UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): February 2, 2004
----------------
I-TRAX, INC.
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(Exact name of registrant as specified in its charter)
Delaware 0-30275 23-3057155
------------------------ ------------- ----------------------
(State or other jurisdiction of (Commission (IRS Employer
incorporation) File Number) Identification No.)
One Logan Square
130 N. 18th St., Suite 2615
Philadelphia, PA 19103
------------------------------------------- ----------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (215) 557-7488
N/A
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(Former name or former address, if changed since last report)
Item 5. Other Events.
On December 26, 2003, I-trax, Inc., a Delaware corporation ("I-trax"),
DCG Acquisition, Inc., a Delaware corporation and a wholly owned subsidiary of
I-trax, CHD Meridian Healthcare, LLC, a Delaware limited liability company of
which I-trax is the sole member, and Meridian Occupational Healthcare
Associates, Inc. (d/b/a CHD Meridian Healthcare), a Delaware corporation ("CHD
Meridian") entered into a merger agreement.
The merger agreement provides for delivery to the CHD Meridian
stockholders of 10,000,000 shares of I-trax common stock, 400,000 shares of
I-trax convertible preferred stock and cash. CHD Meridian stockholders will also
receive additional shares of I-trax common stock if CHD Meridian, continuing its
operations following the closing of the merger as a subsidiary of I-trax,
achieves certain calendar 2004 milestones for earnings before interest, taxes,
depreciation and amortization (or EBITDA). If EBITDA equals or exceeds $8.1
million, the number of such additional I-trax common shares payable will be
3,600,000; the number of such shares increases proportionately up to a maximum
of 4,000,000 such additional I-trax common shares if EBITDA equals or exceeds
$9.0 million.
The amount of cash payable as part of the merger consideration will be
$35 million less (1) the amount, if any, by which CHD Meridian's cash at closing
is less than $13.3 million and (2) the amount CHD Meridian spends to redeem any
of its outstanding common stock or options to acquire common stock, which may
equal up to $11 million.
I-trax expects to fund the cash portion of the merger consideration by
selling additional shares of convertible preferred stock yielding proceeds to
I-trax of $15 to $25 million and obtaining a senior credit facility with a
national lender, which allows a closing date draw of least $16 million.
The convertible preferred stock will accrue dividends at the rate of
8% per year. Dividends will be payable in I-trax common stock or cash, at the
election of I-trax, when the convertible preferred stock is converted into
I-trax common stock. The convertible preferred stock is convertible into I-trax
common stock at a conversion price of $2.50 per share. Holders of convertible
preferred stock may convert such shares into I-trax common stock at any time. In
addition, shares of convertible preferred stock will convert into I-trax common
stock automatically if (1) shares of I-trax common stock issuable upon
conversion are registered for resale under the Securities Act of 1933, (2) the
closing price of I-trax common stock is at least $7.50 per share for 20 of 30
consecutive trading days, (3) there is an effective registration statement and
prospectus permitting resale of conversion shares during the 30 consecutive
trading days, (4) the conversion shares are listed or admitted for trading on
The Nasdaq National Market, The American Stock Exchange or the New York Stock
Exchange and (5) I-trax otherwise honors all conversions. Notwithstanding the
preceding, convertible preferred stock will not automatically convert into
I-trax common stock with respect to a holder if conversion will result in such
holder owning more than 4.9% of the outstanding I-trax common stock. Rather,
such holder will have 90 days to reduce such holder's potential ownership to
below 4.9%. The convertible preferred stock has a liquidation preference of $25
per share (the original purchase price), plus accrued dividends payable in the
event of liquidation, dissolution or winding up of I-trax or in certain
corporate transactions that would constitute a change of control of I-trax.
With regard to the senior credit facility, I-trax and CHD Meridian
have received a loan commitment, subject to customary conditions for a facility
from a national lender. The facility will permit the companies to borrow $16
million towards the cash portion of the merger consideration.
