U.S. Securities and Exchange Commission
Washington, D.C. 20549
Form 10-KSB/A
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the fiscal year ended: December 31, 2003
[ ] TRANSITION REPORT UNDER TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _______ to _______
Commission File Number: 0-30275
I-TRAX, INC.
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(Name of small business issuer in its charter)
Delaware 23-3057155
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
One Logan Square
130 N. 18th Street, Suite 2615
Philadelphia, Pennsylvania 19103
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (215) 557-7488
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act: Common Stock,
$.001 par value
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. [X] Yes [ ] No
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of the registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [X]
State issuer's revenues for its most recent fiscal year: $4,188,860.
The aggregate market value of the voting common stock held by non-affiliates
computed with reference to the price at which the stock was sold on March 25,
2003 on the American Stock Exchange was $112,921,667. As of March 25, 2003, the
number of outstanding shares of common stock, par value $.001 per share, was
28,374,852.
DOCUMENTS INCORPORATED BY REFERENCE: Portions of the issuer's definitive proxy
statement for its 2004 Annual Meeting of Stockholders are incorporated by
reference in Part III of this report.
Transitional Small Business Disclosure Format (Check one): [ ] Yes [X] No
I-TRAX, INC.
FORM 10-KSB/A AMENDMENT TO ANNUAL REPORT
FOR THE YEAR ENDED DECEMBER 31, 2003
TABLE OF CONTENTS
Item Page No.
PART I
1. Description of Business............................................................................ 1
2. Description of Properties..........................................................................16
3. Legal Proceedings..................................................................................17
4. Submission of Matters to a Vote of Security Holders................................................17
PART II
5. Market for Common Equity, Related Stockholder Matters
and Small Business Issuer Purchases of Equity Securities......................................18
6. Management's Discussion and Analysis of Financial Condition and Results of Operations..............21
7. Financial Statements...............................................................................31
8. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure...............98
8A. Controls and Procedures............................................................................98
PART III
9. Directors, Executive Officers, Promoters and Control Persons; Compliance with
Section 16(a) of the Exchange Act .................................................................98
10. Executive Compensation.............................................................................98
11. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters...................................................................98
12. Certain Relationships and Related Transactions.....................................................98
13. Exhibits and Reports on Form 8-K...................................................................99
14. Principal Accounting Fees and Services............................................................101
ii
PART I
ITEM 1. DESCRIPTION OF BUSINESS
This report includes and incorporates forward-looking statements. All
statements, other than statements of historical facts, included or incorporated
in this report regarding our strategy, future operations, financial position,
future revenues, projected costs, prospects, plans and objectives of management
are forward-looking statements. The words "anticipates," "believes,"
"estimates," "expects," "intends," "may," "plans," "projects," "will," "would"
and similar expressions are intended to identify forward-looking statements,
although not all forward-looking statements contain these identifying words. We
cannot guarantee that we actually will achieve the plans, intentions or
expectations disclosed in our forward-looking statements and you should not
place undue reliance on our forward-looking statements. Actual results or events
could differ materially from the plans, intentions and expectations disclosed in
the forward-looking statements we make. We have included important factors in
the cautionary statements included or incorporated in this report, particularly
under the heading "Risk Factors" beginning on page 7 that we believe could cause
actual results or events to differ materially from those stated in or implied by
the forward-looking statements we make. Our forward-looking statements do not
reflect the potential impact of any future acquisitions, mergers, dispositions,
joint ventures or investments we may make.
Introduction
I-trax is a combination of two companies that merged on March 19, 2004:
I-trax, Inc. and Meridian Occupational Healthcare Associates, Inc., a private
company, which does business as CHD Meridian Healthcare. The merger and its
terms are described in greater detail below.
This Annual Report on Form 10-KSB describes the business of the merged
companies. However, because the merger occurred subsequent to the year ended
December 31, 2003, certain portions of this report, including Management's
Discussion and Analysis of Financial Condition and Results of Operations and the
discussion of results of operations presented in that section, are limited to
I-trax. To present the performance and results of operations of the merged
companies for the years ended December 31, 2003 and 2002, we are including in
this report the balance sheet of CHD Meridian Healthcare as of December 31, 2003
and the statements of operations for the years ended December 31, 2003 and 2002,
and the unaudited combined condensed balance sheet of I-trax and CHD Meridian
Healthcare on a pro forma basis as if the merger had been consummated on
December 31, 2003 and the unaudited combined condensed statements of operations
on a pro forma basis as if the merger had been consummated on January 1, 2002.
I-trax and CHD Meridian Healthcare Business Description
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 occupation 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 believe we are the nation's largest
provider of on-site 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 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.
1
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 and 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. Our
health centers generally service a single employer and offer health management
programs addressing the primary care needs of the employee base, including
optometry services and limited prevention and disease management programs.
Clients may combine our health centers with a dedicated pharmacy. We also offer
customized solutions in network management 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. Clients
may also combine our pharmacy with a dedicated primary care center. 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.
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 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,
2
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 utilize 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 includes:
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 Communication 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-Life ProgramSM 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 Communication 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 Communication
Center, we effect targeted interventions to improve the health management of the
populations we serve. The Care Communication Center helps each member or
employee of our client make 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.
3
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's 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 and
wellness management improve the health of the entire population, achieving the
same result. The services offered by the merged companies respond to a specific
and frequent request of large employers, including many historic CHD Meridian
Healthcare clients, for a 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 the savings our programs generate, when properly
deployed in new business opportunities, management believes the merged
companies' suite of products will afford us increased 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.
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:
4
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.
I-trax Corporate History
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.,
I-trax's then parent company. On February 5, 2001, I-trax became the holding
company of I-trax Health Management at the closing of a reorganization pursuant
to Section 251(g) of Delaware General Corporation Law. At the effective time of
the reorganization, all of the stockholders of I-trax Health Management became
the stockholders of I-trax and I-trax Health Management became a wholly owned
subsidiary of I-trax. Further, all outstanding shares of I-trax Health
Management were converted into shares of I-trax in a non-taxable transaction.
I-trax's common stock is traded on the American Stock Exchange under the symbol
"DMX."
The holding company structure has allowed us greater flexibility in our
operations and expansion and diversification plans, including in the
acquisitions of Meridian Occupational Healthcare Associates, Inc. and WellComm
Group, Inc.
I-trax acquired WellComm effective February 6, 2002. In the
acquisition, we paid the WellComm stockholders approximately $2,200,000 in cash
and 1,488,000 shares of our common stock. We also issued to each of two senior
officers of WellComm options to acquire 56,000 shares of our common stock at a
nominal exercise price. Because the acquisition was structured as a merger, we
also assume all of WellComm's liabilities, which equaled approximately $775,000.
We funded this acquisition by selling a 6% convertible senior debenture
in the aggregate principal amount of $2,000,000 to Palladin Opportunity Fund
LLC. We also issued Palladin a warrant to purchase up to 307,692 shares of our
common stock. As of March 19, 2004, Palladin has converted all amounts
outstanding under the debenture into common stock and has exercised the warrant
in full at the conversion price and exercise price of $1.75 per share.
5
On March 19, 2004, we finalized the acquisition of CHD Meridian
Healthcare. 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
shares of common stock will be payable as follows: If EBITDA equals or exceeds
$8,100,000, the number of such additional shares of common stock payable will be
3,473,280; the number of such shares increases proportionately up to a maximum
of 3,859,200 shares if EBITDA equals or exceeds $9,000,000. Any escrowed shares
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.
In the merger, I-trax assumed all of CHD Meridian Healthcare's
liabilities, which equaled approximately $21,000,000.
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 $25.00 per share.
I-trax 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 by borrowing $12,000,000 on a
new $20,000,000 senior secured debt facility from a national lender.
I-trax has committed to register for resale on Form S-3 the shares of
common stock issued in the merger and issuable upon conversion of the Series A
Convertible Preferred Stock issued in the merger and issued to the purchasers of
Series A Convertible Preferred Stock, and the shares of common stock issuable
upon the exercise of warrants issued to the placement agents in connection with
the sale of the Series A Convertible Preferred Stock.
I-trax and CHD Meridian Healthcare Competition
Numerous companies are currently delivering one or several components
of our services, including disease management companies, health insurers and
plans, Internet health information companies and pharmacy benefit management
companies, among others. Many of these companies are larger than we are and have
greater resources, including access to capital. We believe, however, that our
corporate health management services are unique. We also believe that our broad
expertise in establishing and managing employer-dedicated pharmacies and
clinics, our software applications and our expertise in designing and deploying
scalable software applications allow us to compete effectively against these
larger competitors. We consider the following types of companies to compete with
us in providing a similar product:
o Disease management and care enhancement companies, such as American
Healthways, LifeMasters, Matria Healthcare, CorSolutions, SHPS
Healthcare Services, and Health Dialog.
o Wellness companies, such as StayWell, HealthMedia, Harris Health
Trends, and Impact Health.
o Health-related, online services or web sites targeted at consumers,
such as careenhance.com, drweil.com, healthcentral.com,
healthgate.com, intelihealth.com, mayoclinic.com, thriveonline.com,
webmd.com and wellmed.
o On-site healthcare providers, such as Comprehensive Health Services,
MedCor and Whole Health Management.
o Pharmacy benefit management companies, such as Caremark and Express
Scripts.
o Regional occupational health clinics and providers.
6
Intellectual Property
Our proprietary software applications are protected by United States
copyright laws. We have registered the use of certain of our trade names and
service names in the United States. We also have the rights to a number of
Internet domain names, including I-trax.com and .net, MyFamilyMD.com and .net,
CHDMeridianHealthcare.com, CarePrime.com and .net and healthecoordinator.com. In
addition, we continue to explore potential availability of patent protection for
our business processes and innovations.
Research and Development
We conduct research and development related to our technology products
on three levels on a continuing basis. First, we continually study the business
process in the medical community. A pivotal part of the success of our services
is understanding the exact needs of our clients, and applying that knowledge to
the graphic user interface, thus allowing our systems to integrate into the
user's workflow without disruption. I-trax was founded on this principle. We are
constantly studying the changing work environment and clinical landscape of our
clients and the industry as a whole. New modules are under development and
modifications and additional functionality will continue to be added to
currently available technology products.
Second, as a by-product of the business process study, the invention
and development of unique problem solving tools embedded in our software
applications make possible the process of entering and retrieving vast amounts
of information in short periods of time. Constant development, re-engineering
and implementation of these tools is a priority of the design and engineering
staff and will continue to be our focus, allowing us to maintain a leading role
in information systems development.
Third, further technology platform research, development and
engineering are conducted on a continual basis. We believe we are creating
software components to solve new problems that arise for our clients and us, and
we are constantly educating ourselves on available and emerging technologies
that will help support and enhance our services.
We invested approximately $1,237,000 in software development in 2003,
which amount was capitalized, and $413,000 in research on development in 2002,
which amount was charged to operations. The majority of these amounts was
attributable to the completion of MedWizards(R) health assessment tools, and
Health-e-Coordinator(TM) and CarePrime(R) applications. We expect to continue to
invest in research and software development for the foreseeable future,
including to add functionality to the MyFamilyMD(TM) application by adding
MedWizard(R) tools, on CarePrime(R), which interacts with the MyFamilyMD(TM)
application and its MedWizards(R) tools, and on Health-e-Coordinator(TM)
software by adding additional disease management capabilities.
I-trax and CHD Meridian Healthcare Employees
We believe our success depends to a significant extent on our ability
to attract, motivate and retain highly skilled, vision-oriented management and
employees. To this end, we focus on incentive programs for our employees and
endeavor to create a corporate culture that is challenging, rewarding and fun.
As of March 26, 2004, we had 925 full-time, and 624 part-time and 42 temporary
employees.
Risk Factors
In addition to other information in this report, you should carefully
consider the following risks in evaluating I-trax and its business. Our
business, financial condition and results of operations could be materially and
adversely affected by each of these risks. Such an adverse effect could cause
the market price of our common stock to decline, and you could lose all or part
of your investment.
7
Risk Related to I-trax
If we are not able to implement our business strategy of deploying our
integrated services effectively to existing and new clients, we will
not be able to grow our revenue.
Although we believe that there is significant demand for the our
services and products in the corporate healthcare market, there are many reasons
why we may be unable to execute our business strategy, including our possible
inability to:
o deploy our integrated services and solutions on a large scale;
o attract a sufficiently large number of self-insured employers to
subscribe for our services and software applications;
o increase awareness of our brand;
o strengthen user loyalty;
o develop and improve our services and solutions;
o continue to develop and upgrade our services and software solutions;
and
o attract, retain and motivate qualified personnel.
Our inability to achieve the above goals will impact our revenue
growth.
Increasing competition for contracts to establish and manage
employer-dedicated pharmacies and clinics increases the likelihood that
we may lose business to our competitors.
CHD Meridian Healthcare pioneered the field of employer-dedicated
pharmacies and primary care clinics. Although CHD Meridian Healthcare has always
faced competition from other methods by which business enterprises can arrange
and pay for healthcare services for their employees, until recently we rarely
experienced face-to-face bidding for a contract to manage a particular
employer's pharmacy or clinic. We have recently begun to see direct competition
for employer-dedicated pharmacy management contracts, including from Caremark
and Express Scripts. We expect this competition will increase over time. We
believe that we have certain advantages in facing such competition, including
our experience and know-how. However, some of our competitors and potential
competitors, including prescription benefit management companies, with revenues
in the multiple billions of dollars, are substantially bigger than we are. We
believe that the potential market for employer-dedicated pharmacies is large
enough for us to meet our growth plans despite increasing competition, but there
are no assurances that we will in fact be able to do so. Our ability to maintain
existing clients, expand services to existing clients, add new clients so as to
meet our growth objectives, and maintain attractive pricing for our services,
will depend on the interplay among overall growth in the use of
employer-dedicated facilities, entry of new competitors into our business, and
our success or failure in maintaining our market position as against these new
entrants.
In addition to this increasing head-to-head competition for contracts
to establish and manage employer-dedicated facilities, we expect to continue to
face competition for large employers' healthcare budget from other kinds of
enterprises, including pharmacy benefit managers, health insurers, managed
health care plans, and retail pharmacy chains.
Loss of advantageous pharmaceutical pricing could adversely affect our
income and the value we provide to our clients.
We receive favorable pricing from pharmaceutical manufacturers as a
result of our class of trade designation, which means that we only sell
pharmaceutical products to our clients' employees, dependents and retirees. We
also receive rebates from pharmaceutical manufacturers for driving market share
to preferred products.
8
The benefit of favorable pricing is generally passed on to our clients under the
terms of client contracts. In the last few years, retail pharmacies have brought
legal cases against pharmaceutical manufacturers challenging class of trade
designations as unlawful price discrimination under the Robinson-Patman Act.
Although these challenges have generally failed, there remains a possibility
that we could lose the benefit of this favorable pricing, either due to a legal
challenge or to a change in policies of the pharmaceutical manufacturers. Such a
loss would diminish the value that we can provide to our clients and, therefore,
would make our services less attractive. We also receive volume performance
incentives from our pharmaceutical wholesaler which directly affect our revenue
and the loss of which could adversely affect our income.
Our business involves exposure to professional liability claims, and a
failure to manage effectively our professional liability risks could
expose us to unexpected expenses, which would result in losses.
Under the terms of our contracts to manage employer sponsored clinics
or pharmacies, we must procure professional liability insurance covering the
operations of that clinic or pharmacy. We also typically agree to indemnify our
clients against vicarious professional liability claims arising out of acts or
omissions of healthcare providers working at the clinics and pharmacies we
manage. Further, under the terms of our services agreements with affiliated
professional corporations, we are contractually obligated to procure malpractice
insurance on behalf of the professional corporations and their employed
physicians and typically absorb such claims as are subject to the policy
self-insured retention limit (which is explained below) or above the policy
limit. Finally, there also exists the possibility of vicarious professional
liability claims being made directly against us. As a result of these
contractual arrangements, we routinely incur significant expenses arising out of
professional liability claims. If we fail to manage the professional liability
claims and associated risk effectively, we may sustain losses beyond our
historic trend.
Certain of our past professional liability insurance policy years were
insured by two insurance companies that are now either insolvent or under
regulatory supervision. As a result, we are effectively partially uninsured for
those periods. We have established reserves in connection with the six pending
claims from such policy years. Although we believe such reserves are reasonable
based on our historic loss experience, there is no assurance that these reserves
will be sufficient to pay all judgments or settlements. In addition, our current
professional liability insurance provides for self-insured retention of
$500,000. A self-insured retention is the amount that we have agreed to assume
responsibility for under our insurance policy as if we are the insurer subject
to the terms of the policy and related regulatory scheme. This means that we
are, effectively, partially uninsured against a variety of claims that may arise
from other years. We maintain a layer of excess insurance that begins with
losses in excess of $1,000,000 per claim, including for the years in which our
primary insurer is insolvent. We have reserved for projected future professional
liability expenses based on our operations to date. These reserves, however,
could prove inadequate, the size of our ultimate uninsured liability could
exceed our established reserves and we will sustain losses.
Our professional liability insurance policies are written on a
"claims-made" basis, meaning that they cover only claims made during the policy
period, and not events that occur during the policy period but result in a claim
after the expiration of the policy. With this insurance strategy, we must renew
or replace coverage each year in order to have coverage for prior years'
operations. Availability and cost of such coverage are subject to market
conditions, which can fluctuate significantly.
We have established a subsidiary insurance company, which subjects us
to additional regulatory requirements and once operating, will subject
us to the risks associated with the insurance business.
We have established as a wholly owned subsidiary insurance company and
expect to begin operating it in the second quarter of 2004 to insure our
professional liability exposure. We believe this approach will enhance our
ability to manage malpractice exposure and stabilize insurance costs. Operating
an insurance subsidiary, however, represents additional risk to our operations,
including a potential perception among our existing and potential clients that
we are not adequately insured. We have hired a manager and have engaged an
actuarial consulting firm for the insurance subsidiary. When we commence its
operations, we will be subject to the risks associated with any insurance
business, which include investment risk relating to the performance of our
invested assets set aside as reserves for future claims, the uncertainty of
making actuarial estimates of projected future professional liability losses,
and loss adjustment expenses. Failure to make an adequate return on our
investments, to maintain the
9
principal of invested funds, or to estimate future losses and loss adjustment
expenses accurately, could cause us to sustain losses. Also, maintaining the
insurance subsidiary has exposed us to substantial additional regulatory
requirements, with attendant risks if we fail to comply with applicable
regulations.
We may be unable to integrate successfully our operations and realize
the full cost savings we anticipate from the merger.
The merger of CHD Meridian Healthcare and I-trax involves the
integration of two companies that have previously operated independently and
focused on different delivery methods within the corporate health management
solutions market. The difficulties of combining the merged companies' operations
include:
o integrating complementary businesses under centralized management
efficiently;
o coordinating geographically separated organizations;
o integrating personnel with diverse business backgrounds; and
o combining different corporate cultures.
The process of integrating operations could cause an interruption of,
or loss of momentum in, the activities of I-trax or CHD Meridian Healthcare's
businesses or the loss of key personnel. The diversion of management's attention
and any delays or difficulties encountered in connection with the integration of
the merged companies' operations could have an adverse effect on the business,
results of operations or financial condition of the merged companies.
Among the factors considered by the CHD Meridian Healthcare and the
I-trax boards of directors in connection with their respective approvals of the
merger were the opportunities for reduction of operating costs and improvements
in operating efficiencies and other financial synergies that could result from
the merger. We cannot give any assurance that these savings will be realized, or
if realized, will be realized within the time periods contemplated by
management.
If we lose key employees or fail to recruit and retain other skilled
employees, we may not be able to continue our growth.
Our business greatly depends on, among others, Frank A. Martin,
chairman, chief executive officer and director, Haywood D. Cochrane, Jr., vice
chairman and director, John R. Palumbo, president, Charles D. (Chip) Phillips,
executive vice president and chief operating officer, and Shannon W. Farrington,
senior vice president and chief financial officer. If we cannot retain any one
of these individuals, we will loose employees with considerable knowledge of our
business, which could significantly reduce our ability to compete and succeed in
the future.
We maintain employment agreements with Messrs. Martin, Cochrane and Palumbo and
Ms. Farrington. Mr. Martin's employment agreement expires in December 2004. Mr.
Cochrane's and Ms. Farrington's agreements expire in January 2005. And Mr.
Palumbo's agreement expires in October 2005. Each employment agreement may be
terminated by us with or without cause and by the applicable executive with or
without good reason. We maintain a $5,000,000 key-man life insurance policy on
Mr. Martin.
Our future success also depends on our ability to attract, retain and
motivate highly skilled employees. As we secure new contracts and implement our
services and products, we will need to hire additional personnel in all
operational areas. We may be unable, however, to attract, assimilate or retain
such highly qualified personnel. Although we have not experienced such
difficulties in the recent past, we may do so in the future, especially if the
labor markets continue to tighten. If we cannot attract new personnel or retain
and motivate current personnel, the service level we provide to our clients may
suffer, which may cause us to loose clients and revenue.
10
Our sales cycle is long and complex, which may slow our growth.
The corporate health management business is growing rapidly and has
many entrants. Further, although each entrant may define its service as
corporate health management, the details of the services among the entrants are
quite different. Because the services offered are complex, require clients to
incur significant upfront costs and there are significant variations in the
offered services by many vendors, potential clients take a long time to evaluate
and purchase such services, lengthening our sales cycle. Further, the sales and
implementation process for our services and software applications is lengthy,
involves a significant technical evaluation and requires our clients to commit a
great deal of time and money. Finally, the sale and implementation of our
services are subject to delays due to our clients' internal budgets and
procedures for approving large capital expenditures and deploying new services
and software applications within their organizations. The sales cycle for our
solutions, therefore, is unpredictable and has generally ranged from 3 to 24
months from initial contact to contract signing. The time it takes to implement
our services is also difficult to predict and has lasted as long as 18 months
from contract execution to the commencement of live operation. During the sales
cycle and the implementation period, we may expend substantial time, effort and
money preparing contract proposals, negotiating the contract and implementing
the solution without receiving any related revenue.
Deterioration of the financial health of our clients, many of which are
large U.S. manufacturing enterprises, may impair our business volume
and collections.
An adverse trend in one or more U.S. manufacturing industries could
lead to plant closings or layoffs that could eliminate or reduce the need for
some of our employer-dedicated healthcare facilities. Also, if our client
becomes insolvent, we may not be able to recover outstanding accounts receivable
owed by that client, and may suffer premature contract termination.
Our professional liability insurance is written on a "claims-made"
basis. This means that we are protected from malpractice claims only if the
company that insured us at the time of the alleged "occurrence" is the same
company at the time the claim is filed in court. If it is not, we will not have
coverage. To continue coverage in such circumstances, we must obtain "tail"
insurance coverage or continue to purchase insurance written on a "claims made"
basis. We typically charge our clients for tail insurance coverage when the
contract terminates. If a client is insolvent when the contract terminates,
however, we may not be able to recoup the cost of tail insurance coverage, or
other costs related to that facility's shutdown. We already experienced this in
the case of Bethlehem Steel and National Steel, two clients for which we managed
several facilities when these clients became debtors in Federal bankruptcy
proceedings. This resulted in difficulty in collecting some amounts due to us,
and generated claims against us of approximately $920,000 in the aggregate for
repayment of allegedly preferential transfers previously received from the
client. Because of the risks associated with client insolvency, and the
concentration of CHD Meridian Healthcare's client base, our business is to some
extent dependent on the continued health of U.S. manufacturing industries.
We are dependent on the Internet and Internet-related technologies and
as such subject to frequent change and risks associated with Internet
viruses and outages, which could destroy the information we maintain or
prevent our clients from accessing important information.
Our web-based software applications that form the backbone of our
disease management and comprehensive health management solutions depend on the
continuous, reliable and secure operation of Internet servers and related
hardware and software. Numerous viruses and outages on the Internet could cause
outages of our applications from time to time. To the extent that our services
are interrupted, our users will be inconvenienced and our reputation may be
diminished. If access to our system becomes unavailable at a critical time,
users could allege we are liable, which could depress our stock price, cause
significant negative publicity and possibly lead to litigation. Although our
computer and communications hardware is protected by physical and software
safeguards, it is still vulnerable to fire, storm, flood, power loss,
telecommunications failures, physical or software break-ins and similar events.
