations include, but are not
necessarily limited to, matters such as licensure, accreditation, government
healthcare program participation requirements, reimbursement for patient
services, and Medicare and Medicaid fraud and abuse. Recently, government
activity has increased with respect to investigations and allegations concerning
possible violations of fraud and abuse statutes and regulations by healthcare
providers. Violations of these laws and regulations could result in expulsion
from government healthcare programs together with the imposition of significant
fines and penalties, as well as significant repayments for patient services
previously billed. Management believes that the Company is in compliance with
fraud and abuse statutes as well as other applicable government laws and
regulations. Compliance with such laws and regulations can be subject to future
government review and interpretation as well as regulatory actions unknown or
unasserted at this time.
37
Meridian Occupational Healthcare Associates, Inc.
and Subsidiaries (d/b/a CHD Meridian Healthcare)
(Unaudited)
Notes to Consolidated Financial Statements
7. Business Combinations
On March 19, 2004, the Company merged with I-trax, Inc., a publicly traded
company based in Philadelphia, Pennsylvania.
Pursuant to the merger agreement, the Company's shareholders, (1) received
10,000,000 shares of common stock valued at $36,300,000 utilizing $3.63 per
share, (2) received 400,000 shares of convertible preferred stock (with each
share convertible into 10 shares of common stock at a price of $2.50 per share
or 4,000,000 shares in the aggregate) at $25 per share or $10,000,000 in the
aggregate, and (3) received approximately $25,508,000 in cash. The Company has
filed a registration statement with the Securities and Exchange Commission to
register the common stock issued in the merger and issuable upon conversion of
convertible preferred stock issued in the merger. Immediately prior to the
merger, Meridian also redeemed certain of its then outstanding shares of common
stock and options to purchase common stock for which it paid approximately
$9,492,000 in the aggregate.
The former CHD Meridian stockholders will also receive additional shares of the
Company's common stock if CHD Meridian, continuing its operations following the
closing of the merger as CHD Meridian LLC, achieves calendar 2004 milestones for
earnings before interest, taxes, depreciation and amortization (or EBITDA) as
follows: If EBITDA equals or exceeds $8,100,000, the number of such additional
common shares payable will be 3,473,280; the number of such shares increases
proportionately up to a maximum of 3,859,200 additional shares of the Company's
common stock if EBITDA equals or exceeds $9,000,000. In connection with this
earn-out, the Company placed 3,859,200 shares in escrow.
The Company incurred transaction costs of $1,938,000 that are included in the
general and administrative expenses in the consolidated statement of operations
for the period ending March 31, 2004.
38
SIGNATURE
In accordance with the requirements of the Securities Exchange Act of
1934, the registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
I-TRAX, INC.
Date: November 10, 2004 By: /s/ Frank A. Martin
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Name: Frank A. Martin
Title: Chief Executive Officer
39