I-trax and CHD Meridian expect that the closing of the merger
completed by the merger agreement will occur on or before April 30, 2004,
subject to stockholder approval and other customary conditions. I-trax is filing
this Current Report on Form 8-K to disclose the following:
o The unaudited financial statements of CHD Meridian and its
Subsidiaries as of September 30, 2003 and December 31, 2002
and for the nine months ended September 30, 2003 and 2002.
o The audited financial statements of CHD Meridian and its
Subsidiaries as of and for the years ended December 31,
2002, 2001 and 2000.
-2-
o The unaudited pro forma condensed combined balance sheet at
September 30, 2003 and pro forma condensed combined
statements of operations for the nine months ended September
30, 2003 and for the year ended December 31, 2002 of I-trax
and its Subsidiaries and CHD Meridian and its Subsidiaries.
The unaudited pro forma condensed combined balance sheet
gives effect to the proposed merger as of September 30, 2003
and the pro forma condensed combined statements of
operations give effect to the proposed merger if it was
consummated as of January 1, 2002.
o Certain risk factors relating to CHD Meridian and the
proposed transaction.
-3-
FINANCIAL STATEMENTS
CONSOLIDATED FINANCIAL STATEMENTS
Meridian Occupational Healthcare Associates, Inc. and Subsidiaries
(d/b/a CHD Meridian Healthcare)
Nine Months ended September 30, 2003 and 2002 (unaudited)
-4-
Meridian Occupational Healthcare Associates, Inc.
and Subsidiaries (d/b/a CHD Meridian Healthcare)
Consolidated Financial Statements
(Unaudited)
Nine Months ended September 30, 2003 and 2002
Contents
Consolidated Financial Statements
Consolidated Balance Sheet.....................................................6
Consolidated Statement of Operations...........................................7
Consolidated Statement of Stockholders' Equity.................................8
Consolidated Statement of Cash Flows...........................................9
Notes to Consolidated Financial Statements....................................10
-5-
Meridian Occupational Healthcare Associates, Inc.
and Subsidiaries (d/b/a CHD Meridian Healthcare)
Consolidated Balance Sheet
(Unaudited)
(in thousands, except per share data)
As of As of
September 30, December 31,
2003 2002
---------------------------------------------
Assets
Current assets:
Cash and cash equivalents $ 12,157 $ 7,621
Accounts receivable, less allowance for doubtful accounts of
$624 and $639 at September 30, 2003 and December 31, 2002,
respectively 14,537 14,373
Other current assets 1,668 1,598
---------------------------------------------
Total current assets 28,362 23,592
Property and equipment, net 2,840 3,063
Goodwill 8,181 8,181
Customer lists, net 7,201 7,645
Other intangibles, net 2 --
Other long-term assets 36 36
---------------------------------------------
Total assets $ 46,622 $ 42,517
=============================================
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 4,812 $ 5,796
Accrued employee benefits 3,745 3,496
Deferred revenue 2,311 1,644
Net liabilities of discontinued operations 1,299 1,299
Other accrued liabilities 5,779 4,066
---------------------------------------------
Total current liabilities 17,946 16,301
Other long-term liabilities 2,548 2,896
Stockholders' equity:
Common stock, $0.001 par value; authorized
250,000 shares, 207,715 and 208,415 shares
issued and outstanding at September 30, 2003
and December 31, 2002, respectively - -
Additional paid-in capital 66,844 66,44
Accumulated deficit (40,716) (43,624)
---------------------------------------------
Total stockholders' equity 26,128 23,320
---------------------------------------------
Total liabilities and stockholders' equity $ 46,622 $ 42,517
=============================================
See accompanying notes to consolidated financial statements (unaudited).
-6-
Meridian Occupational Healthcare Associates, Inc.
and Subsidiaries (d/b/a CHD Meridian Healthcare)
Consolidated Statements of Operations
(Unaudited)
(in thousands)
For the Nine Months For the Nine Months
Ended September 30, Ended September 30,
2003 2002
-------------------------------------------
Net revenues $ 86,588 $ 78,634
Costs and expenses:
Operating expenses 71,513 65,254
General and administrative expenses 10,316 10,156
Depreciation and amortization 1,125 1,447
-------------------------------------------
Total costs and expenses 82,954 76,857
-------------------------------------------
Operating income 3,634 1,777
Other (income) expense:
Interest, net (62) (93)
-------------------------------------------
Other, net - -
Total other (income) expense (62) (93)
-------------------------------------------
Income from continuing operations before income taxes 3,696 1,870
Provision for income taxes 788 265
-------------------------------------------
-------------------------------------------
Net income $ 2,908 $ 1,605
===========================================
See accompanying notes to consolidated financial statements (unaudited).