We do not have 100% redundancy for all of our computer and telecommunications
facilities. A catastrophic event could have a significant negative effect on our
business, results of operations, and financial condition.
11
We also depend on third parties to provide certain of our clients with
Internet and online services necessary for access to our servers. It is possible
that our clients will experience difficulties with Internet and other online
services due to system failures, including failures unrelated to our systems.
Any sustained disruption in Internet access provided by third parties could have
a material adverse effect on our business, results of operations and financial
condition.
Finally, we retain confidential healthcare information on our servers.
It is, therefore, important that our facilities and infrastructure remain secure
and are perceived by clients to be secure. Although we operate our software
applications from a secure facility managed by a reputable third party, our
infrastructure may be vulnerable to physical or virtual break-ins, computer
viruses, programming errors or similar disruptive problems. A material security
breach could damage our reputation or result in liability to us.
We may be sued and incur losses if we provide inaccurate health
information on our website or inadvertently disclose confidential
health information to unauthorized users.
Because users of our website will access health content and services
relating to a medical condition they may have or may distribute our content to
others, third parties may sue us for defamation, negligence, copyright or
trademark infringement, personal injury or other matters. We could also become
liable if confidential information is disclosed inappropriately. These types of
claims have been brought, sometimes successfully, against online services in the
past. Others could also sue us for the content and services that will be
accessible from our website through links to other websites or through content
and materials that may be posted by our users in chat rooms or bulletin boards.
Any such liability will have a material adverse effect on our reputation and our
business, results of operations or financial position.
We may be unable to compete successfully against companies offering
other disease management products, which will impair our revenue
growth.
Many healthcare companies are offering disease management services and
healthcare focused software solutions. Further, a vast number of Internet sites
offer healthcare content, products and services. In addition, traditional
healthcare providers compete for consumers' attention both through traditional
means as well as through new Internet initiatives. Although we believe our
technology-enabled service solutions are unique and better than our
competitors', we compete for customers with numerous other businesses.
We believe our competitors include the following:
o Disease management and care enhancement companies, such as American
Healthways, LifeMasters, Matria Healthcare, CorSolutions, SHPS
Healthcare Services, and Health Dialog.
o Wellness companies, such as StayWell, HealthMedia, Harris Health
Trends, and Impact Health.
o On-site healthcare providers, such as Comprehensive Health Services,
MedCor and Whole Health Management.
o Pharmacy benefit management companies, such as Caremark and Express
Scripts.
o Regional occupational health clinics and providers.
Many of these potential competitors are likely to enjoy substantial
competitive advantages compared to us, including:
o greater name recognition and larger marketing budgets and resources;
o larger customer and user bases;
o larger production and technical staffs;
12
o substantially greater financial, technical and other resources; and
o a wider array of online products and services.
To be competitive, we must continue to enhance our products and
services as well as our sales and marketing channels. If we do not, we will not
be able to grow our revenue.
If other companies develop intellectual property identical or similar
to ours, we will loose what we believe to be our competitive advantage.
Our intellectual property is important to our business. We rely on a
combination of copyright, trademark and trade secret laws, confidentiality
procedures and contractual provisions to protect our intellectual property. Our
efforts to protect our intellectual property may not be adequate. Our
competitors may independently develop similar technology or duplicate our
products or services. Unauthorized parties may infringe upon or misappropriate
our products, services or proprietary information. In addition, the laws of some
foreign countries do not protect proprietary rights as well as the laws of the
United States do, and the global nature of the Internet makes it difficult to
control the ultimate destination of our products and services. In the future,
litigation may be necessary to enforce our intellectual property rights or to
determine the validity and scope of the proprietary rights of others. Any such
litigation would probably be time-consuming and costly. We could be subject to
intellectual property infringement claims as the number of our competitors grows
and the content and functionality of software applications and services overlap
with competitive offerings. Defending against these claims, even if not
meritorious, could divert our attention from operating our company. If we become
liable to third parties for infringing their intellectual property rights, we
could be required to pay a substantial damage award and forced to develop
noninfringing technology, obtain a license or cease selling the applications
that contain the infringing technology. We may be unable to develop
noninfringing technology or obtain a license on commercially reasonable terms,
or at all. We also intend to rely on a variety of technologies that we will
license from third parties, including any database and Internet server software,
which will be used to operate our applications. These third-party licenses may
not be available to us on commercially reasonable terms. The loss of or
inability to obtain and maintain any of these licenses could delay the
introduction of enhancements to our software applications, interactive tools and
other features until equivalent technology could be licensed or developed. Any
such delays could materially and adversely affect our business, results of
operations and financial condition.
The loss of a major client will significantly reduce our revenues.
In 2003, we had one client, Goodyear, which accounted for 10% of our
pro forma revenue. We anticipate that our results of operations in any given
period will continue to be influenced to a certain extent by a relatively small
number of clients. Accordingly, if we were to lose the business of such a
client, our results of operations could be materially and adversely affected.
Risk Related to Our Industry
The healthcare industry is subject to general cost pressures that could
reduce our revenue and gross margins.
The healthcare industry is currently under pressure by governmental and
private-sector revenue sources to cut spiraling costs. These pressures will
continue and possibly intensify. Although we believe that our services and
software applications assist public health agencies, hospitals, health plans and
self-insured employers to control the high costs associated with treating
patients, the pressures to reduce costs immediately may hinder our ability (or
increase the length of time we require) to obtain new contracts. In addition,
the focus on cost reduction may pressure our customers to restructure contracts
and reduce our fees.
We are affected by changes in the laws governing health plan, hospital
and public health agency reimbursement under governmental programs such as
Medicare and Medicaid. There are periodic legislative and regulatory initiatives
to reduce the funding of the Medicare and Medicaid programs in an effort to
curtail or reduce overall Federal healthcare spending. Federal legislation has
and may continue to significantly reduce Medicare and
13
Medicaid reimbursements to most hospitals. These reimbursement changes are
negatively affecting hospital revenues and operations. Such legislative
initiatives or government regulations could reduce demand for our services, our
revenue and gross margins.
We are subject to judicial and statutory prohibitions on the corporate
practice of medicine, and failure to comply with these prohibitions
will expose us to heightened scrutiny by regulatory agencies, fines,
litigation and possibly loss of revenue.
There are judicial and statutory prohibitions on the corporate practice
of medicine, which vary from state to state. The corporate practice of medicine
doctrine prohibits a corporation, other than a professional corporation, from
practicing medicine or employing physicians. Some states also prohibit a
non-physician from splitting or sharing fees charged by a physician for medical
services. The services we provide include establishing and managing medical
clinics. Most physician services at clinics we manage are provided by physicians
who are employees of professional corporations with which we contract to provide
non-professional services such as purchasing equipment and supplies, patient
scheduling, billing, collection, accounting, and computer services. The
professional corporations control hiring and supervise physicians and all
medical functions. We have option agreements with the physician-owners of these
affiliated professional corporations that entitle us to require the
physician-owners to sell the stock of the professional corporations to any
licensed physician we designate. This structure is intended to permit
consolidation of the professional corporations' financial statements with ours,
while maintaining sufficient separation to comply with the corporate practice of
medicine doctrine and with fee-splitting and fee-sharing prohibitions. There
remains, however, potential exposure to claims that this structure violates the
corporate practice of medicine doctrine or fee-splitting or fee-sharing
prohibitions, even though we do not believe that it does. If such a claim is
successfully asserted against us in any jurisdiction, we could be subject to
civil and criminal penalties, or could be required to restructure our
contractual arrangements with clients. Any restructuring of contractual
arrangements could result in lower revenues, increased expenses and reduced
influence over the business decisions of those operations. Alternatively, some
existing CHD Meridian Healthcare contracts could be found to be illegal and
unenforceable, which could result in their termination and an associated loss of
revenue, or inability to enforce valuable provisions of those contracts.
We have custody of confidential patient records and if we fail to
comply with regulations applicable to maintaining such records we may
be fined or sued.
Our personnel who staff our on-site pharmacies and clinics have custody
of confidential patient records. Also, the computer servers we use to store our
software applications and deliver our technology services also contain
confidential health risk assessments completed by employees, patients and
beneficiaries of our clients. In our capacity as a covered entity or as a
business associate of a covered entity, we and the records we hold are subject
to a rule entitled Privacy of Individually Identifiable Health Information, or
Privacy Rule, promulgated by the U.S. Department of Health and Human Services
under the Health Insurance Portability and Accountability Act of 1996, or HIPAA,
and also to any state laws that may have more stringent privacy requirements. We
attempt to protect the privacy and security of confidential patient information
in accordance with applicable law, but could face claims of violation of the
Privacy Rule, invasion of privacy or similar claims, if our patient records or
computer servers were compromised, or if our interpretation of the applicable
privacy requirements, many of which are complex, were incorrect or allegedly
incorrect, or if we failed to maintain a sufficiently effective compliance
program.
Furthermore, while we believe that the Privacy Rule protects our
ability to obtain patient identifiable medical information for disease
management purposes from certain of our clients, state legislation or
regulations will preempt Federal legislation if state legislation or regulations
are more restrictive. Accordingly, new Federal or state legislation or
regulations restricting the availability of this information for disease
management purposes could prevent us from performing services for our existing
clients, termination of our disease management contracts and loss of revenue.
14
We are subject to fraud and abuse statutes because we bill the Medicare
and Medicaid programs to recover amounts that offset the healthcare
costs of our clients and if we violate such statutes, we will be
subject to civil and criminal penalties.
In recent years, various government entities have actively investigated
potential violations of fraud and abuse statutes and regulations by healthcare
providers and by pharmaceutical manufacturers. The fraud and abuse provisions of
the Social Security Act provide civil and criminal penalties and potential
exclusion from the Medicare and Medicaid programs for persons or businesses who
offer, pay, solicit or receive remuneration in order to induce referrals of
patients covered by Federal healthcare programs (which include Medicare,
Medicaid, TriCare and other Federally funded health programs). Although our
services and those of our affiliated professional corporations are generally
paid for by employer clients, we do bill the Medicare and Medicaid programs, and
private insurance companies, as agent of our affiliated professional
corporations, to recover reimbursable amounts that offset the healthcare costs
borne by our clients. We are therefore subject to various regulations under the
Medicare and Medicaid programs, including fraud and abuse prohibitions. We
believe that we are compliant with these requirements, but could face claims of
non-compliance if our interpretations of the applicable requirements, many of
which are complex, were incorrect or allegedly incorrect, or if we fail to
maintain a sufficiently effective compliance program.
The professionals that staff our affiliated professional corporations
as well as those we employ are subject to state and Federal licensure
requirements and if we fail to comply with such licensure requirements,
we may be scrutinized by regulatory agencies and fined.
The doctors, nurses and other healthcare professionals that staff our
affiliated professional corporations, the nurses that staff our care
communication centers, and our on-site pharmacies and clinics, are subject to
individual licensing requirements. All of our healthcare professionals and
facilities that are subject to licensing requirements are licensed in the state
in which they are physically present. Multiple state licensing requirements for
healthcare professionals who provide services telephonically over state lines
may require us to license some of our healthcare professionals in more than one
state. We continually monitor the developments in telemedicine. There is no
assurance, however, that new judicial decisions or Federal or state legislation
or regulations would not increase the requirement for multi-state licensing of
all central operating unit call center health professionals, which would
significantly increase our administrative costs. Further, in the event a state
regulatory agency alleges that we do not comply with relevant licensing
requirements, we may be subject to fines and administrative action.
The recently adopted Medicare prescription drug benefit legislation
could reduce the demand for the prescription drug benefits we provide.
In December 2003, President Bush signed into law the Medicare
Prescription Drug, Improvement and Modernization Act of 2003. This law provides
Medicare beneficiaries with insurance coverage that offers access to
prescription medicines. The prescription drug benefit, which will be called
Medicare Part D, begins January 1, 2006. In the interim, a national prescription
drug discount card for Medicare-eligible seniors will be instituted in April
2004. Under the new law, drug benefits will be provided through risk-bearing
private plans contracting with the government (including plans offering only the
Medicare Part D coverage as well as integrated plans offering all Medicare
benefits). There will be an annual open period during which Medicare
beneficiaries will choose their drug plan from among those available in their
area of residence. In any areas where there are fewer than two private plan
choices, the government will make a drug plan available directly.
We do not know how this law will affect our business. Subsidies for
employers providing retiree drug benefits will decrease the costs to those
employers of providing such benefits, and therefore may increase the number of
employers willing to provide retiree drug benefits, which would positively
affect our business. On the other hand, employers that now offer prescription
drug benefits may decide no longer to do so, on the basis that their retirees
now will be able to obtain such benefits on their own through Medicare. In that
case, such employers would have less need for employer-dedicated pharmacies of
the kinds that we establish and manage and reduce our revenue.
15
Investment Risks
The price of our common stock is volatile and investors may loose money
if they invest in our stock.
Our stock price has been and we believe will continue to be volatile.
For example, from May 1, 2002 through May 28, 2004, the per share price of our
stock has fluctuated from a high of $6.40 to a low of $1.37. The stock's
volatility may be influenced by the market's perceptions of the healthcare
sector in general, or other companies believed to be similar to us or by the
market's perception of our operations and future prospects. Many of these
perceptions are beyond our control. In addition, our stock is not heavily traded
and therefore the ability to achieve relatively quick liquidity without a
negative impact on our stock price is limited.
Some of our outstanding shares are restricted from immediate resale but
may be sold into the market in the immediate future, which would cause
the market price of our common stock to drop significantly, even if our
business is doing well.
As of May 28, 2004, 28,448,121 shares of our common stock were issued
and outstanding. Of this number, approximately 14,000,000 shares were issued in
the CHD Meridian Healthcare merger as "restricted securities." Further, an
additional 12,000,000 shares of our common stock, which are not reflected as
issued and outstanding, are issuable upon conversion of our outstanding shares
of Series A Convertible Preferred Stock. Of this latter amount, 2,000,000 shares
are issuable upon conversion of Series A Convertible Preferred Stock issued in
the CHD Meridian Healthcare merger and 10,000,000 shares are issuable upon
conversion of Series A Convertible Preferred Stock sold to third party investors
to fund a portion of the cash I-trax needed to acquire CHD Meridian Healthcare.
All such shares of our common stock total approximately 26,000,000, and we are
required to register them for resale under the Securities Act of 1933. If the
selling shareholders under the prospectus covering the resale of such shares
sell them at the same time, the market price of our common stock would drop,
possibly significantly.
Shares reserved for future sale upon the conversion of outstanding
shares of Series A Convertible Preferred Stock and upon the exercise of
issued options and warrants may cause dilution.
As of May 28, 2004, approximately 12,000,000 shares of our common stock
were reserved for issuance upon conversion of outstanding shares of Series A
Convertible Preferred Stock and 5,845,429 shares of our common stock were
reserved for issuance upon the exercise of our outstanding warrants and options.
Our stockholders, therefore, could experience dilution of their investment upon
conversion or exercise, as applicable, of these securities.
Provisions of our certificate of incorporation could impede a takeover
of our company, even though a takeover may benefit our stockholders, or
delay or prevent a change in management.
Our board of directors has the authority, without further action by the
stockholders, to issue from time to time, shares of preferred stock in one or
more classes or series, and to fix the rights and preferences of such preferred
stock, subject, however, to the limitations contained in the certificate of
designations filed with respect to our Series A convertible preferred stock. We
are subject to provisions of Delaware corporate law which, subject to certain
exceptions, prohibit us from engaging in any "business combination" with a
person who, together with affiliates and associates, owns 15% or more of our
common stock (referred to as an interested stockholder) for a period of three
years following the date that such person became an interested stockholder,
unless the business combination is approved in a prescribed manner.
Additionally, bylaws establish an advance notice procedure for stockholder
proposals and for nominating candidates for election as directors. These
provisions of Delaware law and of our certificate of incorporation and bylaws
may have the effect of delaying, deterring or preventing a change in our
existing management or control, may discourage bids for our common stock at a
premium over market price and may adversely affect the market price, and the
voting and other rights of the holders of our common stock.
16
ITEM 2. DESCRIPTION OF PROPERTIES
I-trax Leases
Certain of our executive, administrative and sales offices are located in
Philadelphia, Pennsylvania, where we lease approximately 4,659 square feet of
office space pursuant to a lease expiring in June 2005 at a current base annual
rate of $128,123. The property is in good condition.
Our Care Communication Center is located in Omaha, Nebraska, where we
lease approximately 6,212 square feet of office space pursuant to a lease
expiring in May 2007, at a current base annual rate of $55,908. The property is
in good condition.
CHD Meridian Healthcare Leases
Certain of our executive, administrative and sales offices are located
in Nashville, Tennessee, where we lease approximately 25,000 square feet of
office space pursuant to a lease expiring in November 2009 at a current base
annual rate of $637,104. The property is in good condition.
Certain of our executive and administrative offices are located in
Latham, New York, where we lease approximately 4,703 square feet of office space
pursuant to a lease expiring in July 2007 at a current base annual rate of
$76,894. The property is in good condition.
Certain of our executive and administrative offices are located in New
York, New York, where we lease approximately 4,500 square feet of office space
pursuant to a lease expiring in April 2007 at a current base annual rate of
$98,193. The property is in good condition.
We maintain offices in Elko, Nevada, where we lease approximately
10,000 square feet of office space pursuant to a lease expiring in July 2004 at
a current base annual rate of $147,200. Our clients reimburse us the rent owed
under this lease. The property is in good condition.
We maintain offices in Winnemucca, Nevada, where we lease approximately
5,950 square feet of office space pursuant to a lease expiring in January 2005
at a current base annual rate of $78,540. Our clients reimburse us the rent owed
under this lease. The property is in good condition.
Real Estate Investments
We do not invest in real estate or have interest in real estate, in
real estate mortgages or in securities or of or interests in persons primarily
engaged in real estate activities.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of our stockholders during the
quarter ended December 31, 2003.
17
PART II
ITEM 5. MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND SMALL
BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES
Market For Our Common Stock
Our common stock trades on the American Stock Exchange under the symbol
"DMX." Prior to January 15, 2003, our common stock was quoted on the
Over-the-Counter Bulletin Board under the symbol "IMTX" and "ITRX." The
following table sets forth the high and low closing prices for our common stock
for the periods indicated. All closing prices have been adjusted to reflect a
1-for-5 reverse stock split effected as of close of business on January 3, 2003.
High Low
2004 ----- ------
First Quarter (through March 25, 2004) $ 5.170 $ 3.910
2003
Fourth Quarter 4.490 2.600
Third Quarter 3.790 2.600
Second Quarter 3.000 1.510
First Quarter 5.000 1.370
2002
Fourth Quarter 4.300 2.500
Third Quarter 5.100 2.750
Second Quarter 6.625 4.150
First Quarter 7.650 5.100
We obtained the information presented above from Nasdaq.com.
As of March 25, 2004, there were approximately 630 registered holders
of our common stock. On March 25, 2004, the last reported sales price of our
common stock was $5.17.
Dividend Policy
We have never paid or declared any cash dividends on our common stock
and do not anticipate paying cash dividends on our common stock in the
foreseeable future.
Our Series A Convertible Preferred Stock accrues dividend on the
original issue price at the rate of 8% per annum. The dividend is payable upon
conversion of Series A Convertible Preferred Stock into common stock in
additional shares of common stock or, subject to the consent of our senior
secured lender, in cash.
Recent Sales of Unregistered Securities
As of October 31, 2003, we issued 1,400,000 shares of common stock and
granted warrants to purchase 700,000 additional shares pursuant to a private
placement in which we offered as a unit two shares of common stock and a warrant
to purchase an additional share of common stock exercisable at $3.00 (the market
price of our common stock on the date we commenced the private placement) for a
unit purchase price of $5. Westminster Securities Corporation, a Member of the
New York Stock Exchange, acted as placement agent for this private placement. In
this private placement, we realized proceeds of $3,037,894 net of placement
agent commissions and expenses. Each of the participants in this private
placement is an accredited investor. In undertaking this issuance, we relied on
an exemption from registration under Section 4(2) of the Securities Act and
Regulation D promulgated under the Securities Act.
18
Effective as of October 31, 2003, we issued warrants to acquire an
aggregate of 140,000 shares of our common stock at an exercise price of $2.50
per share to 13 principals of an investment bank as consideration for completing
the private placement described above. Each of the principals is an accredited
investor. In undertaking this issuance, we relied on an exemption from
registration under Section 4(2) of the Securities Act and Regulation D
promulgated under the Securities Act.
On November 11, 17, 21 and 25 and December 2, 2003, an investor
exercised warrants to acquire an aggregate of 125,000 shares of our common stock
by paying the exercise price of $1.50 per share. The investor is an accredited
investor. In undertaking these issuances, we relied on an exemption from
registration under Section 4(2) of the Securities Act and Regulation D
promulgated under the Securities Act.
On November 26, 2003, two investors exercised warrants to acquire an
aggregate of 23,889 shares of our common stock by paying the exercise price of
$1.80 per share. The investors are accredited investors. In undertaking this
issuance, we relied on an exemption from registration under Section 4(2) of the
Securities Act and Regulation D promulgated under the Securities Act.
On November 18, 2003, an investor exercised warrants to acquire 114,285
shares of our common stock at at an exercise price of $1.75 per share. In lieu
paying the exercise price in cash, the investor used the warrants' cashless
exercise feature, such that the investor received 55,271 shares of our common
stock and surrendered to us for cancellation 59,014 shares of our common stock.
The investor is an accredited investor. In undertaking this issuance, we relied
on an exemption from registration under Section 4(2) of the Securities Act and
Regulation D promulgated under the Securities Act.
On December 11, 2003 (but effective as of October 18, 2003), we issued
warrants to acquire an aggregate of 50,000 shares of our common stock at an
exercise price of $2.50 per share to seven principals of an investment bank as
consideration for mergers and acquisitions advisory services related to the
initial merger discussions with CHD Meridian Healthcare. Each of the principals
is an accredited investor. In undertaking this issuance, we relied on an
exemption from registration under Section 4(2) of the Securities Act and
Regulation D promulgated under the Securities Act.
Effective as of December 31, 2003, we issued warrants to acquire 50,000
shares of our common stock at an exercise price of $1.75 per share as
consideration for extending the maturity date of a 6% convertible senior
debenture in the initial aggregate principal amount of $2,000,000. The investor
exercised the warrants on the date of grant. We valued the warrants at $200,000
utilizing the Black-Scholes model, which amount was recorded as a discount to
the debenture payable and will be accreted to interest expense over the
extension period of one year. Also, on various dates ending on December 31,
2003, the investor converted amounts outstanding under the debenture into
847,629 shares of our common stock at the conversion price of $1.75 per share.
Finally, On October 10 and December 19, 2003, the investor exercised warrants to
acquire an additional 307,692 shares of our common stock by paying the exercise
price of $1.75 per share. The investor is an accredited investor. In undertaking
each of these issuances, we relied on an exemption from registration under
Section 4(2) of the Securities Act and Regulation D promulgated under the
Securities Act.
On December 31, 2003, an investor exercised warrants to acquire 100,000
shares of our common stock by paying the exercise price of $1.50 per share. The
investor is an accredited investor. In undertaking this issuance, we relied on
an exemption from registration under Section 4(2) of the Securities Act and
Regulation D promulgated under the Securities Act.
We acquired CHD Meridian Healthcare effective March 19, 2004 in a
two-step merger transaction pursuant to a Merger Agreement dated as of December
26, 2003, as amended. To acquire CHD Meridian Healthcare common stock, we issued
a total of 10,000,000 shares of common stock and 200,000 shares of our Series A
Convertible Preferred Stock to 22 CHD Meridian Healthcare stockholders and
deposited 3,859,200 shares of our common stock into escrow. Each share of Series
A Convertible Preferred Stock is convertible into 10 shares of our common stock
at an initial conversion price of $2.50 per share. In undertaking this issuance,
we relied on an exemption from registration under Section 4(2) and Regulation D
promulgated under the Securities Act.