-7-
Meridian Occupational Healthcare Associates, Inc.
and Subsidiaries (d/b/a CHD Meridian Healthcare)
Consolidated Statements of Stockholders' Equity
For the Nine Months Ended September 30, 2003 and 2002
(Unaudited)
(in thousands, except share data)
Additional Total
Common Stock Preferred Stock Paid-in Accumulated Stockholders'
Shares Amount Shares Amount Capital Deficit Equity
------------------------------------------------------------------------------------------
Balance at December 31, 2002 208,415 $ - - $ - $ 66,944 $ (43,624) $23,320
Repurchase of common stock (700) - - - (100) (100)
Net income - - - - - 2,908 2,908
------------------------------------------------------------------------------------------
Balance at September 30, 2003 207,715 $ - - $ - $ 66,844 $ (40,716) $26,128
==========================================================================================
See accompanying notes to consolidated financial statements (unaudited).
-8-
Meridian Occupational Healthcare Associates, Inc.
and Subsidiaries (d/b/a CHD Meridian Healthcare)
Consolidated Statements of Cash Flows
(Unaudited)
(in thousands, except share data)
For the Nine For the Nine
Months Ended Months Ended
September 30, September 30,
2003 2002
----------------------------------------
Operating activities
Net income from continuing operations $ 2,908 $ 1,605
Adjustments to reconcile net income from continuing
operations to net cash provided by operating
activities:
Depreciation and amortization 1,125 1,447
Changes in operating assets and liabilities, net of
effects of acquisitions:
Accounts receivable (164) 749
Other current assets (70) (858)
Accounts payable (984) (1,634)
Accrued employee benefits 249 196
Deferred revenue 667 (1,497)
Other accruals and liabilities 1,713 (385)
Other long-term liabilities (348) 182
----------------------------------------
Net cash provided by operating activities 5,096 (195)
----------------------------------------
Investing activities
Purchase of property and equipment (460) (793)
Proceeds from sale of fixed assets 65
----------------------------------------
Net cash used in investing activities (460) (728)
----------------------------------------
Financing activities
Repurchase of common stock (100) -
Proceeds from exercise of common stock options -
----------------------------------------
Net cash used in financing activities (100)
----------------------------------------
Discontinued operations
Cash flows of discontinued operations - 2,308
----------------------------------------
Net cash provided by discontinued operations - 2,308
----------------------------------------
Net change in cash and cash equivalents 4,536 1,385
Cash and cash equivalents at beginning of year 7,621 3,155
----------------------------------------
Cash and cash equivalents at end of year $ 12,157 $ 4,540
========================================
Supplemental cash flow information:
Cash paid for interest $ 19 $ 0
========================================
Cash paid for income taxes $ 162 $ 250
========================================
See accompanying notes to consolidated financial statements (unaudited).
-9-
Meridian Occupational Healthcare Associates, Inc.
and Subsidiaries (d/b/a CHD Meridian Healthcare)
Notes to Consolidated Financial Statements
September 30, 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 the nation's largest 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 156 locations in 30
states.
Physician services are provided at CHD Meridian's locations under management
agreements with affiliated physician associations (the Physician Groups), which
are organized professional corporations that hire licensed physicians who
provide medical services.
Pursuant to the service agreements, the Physician Groups provide all medical
aspects of CHD Meridian's services, including the development of professional
standards, policies, and procedures for a fee. CHD Meridian provides a wide
array of business services to the Physician Group, including administrative
services, support personnel, facilities, marketing, and non-medical services in
exchange for a management fee.