19
On March 19, 2004 we completed a private placement of 1,000,000 shares
of Series A Convertible Preferred Stock at $25 per share. Each share of Series A
Convertible Preferred Stock is convertible into 10 shares of our common stock at
an initial conversion price of $2.50 per share. We realized proceeds of
$25,000,000, net of approximately $1,500,000 in placement agent commissions and
approximately $1,169,000 in transaction related expenses. Each of the 49
participants in this private placement is an accredited investor. In undertaking
this issuance, we relied on an exemption from registration under Section 4(2) of
the Securities Act and Regulation D promulgated under the Securities Act.
Effective as of March 19, 2004, we issued warrants to acquire an
aggregate of 492,000 shares of our common stock at an exercise price of $2.50
per share to two placement agents that assisted us with the Series A Convertible
Preferred Stock private placement referred to above. Each of the placement
agents is an accredited investor. In undertaking this issuance, we relied on an
exemption from registration under Section 4(2) of the Securities Act and
Regulation D promulgated under the Securities Act.
Purchases of Equity Securities by the Small Business Issuer and Affiliated
Purchases
None.
20
ITEM 6. 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 audited financial statements and related
notes appearing in this Annual Report on Form 10-KSB for the fiscal years ended
December 31, 2003 and 2002.
I-trax is a combination of two companies that merged on March 19, 2004:
I-trax, Inc. and Meridian Occupational Healthcare Associates, Inc., a private
company, which does business as CHD Meridian Healthcare. Although this Annual
Report on Form 10-KSB describes the business of the merged companies, because
the merger occurred subsequent to the year ended December 31, 2003, certain
portions of this report, including the results of operations presented in this
Management's Discussion and Analysis of Financial Condition and Results of
Operations, are limited to I-trax. To present the performance and results of
operations of the merged companies for the years ended December 31, 2003 and
2002, we are including in this report the balance sheet of CHD Meridian
Healthcare as of December 31, 2003 and the statements of operations for the
years ended December 31, 2003 and 2002, and the unaudited combined condensed
balance sheet of I-trax and CHD Meridian Healthcare on a pro forma basis as if
the merger had been consummated on December 31, 2003 and the unaudited combined
condensed statements of operations on a pro forma basis as if the merger had
been consummated on January 1, 2002.
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 elsewhere in this report, and consequently, actual
operations and results may differ materially from those expressed in these
forward-looking statements. The most important factor 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 market place our combined products and services. This and other risks
concerning the merged companies business are discussed above beginning on page
7. The acquisition is discussed further below.
Our consolidated financial statements and applicable notes are prepared
in accordance with the generally accepted accounting principles in the United
States of America. 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, restructuring costs, 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.
Business Description
Following I-trax and CHD Meridian Healthcare merger, 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 occupation 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.
Also as the result of the merger, we believe we are the nation's
largest provider of on-site 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 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.
21
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.
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 and expansion and diversification plans, including in the
acquisitions of CHD Meridian Healthcare and WellComm Group, Inc.
On March 19, 2004, we finalized the acquisition of CHD Meridian
Healthcare. 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
shares of common stock will be payable as follows: If EBITDA equals or exceeds
$8,100,000, the number of such additional shares of common stock payable will be
3,473,280; the number of such shares increases proportionately up to a maximum
of 3,859,200 shares if EBITDA equals or exceeds $9,000,000. Any escrowed shares
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.
In the merger, I-trax assumed all of CHD Meridian Healthcare's
liabilities, which equaled approximately $21,000,000.
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 $25.00 per share.
I-trax 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 by borrowing $12,000,000 on a
new $20,000,000 senior secured debt facility from a national lender.
Under the merger agreement and the related financing documents, we are
required to register for resale the shares of common stock issued in the merger
and issuable upon conversion of shares of Series A Convertible Preferred Stock
issued in the merger and in the related financing.
The estimated purchase price we paid for CHD Meridian Healthcare,
valuing our common stock at $4.96 per share as of March 19, 2004, the date of
acquisition, and before the issuance of any of the earn-out shares, is
approximately $86.2 million. The acquisition will be accounted for as a
purchase. As such, the purchase price will be 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 be also allocated to the estimated fair values of
the assets acquired and liabilities assumed. We will obtain a third-party
valuation of the acquired intangible assets.
22
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, 2002.
Year ended Year ended
December 31, December 31,
2003 2002
------------------ -------------------
Sales $ 121,966,000 $ 111,056,000
Expenses 128,632,000 121,622,000
------------------ -------------------
Net loss $ (6,666,000) $ (10,566,000)
================== ===================
We acquired WellComm effective February 6, 2002. In the acquisition, we
paid the WellComm stockholders approximately $2,200,000 in cash and 1,488,000
shares of our common stock. We also issued to each of two senior officers of
WellComm options to acquire 56,000 shares of our common stock at a nominal
exercise price. Because the acquisition was structured as a merger, we also
assume all of WellComm's liabilities, which equaled approximately $775,000.
We funded this acquisition by selling a 6% convertible senior debenture
in the aggregate principal amount of $2,000,000 to Palladin Opportunity Fund
LLC. We also issued Palladin a warrant to purchase up to 307,692 shares of our
common stock. As of March 19, 2004, Palladin has converted all amounts
outstanding under the debenture into common stock and has exercised the warrant
in full at the conversion price and exercise price of $1.75 per share.
Listing on the American Stock Exchange
Effective January 3, 2003 we completed a 1-for-5 reverse stock split.
Our board of directors and stockholders authorized the reverse stock split in
connection with the then pending application to list our common stock on the
American Stock Exchange. We began trading on the American Stock Exchange on
January 15, 2003 under the symbol "DMX."
Key Trends and Other Factors
Our business is facing the following trends and other factors, which
are discussed in greater detail in management's discussion and analysis of
financial condition and results of operations:
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 the revenue of
CHD Meridian Healthcare, our operational expenses, general and
administration expenses, depreciation and amortization expenses and
interest expense will also increase significantly.
o Revenue and Cost of Revenue: Revenue and cost of revenue increased
modestly from year ended December 31, 2002 to year ended December 31,
2003. In accordance with management's expectations, we continued to
increase our service revenue and decrease our technology revenue. We
expect this trend to continue. We also expect to increase our revenue
both as a result of the merger and because of I-trax's continuing
sales efforts.
o Operating Expenses: Operating expenses have decreased from year ended
December 31, 2002 to year ended December 31, 2003, with salary and
related benefits, research and development, depreciation and
amortization and impairment charges related to intangible assets
declining. The decline was partially offset by an increase in
marketing and publicity expenses. In coming periods, we expect
operating expenses to increase as our revenue increases.
o Other Income and Expenses: Interest expense and financing costs
increased from year ended December 31, 2002 to year ended December 31,
2003. We expect interest expense to increase in future periods because
of the additional interested required to service amounts outstanding
under our senior secured credit facility.
o Working Capital: We finished the year ended December 31, 2003 with
negative working capital. However, as of March 31, 2004, we had
estimated pro forma working capital that, together with operating cash
flow and amounts available under a newly established secured credit
facility, we expect will be sufficient to conduct our operations for
the next twelve months.
23
Results of Operations
The following discussion of results of operations is limited to the
historic business of I-trax as in effect as of December 31, 2003.
Year Ended December 31, 2003 Compared to Year Ended December 31, 2002.
Revenue for the year ended December 31, 2003 was $4,188,860, an
increase of $256,950 or 7% from $3,931,910 for the year ended December 31, 2002.
Total revenue was comprised of two components: (1) prevention and care services
revenue of $2,612,941; and (2) technology license and services revenue of
$1,575,919. Of the total technology license and services revenue, approximately
$1,400,000 represents revenue from a perpetual license of CarePrime(R) and
MyFamilyMD(TM) to UICI, Inc. This license also grants UICI an exclusive right to
use CarePrime(R) and MyFamilyMD(TM) in the student health market. We contracted
this license and software development in the third quarter of 2002 and we
recognize it based on deliverables throughout 2002 and 2003. We expect to
commence reporting CHD Meridian Healthcare revenue beginning as of April 1, 2004
pursuant to a letter of understanding between the two companies.
Cost of revenue for the year ended December 31, 2003 was $1,371,870, an
increase of 12% from $1,229,044 for the year ended December 31, 2002. The
increase is attributable to the personnel costs required to service our
prevention and care services contracts. Cost of revenue will increase when we
begin to report CHD Meridian Healthcare revenue as of April 1, 2004.
Software development costs amounting to $1,237,713 were capitalized for
the year ended December 31, 2003, since the development stage of these products
had reached technological feasibility. For the year ended December 31, 2002, we
charged to operations $410,220 in research and development costs. We expensed
such costs during the year ended December 31, 2002 because the products under
development had not reached technological feasibility and therefore, the related
expense could not be capitalized. We expect to continue to spend funds to
improve our technology and to add functionality to our technology products. Such
products include the MyFamilyMD(TM) application and its MedWizard(R) tools, the
CarePrime(TM) application, which interacts with MyFamilyMD(TM) and its
MedWizard(R) tools, and the Health-e-Coordinator(TM) application, which is a
disease management platform.
General and administrative expenses (excluding salary and related
benefits which are discussed separately below) increased from $1,721,685 for the
year ended December 31, 2002 to $1,740,710 for the year ended December 31, 2003,
an immaterial increase of $19,025. Our ability to control general and
administrative expenses is attributable to increased efficiencies and
implementation of stringent budgetary controls. General and administrative
expenses will increase when we begin to report CHD Meridian Healthcare revenue
and associated expenses as of April 1, 2004.
Salary and related benefits were $2,468,468 for the year ended December
31, 2003 as compared to $4,233,209 for the year ended December 31, 2002. This
decrease amounted to $1,764,741 or 42%. The two major reasons for the large
decrease in salary and related benefits were: (1) capitalization of
approximately $805,000 of development salaries to software development costs in
2003, and (2) implementation of a variable pay plan in December 2002. Pursuant
to the plan, all employees accepted a 10% salary reduction in order to fund the
variable plan. If certain financial and personal goals were met during 2003, the
employees were eligible to participate in the plan, thus potentially receiving
additional compensation in excess of the accepted 10% salary reduction. Because
we only met the financial goals established under the plan during the first
quarter of 2003, the net reduction in salary associated with the plan amounted
to approximately $500,000. The balance of the decrease in salary and related
benefits is the result of consolidating positions and improving efficiencies.
Salary and related benefits will increase effective April 1, 2004 when we begin
to report CHD Meridian Healthcare revenue and related expenses.
24
Depreciation and amortization expenses were $1,702,469 for the year
ended December 31, 2003, as compared to $2,045,461 for the year ended December
31, 2002. The decrease is primarily attributable to the write down of certain
intangible assets during the last quarter of 2002.
During 2002, we incurred an impairment charge of $1,648,332 in
connection with certain intangible assets (customer relations) acquired in the
WellComm acquisition. During the quarter ended December 31, 2003, we recorded an
impairment charge of approximately $458,000 representing the un-amortized
portion of covenants not to compete attributable to the founder of WellComm, who
passed away.
Marketing and publicity expenses were $1,762,567 for the year ended
December 31, 2003 as compared to $773,963 for the year ended December 31, 2002.
The increase of 128% or $988,604 is a direct result of augmented marketing and
investor relation campaigns to promote I-trax in the capital markets and its
products in the wellness and disease management market. The marketing and
publicity expense for 2003 includes a non-cash charge of approximately
$1,414,000, for the issuance of common stock, granting of warrants and
contribution of common stock by certain of our stockholders to an investor
relations firm.
Interest expense and financing costs for the year ended December 31,
2003 were $2,405,015 an increase of $1,297,383 or 117% from $1,107,632 for the
year ended December 31, 2002. For the year ended December 31, 2003, interest
expense includes charges of approximately $1,880,826 related to the debenture
and related warrants issued to Palladin Opportunity Fund, LLC. Of this amount,
$224,350 represents interest of 6% on the debenture for the year ended December
31, 2003; $1,125,085 represents amortization of the value assigned to the
original beneficial conversion value of the Palladin debenture and the
associated warrants and additional charges and amortization for the further
beneficial conversion value caused by the June 2003 reset of the conversion
price of such debenture and the exercise price of the associated warrants; and
$531,391 represents an accelerated charge to interest expense for the portion of
the debenture converted during the year ended December 31, 2003. During the
period, Palladin converted $1,483,351 of principal outstanding under the
debenture into common stock. Generally, the beneficial conversion value
represents the benefit to the investor that results from purchasing an
immediately convertible debenture with a conversion price that is less than fair
market value on the date of purchase after first allocating a portion of the
proceeds from the debenture to the associated warrants. The remaining balance of
interest expense of approximately $524,189 is associated with interest on other
debt and the amortization of the value of warrants granted to certain
shareholders for loans made to us. Interest expense will increase effective
April 1, 2004 to reflect interest payable in connection with $12,000,000
outstanding under a new $20,000,000 senior secured credit facility established
to fund a portion of the CHD Meridian Healthcare acquisition price.
Amortization of debt issuance and conversion costs was $336,783 and
$187,337 for the years ended December 31, 2003 and 2002, respectively. These
amounts represented costs incurred in selling the $2,000,000 debenture to
Palladin and were amortized over the two-year life of the debenture. During the
year ended December 31, 2003, however, we recorded a one-time charge of $122,228
in connection with the re-pricing of the exercise price of the warrants issued
to the third party that brokered the Palladin investment and increasing the
number of shares covered by the warrant as per the broker agreement.
Under the terms of the registration rights agreement entered in
connection with the private placement of common stock and warrants closed on
October 31, 2003, we were required to file with the Securities and Exchange
Commission a registration statement under the Securities Act of 1933, as
amended, covering the resale of all the common stock purchased and the common
stock underlying the warrants within 30 days of the placement's closing.
Additionally, under the same registration rights agreement, we were required to
use our best efforts to cause such registration statement to become effective
within 90 days of closing of the placement. The registration rights agreement
further provided that if the registration statement was not filed, or did not
become effective within the defined time period, I-trax would have been required
to pay each holder an amount in cash, as liquidated damages, equal to 1.5% per
month of the aggregate purchase price paid by such holders. The registration
statement was filed within the allowed time, and was declared effective by the
Commission on February 17, 2004.
In accordance with EITF 00-19, "Accounting for Derivative Financial
Instruments Indexed to, and Potentially Settled in, a Company's Own Stock," the
fair value of the warrants issued in the October 2003 private placement was
accounted for as a liability, with an offsetting reduction to additional paid-in
capital received in the
25
private placement. The warrant liability was reclassified to equity as of
February 17, 2004, the effective date of the registration statement. Such
transaction did not impact our financial position or business operations.
The fair value of the warrants was estimated using the Black-Scholes
option-pricing 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 at December 31, 2003 was estimated to be
approximately $2,760,000, which reflects an increase in fair value of $301,305
from the time the warrants were granted. This amount has been charged to
operations as an increase in common stock warrants. The fair value of the
warrants increased by approximately an additional $350,000 from December 31,
2003 to February 17, 2004. This increase will be charged in the statement of
operations for the quarter ended March 31, 2004 as an increase in common stock
warrants.
The adjustments required by EITF 00-19 were required because of a
private placement subscription agreement, which specified a penalty if we did
not timely register the common stock underlying the warrants issued in the
transaction. The Securities and Exchange Commission declared the related
registration statement effective within the contractual deadline and we did not
incur any penalties. The adjustments for EITF 00-19 had no impact on our working
capital, liquidity, or business operations.
During January 2003, in connection with the termination of our
agreement to acquire DxCG, Inc., a Boston-based predictive modeling company, we
charged $200,000 to earnings. 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.
No provision or benefit for Federal or state income taxes has been
recorded for the years ended December 31, 2003 and 2002, because we have
incurred net operating losses and have no carry-back potential. Based on a
number of factors, including the lack of a history of profits and net operating
loss carry-forward limitations due to changes in ownership, management believes
that there is sufficient uncertainty regarding the realization of deferred tax
assets such that a valuation allowance has been provided. At December 31, 2003,
our net operating loss carry-forwards of approximately $23,700,000 were
available to reduce future taxable income. These losses expire at various times
beginning in 2004. These carry-forward losses are also of no value unless we are
profitable. To the extent that we are profitable, the utilization of these
carry-forward losses may be limited as a result of substantial changes in our
stock ownership in the past along with the effect of the CHD Meridian Healthcare
acquisition. The amount of the limitation has not yet been calculated.
For the year ended December 31, 2003, our net loss was $8,058,579,
inclusive of $500,000 of income resulting from a life insurance policy pay out
following the death of an executive officer, compared to a net loss of
$9,424,973 for the year ended December 31, 2002, a decrease of 14%.
Liquidity and Capital Resources
The following discussion concerns the liquidity and capital resources
of I-trax, with the exception of portions specifically addressing the CHD
Meridian Healthcare acquisition and certain pro forma information subsequent to
the CHD Meridian Healthcare acquisition.
Working Capital
As of December 31, 2003, we had a working capital deficiency of
$290,042.
On March 19, 2004, we completed the CHD Meridian Healthcare
acquisition. We obtained some of the cash 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 million.
In addition, on March 19, 2004, contemporaneously with the CHD Meridian
Healthcare acquisition, we obtained a permanent $20 million senior secured
credit facility from Bank of America, N.A., and borrowed $12 million under this
facility to fund the balance of the cash merger consideration. The credit
facility expires on April 1, 2007. The credit facility has a $6 million term
loan commitment with a $14 million revolving credit commitment, which is reduced
by letter of credit liabilities, which currently amount to $3.25 million. The
credit facility is secured
26
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 million.
From June 1, 2004 until November 1, 2005, the borrowings under the revolving
credit commitment may not exceed 80% of eligible receivables and 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 coverage rations. The
Eurodollar rate loans bear interest at the Eurodollar rate plus up to 3.0% per
annum likewise depending on our coverage ratios. As of March 26, 2004, we had
outstanding $6 million under the term loan, $6 million under the revolving loan
and an aggregate of $3.25 million under letters of credit.
The credit facility includes certain financial covenants customary for
the amount of duration of this commitment. As of the date of this filing, we
were in compliance with all such covenants.
We are required to make twelve principal installment payments of $0.5
million each quarter beginning on July 1, 2004.
As of March 31, 2004, we had estimated pro forma working capital of
approximately $5,500,000. We believe that this amount, together with our
operating cash flow and amounts available to be drawn from the credit facility,
is sufficient to meet our working capital and operating expense requirements for
the next twelve months. We also believe that cash flow from operations, existing
working capital and additional availability under the credit facility should be
sufficient to fund long-term operations, capital expenditures and expansion of
our existing client base. If we have other long-term capital needs, however,
such as for acquisition capital, additional equity or debt financings may be
needed.
Sources and Uses of Cash
Despite negative cash flows from operations, which amounted to
$3,509,478 for the year ended December 31, 2003 and $2,871,201 for the year
ended December 31, 2002, we have been able to secure funds to support our
operations. During the year ended December 31, 2002, we secured funding by
selling equity securities, issuing a debenture and receiving advances from
officers, directors and other related parties, which aggregated approximately
$4,800,000. Of the $4,800,000, approximately $2,200,000 was used to acquire
WellComm, $190,000 was used to repay debt and the remainder was used to fund
operations. During the year ended December 31, 2003, we borrowed, net of
repayments, approximately $600,000 from officers, related parties and certain
stockholders. Additionally, during the year ended December 31, 2003, we raised
an aggregate of $5,010,000 in two private placements of our securities and upon
the exercise of warrants to acquire 720,866 shares of common stock, which
yielded approximately $970,000. The funds were used primarily to fund
operations, continue the investment in our technology and satisfy certain
liabilities, including the pay off of a $300,000 credit line.
Current Liabilities. As of December 31, 2003, our current liabilities
were $1,601,524, of which $280,000 was due to related parties. The remainder of
current liabilities of $1,321,524 was comprised primarily of trade payables of
$605,689, accrued expenses of $361,168, $114,452 of short term loans and capital
lease obligations and $250,000 of deferred revenue. We have good relationships
with all of our vendors.
Long-Term Debt. As of December 31, 2003, the face value of our
long-term debt was $1,358,808 (with a carrying value of $797,805), and was held
by two investor groups. Psilos Group Partners and affiliated entities were owed
$617,809 for which principal and interest was not due until March 2006. The
balance of $740,999 was outstanding under the convertible debenture held by
Palladin, which was not due until February 2005 (after receiving a one year
extension effective December 31, 2003).
Pay-off of Liabilities. In connection with obtaining a senior secured
credit facility to fund the CHD Meridian Healthcare acquisition, we repaid all
related party loans and advances, and all other outstanding loans on March 19,
2004. Accordingly, contemporaneously with the closing of the CHD Meridian
Healthcare acquisition, we repaid an aggregate of $1,233,932 of which $289,897
was for related party loans and accrued interest and $944,035 was for principal
and accrued interest under various promissory notes.
In the first quarter of 2004, Palladin converted the remaining balance
of its debenture into 427,106 shares of our common stock.
27
Equity Sales. Under a private placement initiated in June 2003, we
raised approximately $1,000,000 in cash, converted approximately $1,169,270 in
related party loans, of which $1,037,038 represented principal and $132,232
represented interest, and converted $121,997 of deferred salaries by selling or
issuing, as applicable, common stock. In this offering, we issued a total of
1,311,682 shares.
During August 2003 we commenced a private placement whereby we offered
as a unit, two shares of common stock and a warrant to purchase an additional
share of common stock exercisable at $3.00, the market price of our common stock
on the date we commenced the private placement, for a unit purchase price of $5.
The maximum amount offered was $3,500,000. Through October 31, 2003, the end of
the private placement, we issued a total of 1,400,000 shares of common stock and
granted warrants to purchase 700,000 additional shares. We realized net proceeds
of $3,037,894 after expenses as of December 31, 2003.
For the year ended December 31, 2003, we received approximately
$973,000 from exercises of warrants.
Material Commitments
The following schedules summarizes the contractual 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 $ 1,294,000 $ 1,500,000
2005 119,000 986,000 1,105,000
2006 56,000 927,000 983,000
2007 24,000 780,000 804,000
2008 -- 651,000 651,000
Thereafter -- 574,000 574,000
---------------- -------------- --------------
Total future payments $ 405,000 $ 5,212,000 $ 5,617,000
================ =============== ==============
Related Party Transactions
During February 2003, we repaid $140,000 of the $225,000 loan
outstanding to a relative of our former chief operating officer.
During February 2003, pursuant to two promissory notes, two of our
former directors advanced us $200,000 for working capital. The notes accrued
interest at 8% per year and matured in February 2004.
As of June 30, 2003, our chief executive officer and former chief
operating officer, along with a director, advanced us a total of $540,000 for
working capital at an interest rate of 8% per year.
As of December 31, 2003, we repaid an aggregate of $99,622 to our chief
executive officer and other related parties. As of March 22, 2004, we repaid all
related party loans, and interest accrued on such loans, in the aggregate amount
$289,897.
In connection with the death of a senior executive officer, in October
2003 we were entitled to receive proceeds of $500,000 from a key-person life
insurance policy we maintained on the life of such senior executive officer. The
proceeds from the life insurance policy were pledged as security for loans made
to us in 2002 and 2003 by the deceased executive officer, a former director and
a key employee. Accordingly, the life insurance company was instructed to
disburse such proceeds directly to the note holders in partial satisfaction of
such loans.
28
Critical Accounting Policies
The following critical accounting policies concern the business of
I-trax at December 31, 2003. 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
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. During the year
ended December 31, 2003 and 2002, we recorded an impairment charge of $458,252
and $1,648,332, respectively in connection with certain intangible assets
acquired in the WellComm acquisition. For 2003, the charge related to the
unamortized portion of covenants not to compete directly attributable to the
founder of WellComm. The founder of WellComm passed away in 2003. For 2002, the
charge related to the write off of a portion of an intangible asset associated
with customer relations.
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 no software is 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 credit worthiness 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 arrangements with multiple obligations (for example, undelivered
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 revenue for 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
29
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.
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, provides 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 2003, we executed equity transactions with related and unrelated
parties in connection with the raising funds for working capital along with
issuing securities in lieu of compensation for services received. We believe
that we have valued all such transaction 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-Sources and Uses of Funds" and "Item
5-Recent Sales of Unregistered Securities" above.
30
ITEM 7. FINANCIAL STATEMENTS
Item Page No.
I-trax, Inc. and Subsidiaries Consolidated Financial Statements as of December 31, 2003
and For The Years Ended December 31, 2003 and 2002.................................................32
Meridian Occupational Healthcare Associates, Inc. and Subsidiaries (d/b/a CHD Meridian Healthcare)
Consolidated Financial Statements For the Years Ended December 31, 2003, 2002 and 2001.............64
Unaudited Combined Condensed Balance Sheet of I-trax and CHD Meridian Healthcare
on a Pro Forma Basis as if the Merger Had Been Consummated On December 31, 2003
and the Unaudited Combined Condensed Statements of Operations on a Pro Forma Basis
as if the Merger Had Been Consummated on January 1, 2002...........................................88
31
I-TRAX, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2003
AND
FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Item Page No.
Report of Independent Registered Public Accounting Firm.....................................................33
Balance sheet at December 31, 2003..........................................................................34
Statements of operations for the years ended December 31, 2003 and 2002.....................................35
Statement of stockholders' equity for the years ended December 31, 2003 and 2002............................36
Statements of cash flows for the years ended December 31, 2003 and 2002.....................................38
Notes to consolidated financial statements..................................................................40
32
Report of Independent Registered Public Accounting Firm
To the Board of Directors and
Stockholders of I-trax, Inc.:
We have audited the accompanying consolidated balance sheet of I-trax,
Inc. & Subsidiaries (the "Company") as of December 31, 2003, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the two years in the period then ended. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of the Company
at December 31, 2003, and the results of its operations and cash flows for each
of the two years in the period then ended in conformity with U.S. generally
accepted accounting principles.
Goldstein Golub Kessler LLP
New York, New York
February 16, 2004, except for Note 19, as to which the date is as of March 19,
2004.
33
I-TRAX, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 2003
ASSETS
Current assets
Cash $ 573,774
Accounts receivable, net 549,229
Prepaid expenses 150,631
Other current assets 37,848
-----------------
Total current assets 1,311,482
-----------------
Office equipment, furniture, leasehold improvements and
software development costs, net 1,514,767
Deposit on acquisition of perpetual license 160,000
Deferred marketing costs, net 831,109
Deferred acquisition costs 84,783
Debt issuance costs, net 34,718
Goodwill 8,424,062
Intangible assets, net 1,217,609
Security deposits 24,659
-----------------
Total assets $ 13,603,189
=================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 605,689
Accrued expenses 361,168
Due to officers and related parties 280,000
Capital lease payable 26,814
Note payable - other, net of discount of $12,362 87,638
Deferred revenue 240,215
-----------------
Total current liabilities 1,601,524
-----------------
Common stock warrants 2,760,105
Capital lease obligation, net of current portion 58,626
Promissory notes and debenture payable, net of discount of $561,003 797,805
-----------------
Total liabilities 5,218,060
-----------------
Commitments and contingencies
Stockholders' equity
Preferred stock - $.001 par value, 2,000,000 shares authorized,
-0- issued and outstanding
Common Stock - $.001 par value, 100,000,000 shares authorized,
13,966,817 shares issued and outstanding 13,966
Additional paid in capital 47,276,266
Accumulated deficit (38,905,103)
-----------------
Total stockholders' equity 8,385,129
-----------------
Total liabilities and stockholders' equity $ 13,603,189
=================
See accompanying notes to financial statements.
34
I-TRAX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002
2003 2002
------------ ------------
Revenue:
Technology licenses $ 1,575,919 $ 2,225,308
Services 2,612,941 1,706,602
------------ ------------
Total revenue 4,188,860 3,931,910
============ ============
Cost of revenue:
Technology licenses 63,363 67,788
Services 1,308,507 1,161,256
------------ ------------
Total cost of revenue 1,371,870 1,229,044
------------ ------------
Gross profit 2,816,990 2,702,866
Operating expenses:
General and administrative 1,740,710 1,721,685
Salary and related benefits 2,468,468 4,233,209
Research and development -- 410,220
Depreciation and amortization 1,702,469 2,045,461
Marketing and publicity, includes non-cash charges of $1,414,000
for 2003 1,762,567 773,963
Impairment charge related to intangible assets 458,252 1,648,332
------------ ------------
Total operating expenses 8,132,466 10,832,870
------------ ------------
Operating loss (5,315,476) (8,130,004)
------------ ------------
Other income (expenses):
Proceeds from life insurance company 500,000 --
Costs in connection with terminated acquisition (200,000) --
Amortization of debt issuance and conversion costs (336,783) (187,337)
Interest expense and financing costs (2,405,015) (1,107,632)
Increase in fair value of common stock warrants (301,305) --
------------ ------------
Total other income (expenses) (2,743,103) (1,294,969)
------------ ------------
Net loss $ (8,058,579) $ (9,424,973)
============ ============
Loss per common share:
Basic and diluted $ (.74) $ (1.04)
============ ============
Weighted average number of shares outstanding: 10,904,553 9,096,958
============ ============
See accompanying notes to financial statements.
35
I-TRAX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002
Common Stock Additional Total
--------------------------- Paid-in Accumulated Stockholders'
Shares Amount Capital Deficit Equity
------------- ------------ ---------------- -------------- ----------------
Balances at December 31, 2001 6,987,894 $ 6,987 $ 22,992,730 $ (21,421,551) $ 1,578,166
Cancellation of unclaimed shares and reverse stock
split adjustment (45,332) (45) 45 -- --
Issuance of compensatory stock options -- -- 163,200 -- 163,200
Fair market value of detachable warrants issued in
connection with debenture and beneficial
conversion value -- -- 1,838,923 -- 1,838,923
Issuance of common stock and granting of options
in connection with the acquisition of WellComm
Group, Inc. 1,488,000 1,488 10,478,512 -- 10,480,000
Issuance of common stock and warrants as
consideration for finder fee 22,200 22 391,386 -- 391,408
Sale of common stock, net of $7,150 in costs 540,833 541 1,942,935 -- 1,943,476
Issuance of common stock and warrants as
consideration for services 23,708 24 1,677,243 -- 1,677,267
Issuance of common stock in connection with
exercise of options and warrants 355,424 355 1,145 -- 1,500
Mark-to-market of options granted to officers in
lieu of canceling note and pledge agreement
during 2001 -- -- (250,000) -- (250,000)
Net loss for the year ended December 31, 2002 -- -- -- (9,424,973) (9,424,973)
------------- ------------ ---------------- -------------- ----------------
Balances at December 31, 2002 9,372,727 $ 9,372 $ 39,236,119 $ (30,846,524) $ 8,398,967
============= ============ ================ ============== ================
See accompanying notes to financial statements.
36
I-TRAX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002
Common Stock Additional Total
----------------------------- Paid-in Accumulated Stockholders'
Shares Amount Capital Deficit Equity
-------------- ------------- ---------------- -------------- ---------------
Balances at December 31, 2002 9,372,727 $ 9,372 $ 39,236,119 $ (30,846,524) $ 8,398,967
Issuance of compensatory stock options -- -- 27,942 -- 27,942
Mark to market of warrants granted for
investor relations services and stock
options granted to a former employee -- -- (4,097) -- (4,097)
Fair market value of detachable warrants
and additional beneficial conversion
value in connection with re-pricing of
convertible debenture -- -- 1,007,833 -- 1,007,833
Issuance of common stock for services 332,760 333 522,375 -- 522,708
Contribution of common stock given by
shareholders to vendor for services
rendered to the Company -- -- 246,240 -- 246,240
Proceeds from sale of common stock and
exercise of warrants, net of costs and
common stock warrants liability 2,675,838 2,676 2,549,373 -- 2,552,049
Issuance of warrants for services -- -- 649,448 -- 649,448
Fair value of detachable warrants issued in
connection with convertible note -- -- 268,000 -- 268,000
Issuance of common stock for conversion of
related party debt and assigned debt 668,152 668 1,168,602 -- 1,169,270
Issuance of common stock for conversion of
deferred salaries 69,711 69 121,928 -- 121,997
Issuance of common stock upon conversion of
debenture 847,629 848 1,482,503 -- 1,483,351
Net loss for the year ended December 31, 2003 -- -- -- (8,058,579) (8,058,579)
-------------- ------------- ---------------- -------------- ---------------
Balances at December 31, 2003 13,966,817 $ 13,966 $ 47,276,266 $ (38,905,103) $ 8,385,129
============== ============ ================ ============== ===============
See accompanying notes to financial statements.
37
I-TRAX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002
2003 2002
----------------- -----------------
Operating activities:
Net loss $ (8,058,579) $ (9,424,973)
Adjustments to reconcile net loss to net cash used in operating
activities:
Accretion of discount on notes payable charged to interest 858,887 498,751
expense
Accretion of beneficial conversion value of debenture 1,168,285 434,798
Amortization of option liability (13,423) (147,655)
Amortization of debt issuance costs 336,783 187,337
Depreciation and amortization 1,702,469 2,045,461
Impairment charge related to intangible assets 458,252 1,648,332
Expenses for compensatory stock options and warrants 23,845 --
Bad debt expense 58,829 --
Issuance of securities for services 1,418,396 230,467
Increase in fair value of common stock warrants 301,305 --
Write-off of deposit on terminated acquisition 200,000 --
Changes in operating assets and liabilities, net of acquisitions:
Decrease (increase) in:
Accounts receivable 8,406 (119,888)
Prepaid expenses (73,062) 54,828
Other current assets (16,888) (19,045)
(Decrease) increase in:
Accounts payable (333,582) 235,686
Accrued expenses (409,694) 273,608
Deferred revenue (1,139,707) 1,231,092
----------------- -----------------
Net cash used in operating activities (3,509,478) (2,871,201)
----------------- -----------------
Investing activities:
Proceeds from repayment of note receivable -- 72,437
Increase in transaction costs (84,783) --
Proceeds from release of security deposit 6,905 38,839
Deposit on potential acquisition -- (200,000)
Deposit on acquisition of perpetual license (160,000) --
Property, equipment and software development costs acquired (1,278,891) (68,040)
Net cash to acquire WellComm Group, Inc. -- (2,199,136)
----------------- -----------------
Net cash used in investing activities (1,516,769) (2,355,900)
----------------- -----------------
Financing activities:
Principal payments on capital leases (71,372) (21,918)
Proceeds from credit line payable -- 125,000
Repayments to credit line (300,000) --
Repayment to related parties (239,622) (190,000)
Proceeds from related parties 740,000 700,000
Proceeds from notes payable 350,000 --
Proceeds from sale of Common Stock and exercise of warrants 5,010,849 1,944,976
Proceeds from sale of option -- 161,078
Proceeds from issuance of debenture -- 1,838,923
Notes payable repayments (250,000) --
----------------- -----------------
Net cash provided by financing activities 5,239,855 4,558,059
----------------- -----------------
Net increase (decrease) in cash 213,608 (669,042)
Cash at beginning of period 360,166 1,029,208
----------------- -----------------
Cash at end of period $ 573,774 $ 360,166
================= =================
Supplemental disclosure of non-cash flow information: Cash paid during the year
for:
Interest $ 83,833 $ 15,163
================= =================
38
I-TRAX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002
(Continues from previous page.)
2003 2002
--------------- -----------
Schedule of non-cash investing activities:
Issuance of 1,488,000 shares of common stock and granting of 112,000 stock
options in connection with acquisition of WellComm Group,
Inc $ -- $10,480,000
=============== ===========
Issuance of common stock and warrants for finder fee $ -- $ 391,408
=============== ===========
Schedule of non-cash financing activities:
Issuance of common stock in connection with conversion of promissory
notes, related party advances, and accrued interest $ 1,169,270 $ --
=============== ===========
Issuance of common stock in connection with conversion of deferred
salaries $ 121,997 $ --
=============== ===========
Issuance of common stock in connection with conversion of debenture
payable $ 1,483,351 $ --
=============== ===========
Accrued interest expense on debenture payable and promissory notes $ 394,538 $ --
=============== ===========
Proceeds from life insurance company in connection with the death of
executive officer $ 500,000 $ --
=============== ===========
Repayments to related parties from pledged life insurance proceeds $ 500,000 $ --
=============== ===========
Issuance of common stock in connection with conversion of accounts
payable $ -- $ 16,667
=============== ===========
Acquisition of office equipment in connection with capital lease
obligation $ -- $ 107,709
=============== ===========
Issuance of warrants in connection with marketing agreement $ -- $ 1,360,000
=============== ===========
Fair market value of detachable warrants and beneficial conversion
value in connection with re-pricing $ 1,007,833 $ --
=============== ===========
Fair market value of warrants granted in connection with convertible
note $ 268,000 $ --
=============== ===========
See accompanying notes to financial statements.
39
I-TRAX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002
NOTE 1--ORGANIZATION
I-trax, Inc. (the "Company") provides focused disease management and
comprehensive health management solutions designed to improve the health of the
populations it serves while reducing the cost of medical care. The Company was
incorporated in the State of Delaware on September 15, 2000. On February 5,
2001, the Company and I-trax Health Management Solutions, Inc. ("Health
Management") completed a holding company reorganization. At the effective time
of the reorganization, Health Management became a wholly owned subsidiary of the
Company. The Company's common stock is traded on the American Stock Exchange
under the symbol "DMX."
As of December 31, 2003, the Company had two wholly owned subsidiaries: Health
Management, a corporation, and I-trax Health Management Solutions, LLC (formerly
known as WellComm Group, LLC) ("Health Management, LLC"), a single member
limited liability company. The Company formed Health Management, LLC to conduct
the activities of WellComm Group, Inc., which the Company acquired on February
6, 2002, as further described in Note 4. The Company conducts its operations
through Health Management and Health Management, LLC.
Effective January 3, 2003, the Company completed a 1-for-5 reverse stock split.
Accordingly, all information presented in these financial statements has been
adjusted retroactively to reflect this reverse stock split.
The Company entered into a merger agreement, as amended, on December 26, 2003,
with Meridian Occupational Healthcare Associates, Inc, (doing business as CHD
Meridian Healthcare) ("CHD Meridian"), a privately held company and a provider
of outsourced, employer-sponsored healthcare services. The merger was
consummated on March 19, 2004. (See note 19 for additional information.)
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Income Taxes
The Company accounts for income taxes in accordance with Financial Accounting
Standards Board's ("FASB") Statement of Financial Accounting Standards ("SFAS")
No. 109, "Accounting for Income Taxes," which requires the use of the "liability
method" of accounting for income taxes. Accordingly, deferred tax liabilities
and assets are determined based on the difference between the financial
statement and tax bases of assets and liabilities, using enacted tax rates in
effect for the year in which the differences are expected to reverse. Current
income taxes are based on the respective periods' taxable income for federal and
state income tax reporting purposes.
Loss Per Common Share
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 shareholders 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 debt. As of December 31, 2003 and 2002, 5,469,286 and
3,843,755, respectively, of options and warrants were excluded from the diluted
loss per share computation, as their effect would be anti-dilutive.
40
I-TRAX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd)
Use Of Estimates
In preparing the financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and assumptions
which affect the reported amounts of assets and liabilities and the disclosure
of contingent assets and liabilities at the date of the financial statements and
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
Fair Value Disclosure At December 31, 2003
The carrying value of cash, accounts receivable, accounts payable and accrued
expenses are reasonable estimates of their fair value because of short-term
maturity. The fair value of the promissory notes and debenture payable
approximates their principal amount of $1,358,808.
Office Equipment, Furniture And Leasehold Improvements
The Company records office equipment, furniture and leasehold improvements at
cost less accumulated depreciation and amortization, which is provided for on
the straight line basis over the estimated useful lives of the assets which
range between three and seven years. The Company expenses expenditures for
maintenance and repairs as incurred.
Accounts Receivable
The Company utilizes the allowance method for determining the collectibility of
its accounts receivable. The allowance method recognizes bad debt expense
following a review of the individual accounts outstanding in light of the
surrounding facts. Accounts receivables are reported at their outstanding unpaid
principal balances reduced by an allowance for doubtful accounts based on
historical bad debts, factors related to specific customers' ability to pay and
economic trends. The Company writes off accounts receivables against the
allowance when a balance is determined to be uncollectible.
Research And Development Costs
Research and development costs are expensed as incurred. For the year ended
December 31, 2003, the Company did not incur any research and development costs.
Such costs amounted to $410,220 for the year ended December 31, 2002.
Revenue Recognition
Fees under the Company's service contracts are generally fixed-fee and are
recorded as services are provided. Service fees are generally determined by
multiplying a contractually negotiated rate per call/member by the number of
calls/members for the month. These contracts are generally for a term of three
years with a provision for automatic renewals. The Company recognizes service
revenue when persuasive evidence of an arrangement exists, the service has been
performed, the fee is fixed and determinable and collections of the resulting
receivable is reasonably assured.
The Company recognizes revenue from technology licenses in accordance with
Statement of Position ("SOP") 97-2 "Software Revenue Recognition" as further
modified by Statement of Position 98-9 "Modification of SOP 97-2, "Software
Revenue Recognition with Respect to Certain Transactions." SOP 97-2 generally
requires revenue earned on software arrangements involving multiple elements
such as software products, upgrades, enhancements, post-contract customer
support, installation and training to be allocated to each element based on
vendor-specific objective evidence (VSOE) of the fair value of the elements.
VSOE consists of the price charged when the same element is sold separately, or,
for an element not yet being sold separately, the price established by
management having the relevant authority, where it is probable that the price,
once established will not change before separate introduction of the elements
into the market place.
41
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd)
Revenue Recognition (cont'd)
The Company recognizes revenue from software development contracts on a
percentage-of-completion method with progress to completion measured based upon
labor hours incurred or achievement of contract milestones. Revenue from re-sale
of hardware and software, obtained from vendors, is recognized at the time
hardware and software is delivered to or received by customers depending on when
title passes. If a sale is subject to specific customer acceptance provisions,
or if there are any uncertainties about customer acceptance, revenue is not
recognized until accptance occurs. Customer deposits represent funds received in
advance in excess of revenue recognized.
Software Development Costs
In accordance with the provisions of AICPA Statement of Position No. 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use," the Company capitalizes all application development costs and
expenses all preliminary project and post-implementation costs in the
accompanying statement of operations.
For the year ended December 31, 2003, the Company capitalized $1,237,713 of
software developed for internal use. The Company expects to start amortizing
such software development costs during the first quarter of 2004.
Deferred Marketing Costs
Deferred marketing costs consist of the value of the warrant to acquire 400,000
shares of common stock issued to a customer in October 2002 in connection with a
three-year joint marketing agreement. The warrant was valued at $1,360,000
utilizing the Black-Scholes pricing model. The value of the warrant is being
amortized over the three-year life of the joint marketing agreement on a
straight-line basis. For the years ended December 31, 2003 and 2002, $453,336
and $75,555, respectively was charged to amortization expense. The unamortized
portion of the deferred marketing costs was $831,109 and is reflected on the
accompanying consolidated balance sheet.
Marketing and publicity costs are expensed as incurred and totaled $1,762,567
and $773,963 for the years ended December 31, 2003 and 2002, respectively.
Marketing and publicity costs for 2003 included a non- cash charge of
approximately $1,414,000 in addition to the amortization of the value of the
warrant referred to in the preceding paragraph.
Debt Issuance Costs
The Company recorded a total of $416,610 of debt issuance costs in connection
with the sale of a 6% senior debenture in February 2002. These costs consisted
of a cash payment of $130,000 and common stock and warrants valued at $286,610,
which was issued to a placement agent as a finder fee. The Company amortized
these costs on a straight-line basis over the two-year life of the debenture.
Accordingly, for the years ended December 31, 2003 and 2002, amortization of
debt issuance costs amounted to $214,555 and $187,337, respectively.
Additionally, during June 2003, in connection with the re-pricing of the
warrants granted to such placement agent, the Company charged an additional
$122,228 as amortization of debt issuance costs, bringing the total amortization
expense for the year ended December 31, 2003 to $336,783. As of December 31,
2003, the remaining un-amortized portion of debt issuance costs amounted to
$34,718.
42
I-TRAX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd)
Comprehensive Income
The Company adopted SFAS No. 130, "Accounting for Comprehensive Income." This
statement establishes standards for reporting and disclosing of comprehensive
income and its components (including revenues, expenses, gains and losses) in a
full set of general-purpose financial statements. The items of other
comprehensive income that are typically required to be disclosed are foreign
currency items, minimum pension liability adjustments, and unrealized gains and
losses on certain investments in debt and equity securities. The Company had no
items of other comprehensive income for the years ended December 31, 2003 and
2002.
Stock-Based Compensation
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure, an amendment of FASB Statement No. 123."
SFAS No. 148 amends FASB Statement No. 123, "Accounting for Stock-Based
Compensation," to provide alternative methods of transition for an entity that
chooses to change to the fair-value-based method of accounting for stock-based
employee compensation. It also amends the disclosure provisions of that
statement to require prominent disclosure about the effects that accounting for
stock-based employee compensation using the fair-value-based method would have
on reported net income and earnings per share and to require prominent
disclosure about the entity's accounting policy decisions with respect to
stock-based employees compensation. Certain of the disclosure requirements are
required for all companies, regardless of whether the fair value method or
intrinsic value method is used to account for stock-based compensation
arrangements. The amendments to SFAS No. 123 are effective for financial
statements for fiscal years ended after December 15, 2002 and for interim
periods beginning after December 15, 2002.
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.
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:
43
I-TRAX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd)
2003 2002
----------------- ------------------
Net loss as reported $ (8,058,579) $ (9,424,973)
Add back intrinsic value of the options issued to
employee and charged to operations 27,942 163,200
Deduct total stock based employee compensation
expense determined under fair value based methods
for all awards (2,952,906) (2,844,904)
------------ ------------
Pro forma net loss $(10,983,543) $(12,106,677)
============ ============
Basic and diluted net loss per share as reported $ (.74) $ (1.04)
Pro forma basic and diluted net loss per share $ (1.01) $ (1.33)
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 option-pricing model with the following weighted-average
assumptions:
Dividend yield 0.00%
Expected volatility 112%
Risk-free interest rate 4%
Expected life 5 year
Segment Reporting
The Company evaluates segment performance based on income from operations.
Through December 31, 2003, the Company has not measured segment performance
because the Company has operated in only one segment.
New Accounting Pronouncements
In May 2003, the Financial Accounting Standards Board issued Statement No. 150,
Accounting for Certain Financial Instruments with Characteristics of Both
Liabilities and Equity, effective for the fiscal period beginning after December
15, 2003. Statement No. 150 establishes standards for how an issuer classifies
and measures certain financial instruments with characteristics of both
liabilities and equity. To the extent that the Company is either now or in the
future required to repurchase shares of common stock, the adoption of Statement
No. 150 would require the Company to classify common stock subject to redemption
as a liability as of January 1, 2004, based on the latest revision.
Prospectively, changes in the liability with the exception of redemptions will
be included in pre-tax income.
44
I-TRAX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd)
New Accounting Pronouncements (cont'd)
In November 2002, the Emerging Issues Task Force ("EITF") reached a consensus on
Issue No. 00-21 ("Issue 00-21"), Revenue Arrangements with Multiple
Deliverables. Issue 00-21 provides guidance on how to account for arrangements
that involve delivery or performance of multiple products, services and/or
rights to use assets. The adoption of Issue 00-21 is not expected to have an
impact on the Company's consolidated financial position or results of
operations.
The Company does not believe that any other recently issued and adopted, but not
yet effective, accounting standards would have a material effect on the
accompanying financial statements.
NOTE 3--OFFICE EQUIPMENT, FURNITURE AND LEASEHOLD IMPROVEMENTS
Office equipment, furniture and leasehold improvements are as follows at
December 31, 2003:
Office equipment $ 889,720
Furniture 145,422
Software Development Costs 1,237,713
Leasehold improvements 50,000
-------------
Less accumulated depreciation and amortization (808,088)
-------------
$ 1,514,767
=============
Certain office equipment is pledged as collateral for related capital lease
obligations. (See Note 8.)
Depreciation and amortization expense for the years ended December 31, 2003 and
2002 amounted to $176,903 and $216,762, respectively.
NOTE 4--ACQUISITION OF WELLCOMM GROUP
On February 6, 2002, the Company acquired all of the issued and outstanding
common stock of WellComm Group, Inc. ("WellComm Group"). WellComm Group was a
disease management company. As stipulated in the Merger Agreement dated January
28, 2002, as amended, the Company issued 1,488,000 shares of common stock valued
at $9,746,400, granted 112,000 options valued at $733,600 to acquire common
stock at a nominal exercise price and paid $2,199,136 in cash. In addition, the
Company issued 16,000 shares of common stock, valued at $104,800 and charged to
operations as compensation expense, to an employee for introducing the Company
to WellComm Group. The aggregate acquisition price amounted to $12,679,136. The
value of common stock issued and stock options granted was determined based on
the average market price of common stock immediately before and after the
acquisition was agreed to and announced. For accounting purposes, the effective
date of the acquisition was January 31, 2002.
45
I-TRAX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002
NOTE 4--ACQUISITION OF WELLCOMM GROUP (cont'd)
The Company now conducts the former operations of WellComm Group through Health
Management, LLC. The financial statements include the former operations of
WellComm Group from February 1, 2002 forward.
The purchase price allocation was based on a formal valuation prepared by an
independent appraiser. Of the total purchase price, the Company allocated
$1,648,000 to non-compete covenants, $4,501,563 to customer relationships,
$330,237 to net assets acquired with the remainder of $6,199,336 to goodwill.
Non-compete covenants are being amortized on a straight-line basis over a
four-year life and customer relationships are amortized over a three-year life.
The following table summarizes the actual fair values of the assets acquired and
liabilities assumed at the acquisition date:
Current assets $ 651,474
Property and equipment 190,000
Intangible assets 6,149,563
Goodwill 6,199,336
----------------
Total assets acquired $ 13,190,373
================
Current liabilities $ 482,882
Long term debt 28,355
----------------
Total liabilities assumed 511,237
----------------
Net assets acquired $ 12,679,136
================
The following pro forma results of operations of the Company give effect to the
acquisition of WellComm Group as though the acquisition was consummated as of
January 1, 2002.
For the year
ended December
31, 2002
-----------------
Total revenue $ 4,185,689
=================
Total expenses $ 13,688,289
=================
Net loss $ (9,502,600)
=================
Pro forma net loss per share:
Basic and Diluted $ (1.03)
=================
Weighted average number of shares outstanding:
Basic and Diluted 9,220,958
=================
46
I-TRAX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002
NOTE 5--GOODWILL AND INTANGIBLE ASSETS
The Company has adopted SFAS No. 142 as of January 1, 2002. SFAS No. 142
eliminates the amortization of goodwill and certain other intangible assets and
requires the Company to complete a test for impairment of these assets annually
as well as a transitional goodwill impairment test within six months of the date
of adoption. The Company has completed its impairment assessment as required by
SFAS No. 142 and concluded that no impairment of recorded goodwill exists.
There were no changes in the carrying amount of goodwill for the year ended
December 31, 2003.
The components of identifiable intangible assets, which are included in the
consolidated balance sheet as of December 31, 2003, are as follows:
Gross Carrying Accumulated Net Carrying
Amount Amortization Amount
----------------- --------------- -----------------
Amortized intangible assets:
Non-compete covenants 1,648,000 (1,198,815) 449,185
Customer relationships 4,501,563 (3,733,139) 768,424
----------------- --------------- -----------------
Total $ 6,149,563 $ (4,931,954) $ 1,217,609
================= =============== =================
During the quarter ended December 31, 2003, the Company recorded an impairment
charge of approximately $458,000 representing the unamortized portion of
covenants not to compete directly attributable to the founder of WellComm Group
who passed away. For the year ended December 31, 2002, the Company recorded an
impairment charge amounting to $1,648,332 related to customer relationships.
Total amortization expense for all the intangibles amounted to $1,072,230 for
the year ended December 31, 2003. The estimated amortization expense for the
years ending December 31, 2004 and 2005 is $1,095,944 and $37,185, respectively.
NOTE 6--DEPOSIT ON ACQUISITION OF PERPETUAL LICENSE
On April 25, 2003 the Company entered into a Marketing and Services Agreement
with BioSignia, Inc. ("BioSignia"), whereby the Company committed to pay
BioSignia certain minimum payments in return for allowing the Company to private
label BioSignia's technology, products and services in connections with the
Company's products and services. BioSignia provides products and services in the
field of predictive modeling, health economics, epidemiology and prospective
medicine. Pursuant to the agreement, the Company paid BioSignia $160,000.
Subsequent to December 31, 2003, the Company and BioSignia entered into a new
agreement whereby for an additional $575,000, the Company acquired a perpetual
license to BioSignia's technology and products. Accordingly, as of December 31,
2003, the Company classified the $160,000 paid under the original agreement as a
deposit on perpetual license.
47
I-TRAX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002
NOTE 7--ACCRUED EXPENSES
Accrued expenses consist of the following at December 31, 2003:
Interest $ 157,280
Salaries 203,888
------------
Total $ 361,168
============
NOTE 8--CAPITAL LEASE OBLIGATIONS
In April 2000, the Company acquired a telephone system for $34,290 by entering
into capital lease obligations with interest at approximately 10% per annum,
requiring 60 monthly payments of $731, which include principal and interest. The
related equipment secures the lease.
In October 2000, the Company acquired web hosting equipment for $107,288 by
entering into a capital lease obligation with interest at approximately 9% per
annum, requiring 36 monthly payments of $3,572, which include principal and
interest. Such lease terminated during October 2003.
In July 2002, the Company acquired a new telephony system for its call center
with a total cost of $107,709 by entering into a capital lease obligation with
interest at approximately 8% per annum, requiring 60 monthly payments of
approximately $2,278, which includes principal and interest. The related
equipment secures the lease.
The future minimum lease commitments under the capital leases as of December 31,
2003 are as follows:
For the year ending December 31:
--------------------------------
2004 $ 32,836
2005 26,257
2006 24,064
2007 14,037
----------
Total future payments 97,194
Less amount representing interest (11,754)
----------
Present value of minimum lease payments 85,440
Less current portion 26,814
----------
Net long term portion $ 58,626
==========
At December 31, 2003 equipment under capital leases is carried at a book value
of $79,424.
48
I-TRAX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002
NOTE 9--RELATED PARTIES TRANSACTIONS
During February 2003, the Company repaid $140,000 of the $225,000 loan
outstanding to a relative of the Company's Chief Operating Officer.
During February 2003, pursuant to two promissory notes, two former directors of
the Company advanced $200,000 to the Company for working capital. The notes
accrued interest at 8% per year and matured in February 2004.
As of June 30, 2003, the Company's Chief Executive and Operating Officers, along
with a director of the Company, advanced the Company a total of $540,000 for
working capital at an interest rate of 8% per year.
As of December 31, 2003, the Company repaid an aggregate of $99,622 to its Chief
Executive Officer and other related parties.
During May 2003, certain stockholders of the Company contributed a total of
163,073 shares of common stock valued at $246,240 to an investor relations
consultant for services rendered. Accordingly, the Company charged this amount
to operations.
In June 2003, certain of the Company's officers, directors and a venture capital
fund managed by the Company's Chief Executive Officer converted a total
$909,421, comprised of loans and advances of $790,697 (includes $75,000 from a
venture fund managed by the Company's Chief Executive Officer) and accrued
interest of $118,724, into 519,667 shares of common stock at $1.75 per share. In
addition, certain of the same parties assigned additional loans in the principal
amount of $246,342, and accrued interest of $13,507 thereon, to an investor
relations firm, which thereafter converted the assigned loans into common stock
also at $1.75 per share. The price of the conversions was determined with
reference to a private placement of common stock to third parties completed by
the Company contemporaneously with the conversions as disclosed in Note 17
below.
In connection with the death of a senior executive officer of the Company,
during 2003, the Company was entitled to receive proceeds of $500,000 from a
key-person life insurance policy maintained by the Company on the life of such
senior executive officer. The proceeds from the life insurance policy were
pledged as security for loans made to the Company in 2002 and 2003 by the
deceased senior executive officer, a former director and a key employee.
Accordingly, the life insurance company was instructed to disburse such proceeds
directly to the related note holders in partial satisfaction of such loans.
As of December 31, 2003, the amount due to officers and related parties amounted
to $280,000, which are classified as current liabilities since they are due on
demand. On March 19, 2004, the Company repaid such related party advances along
with accrued interest. See Note 19.
Interest expense associated with related party loans and advances amounted to
$83,761 and $79,735 for the years ended December 31, 2003 and 2002,
respectively.
NOTE 10--CREDIT LINE
The Company, by virtue of acquiring WellComm Group, assumed a revolving line of
credit that allowed the Company to borrow up to $300,108. Amounts outstanding
under the line of credit incurred interest at 0.5% over the national prime rate,
as reported by the Wall Street Journal, and were payable monthly. During October
2003, the Company repaid $300,000 owed on the line of credit, representing
payment in full. Interest expense associated with the credit line amounted to
$12,996 and $11,742 for the years ended December 31, 2003 and 2002,
respectively.
49
I-TRAX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002
NOTE 11--NOTES PAYABLE--OTHER
In April 2003, the Company borrowed $100,000 from a shareholder pursuant to a
convertible promissory note. The note, with an eleven-month term, accrues
interest at 6% per annum and a default interest rate of 12% per annum. The
principal and related accrued and unpaid interest is convertible by the
shareholder into common stock at anytime at $1.50 per share. As consideration
for this loan, the Company also granted the shareholder a warrant to acquire
100,000 shares of common stock at an exercise price of $1.50 per share. The
value assigned to the warrant of $68,000 was recorded as a discount to the
promissory note using the relative fair value of the debt and the warrant to the
actual proceeds from the convertible promissory note. The discount is accreted
to interest expense over the term of the convertible promissory note. For the
year ended December 31, 2003, the discount accreted to interest expense
associated with the convertible promissory note amounted to $55,638. At December
31, 2003 the carrying value of the note amounted to $87,638 and is included in
"Notes payable - other, net of discount" on the accompanying consolidated
balance sheet. On March 19, 2004, the Company repaid such note payable along
with accrued interest. See Note 19.
Pursuant to a promissory note dated April 10, 2003, the Company borrowed
$150,000 from a shareholder with an interest rate of 12% per annum, requiring
monthly payments of $25,000 plus accrued interest with a final payment due on
December 31, 2003. As of December 31, 2003, the outstanding principal balance
and related accrued interest was paid in full. For the year ended December 31,
2003, interest expense amounted to $7,981.
On May 29, 2003, the Company borrowed $100,000 from a shareholder. For the
period the loan was outstanding, interest expense amounted to $12,000. The loan
and related interest amounting to $112,000 was repaid in full on September 29,
2003.
NOTE 12--PROMISSORY NOTES PAYABLE
On March 2, 2001, the Company borrowed $692,809 from an investor group that
included $75,000 from a venture capital fund managed by the Company's Chief
Executive Officer. The loan bears interest at 8% per annum, with a default rate
of 12% per annum, and is due on March 2, 2006. The Company also granted this
investor group warrants to purchase 364,694 shares of common stock at $0.50 per
share, which were exercised during the first quarter of 2002 into 340,317 shares
of common stock, net of shares surrendered as exercise price. The value assigned
to detachable warrants of $459,854 is accreted to interest expense over the
five-year term of the underlying promissory notes.
In June 2003, as part of certain related parties converting and assigning debt
as discussed in Note 9 above, the venture capital fund managed by the Company's
Chief Executive Officer, with the consent of the Company, assigned the fund's
loan in the principal amount of $75,000 and a portion of the accrued interest
thereon amounting to $6,669 to an investment relations firm, which thereafter
converted the assigned loan into common stock at $1.75 per share. The balance of
the accrued interest not assigned in the amount of $6,098 was converted into
3,484 shares of common stock also at $1.75 per share. The price of the
conversion was determined with reference to a private placement of common stock
to third parties completed by the Company contemporaneously with the conversion
as disclosed in Note 17 below.
The amount accreted to interest expense amounted to $90,708 and $90,708 for the
years ended December 31, 2003 and 2002, respectively. At December 31, 2003, the
carrying value of the notes amounted to $418,744 and is included in the
"Promissory notes and debenture payable, net of discount" on the accompanying
consolidated balance sheet. The face value of the promissory notes amounted to
$617,809 at December 31, 2003.
On March 19, 2004, the Company repaid such promissory notes along with accrued
interest. See note 19.
50
I-TRAX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002
NOTE 13--CONVERTIBLE DEBENTURE
The Company funded the acquisition of WellComm Group by selling a 6% convertible
senior debenture in the aggregate principal amount of $2,000,000 to Palladin
Opportunity Fund LLC. Pursuant to the purchase agreement, the Company also
issued Palladin a warrant to purchase an aggregate of up to 307,692 shares of
common stock at an exercise price of $5.50 per share. The outstanding principal
and any interest under the debenture was payable in full on or before February
3, 2004. Further, outstanding principal and any accrued interest may be
converted at any time at the election of Palladin into common stock. The
original conversion price of the debenture was $5.00 per share. In accordance
with the terms of the debenture, the price was reset to $3.03 in February 2003
and to $1.75 in June 2003. In accordance with the terms of the warrant, the
exercise price of the warrant was reset from $5.50 to $1.75 in June 2003.
The initial value assigned to the warrant of $890,272 was recorded as a discount
to the debenture and is accreted to interest expense over the term of the
debenture. The amount accreted to interest expense associated with the original
value assigned to the warrant amounted to $343,782 and $257,650 for the years
ended December 31, 2003 and 2002, respectively. As a result of resetting of the
exercise price of the warrant in June 2003, the Company recorded an additional
charge of $203,077 for interest expense for the additional market value of the
warrant on the date of resetting. Lastly, as a result of Palladin's partial
conversion of the debenture, the Company recorded $165,682 of additional
interest expense for the year ended December 31, 2003. This amount represents
the acceleration of the unamortized discount of the warrant, which is
attributable to the converted portion of principal.
Upon the initial sale of the debenture, the Company recorded a beneficial
conversion value of $948,651. The beneficial conversion value represents the
difference between the fair market value of the common stock on the date the
debenture was sold (or the date the conversion price is changed) and the price
at which the debt could be converted into common stock. The beneficial
conversion value was increased by $682,528 as a result of the reset in June
2003. The Company recorded $802,576 and $424,113 of interest expense for the
years ended December 31, 2003 and 2002, respectively, for the amortization of
the beneficial conversion value of the debenture. As a result of Palladin's
partial conversion of the debenture, the Company recorded $365,709 of additional
interest expense for the year ended December 31, 2003. This amount represents
the unamortized portion of the beneficial conversion value, which is
attributable to the converted portion of principal.
The Company, pursuant to the debenture agreement, has also recorded accrued
interest at the rate of 6% on the outstanding principal portion of the
debenture. Interest accrued for the year ended December 31, 2003 amounted to
$224,350.
For the year ended December 31, 2003, Palladin converted an aggregate of
$1,483,351 of the amount due on the debenture for which the Company issued
847,629 shares of common stock.
As of December 31, 2003, the carrying value of the debenture amounted to
$379,061 and is included in "Promissory notes and debenture payable, net of
discount" on the accompanying consolidated balance sheet. The face value of the
debenture amounted to $740,999 at December 31, 2003.
The debenture is classified as a long-term liability because, during December
2003, Palladin agreed to extend the maturity date of the debenture until
February 2005. As consideration for the extension, the Company granted 50,000
warrants to acquire common stock at $1.75, which Palladin exercised on December
30, 2003. The warrants have been valued at approximately $200,000 utilizing the
Black-Scholes valuation model. This amount was recorded as a discount to the
debenture and is accreted to interest expense over the extension period of one
year.
51
I-TRAX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002
NOTE 13--CONVERTIBLE DEBENTURE (cont'd)
During November and December 2003, Palladin exercised 307,692 warrants,
representing the warrants granted upon the sale of the debenture during February
2002 and the 50,000 warrants granted for the extension of the maturity date of
the debenture. As a result of the exercise, the Company received proceeds of
$625,961.
Lastly, in connection with facilitating the transaction with Palladin, the
Company recorded $416,610 of debt issuance costs comprised of $130,000 of cash,
6,200 shares of common stock valued at $40,610 and a warrant to acquire 40,000
shares of common stock at $5.00 per share valued at $246,000 delivered to a
third party that brokered the transaction. In connection with the reset in June
2003 of the conversion price of Palladin's debenture and the exercise price of
Palladin's warrant, the Company also, in accordance with a contractual
commitment: (1) reset the exercise price of the warrant originally granted to
the third party from $5.00 to $1.75 per share, resulting in a charge to
operations of $26,400 for additional debt issuance costs; and (2) increased the
shares of common stock issuable under the warrant by 74,285 shares, resulting in
a further charge to operations of $95,828.
For the years ended December 31, 2003 and 2002 the amortization of these debt
issuance costs amounted to $336,783 and $187,337, respectively.
During the first quarter of 2004, Palladin converted the balance of the
debenture payable. See Note 19.
NOTE 14--COMMITMENTS AND CONTINGENCIES
Employment Agreements
The Company is a party to various employment agreements with certain of its
officers and key employees. Such employment agreements range between three to
five years with annual salaries ranging from $83,000 to $200,000.
Nature of Business
The Company is subject to risks and uncertainties common to growing technology
companies, including rapid technological developments, reliance on continued
development and acceptance of the Internet and health care applications
utilizing the Internet, intense competition and a limited operating history.
Significant Customers
Financial instruments, which may expose the Company to concentrations of credit
risk, consist primarily of accounts receivable. As of December 31, 2003, one
customer represented 25% of the total accounts receivable. For the year ended
December 31, 2003, the Company had three unrelated customers, which accounted
for 29%, 13%, and 14%, respectively, of total revenue. For the year ended
December 31, 2002, the Company had two unrelated customers, which accounted for
42% and 30%, respectively of total revenue.
Office Leases
During October 1999, the Company entered into a lease agreement for its
technology and product development offices. The lease was to expire on October
31, 2004 with annual rent of approximately $162,000 before annual escalations.
During December 2001, the Company was successful in negotiating out of this
lease by entering into an amendment\relocation lease agreement with the same
landlord for materially less space. The Company entered into an eighteen-month
lease requiring monthly payments of approximately $3,600. The lease expired on
October 31, 2003.
52
I-TRAX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002
NOTE 14--COMMITMENTS AND CONTINGENCIES (cont'd)
Office Leases (cont'd)
During April 2000, the Company entered into a lease agreement for its executive
offices. The lease expires June 2005 and requires annual rent payments of
approximately $150,000 before annual escalations.
During May 2002, the Company entered into a lease agreement for its call center
located in Omaha, Nebraska. The lease expires during May 2007 with annual rent
of approximately $56,000 before annual escalations.
The Company's approximate future minimum annual rental payments, including
annual escalations under the non-cancelable operating leases in effect as of
December 31, 2003, are as follows:
For the year ending December 31:
2004 $ 206,000
2005 119,000
2006 56,000
2007 24,000
-----------
$ 405,000
===========
Rent expense for the years ended December 31, 2003 and 2002 amounted to
approximately $245,000 and $275,000, respectively.
Profit Sharing Plan
The Company maintains a 401(k) profit sharing plan covering qualified employees,
which includes employer participation in accordance with the provisions of the
Internal Revenue Code. The plan allows participants to make pretax contributions
and the Company to match certain percentages of employee contributions depending
on a number of factors, including the participant's length of service. The
profit sharing portion of the plan is discretionary and noncontributory. All
amounts contributed to the plan are deposited into a trust fund administered by
an independent trustee. As of December 31, 2003, the Company has made no
contributions.
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 a customer if the Company does not save such customer a
pre-determined percentage of the expenses incurred by individuals whose health
is managed by the Company. As of December 31, 2003, the Company is not a party
to any risk sharing contracts.
53
I-TRAX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002
NOTE 15--COSTS IN CONNECTION WITH TERMINATED ACQUISITION
On November 8, 2002, the Company entered into a merger agreement to acquire a
technology company, which had developed web based predictive modeling software.
Under the terms of this agreement and at the time this agreement was executed,
the Company deposited $200,000 into an escrow account. This sum was to be
released to the company being acquired if the Company failed to satisfy certain
conditions to closing, including third party financing for the cash portion of
the purchase price. As a result of not securing the financing by January 31,
2003 as stipulated in the merger agreement, the sum of $200,000 was released in
the first quarter of 2003 and charged to operations as terminated acquisition
cost.
NOTE 16--PROVISION FOR INCOME TAXES
Income taxes are provided for the tax effects of transactions reported in the
financial statements and consist of taxes currently due plus deferred taxes
related to differences between the financial statement and tax bases of assets
and liabilities for financial statement and income tax reporting purposes.
Deferred tax assets and liabilities represent the future tax return consequences
of these temporary differences, which will either be taxable or deductible in
the year when the assets or liabilities are recovered or settled. Accordingly,
measurement of the deferred tax assets and liabilities attributable to the
book-tax basis differentials are computed at a rate of 34% federal and 6% state.
As of December 31, 2003, the Company had deferred tax assets of approximately
$9,561,000 resulting from temporary differences and net operating loss
carry-forwards of approximately $25,160,000, which are available to offset
future taxable income, if any, through 2018. As utilization of the net operating
loss carry-forwards and temporary difference is not assured, the deferred tax
asset has been fully reserved through the recording of a 100% valuation
allowance. Further, the Company will be limited in the amount of net operating
losses it may utilize following the merger with CHD Meridian. Such limitations
resulting from 50% or more change in ownership have not been determined.
The tax effects of temporary differences, loss carry-forwards and the valuation
allowance that give rise to deferred income tax assets are as follows:
December 31,
2003
---------------
Temporary differences:
Fair value of warrants and common stock $ 574,000
Net operating losses 8,987,000
Less valuation allowance (9,561,000)
---------------
Deferred tax assets $ 0
===============
The reconciliation of the effective income tax rate to the federal
statutory rate for the years ended December 31, 2003 and 2002 is as
follows:
Federal income tax rate (38.0)%
Change in valuation allowance on net operating carry-forwards 38.0
---------------
Effective income tax rate: 0.0 %
===============
54
I-TRAX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002
NOTE 17--STOCKHOLDERS' EQUITY
2002 Issuance of Common Stock and Warrants
The Company has been unable to locate one stockholder entitled to receive common
stock as a result of a 1999 merger. Accordingly, the Company has cancelled
45,141 unclaimed shares of common stock. In connection with a 1-for-5 reverse
stock split, the Company paid stockholders cash for all fractional shares that
resulted from the reverse stock split. Accordingly, a total of 191 shares were
cashed out.
The Company funded the acquisition of WellComm Group by selling a 6% convertible
senior debenture in the aggregate principal amount of $2,000,000 to Palladin
Opportunity Fund LLC. Pursuant to the purchase agreement, the Company also
issued Palladin a warrant to purchase an aggregate of up to 307,692 shares of
common stock at an exercise price of $5.50 per share. The original conversion
price of the debenture was $5.00 per share. In accordance with the terms of the
debenture, the price was reset to $3.03 in February 2003 and to $1.75 in June
2003. In accordance with the terms of the warrant, the exercise price of the
warrant was reset from $5.50 to $1.75 in June 2003.
The Company valued the warrant issued to Palladin at $890,272 using the
Black-Scholes pricing model, thereby allocating a portion of the proceeds from
the debt to the warrant and the option using the relevant fair value of the debt
and warrant to the actual proceeds from the debenture. The Company recorded
$890,272 as a discount to the debenture. This amount is accreted to interest
expense over the life of the debenture.
Upon the initial sale of the debenture, the Company recorded a beneficial
conversion value of $948,651. The beneficial conversion value represents the
difference between the fair market value of the common stock on the date the
debenture was sold (or the date the conversion price is changed) and the price
at which the debt could be converted into common stock.
In connection with facilitating the transaction with Palladin, the Company paid
$130,000, issued 6,200 shares of common stock valued at $40,610 and granted a
warrant to acquire 40,000 shares of common stock at $5.00 per share to a third
party that brokered the transaction. In addition, the Company issued 16,000
shares of common stock valued at $104,800 to an employee for introducing the
Company to WellComm. The Company has valued the shares at the market price on
day of issuance or $145,408 and has valued the warrants utilizing the
Black-Scholes option-pricing model or $246,000.
On February 6, 2002, the Company acquired all of the issued and outstanding
common stock of WellComm Group, Inc. by issuing 1,488,000 shares of common stock
valued at $9,746,400, granting options valued at $733,600 to acquire 112,000
shares common stock at a nominal exercise price, and paying approximately
$2,200,000 in cash. The aggregate acquisition price amounted to approximately
$12,680,000.
During January 2002, the Company sold in a private placement an aggregate of
22,000 shares of common stock for $47,850, net of $7,150 of direct costs. This
private placement was commenced in November 2001. Additionally, pursuant to a
private placement commenced in February 2002, the Company sold 505,500 shares of
common stock, yielding proceeds of $1,895,626. In connection with the fund
raising efforts from an existing stockholder, the Company issued 13,333 shares
as consideration to such stockholder.
55
I-TRAX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002
NOTE 17--STOCKHOLDERS' EQUITY (cont'd)
2002 Issuance of Common Stock and Warrants (cont'd)
During the year ended December 31, 2002, pursuant to various agreements and
board approvals, the Company issued an aggregate of 23,708 shares of common
stock and granted 60,000 warrants to various consultants for services received
and for settlement of debt. The common stock was valued at fair market value on
the date of issuance or $114,167 in the aggregate, which was charged to
operations. The warrants were valued utilizing the Black-Scholes option-model.
Accordingly, the Company recorded a charge of $222,000 for investor relations as
a result of granting such warrants.
During the year ended December 31, 2002, the Company charged operations for
$163,200 related to the issuance of options to a former employee.
Effective October 31, 2002, the Company and one of its customers entered into a
three year Joint Marketing Agreement. Under this agreement, each party will,
using its reasonable discretion, market to its clients the other party's
products and services. In connection with the agreement, the Company granted
UICI, a New York Stock Exchange Company, a seven-year warrant to acquire up to
400,000 shares of common stock at $5.50 per share.
The Company and UICI are also parties to a license and maintenance agreement
entered into on September 30, 2002, pursuant to which the Company granted UICI
an exclusive license to certain software in the student market and a
non-exclusive license to such software for use by UICI for its other businesses.
The Company, utilizing the Black-Scholes option-pricing model, has valued such
warrant at approximately $1,360,000. Such amount has been capitalized and it
will be amortized on a monthly basis over the life of the agreement of three
years.
During the year ended December 31, 2002, a total of 380,960, warrants and
options were exercised and accordingly, the Company issued an aggregate of
355,424 shares of common stock, net of shares surrendered as exercise price.
2003 Issuance of Common Stock and Warrants
During May 2003 the Company issued an aggregate of 332,760 shares of common
stock to four investor relations firms. The common stock valued at $522,708,
based on the market price of the Company's common stock on the date of issuance,
has been charged to operations for 2003.
During May 2003, certain shareholders of the Company contributed loans (which
were thereafter converted into common stock) and 163,073 shares of common stock
to an investor relations firm retained by the Company as compensation for
services. The benefit that the Company has received from these contributions
aggregates $246,240 based on the market price of the Company's common stock on
the date of the contribution, and was charged to operations.
During June 2003 the Company sold 613,986 shares of common stock at $1.75 per
share yielding net proceeds (after direct costs including 40,167 shares of
common stock) of $1,004,186.
During June 2003, the Company issued 519,667 shares of common stock in
connection with the conversion of related party debt and accrued interest
thereon amounting to $909,421 based on the market price of the Company's common
stock on the date of issuance.
During June 2003, the Company issued 148,485 shares of common stock in
connection with the conversion of assigned debt to an investor relations firm
amounting to $259,849 based on the market price of the Company's common stock on
the date of issuance.
56
I-TRAX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002
NOTE 17--STOCKHOLDERS' EQUITY (cont'd)
2003 Issuance of Common Stock and Warrants (cont'd)
During June 2003, the Company issued 69,711 shares of common stock in connection
with the conversion of deferred salaries amounting to $121,997 based on the
market price of the Company's common stock on the date of issuance.
During August 2003, the Company commenced a private placement whereby it offered
as a unit, two shares of common stock and a warrant to purchase an additional
share of common stock exercisable at $3.00 (the market price on the Company's
common stock on the date the Company commenced the private placement) for a unit
purchase price of $5. The maximum amount offered was $3,500,000. Through October
31, 2003, the end of the private placement, the Company has issued a total of
1,400,000 shares of common stock and granted warrants to purchase 700,000
additional shares under this private placement. The Company has realized net
proceeds of $3,037,894 after expenses as of December 31, 2003.
Pursuant to the terms of the registration rights agreement entered in connection
with the transaction, within 30 days of the closing of the private placement,
the Company was required to file with the Securities and Exchange Commission
(the "SEC") a registration statement under the Securities Act of 1933, as
amended, covering the resale of all the common stock purchased and the common
stock underlying the warrants. Additionally, within 90 days of closing, the
Company was required to use its best efforts to cause such registration
statement to become effective. The registration rights agreement further
provided that if a registration statement is not filed, or does not become
effective, within the defined time periods, then in addition to any other rights
the holders may have, the Company would be required to pay each holder an amount
in cash, as liquidated damages, equal to 1.5% per month of the aggregate
purchase price paid by such holders. The registration statement was filed within
the allowed time, and was declared effective by the SEC on February 17, 2004.
In accordance with EITF 00-19, "Accounting for Derivative Financial Instruments
Indexed To, and Potentially Settled In a Company's Own Stock," and the terms of
the warrants and the transaction documents, the fair value of the warrants
amounted to $2,458,800 on date of grant. 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 will be 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 option-
pricing 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 at December 31, 2003 was estimated to be approximately
$2,760,000, which reflects an increase in fair value of $301,305 from the time
the warrants were granted. This amount has been charged to operations as an
increase in common stock warrants. The fair value of the warrants increased
additionally by approximately $350,000 from December 31, 2003 to February 17,
2004. Accordingly, such increase will be charged in the statement of operations
for the quarter ended March 31, 2004 as an increase in common stock warrants.
The adjustments required by EITF 00-19 were triggered by the terms of the
private placement agreement, specifically the potential penalties if the Company
did not timely register the common stock underlying the warrants issued in the
transaction. The SEC 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.
For the year ended December 31, 2003, Palladin converted an aggregate of
$1,483,351 of its debenture into 847,629 shares of the Company's common stock.
57
I-TRAX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002
NOTE 17--STOCKHOLDERS' EQUITY (cont'd)
2003 Issuance of Common Stock and Warrants
During 2003, the Company granted fully vested, non-forfeitable warrants to
purchase 375,000 shares of common stock with exercise prices of $1.50 and $1.76
(based on market value at the date of issuance) to certain individuals and one
institution for investor relations services pursuant to various consulting
agreements expiring in May and June 2004. The value of such warrants, utilizing
the Black-Scholes model amounted to $649,448.
During May 2003 pursuant to the approval of the Board of Directors, the Company
granted warrants to purchase an aggregate of 450,000 shares for an exercise
price of $1.80 per share (representing a premium over market price on the date
of grant) to its Chief Executive and Operating Officers for their continued
financial support and for their guarantees to continue to support the Company
through January 2004. The granting of such warrants did not result in any
charges to operations because they were granted to employees.
In April 2003, the Company borrowed $100,000 from a shareholder pursuant to a
convertible promissory note. The note, with an eleven-month term, accrues
interest at 6% per annum and a default interest rate of 12% per annum. The
principal and related accrued and unpaid interest is convertible by the
shareholder into common stock at anytime at $1.50 per share. As consideration
for this loan, the Company also granted the shareholder a warrant to acquire
100,000 shares of common stock at an exercise price of $1.50 per share. The
value assigned to the warrant of $68,000 was recorded as a discount to the
promissory note using the relevant fair value of the debt and the warrant to the
actual proceeds from the convertible promissory note.
During December 2003, Palladin agreed to extend the maturity date of the
Debenture until February 2005, in exchange for which, the Company granted an
additional 50,000 warrants with an exercise price of $1.75. The warrants have
been valued at approximately $200,000 utilizing the Black-Scholes valuation
model. This amount, also recorded as a discount to the debenture, is accreted to
interest expense over the extension period of one year.
In connection with the reset in June 2003 of the conversion price of Palladin's
debenture and the exercise price of Palladin's warrant, the Company, in
accordance with a contractual commitment, reset the exercise price of the
warrant originally granted to a third party that brokered the Palladin
investment from $5.00 to $1.75 per share and amended the warrant to increase the
number of shares issuable thereunder by 74,285 shares of common stock. This
reset of the exercise and the amendment to the warrant resulted in a charge to
operations in the amount of $95,828.
During the last quarter of the year, the Company received an aggregate of
$968,769 (net of financing costs) from the exercise of warrants from various
holders.
58
I-TRAX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002
NOTE 17--STOCKHOLDERS' EQUITY (cont'd)
2003 Issuance of Common Stock and Warrants (cont'd)
The following table summarizes the Company's activity as it relates to its
warrants for the year ended December 31, 2003:
Shares
-----------------
Balance outstanding at January 1, 2003 2,132,953
Quarter ended March 31, 2003:
Granted --
Exercised --
-----------------
Balance outstanding at March 31, 2003 2,132,953
-----------------
Quarter ended June 30, 2003:
Granted 999,285
Exercised --
-----------------
Balance outstanding at June 30, 2003 3,132,238
-----------------
Quarter ended September 30, 2003:
Granted 320,000
Exercised
-----------------
Balance outstanding at September 30, 2003 3,452,238
-----------------
Quarter ended December 31, 2003:
Granted 620,000
Exercised (720,866)
-----------------
Balance outstanding at December 31, 2003 3,351,372
=================
Outstanding warrants are exercisable at prices ranging from $.75 to $5.50.
NOTE 18--STOCK OPTIONS
Equity Compensation Plans and Non-Plan Stock Options
The Company has two equity compensation plans, which were adopted in 2000 and
2001. The purpose of the plans is to provide the opportunity for grants of
incentive stock options, nonqualified stock options and restricted stock to
employees of the Company and its subsidiaries, certain consultants and advisors
who perform services for the Company or its subsidiaries and non-employee
members of the Company's Board of Directors. The 2001 plan has several
additional features, including, a salary investment option grant program that
permits eligible employees to reduce their salary voluntarily as payment of
two-thirds of the fair market value of the underlying stock subject to the
option, with the remaining one-third of the fair market value payable as the
exercise price for the option and, if specifically implemented, automatic grant
program for non-employee members of the Board of Directors at periodic
intervals.
59
I-TRAX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002
NOTE 18--STOCK OPTIONS (cont'd)
Equity Compensation Plans and Non-Plan Stock Options (cont'd)
Originally, there were 600,000 shares of common stock authorized for issuance
under the 2000 plan and 1,200,000 shares of common stock authorized for issuance
under the 2001 plan. The number of shares authorized for issuance under the 2001
plan increases automatically on the first day of each year beginning with the
year 2002 by an amount equal to the lesser of (a) three percent of the shares of
common stock then outstanding or (b) 200,000 shares. As a result, effective
January 1, 2003, the number of shares of common stock available for issuance
under the 2001 plan increased from 1,200,000 to 1,400,000.
The maximum aggregate number of shares of common stock that can be granted to
any individual during any calendar year is 70,000 under the 2000 plan and 80,000
and under the 2001 plan.
2000 Plan Grants
As of December 31, 2003, an aggregate of 226,500 options were outstanding under
the 2000 plan. Exercise prices of these options range from $5.00 to $10.00 per
share (depending on the fair market value of the stock on the date of grant).
2001 Plan Grants
As of December 31, 2003, an aggregate of 1,222,414 options were outstanding
under the 2001 plan. Exercise prices of these options range from $1.77 to $7.50
(depending on fair market value of the stock on the date of grant).
Non-Plan Stock Option Grants
As of December 31, 2003, the Company had outstanding an aggregate of 669,000
options outside of any stock option plan with exercise prices ranging from $.01
to $10.00 per share (depending on fair market value of the stock on the date of
grant).
60
I-TRAX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002
NOTE 18--STOCK OPTIONS (cont'd)
Equity Compensation Plans and Non-Plan Stock Options (cont'd)
The table below summaries the activity in the Company's stock option plans for
the years ended December 31, 2002 and 2003:
Non-Qualified Non-Plan
Incentive Options Options Non-Qualified Total
Options
------------------------ -------------------- ------------------- ------------------- -------------------
Outstanding as of
January 1, 2002 463,500 527,371 209,000 1,199,871
Granted 342,878 95,700 230,000 668,578
Exercised -- (2,727) -- (2,727)
Forfeited/Expired (70,549) (84,371) -- (154,920)
-------------------- ------------------- ------------------- -------------------
Outstanding as of
December 31, 2002 735,829 535,973 439,000 1,710,802
Granted 288,000 340,000 300,000 928,000
Exercised -- -- -- --
Forfeited/Expired (370,888) (80,000) (70,000) (520,888)
-------------------- ------------------- ------------------- -------------------
Outstanding as of
December 31, 2003 652,941 795,973 669,000 2,117,914
==================== =================== =================== ===================
Vesting Dates:
December 31, 2004 172,045 200,998 177,496 550,539
December 31, 2005 112,248 82,665 101,665 296,578
December 31, 2006 75,089 50,004 75,006 200,099
December 31, 2007 -- -- -- --
December 31, 2008 -- -- 20,000 20,000
Thereafter -- -- -- --
As of December 31, 2003, there were outstanding an aggregate of 1,050,698 of
exercisable plan and non-plan options with exercise prices ranging from $.01 to
$10.00.
The weighted average fair value of options granted during the year ended
December 31, 2003 amounted to $2.90.
For the year ended December 31, 2003 and 2002, the Company recorded $27,942 and
$163,000, respectively, of compensation in connection with granting of options.
NOTE 19--SUBSEQUENT EVENTS
Acquisition of CHD Meridian (unaudited)
The Company entered into a merger agreement, as amended, on December 26, 2003,
with CHD Meridian, a privately held company and a provider of outsourced,
employer-sponsored healthcare services.
61
I-TRAX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002
NOTE 19--SUBSEQUENT EVENTS (cont'd)
Acquisition of CHD Meridian (unaudited) (cont'd)
Pursuant to the merger agreement, the Company, on March 19, 2004, the effective
date of the merger, (1) issued 10,000,000 shares of common stock valued at
$49,600,000 utilizing $4.96 (the closing market price on effective date of the
merger) 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 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 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
preferred 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. The
credit facility 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 letters of credit, which currently amount to $3,250,000. The credit
facility is secured by substantially all of the Company's assets.
The acquisition, which is valued at $ 86,277,000 as of March 19, 2004, the date
of acquisition, is accounted for as a purchase. As such, the purchase price will
be allocated to the estimated fair values of the assets acquired and liabilities
assumed. The Company will be obtaining third-party valuations of certain
intangible assets.
The following unaudited pro forma results of operations of the Company give
effect to the acquisition of CHD Meridian as though the transaction had occurred
on January 1, 2002.
Year ended Year ended
December 31, December 31,
2003 2002
------------- -------------
Sales $ 121,966,000 $ 111,056,000
Expenses 128,632,000 121,622,000
------------- -------------
Net loss $ (6,666,000) $ (10,566,000)
============= =============
Less: Dividends applicable to
Preferred Stockholders $ -- $ 34,440,000
------------- -------------
Net loss applicable to common stock $ (6,666,000) $ (45,006,000)
============= =============
Loss per share
Basic and Diluted $ (.32) $ (2.36)
============= =============
Weighted average shares outstanding
Basic and Diluted 20,905,000 19,097,000
============= =============
62
I-TRAX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002
NOTE 19--SUBSEQUENT EVENTS (cont'd)
Repayments of related party loans and advances and promissory notes
In connection with obtaining a credit line facility for the funding of the CHD
Meridian merger, the Company was required to repay all related party loans and
advances and any other outstanding loans immediately prior to closing.
Accordingly, contemporaneously with the closing of the merger, the Company
repaid an aggregate of $1,233,932 of which $289,897 was for related party debts
and accrued interest and $944,035 was for principal and accrued interest
(through March 19, 2004) pursuant to various promissory notes.
Conversion of Debenture Payable
During the first quarter of 2004, Palladin converted the remaining balance of
the debenture payable. Accordingly, the Company issued 427,106 shares of common
stock.
Conversion of Note Payable
Effective March 19, 2004, the Company issued 70,533 shares of common stock in
connection with the conversion of a note payable, and interest accrued
thereunder, issued to a stockholder.
63
Consolidated Financial Statements
Meridian Occupational Healthcare Associates, Inc. and Subsidiaries
(d/b/a CHD Meridian Healthcare)
Years ended December 31, 2003, 2002 and 2001 with Report of Independent Auditors
64
Meridian Occupational Healthcare Associates, Inc.
and Subsidiaries (d/b/a CHD Meridian Healthcare)
Consolidated Financial Statements
Years ended December 31, 2003, 2002 and 2001
Contents
Report of Independent Registered Public Accounting Firm...................66
Consolidated Financial Statements
Consolidated Balance Sheets...............................................67
Consolidated Statements of Operations.....................................68
Consolidated Statements of Stockholders' Equity...........................69
Consolidated Statements of Cash Flows.....................................70
Notes to Consolidated Financial Statements................................71
65
Report of Independent Registered Public Accounting Firm
The Board of Directors
CHD Meridian Healthcare
We have audited the accompanying consolidated balance sheets of Meridian
Occupational Healthcare Associates, Inc. and subsidiaries (d/b/a CHD Meridian
Healthcare), a Delaware corporation, as of December 31, 2003 and 2002, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the three years in the period ended December 31, 2003. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Meridian
Occupational Healthcare Associates, Inc. and subsidiaries at December 31, 2003
and 2002, and the consolidated results of their operations and their cash flows
for each of the three years in the period ended December 31, 2003, in conformity
with U.S. generally accepted accounting principles.
As discussed in Note 2, effective January 1, 2002, the Company changed its
method of accounting for goodwill and other intangible assets.
As discussed in Note 4, effective January 1, 2001, the Company changed its
method of accounting for discontinued operations.
Ernst & Young, LLP
Nashville, Tennessee
February 24, 2004
66
Meridian Occupational Healthcare Associates, Inc.
and Subsidiaries (d/b/a CHD Meridian Healthcare)
Consolidated Balance Sheets
(in thousands, except share data)
December 31
2003 2002
` -----------------------------
Assets
Current assets:
Cash and cash equivalents $ 11,299 $ 7,621
Accounts receivable, less allowance for doubtful accounts
of $601 and $639, at December 31, 2003 and 2002, respectively 17,167 14,373
Income tax receivable 153 529
Other current assets 1,849 1,069
` -----------------------------
Total current assets 30,468 23,592
Property and equipment, net 2,880 3,063
Goodwill 8,181 8,181
Customer lists, net 7,101 7,645
Other intangible assets, net 70 --
Other long-term assets 36 36
` -----------------------------
Total assets $ 48,736 $ 42,517
=============================
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 5,955 $ 5,796
Accrued employee benefits 4,088 3,496
Deferred revenue 951 1,644
Net liabilities of discontinued operations 1,299 1,299
Other accrued liabilities 6,287 4,066
` -----------------------------
Total current liabilities 18,580 16,301
Other long-term liabilities 2,548 2,896
Stockholders' equity:
Preferred stock, no par value, authorized 153,500 shares, no shares
issued and outstanding at December 31, 2003 and 2002 -- --
Common stock, $0.001 par value; authorized 250,000 shares, 220,015 shares
issued and outstanding at December 31, 2003, and 208,415 shares issued
and outstanding at December 31, 2002 -- --
Additional paid-in capital 68,605 66,944
Notes due from stockholders (1,682) --
Accumulated deficit (39,315) (43,624)
` -----------------------------
Total stockholders' equity 27,608 23,320
` -----------------------------
Total liabilities and stockholders' equity $ 48,736 $ 42,517
=============================
See accompanying notes to consolidated financial statements.
67
Meridian Occupational Healthcare Associates, Inc.
and Subsidiaries (d/b/a CHD Meridian Healthcare)
Consolidated Statements of Operations
(in thousands)
Year ended December 31
2003 2002 2001
-----------------------------------------------------
Net revenues $ 117,777 $ 107,124 $ 100,411
Costs and expenses:
Operating expenses 96,750 88,858 82,950
General and administrative expenses 15,005 14,275 14,057
Depreciation and amortization 1,461 1,854 2,117
-----------------------------------------------------
Total costs and expenses 113,216 104,987 99,124
-----------------------------------------------------
Operating income 4,561 2,137 1,287
Other (income) expense:
Interest, net (87) (124) 255
-----------------------------------------------------
Total other (income) expense (87) (124) 255
-----------------------------------------------------
Income from continuing operations before income taxes 4,648 2,261 1,032
Provision for income taxes 339 337 139
-----------------------------------------------------
Income from continuing operations 4,309 1,924 893
Gain on discontinued operations, net of income taxes of $80 - - 527
Loss on disposal of discontinued operations, net of income
tax benefit of $506 - - (3,128)
-----------------------------------------------------
Net income (loss) $ 4,309 $ 1,924 $ (1,708)
=====================================================
See accompanying notes to consolidated financial statements.
68
Meridian Occupational Healthcare Associates, Inc.
and Subsidiaries (d/b/a CHD Meridian Healthcare)
Consolidated Statements of Stockholders' Equity
(in thousands, except share data)
Common Stock Preferred Stock Additional Total
---------------------- ---------------- Notes due from Paid-in Accumulated Stockholders'
Shares Amount Shares Amount Stockholders Capital Deficit Equity
----------- ---------- ------- -------- ---------------- ------------- ---------------- -------------
Balance at December 31, 2000 208,415 $ - - $ - $ - $ 66,944 $ (43,840) $ 23,104
Net loss - - - - - - (1,708) (1,708)
----------- ---------- ------- -------- ---------------- ------------- ---------------- -------------
Balance at December 31, 2001 208,415 - - - - 66,944 (45,548) 21,396
Net income - - - - - - 1,924 1,924
----------- ---------- ------- -------- ---------------- ------------- ---------------- -------------
Balance at December 31, 2002 208,415 - - - - 66,944 (43,624) 23,320
Repurchase of common stock (700) - - - - (111) - (111)
Exercise of stock options 12,300 - - - (1,682) 1,772 - 90
Net income - - - - - - 4,309 4,309
----------- ---------- ------- -------- ---------------- ------------- ---------------- -------------
Balance at December 31, 2003 220,015 $ - - $ - $ (1,682) $ 68,605 $ (39,315) $ 27,608
=========== ========== ======= ======== ================ ============= ================ =============
See accompanying notes to consolidated financial statements.
69
Meridian Occupational Healthcare Associates, Inc.
and Subsidiaries (d/b/a CHD Meridian Healthcare)
Consolidated Statements of Cash Flows
(in thousands, except share data)
Year ended December 31
2003 2002 2001
--------------------------------------------------
Operating activities
Net income from continuing operations $ 4,309 $ 1,924 $ 893
Adjustments to reconcile net income from continuing operations to
net cash provided by operating activities:
Depreciation and amortization 1,462 1,854 2,117
Loss on disposal of fixed assets - 72 -
Changes in operating assets and liabilities, net of effects of
acquisitions:
Accounts receivable (2,794) (778) 2,955
Other current assets (780) (585) (581)
Accounts payable 159 (17) (466)
Income taxes receivable (payable) 376 120 (270)
Deferred revenue (693) (800) 1,103
Other accruals and liabilities 2,813 1,195 1,377
Other long-term liabilities (348) 171 521
--------------------------------------------------
Net cash provided by operating activities 4,504 3,156 7,649
--------------------------------------------------
Investing activities
Purchase of property and equipment (735) (1,170) (1,266)
Proceeds from sale of fixed assets - 172 -
Increase in intangible assets (70) - -
Cash paid for acquisitions - - (43)
--------------------------------------------------
Net cash used in investing activities (805) (998) (1,309)
--------------------------------------------------
Financing activities
Payments under line of credit, net - - (6,030)
Payments on debt and capital lease obligations - - (22)
Issuance of common stock 90 - -
Repurchase of common stock (111) - -
--------------------------------------------------
Net cash used in financing activities (21) - (6,052)
--------------------------------------------------
Discontinued operations
Cash flows of discontinued operations - 2,308 959
--------------------------------------------------
Net cash provided by discontinued operations - 2,308 959
--------------------------------------------------
Net change in cash and cash equivalents 3,678 4,466 1,247
Cash and cash equivalents at beginning of year 7,621 3,155 1,908
--------------------------------------------------
Cash and cash equivalents at end of year $ 11,299 $ 7,621 $ 3,155
==================================================
Supplemental cash flow information:
Cash paid for interest $ - $ - $ 350
==================================================
Cash paid for income taxes $ 339 $ 217 $ 1,392
==================================================
See accompanying notes to consolidated financial statements.
70
Meridian Occupational Healthcare Associates, Inc.
and Subsidiaries (d/b/a CHD Meridian Healthcare)
Notes to Consolidated Financial Statements
December 31, 2003
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
71
Meridian Occupational Healthcare Associates, Inc.
and Subsidiaries (d/b/a CHD Meridian Healthcare)
Notes to Consolidated Financial Statements (continued)
1. Reporting Entity and Principles of Consolidation (continued)
Principles of Consolidation (continued)
nominee shareholder model and the management agreements between the entities.
The net tangible assets of the Physician Groups were not material at December
31, 2003 and 2002. All significant intercompany accounts and transactions have
been eliminated in consolidation.
2. Summary of Significant Accounting Policies
Revenue Recognition and Accounts Receivable
The Company generates revenue from contractual client obligations for
occupational health, primary care, pharmacy and corporate health services
rendered on either a fixed fee or a cost-plus arrangement. For fixed fee
contracts, revenues are recorded on a straight-line basis as services are
rendered. For cost-plus contracts, revenues are recorded as costs are incurred
with the management fee component recorded as earned based upon the method of
calculation stipulated in the client contracts.
Revenue is recorded at estimated net amounts to be received from employers for
services rendered. The allowance for doubtful accounts represents management's
estimate of potential credit issues associated with amounts due from employers.
The Company records pass-through pharmaceutical purchases on either a gross or a
net revenue basis dependent upon specific contractual language and obligations
in accordance with EITF 99-19, Reporting Revenue Gross as a Principal versus Net
as an Agent.
Cash received by the Company prior to the performance of services is reflected
as deferred revenue on the balance sheet.
Pharmaceutical Manufacturer Rebates
All rebates received by the Company from pharmaceutical manufacturers are passed
directly through to our clients. Rebates received from manufacturers but not yet
remitted to clients are reflected as liabilities on the balance sheet.
72
Meridian Occupational Healthcare Associates, Inc.
and Subsidiaries (d/b/a CHD Meridian Healthcare)
Notes to Consolidated Financial Statements (continued)
2. Summary of Significant Accounting Policies (continued)
Concentration of Credit Risks
The Company's credit risks primarily relate to cash and cash equivalents and
accounts receivable. Cash and cash equivalents are primarily held in bank
accounts, whose balances may exceed federally-insured limits from time-to-time.
Accounts receivable consist primarily of amounts due from corporate customers.
The Company continually reviews collectibility of its accounts receivable and
maintains allowances for doubtful accounts.
The Company had one customer in 2003, 2002 and 2001 that accounted for 11%, 11%
and 11% of total revenue, respectively.
Cash and Cash Equivalents
The Company considers highly liquid investments with original maturities of
three months or less to be cash equivalents.
Property and Equipment
Property and equipment are stated on the basis of cost. Depreciation and
amortization are provided on the straight-line method over the following
estimated useful lives:
Years
-----------------------------------
Furniture and equipment 5-7
Leasehold improvements Remaining life of the lease
Goodwill and Other Intangible Assets
Goodwill represents the excess of purchase price over fair value of net tangible
assets acquired. Through December 31, 2001, goodwill was amortized on a
straight-line basis over the expected periods to be benefited, generally forty
years. In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and
Other Intangible Assets" ("Statement 142"). Effective January 1, 2002, the
amortization of all goodwill was discontinued upon the adoption of Statement
142. This statement prohibits the amortization of goodwill and other indefinite
lived intangible assets over a set period, rather these assets must be tested
for impairment at least annually using a fair value method. The Company
performed a transitional goodwill impairment test, noting no impairment.
Impairment is measured at the reporting unit level using a discounted cash flows
model to determine the fair value of the reporting units.
73
Meridian Occupational Healthcare Associates, Inc.
and Subsidiaries (d/b/a CHD Meridian Healthcare)
Notes to Consolidated Financial Statements (continued)
2. Summary of Significant Accounting Policies (continued)
The Company will perform a goodwill impairment test whenever events or changes
in facts or circumstances indicate that impairment may exist, or at least
annually during the fourth quarter each year.
Other intangible assets represent customer lists, which are amortized on a
straight-line basis over the expected periods to be benefited, generally 16
years. The Company evaluates impairment of its customer lists through SFAS No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets"
("Statement 144"), as discussed below.
Long-Lived Assets
The Company adopted Statement 144 on September 1, 2001. Statement 144 supersedes
Statement 121 and addresses financial accounting and reporting for the
impairment of long-lived assets and for long-lived assets to be disposed of.
Management evaluates the carrying value of long-lived assets, including property
and equipment in accordance with Statement 144. Statement 144 requires that
companies consider whether events or changes in facts and circumstances, both
internally and externally, may indicate that an impairment of long-lived assets
held for use is present. If this review indicates that such long-lived assets
will not be recoverable based on undiscounted cash flows of the related assets,
the Company would record an impairment charge, representing the difference
between carrying value and fair value (generally determined based on discounted
cash flows). Other than as described in Note 4, management has determined that
there was no impairment of long-lived assets at December 31, 2003 and 2002.
Stock Option Plan
The Company, from time to time, grants stock options for a fixed number of
common shares to employees and directors. The Company applies the intrinsic
value method of accounting prescribed by Accounting Principles Board Opinion No.
25 ("APB 25") "Accounting for Stock Issued to Employees," and related
interpretations in accounting for its options. As such, compensation expense
would generally be recorded on the date of grant only if the then current market
price of the underlying stock exceeded the exercise price.
74
Meridian Occupational Healthcare Associates, Inc.
and Subsidiaries (d/b/a CHD Meridian Healthcare)
Notes to Consolidated Financial Statements (continued)
2. Summary of Significant Accounting Policies (continued)
Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements. Estimates also affect the reported amount of revenue and expenses
during the reporting period. Actual results could differ from those estimates.
Estimated Medical Professional Liability Claims
The Company is insured for medical professional liability claims on a
claims-made basis through commercial insurance policies. It is the Company's
policy that provision for estimated medical professional liability costs be made
for asserted and unasserted claims based on actuarially projected estimates,
based on historical loss payment patterns. Provision for such professional
liability claims includes estimates of the ultimate costs of such claims. The
Company evaluates the financial condition of its insurers and reinsurers and
monitors its credit risk related to insolvencies. At December 31, 2003, certain
of the Company's policy years were insured by two companies who are either
insolvent or under regulatory supervision. The Company's provision for losses
from professional liability claims assumes these policy years to be
self-insured. The Company's estimated liability for its self-insured retention
related to medical professional claims was $3,253,784 and $3,098,000 at December
31, 2003 and 2002, respectively.
75
Meridian Occupational Healthcare Associates, Inc.
and Subsidiaries (d/b/a CHD Meridian Healthcare)
Notes to Consolidated Financial Statements (continued)
2. Summary of Significant Accounting Policies (continued)
Disclosure About Fair Value of Financial Instruments
The fair value of the Company's cash and cash equivalents, accounts receivable,
other current assets, accounts payable, and accrued expenses approximate
carrying amounts because of the short maturity of those instruments.
The fair value of the Company's debt instruments is estimated based on the
current rates offered to the Company for similar instruments of the same
maturities and approximates the carrying amounts.
Reclassifications
Certain prior year balances have been reclassified to conform with the current
year presentation. Such reclassifications had no effect on the net results of
operations as previously reported.
Business Segment
The Company operates in a single reportable business segment.
Recently Issued Accounting Pronouncements
In January 2003, the Financial Accounting Standards Board ("FASB") issued
Interpretation No. 46, Consolidation of Variable Interest Entities ("FIN 46") to
expand upon and strengthen existing accounting guidance that addresses when a
company should include in its financial statements the assets, liabilities and
activities of another entity. Until now, a company generally has included
another entity in its consolidated financial statements only if it controlled
the entity through voting interests. FIN 46 changes that guidance by requiring a
variable interest entity, as defined, to be consolidated by a company if that
company is subject to a majority of the risk of loss from the variable interest
entity's activities, or is entitled to receive a majority of the entity's
residual returns, or both. FIN 46 also requires disclosure about variable
interest entities that the company is not required to consolidate but in which
it has a significant variable interest.
76
Meridian Occupational Healthcare Associates, Inc.
and Subsidiaries (d/b/a CHD Meridian Healthcare)
Notes to Consolidated Financial Statements (continued)
2. Summary of Significant Accounting Policies (continued)
On December 24, 2003, the FASB issued a revision of FIN 46 that replaced the
original interpretation and codified proposed modifications and other decisions
previously issued through certain FASB Staff Positions including the deferral of
the effective date of applying FIN 46 to certain variable interests. The revised
FIN 46 requires the Company to apply the provisions of FIN 46 immediately to any
special purpose entities and to any variable interest entities created after
January 31, 2003. Application of the provisions will be required for all other
variable interest entities in financial statements for periods ending after
March 15, 2004. The adoption of FIN 46 had no impact on the financial position
or operating results of the Company.
3. Business Combinations
On December 26, 2003, the Company signed a definitive merger agreement with
I-trax, Inc. (Amex: DMX), a Philadelphia, Pennsylvania, based health management
solutions company. The transaction is valued at approximately $80 million based
on the closing share price of I-trax common stock on Friday, December 26, 2003.
Under the terms of the agreement, I-trax will acquire all of the outstanding
shares of CHD Meridian in exchange for $35 million in cash, 10 million shares of
I-trax common stock and $10 million of I-trax Series A preferred stock. CHD
Meridian stockholders could receive an additional 4 million shares of I-trax
common stock ("earn out shares") depending upon the operating results of CHD
Meridian for calendar year 2004. Subsequent to closing, CHD Meridian will
operate as a wholly-owned subsidiary of I-trax. The transaction is expected to
close by April 30, 2004, but is subject to gaining stockholders' approval from
both companies, obtaining certain regulatory approvals and satisfying other
material conditions.
The merger will create a provider of integrated corporate healthcare management
solutions. The merged company will offer employers an opportunity not only to
manage the healthcare of employees who use on-site facilities, but also to
provide an integrated, comprehensive health management program for a customer's
entire employee base.
77
Meridian Occupational Healthcare Associates, Inc.
and Subsidiaries (d/b/a CHD Meridian Healthcare)
Notes to Consolidated Financial Statements (continued)
3. Business Combinations (continued)
The merged company will offer customers a single vendor for primary care,
pharmacy, occupational health, as well as disease management and health
interventions. These solutions help to increase productivity, reduce
absenteeism, and improve health status of both active employees and retirees and
reduce overall healthcare costs.
4. Discontinued Operations
During 2001, the Company was notified of the cancellation of two government
contracts, located in Fairfax, VA and Woodbridge, VA. The cancellation of these
contracts met the requisite requirements to be accounted for as discontinued
operations under Statement 144 because of the distinct financial information of
the component entities that was available and reviewed by management. In
accordance with Statement 144, the gain on discontinued operations of these two
contracts of $607,000 for the year ended December 31, 2001 was reclassified and
reflected separately in the accompanying Consolidated Statements of Operations.
In accordance with Statement 144, the Company recorded a loss on disposal of the
discontinued operations of $3,716,000 for the year ended December 31, 2001,
which consisted predominantly of the write-down of the equipment and intangible
assets. Any remaining gains or losses on the discontinued operations will be
recorded in the period incurred, in accordance with the requirements of
Statement 144. At December 31, 2003 and 2002, the net liabilities of
discontinued operations consisted of contract staffing accruals of $1,299,000.
The contract staffing accruals represent management's estimate of the Company's
obligations related to the government's right to audit the contract terms and
conditions.
The Company divested of its 11 freestanding occupational healthcare clinics
located in Northern California (California Operations) during 1998. The sale of
the California Operations was accounted for as discontinued operations in the
accompanying consolidated financial statements. During 2001, a final lease
expired, resulting in a gain on disposal of discontinued operations of $82,000.
There was no impact to the financial statements related to the California
Operations during 2003 or 2002.
78
Meridian Occupational Healthcare Associates, Inc.
and Subsidiaries (d/b/a CHD Meridian Healthcare)
Notes to Consolidated Financial Statements (continued)
5. Property and Equipment
Property and equipment consist of the following (in thousands):
December 31
2003 2002
--------------------------------------
Furniture and equipment $ 6,823 $ 6,089
Leasehold improvements 181 180
--------------------------------------
7,004 6,269
Less accumulated depreciation (4,124) (3,206)
--------------------------------------
$ 2,880 $ 3,063
======================================
Depreciation expense was $918,000, $1,105,000 and $1,083,000 for the years ended
December 31, 2003, 2002 and 2001, respectively.
6. Goodwill and Other Intangible Assets
In accordance with Statement 142, the Company discontinued the amortization of
goodwill effective January 1, 2002. A reconciliation of previously reported net
income (loss) to the pro forma amounts adjusted for the exclusion of goodwill
amortization net of the related income tax effect follows (in thousands):
Year ended December 31
2003 2002 2001
------------------ ---------------- ----------------
Reported net income (loss) $ 4,309 $ 1,924 $ (1,708)
Add: goodwill amortization - - 200
------------------ ---------------- ----------------
Pro forma adjusted net income (loss) $ 4,309 $ 1,924 $ (1,508)
================== ================ ================
79
Meridian Occupational Healthcare Associates, Inc.
and Subsidiaries (d/b/a CHD Meridian Healthcare)
Notes to Consolidated Financial Statements (continued)
6. Goodwill and Other Intangible Assets (continued)
The Company's separately identifiable intangible assets, which consists of
customer lists and non-compete agreements, are as follows (in thousands):
December 31
2003 2002
------------------ ----------------
Amortized intangible assets:
Carrying amount $ 10,761 $ 10,691
Accumulated amortization (3,590) (3,046)
------------------ ----------------
Net $ 7,171 $ 7,645
================== ================
Amortization expense for the year ended December 31, 2003 was $544,000.
Estimated amortization expense for each of the succeeding five fiscal years is
as follows:
Year ending December 31
2004 610,000
2005 610,000
2006 610,000
2007 610,000
2008 610,000
80
Meridian Occupational Healthcare Associates, Inc.
and Subsidiaries (d/b/a CHD Meridian Healthcare)
Notes to Consolidated Financial Statements (continued)
7. 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.
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 December 31, 2003 and 2002, the
Company had no debt outstanding on the term loan.
The credit facility includes certain financial covenants customary for the
amount and duration of this commitment. The Company was in compliance with all
such covenants at December 31, 2003.
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.
8. Income Taxes
Income tax expense is comprised of the following for the years ended December
31:
2003 2002 2001
--------------- ------------- ---------------
Current:
Federal $ 278 $ - $ (128)
State 339 337 267
Deferred- federal (278) - -
--------------- ------------- ---------------
Income tax expense $ 339 $ 337 $ 139
=============== ============= ===============
81
Meridian Occupational Healthcare Associates, Inc.
and Subsidiaries (d/b/a CHD Meridian Healthcare)
Notes to Consolidated Financial Statements (continued)
8. Income Taxes
During the year ended December 31, 2001 and all years prior to December 31,
2000, the Company generated net operating loss (NOL) carryforwards for federal
and state income tax purposes. The NOL carryforwards are applicable to both
discontinued and continuing operations. As a result of each period's loss and
existing NOL carryforwards, the Company recorded a provision for current federal
income tax during the year ended December 31, 2003 only. No provision for
current federal income taxes was recorded for 2002 or 2001. At December 31, 2003
and 2002, the Company has a cumulative NOL carryforward for federal income tax
purposes of $14.4 million and $18.2 million, respectively, which expires between
2011 and 2021. At December 31, 2003 and 2002, the Company has cumulative NOL
carryforwards for state income tax purposes of $29.7 million and $33.7 million,
respectively, which expire between 2006 and 2021. For financial reporting
purposes, a valuation allowance has been recorded against the deferred tax
assets related to these carryforwards.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the company's deferred tax assets and liabilities for continuing and
discontinued operations are as follows:
2003 2002
---------------- -----------------
Deferred tax assets:
Net operating loss carryforwards $ 6,563 $ 7,880
Allowance for doubtful accounts 234 249
Accrued expenses 1,913 1,712
Amortization 1,282 1,387
Other 450 331
---------------- -----------------
Total gross deferred tax assets 10,442 11,559
Less: Valuation allowance (9,548) (11,248)
---------------- -----------------
Total deferred tax assets 894 311
Deferred tax liability:
Depreciation (616) (311)
---------------- -----------------
Net deferred tax asset $ 278 $ -
================ =================
82
Meridian Occupational Healthcare Associates, Inc.
and Subsidiaries (d/b/a CHD Meridian Healthcare)
Notes to Consolidated Financial Statements (continued)
8. Income Taxes (continued)
The provision for income taxes for continuing operations for the years ended
December 31, 2003, 2002 and 2001 differs from the amount computed by applying
the statutory rate of 34% due to the following:
2003 2002 2001
------------ ----------- -----------
Tax at federal statutory rate $ 1,611 $ 769 $ 351
State income taxes 231 223 176
Nondeductible amortization 171 225 309
Other 26 23 129
Change in valuation allowance (1,700) (903) (826)
------------ ----------- -----------
Income tax provision $ 339 $ 337 $ 139
============ =========== ===========
During 2001, the valuation allowance changed by approximately $1.2 million for
the tax effect of discontinued operations.
9. 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 December 31, 2003, 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.
83
Meridian Occupational Healthcare Associates, Inc.
and Subsidiaries (d/b/a CHD Meridian Healthcare)
Notes to Consolidated Financial Statements (continued)
9. Stockholders' Equity (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 years ended December 31, 2003, 2002
and 2001, respectively.
84
Meridian Occupational Healthcare Associates, Inc.
and Subsidiaries (d/b/a CHD Meridian Healthcare)
Notes to Consolidated Financial Statements (continued)
9. Stockholders' Equity (continued)
Stock Option Plan (continued)
The following is a summary of option transactions during 2003, 2002, and 2001:
Number of Shares Weighted Average
Exercise Price
--------------------- -------------------
Outstanding at December 31, 2000 35,202 $ 111
Granted 2,890 143
Canceled (1,545) 139
Exercised - -
--------------------- -------------------
Outstanding at December 31, 2001 36,547 $ 113
Granted - -
Canceled (455) 141
Exercised - -
--------------------- -------------------
Outstanding at December 31, 2002 36,092 $ 112
Granted - -
Canceled (625) 143
Exercised (12,300) 137
--------------------- -------------------
Outstanding at December 31, 2003 23,167 $ 98
===================== ===================
Available for future grant 1,253
=====================
Exercisable at December 31, 2003 17,258 $ 97
===================== ===================
Exercisable at December 31, 2002 19,301 $ 110
===================== ===================
Exercisable at December 31, 2001 11,127 $ 108
===================== ===================
85
Meridian Occupational Healthcare Associates, Inc.
and Subsidiaries (d/b/a CHD Meridian Healthcare)
Notes to Consolidated Financial Statements (continued)
10. 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 $588,000, $498,000 and $565,000 for the
years ended December 31, 2003, 2002 and 2001, respectively.
11. Lease Obligations
The Company leases corporate office space, operating facilities, and equipment
under various operating lease agreements. Future minimum lease payments under
noncancelable operating leases as of December 31, 2003, are as follows (in
thousands):
Year ending December 31
2004 $ 1,294
2005 986
2006 927
2007 780
2008 651
Thereafter 574
----------------
$ 5,212
================
Rent expense on operating leases for the years ended December 31, 2003, 2002 and
2001 was $2,589,000, $2,753,000 and $3,117,000, respectively.
12. Related Party Transactions
In October of 2003, the Company made loans in the amount of $1.7 million to
three officers of the Company for the purpose of exercising 12,300 options to
purchase common stock. These recourse loans, which are due and payable at the
earlier of December 31, 2006 or the acquisition or merger of the Company, carry
an annual interest rate of 6%. The Company recorded approximately $90,000 of
compensation expense related to these transactions. These loans are reflected as
a deduction to stockholders' equity.
86
Meridian Occupational Healthcare Associates, Inc.
and Subsidiaries (d/b/a CHD Meridian Healthcare)
Notes to Consolidated Financial Statements (continued)
13. 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.
87
UNAUDITED COMBINED CONDENSED BALANCE SHEET OF I-TRAX AND CHD MERIDIAN
HEALTHCARE ON A PRO FORMA BASIS AS IF THE MERGER HAD BEEN CONSUMMATED ON
DECEMBER 31, 2003 AND THE UNAUDITED COMBINED CONDENSED STATEMENTS OF OPERATIONS
ON A PRO FORMA BASIS AS IF THE MERGER
HAD BEEN CONSUMMATED ON JANUARY 1, 2002
General
I-trax entered into a merger agreement, as amended, on December 26,
2003, with CHD Meridian Healthcare, a privately held company and a provider of
outsourced, employer-sponsored healthcare services. The merger was consummated
on March 19, 2004.
Pursuant to the merger agreement, I-trax delivered 10,000,000 shares of
common stock, 400,000 shares of Series A Convertible Preferred Stock, and paid
in cash, $25,508,000 to the CHD Meridian Healthcare stockholders. CHD Meridian
Healthcare stockholders will also receive additional shares of I-trax common
stock if CHD Meridian Healthcare's continuing operations following the closing
of the merger as a subsidiary of I-trax achieve calendar 2004 milestones for
earnings before interest, taxes, depreciation and amortization, or EBITDA as
follows: If EBITDA exceeds $8.1 million, the number of such additional shares
will be 3,473,280; the number of such shares increases proportionately up to a
maximum of 3,859,200 if EBITDA exceeds $9.0 million.
I-trax funded the cash portion of the merger consideration by selling
1,000,000 shares of Series A Convertible Preferred Stock at $25 per share, which
are convertible into 10 shares of common stock at a conversion price of $2.50
per share, for gross proceeds of $25 million, and obtaining a new $20 million
senior secured credit facility with a national lender. At closing date, I-trax
drew down $12 million under the facility to fund a portion of the purchase
price.
Pro Forma Condensed Combined Financial Statements
The following information has been provided to aid you in your analysis
of the financial aspects of the merger consummated on March 19, 2004. This
information was derived from the audited consolidated financial statements of
each of I-trax and CHD Meridian Healthcare for fiscal years ended 2003 and 2002.
The information should be read together with the historical financial statements
and related notes of I-trax and CHD Meridian Healthcare contained in this Annual
Report on Form 10-KSB.
The unaudited pro forma adjustments are based on management's
preliminary estimates of the value of the tangible and intangible assets and
liabilities acquired. As a result, the actual determination of the value of the
tangible and intangible assets and liabilities acquired may differ materially
from those presented in these unaudited pro forma condensed combined financial
statements. A change in the unaudited pro forma condensed combined balance sheet
adjustments of the purchase price for the acquisition would primarily result in
the reallocation affecting the value assigned to tangible and intangible assets.
The income statement effect of these changes will depend on the nature and the
amount of the assets or liabilities adjusted.
The unaudited pro forma condensed combined financial statements are
presented for informational purposes only and are not necessarily indicative of
the financial position or results of operations of I-trax that would have
occurred had the purchase been consummated as of the dates indicated below in
the section titled "Periods Covered." In addition, the unaudited pro forma
condensed combined financial statements are not necessarily indicative of the
future financial condition or operating results of I-trax.
Accounting Treatment
The merger is accounted for under the purchase method of accounting,
with I-trax treated as the acquirer. As a result, I-trax will record the assets
and liabilities of CHD Meridian Healthcare at their estimated fair values and
will record as goodwill the excess of the purchase price over such estimated
fair values. The unaudited pro forma condensed combined financial statements
reflect preliminary estimates of the allocation of the purchase price for the
acquisition that may be adjusted, including in connection with payment of any
earn-out shares. As agreed among
88
the parties, the operating results of CHD Meridian Healthcare will be combined
with the results of I-trax commencing on April 1, 2004.
Periods Covered
The following unaudited pro forma condensed combined balance sheet as
of December 31, 2003 is presented as if the merger had occurred on December 31,
2003. The unaudited pro forma condensed combined statements of operations for
the years ended December 31, 2003 and 2002 are presented as if the companies had
merged as of January 1, 2002.
PRO FORMA CONDENSED COMBINED BALANCE SHEET
DECEMBER 31, 2003 (UNAUDITED)
(In thousands, except per share price.)
Meridian Pro Forma
Occupational Consolidated
Healthcare I-trax, Inc.
I-trax, Inc. Associates, and
and Inc., and Pro Forma Subsidiaries
Subsidiaries Subsidiaries Adjustments (Unaudited)
December 31, December 31, Adj- (Unaudited) December 31,
2003 (a) 2003 (b) Ref. (c) 2003
--------------- ------------------------ --------------- ----------------
Current assets
Cash and cash equivalents $ 574 $ 11,299 A $ 37,000 $ 4,470
F (25,508)
F (1,169)
C (1,500)
E (9,492)
H (500)
I (5,000)
N (1,234)
Accounts receivable, net 549 17,167 17,716
Other current assets 188 2,002 2,190
--------------- ------------------ --------------- ----------------
Total current assets 1,311 30,468 (7,403) 24,376
--------------- ------------------ --------------- ----------------
Investments in CHD Meridian -- -- F 86,277 --
G (86,277)
Property, equipment and
furniture, net 1,515 2,880 4,395
Deferred marketing costs,
net 831 -- 831
Deposit on intellectual
license 160 -- 160
Deferred acquisition costs 85 -- 85
Debt issuance costs 35 -- 35
Goodwill 8,424 8,181 G 57,063 73,668
Customer lists\relations,
net 768 7,101 G 22,235 30,104
Non-compete agreements, net 449 449
Other intangibles, net -- 70 G 1,030 1,100
Other long term assets 25 36 61
--------------- ------------------ --------------- ----------------
Total assets $ 13,603 $ 48,736 $ 72,925 $ 135,264
=============== ================== =============== ================
(Continues on following page.)
89
(Continues from previous page.)
Meridian Pro Forma
Occupational Consolidated
Healthcare I-trax, Inc.
I-trax, Inc. Associates, and
and Inc., and Pro Forma Subsidiaries
Subsidiaries Subsidiaries Adjustments (Unaudited)
December 31, December 31, Adj. (Unaudited) December 31,
2003 (a) 2003 (b) Ref. (c) 2003
--------------- ------------------ --------------- ----------------
Current liabilities
Accounts payable 606 5,955 6,561
Accrued expenses 361 4,088 N (156) 4,293
Due to related parties 280 -- N (280) --
Deferred revenue 240 951 1,191
Other current liabilities 115 7,586 7,701
--------------- ------------------ --------------- ----------------
Total current liabilities 1,602 18,580 (436) 19,746
--------------- ------------------ --------------- ----------------
Common Stock Warrants 2,760 -- L 350 --
M (3,110)
Credit lines payable, long
term -- -- A 12,000 12,000
Promissory notes and
debenture payable, net of
discount 798 -- N (798) --
Other long term liabilities 58 2,548 2,606
--------------- ------------------ --------------- ----------------
Total liabilities 5,218 21,128 8,006 34,352
--------------- ------------------ --------------- ----------------
Preferred stock -- -- A 25,000 30,000
F 10,000
I (5,000)
Common stock and additional
paid -in-capital 47,290 66,923 F 49,600 135,217
C (1,500)
E (9,492)
B 24,600
D 2,125
D (2,125)
G (45,264)
L (350)
H 300
M 3,110
Accumulated deficit and other (38,905) (39,315) G 39,315 (64,305)
B (24,600)
H (800)
--------------- ------------------ --------------- ----------------
Total stockholders' equity 8,385 27,608 64,919 100,912
--------------- ------------------ --------------- ----------------
Total liabilities and
stockholder's equity $ 13,603 $ 48,736 $ 72,925 $ 135,264
=============== ================== =============== ================
(Continues on following page.)
90
(Continues from previous page.)
(a) Represents historical balance sheet of I-trax, Inc and subsidiaries as
of December 31, 2003 derived from the audited consolidated financial
statements included in this Annual Report on Form 10-KSB.
(b) Represents historical balance sheet of Meridian Occupational
Healthcare Associates, Inc. and subsidiaries as of December 31, 2003
derived from the audited consolidated financial statements included in
this Annual Report on Form 10-KSB.
(c) The pro forma adjustments give effect to the financings of the
acquisition and the acquisition of CHD Meridian Healthcare as if it
were consummated as of December 31, 2003.
See accompanying notes to unaudited pro forma condensed combined financial
information.
91
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2003
(UNAUDITED)
(In thousands, except per share price.)
Meridian Pro Forma
Occupational consolidated
I-trax, Inc. and Healthcare I-trax, Inc. and
Subsidiaries for Associates, Inc. and Subsidiaries for
the year ended Subsidiaries for the Pro Forma the year ended
December 31, 2003 year ended December Adj. adjustments December 31, 2003
(a) 31, 2003 (b) Ref. (Unaudited) (c) (Unaudited)
--------------------- ---------------------- --------------------------- ------------------
Revenue $ 4,189 $ 117,777 $ 121,966
--------------------- ---------------------- --------------------
Cost and expenses:
Cost of revenue/operating expenses 1,372 96,750 98,122
General and administrative 4,210 15,005 19,215
Depreciation and amortization 1,702 1,461 J 1,846 5,009
Impairment charge related to
intangible assets 458 458
Marketing and publicity 1,763 -- 1,763
--------------------- ---------------------- ------------------- --------------------
Total costs and expenses 9,505 113,216 1,846 124,567
--------------------- ---------------------- ------------------- --------------------
Operating (loss) income (5,316) 4,561 (1,846) (2,601)
--------------------- ---------------------- ------------------- --------------------
Other income (expenses):
Proceeds from life insurance policy 500 -- 500
Costs in connection with terminated
acquisition (200) -- (200)
Amortization of debt issuance and
conversion costs (337) -- (337)
Increase in common stock warrants (301) -- L (350) (651)
Interest (expense) income and
financing costs (2,405) 87 K (720) (3,038)
--------------------- ---------------------- ------------------- --------------------
Total other expenses (2,743) 87 (1,070) (3,726)
--------------------- ---------------------- ------------------- --------------------
Net income (loss) before provision for
income taxes (8,059) 4,648 (2,916) (6,327)
--------------------- ---------------------- ------------------- --------------------
Provision for income taxes -- 339 -- 339
--------------------- ---------------------- ------------------- --------------------
Net income (loss) $ (8,059) $ 4,309 $ (2,916) $ (6,666)
===================== ====================== =================== ====================
Loss per common share:
Basic and diluted $ (0.74) $ (0.32)
===================== ====================
Weighted average number of shares
outstanding: 10,905 F 10,000 20,905
===================== =================== ====================
(Continues on following page.)
92
(Continues from previous page.)
(a) Represents historical statement of operations of I-trax and
subsidiaries for the year ended December 31, 2003 derived from the
audited financial statements included in this Annual Report on Form
10-KSB.
(b) Represents historical statement of operations for CHD Meridian
Healthcare and subsidiaries for the year ended December 31, 2003
derived from the audited financial statements included in this Annual
Report on Form 10-KSB.
(c) The pro forma adjustments give effect to the financings of the
acquisition and the acquisition of CHD Meridian Healthcare as if it
were consummated on January 1, 2002.
See accompanying notes to unaudited pro forma condensed combined financial
information.
93
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2002
(UNAUDITED)
(In thousands, except per share price.)
Meridian
Occupational Pro Forma
I-trax, Inc. and Healthcare consolidated
Subsidiaries for Associates, Inc. and I-trax, Inc. and
the year ended Subsidiaries for the Pro Forma Subsidiaries for
December 31, year ended December Adj. adjustments the year ended
2002 (a) 31, 2002 (b) Ref. (Unaudited) (c) December 31, 2002
------------------ ---------------------- ------- ---------------- --------------------
Revenue $ 3,932 $ 107,124 $ 111,056
------------------ ---------------------- --------------------
Cost and expenses:
Cost of revenue/operating expenses 1,229 88,858 90,087
General and administrative 5,955 14,275 H 500 20,730
Depreciation and amortization 2,045 1,854 J 1,846 5,745
Marketing and publicity 774 -- 774
Research & Development 410 -- 410
Impairment charges related to
intangible assets 1,648 -- 1,648
------------------ ---------------------- ---------------- --------------------
Total costs and expenses 12,061 104,987 2,346 119,394
------------------ ---------------------- ---------------- --------------------
Operating (loss) income (8,129) 2,137 (2,346) (8,338)
------------------ ---------------------- ---------------- --------------------
Other income (expenses):
Amortization of debt issuance and
conversion costs (187) -- (187)
Interest (expense) income and
financing costs (1,108) 124 K (720) (1,704)
------------------ ---------------------- ---------------- --------------------
Total other expenses (1,295) 124 (720) (1,891)
------------------ ---------------------- ---------------- --------------------
Net income(loss) before provision for
income taxes (9,424) 2,261 (3,066) (10,229)
------------------ ---------------------- ---------------- --------------------
Provision for income taxes -- 337 337
------------------ ---------------------- ---------------- --------------------
Net Income (loss) (9,424) 1,924 (3,066) (10,566)
Less: dividends applicable to preferred
stockholders -- -- B, F 34,440 34,440
------------------ ---------------------- ---------------- --------------------
Net income (loss) applicable to common
stock $ (9,424) $ 1,924 $ (37,506) $ (45,006)
================== ====================== ================ ====================
Loss per common share:
Basic and diluted $ (1.04) $ (2.36)
================== ====================
Weighted average number of shares
outstanding: 9,097 F 10,000 19,097
================== ================ ====================
(Continues on following page.)
94
(Continues from previous page.)
(a) Represents historical statement of operations of I-trax and
subsidiaries for the year ended December 31, 2002 derived from the
audited financial statements included in this Annual Report on Form
10-KSB.
(b) Represents historical statement of operations for CHD Meridian
Healthcare and subsidiaries for the year ended December 31, 2002
derived from the audited financial statements included in this Annual
Report on Form 10-KSB.
(c) The pro forma adjustments give effect to the financings of the
acquisition and the acquisition of CHD Meridian Healthcare as if it
were consummated on January 1, 2002.
See accompanying notes to unaudited pro forma condensed combined financial
information.
95
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
The pro forma adjustments to the condensed combined balance sheet below
give effect to the financing of the CHD Meridian Healthcare acquisition and the
acquisition of CHD Meridian Healthcare as if they were both consummated as of
December 31, 2003. The pro forma adjustments to the condensed combined
statements of operations below give effect to the financing of the CHD Meridian
Healthcare acquisition and the acquisition of CHD Meridian Healthcare as if they
were both consummated as of January 1, 2002.
A. To give effect to the receipt of $37,000 of cash comprised of a $12,000
draw down under a senior credit facility and $25,000 from the issuance
of 1,000,000 shares of I-trax's Series A Convertible Preferred Stock at
$25 per share. Each share of Series A Convertible Preferred Stock is
convertible into 10 shares of I-trax common stock at $2.50 per share.
B. In connection with the issuance of Series A Convertible Preferred
Stock, I-trax reported $24,600 as a deemed dividend to preferred
stockholders, representing the value of 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 for purpose of computing earnings per share. The dividend is
computed by multiplying the difference between the market value of the
underlying common stock at closing of the merger ($4.96 per share), and
the conversion price ($2.50 per share) by the number of shares of
common stock for which the preferred is convertible into (10,000,000
shares).
C. To give effect to the placement agent commission fees associated with
the sale of $25,000 of Series A Convertible Preferred Stock computed at
6% of the gross proceeds or $1,500 in cash.
D. To give effect to the additional placement agent commission fees
associated with the sale of $25,000 of Series A Convertible Preferred
Stock. The consideration consists of warrants to purchase 500,000
shares of common stock at $2.50 per share. Based on the Black-Scholes
model, I-trax has valued such warrants at $2,125.
E. To give effect to CHD Meridian Healthcare's redeeming approximately
$9,492 of common stock and options from its current stockholders and
option holders.
F. To give effect to the acquisition of CHD Meridian Healthcare estimated
at $86,277 as of March 19, 2004. The pro forma adjustment gives effect
to the following items: (1) disbursement of the cash portion of the
acquisition in the amount of $25,508, as adjusted for the redemption of
CHD Meridian Healthcare common stock and options, and for a minimum
cash balance requirement as per the merger agreement; (2) estimated
disbursements in connection with the costs of the transaction amounting
to $1,169; (3) issuance of 10,000,000 shares of I-trax common stock
valued at $4.96 per share, or $49,600; (4) issuance of 400,000 shares
of convertible preferred stock at $25 per share or $10,000, convertible
into 4,000,000 shares of I-trax common stock. In connection with the
issuance of the 400,000 shares of Series A Convertible Preferred Stock,
I-trax reported $9,840 as a deemed dividend to the 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 for
purpose of computing earnings per share. The dividend is computed by
multiplying the difference between the market value of the underlying
common stock at closing of the merger ($4.96 per share), and the
conversion price ($2.50 per share) by the number of shares of common
stock for which the preferred is convertible into (4,000,000 shares).
G. To give effect to the consolidation and the elimination of CHD Meridian
Healthcare's equity and preliminarily to allocate the purchase price
over the estimated fair values of the assets and liabilities acquired
with the excess assigned to goodwill.
H. To give effect to a $500 cash bonus pool approved by the compensation
committee of the board of directors of I-trax for employees assisting
with the merger.
96
I. To give effect to the redemption of 200,000 shares of Series A
Convertible Preferred Stock following the merger from certain CHD
Meridian Healthcare stockholders.
J. To give effect to the amortization expense for the respective periods
utilizing an estimated amortizable life of fourteen years as it relates
to customer lists/relations acquired and four years as it relates to
other intangible.
K. To give effect to the interest expense associated with the draw down of
$12,000 under the credit facility, which has been utilized to fund a
portion of the acquisition price as discussed in Note A above.
L. To give effect to the increase in common stock warrants from January 1,
2003 to February 17, 2004 (the effective date of the registration
statement) as required by EITF 00-19.
M. To give effect to the reclassification of the common stock warrant
liability into equity on February 14, 2004.
N. To give effect to the repayments of obligations subsequent to the year
end and as part of the merger transaction.
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ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There are no changes and disagreements with accountants on accounting
or financial disclosure.
ITEM 8A. CONTROLS AND PROCEDURES
Our management, under the supervision and with the participation of the
principal executive officer and principal financial officer, have evaluated the
effectiveness of our controls and procedures related to our reporting and
disclosure obligations as of December 31, 2003, which is the end of the period
covered by this Annual Report on Form 10-KSB. Based on that evaluation, the
principal executive officer and principal financial officer have concluded that
our disclosure controls and procedures are sufficient to provide that (a)
material information relating to us, including our consolidated subsidiaries, is
made known to these officers by our and our consolidated subsidiaries other
employees, particularly material information related to the period for which
this periodic report is being prepared; and (b) this information is recorded,
processed, summarized, evaluated and reported, as applicable, within the time
periods specified in the rules and forms promulgated by the Securities and
Exchange Commission.
There were no changes that occurred during the fiscal quarter ended
December 31, 2003 that have materially affected, or are reasonable likely to
materially affect, our internal controls over financial reporting.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16 (a) OF THE EXCHANGE ACT
See the information set forth in the section entitled "Proposal No. 1
Election of Directors" in I-trax's Proxy Statement for the 2004 Annual Meeting
of Stockholders to be filed with the Securities and Exchange Commission within
120 days after the end of our fiscal year ended December 31, 2003, or 2004 Proxy
Statement, which is incorporated herein by reference.
ITEM 10. EXECUTIVE COMPENSATION
See the information set forth in the section entitled "Executive
Compensation" in the 2004 Proxy Statement, which is incorporated herein by
reference.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
See the information set forth in the section entitled "Security
Ownership of Certain Beneficial Owners and Management And Related Stockholder
Matters" in the 2004 Proxy Statement, which is incorporated herein by reference.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
See the information set forth in the section entitled "Certain
Relationships and Related Transactions" in the 2004 Proxy Statement, which is
incorporated herein by reference.
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ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
NUMBER EXHIBIT TITLE
------- -------------
2.1 Merger Agreement, dated as of December 26, 2003, by and among
I-trax, Inc. Meridian Occupational Healthcare Associates,
Inc., doing business as CHD Meridian Healthcare, DCG
Acquisition, Inc., and CHD Meridian Healthcare, LLC.
(Incorporated by reference to I-trax's current report on Form
8-K, filed December 29, 2003.)
2.2 Amendment to Merger Agreement, dated February 4, 2004, by and
among I-trax, Inc. Meridian Occupational Healthcare
Associates, Inc., doing business as CHD Meridian Healthcare,
DCG Acquisition, Inc., and CHD Meridian Healthcare, LLC.
(Incorporated by reference to Appendix A to I-trax's Proxy
Statement dated February 6, 2004 filed pursuant to Section
14(a) of the Securities Exchange Act, as amended).
3.1 Certificate of Incorporation of I-trax, Inc. filed September
15, 2000 (Incorporated by reference to Exhibit 3.1 to I-trax,
Inc.'s Registration Statement on Form S-4, Registration No.
333-48862, filed on October 27, 2000.)
3.2 Certificate of Amendment to Certificate of Incorporation of
I-trax, Inc. filed June 4, 2001. (Incorporated by reference to
Exhibit 3.2 to I-trax, Inc.'s Annual Report on Form 10-KSB for
the fiscal year ended December 31, 2001, filed on April 4,
2002.)
3.3 Certificate of Amendment to Certificate of Incorporation of
I-trax, Inc. filed on January 2, 2003. (Incorporated by
reference to Exhibit 3.3 to I-trax, Inc.'s Annual Report on
Form 10-KSB for the fiscal year ended December 31, 2002, filed
on April 15, 2003.)
3.4 By-laws of I-trax, Inc. (Incorporated by reference to Exhibit
3.2 to I-trax, Inc.'s Registration Statement on Form S-4,
Amendment No.1, Registration No. 333-48862, filed on December
22, 2000.)
4.1 Form of Common Stock certificate of I-trax, Inc.'s Common
Stock. (Incorporated by reference to Exhibit 4.1 to I-trax,
Inc.'s Annual Report on Form 10-KSB for the fiscal year ended
December 31, 2001, filed on April 4, 2002.)
4.2* Certificate of Designations, Preferences and Rights of the
Series A Convertible Preferred Stock of I-trax, Inc. filed on
March 19, 2004.
4.3 Form of warrant certificate of I-trax, Inc. issued to private
placement participants in private placement closed on October
31, 2003. (Incorporated by reference to Exhibit 4.1 to I-trax,
Inc.'s Registration Statement on Form S-3, Registration No.
333-110891, filed on December 3, 2003.)
4.4 Financial Advisor's Warrant Agreement between Westminster
Securities Corporation and I-trax, Inc. dated as of May 23,
2003, with a form of warrant attached. (Incorporated by
reference to Exhibit 4.2 to I-trax, Inc.'s Registration
Statement on Form S-3, Registration No. 333-110891, filed on
December 3, 2003.)
4.5 Financial Advisor's Warrant Agreement between Westminster
Securities Corporation and I-trax, Inc. dated as of October
31, 2003, with a form of warrant attached. (Incorporated by
reference to Exhibit 4.3 to I-trax, Inc.'s Registration
Statement on Form S-3, Registration No. 333-110891, filed on
December 3, 2003.)
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4.6 Financial Advisor's Warrant Agreement between Westminster
Securities Corporation and I-trax, Inc. dated as of December
11, 2003, with a form of warrant attached. (Incorporated by
reference to Exhibit 4.4 to I-trax, Inc.'s Registration
Statement on Form S-3, Amendment No. 1, Registration No.
333-110891, filed on February 2, 2003.)
4.7* Form of warrant certificate of I-trax, Inc. issued as of March
19, 2004 to placement agents of Series A Convertible Preferred
Stock.
10.1 Lease Agreement dated April 10, 2000 between I-Trax.com, Inc.
and OLS Office Partners, L.P. (Incorporated by reference to
Exhibit 10.1 to I-Trax.com, Inc.'s Quarterly Report Form
10-QSB for the quarter ended June 30, 2000, filed on August
15, 2000.)
10.2 Lease Agreement dated May 28, 2002, between I-trax, Inc. and F
& J Enterprises, Inc. dba Bedford Plaza. (Incorporated by
reference to Exhibit 10.23 to I-trax, Inc.'s Registration
Statement on Form SB-2, Amendment No. 1, Registration No.
333-87134, filed on July 10, 2002.)
10.3 Employment Agreement effective as of December 29, 2000 between
I-trax Health Management Solutions, Inc. (f/k/a I-Trax.com,
Inc.) and Frank A. Martin. (Incorporated by reference to
Exhibit 10.17 to I-trax Health Management Solutions, Inc.
(f/k/a I-Trax.com, Inc.) Annual Report on Form 10-KSB for the
fiscal year ended December 31, 2000, filed on April 2, 2001.)
10.4 Employment Agreement effective as of December 29, 2000 between
I-trax Health Management Solutions, Inc. (f/k/a I-Trax.com,
Inc.) and Gary Reiss. (Incorporated by reference to Exhibit
10.19 to I-trax Health Management Solutions, Inc. (f/k/a
I-Trax.com, Inc.) Annual Report on Form 10-KSB for the fiscal
year ended December 31, 2001, filed on April 2, 2001.)
10.5 I-Trax.com, Inc. 2000 Equity Compensation Plan. (Incorporated
by reference to Exhibit 10.16 to I-Trax.com's Registration
Statement on Form 10-SB, Registration No. 000-30275.)
10.6 I-trax, Inc. 2001 Equity Compensation Plan. (Incorporated by
reference to Attachment to I-trax's 2001 Preliminary Proxy
Statement on Schedule 14A, filed on April 20, 2001.)
10.7 License and Maintenance Agreement dated as of September 30,
2002, between I-trax, Inc. and UICI, Inc. (Incorporated by
reference to Exhibit 10.1 to I-trax, Inc.'s Current Report on
Form 8-k for filed on October 8, 2002.)
10.8 Employment Agreement dated as of October 15, 2002 between
I-trax Health Management Solutions, Inc. and John Palumbo.
(Incorporated by reference to Exhibit 10.24 to I-trax, Inc.'s
Annual Report on Form 10-KSB for the fiscal year ended
December 31, 2002, filed on April 15, 2003.)
10.9* Employment Agreement dated as of January 1, 2000 between
Meridian Occupational Healthcare Associates, Inc. and Shannon
Wolcott Farrington.
10.10* Employment Agreement dated as of January 1, 2000 between
Meridian Occupational Healthcare Associates, Inc. and Haywood
D. Cochrane, Jr.
10.11* Credit Agreement dated as of March 19, 2004 by and among
I-trax, Inc., all subsidiaries of the Borrower now or
hereafter becoming parties to the Credit Agreement, and Bank
of America, N.A.
100
10.12** License And Services Agreement effective as of March 5th, 2004
among I-trax Health Management Solutions, Inc., Meridian
Occupational Healthcare Associates, Inc. (d/b/a CHD Meridian
Healthcare) and BioSignia, Inc.
21* Subsidiaries of I-trax, Inc.
23.1** Consent of Goldstein Golub Kessler LLP.
23.2** Consent of Ernst & Young LLP.
31.1** Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2** Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1** Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2** Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
---------------------------------
* Previously filed.
** Filed herewith.
(b) Reports on Form 8-K
We filed a current report on Form 8-K with the Securities and Exchange
Commission on October 17, 2003 to report the closing of a private placement of
common stock and warrants.
We furnished a current report on Form 8-K to the Securities and
Exchange Commission on November 17, 2003 to report results of operations and
financial condition.
We filed a current report on Form 8-K with the Securities and Exchange
Commission on December 29, 2003 to report the signing of the merger agreement
with CHD Meridian Healthcare.
We furnished a current report on Form 8-K with the Securities and
Exchange Commission on December 30, 2003 to report certain Regulation FD
disclosures.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
See the information set forth in the section entitled "Principal
Accounting Fees and Services" in the 2004 Proxy Statement, which is incorporated
herein by reference.
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SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act
of 1934, the registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized as of June 2, 2004.
I-TRAX, INC.
By: /s/ Frank A. Martin
-----------------------------------------
Frank A. Martin, Chairman and
Chief Executive Officer
102