Principles of Consolidation
The consolidated financial statements include accounts of Meridian Occupational
Healthcare Associates, Inc., its wholly owned subsidiaries, and the Physician
Groups. The financial statements of the Physician Groups are consolidated with
CHD Meridian in accordance with the nominee shareholder model of EITF 97-2,
"Application of FASB Statement No. 94 and APB Opinion No. 16 to Physician
Practice Management Entities and Certain Other Entities with Contractual
Management Arrangements". CHD Meridian has unilateral control over the assets
and operations of the Physician Groups. Consolidation of the Physician Groups
with CHD Meridian is necessary to present fairly the financial position and
results of operations of CHD Meridian. Control of the Physician Groups is
perpetual and other than temporary because of the nominee shareholder model and
the management agreements between the entities. The net tangible assets of the
Physician Groups were not material at September 30, 2003. All significant
intercompany accounts and transactions have been eliminated in consolidation.
-10-
Meridian Occupational Healthcare Associates, Inc.
and Subsidiaries (d/b/a CHD Meridian Healthcare)
Notes to Consolidated Financial Statements (continued)
2. Interim Results and Basis of Presentation
The accompanying unaudited financial statements have been prepared in accordance
with accounting principles generally accepted in the United States of America.
In the opinion of management, the unaudited financial statements have been
prepared on the same basis as the annual financial statements and reflect all
adjustments, which include only normal recurring adjustments, necessary to
present fairly the financial position as of September 30, 2003 and the results
of the operations and cash flows for the nine months ended September 30, 2003
and 2002. The results for the nine months ended September 30, 2003 are not
necessarily indicative of the results to be expected for any subsequent quarter
or the entire fiscal year ending December 31, 2003.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with accounting principles generally accepted
in the United States of America have been condensed or omitted pursuant to the
Securities and Exchange Commission's rules and regulations.
These unaudited financial statements should be read in conjunction with the
Company's audited financial statements and notes thereto for the year ended
December 31, 2002 included in elsewhere in this filing.
3. Long-Term Debt
In January 2000, Bank of America purchased the Company's line of credit from
First Union and extended the maturity date to May 2000. Effective May 15, 2000,
the Company obtained a permanent $7.5 million credit facility from Bank of
America that 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 $2.25 million letter of credit
portion with the remainder being a term loan revolver. The letter of credit of
$2 million has been issued for the benefit of AIG, the Lexington Group, the
Company's medical malpractice carrier. 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 September 30, 2003, 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 September 30, 2003.
4. Stockholders' Equity
Capital Stock
The Company has 93,500 authorized shares of Series A preferred stock and 60,000
authorized shares of Series B preferred stock. Through September 30, 2003, the
Company has not issued any of the preferred series stock.
The Company has 250,000 authorized shares of common stock. During 2003, the
company repurchased 700 shares of common stock. Through September 30, 2003, the
Company has 207,715 issued and outstanding shares of common stock.
-11-
Meridian Occupational Healthcare Associates, Inc.
and Subsidiaries (d/b/a CHD Meridian Healthcare)
Notes to Consolidated Financial Statements (continued)
4. Stockholders' Equity (continued)
Stock Option Plan
The Company's 1997 Stock Incentive Plan (the "Plan"), provides for qualified and
non-qualified incentive stock option grants which 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. All option agreements stipulate immediate
vesting upon a change of control of ownership. 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.
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 nine months ended September 30, 2003.
A summary of the status of the Company's options issued to employees is as
follows at September 30, 2003:
Weighted Average
Number of Shares Exercise Price
-----------------------------------------
Outstanding at December 31, 2002 36,092 $ 137
Canceled (625) 143
-----------------------------------------
Outstanding at September 30, 2003 35,467 $ 112
=========================================
Available for future grant 1,253
===================
Exercisable at September 30, 2003 29,960 $ 106
=========================================
-12-
Meridian Occupational Healthcare Associates, Inc.
and Subsidiaries (d/b/a CHD Meridian Healthcare)
Notes to Consolidated Financial Statements (continued)
5. Employee Benefit Plan
The Company has a defined-contribution employee benefit plan that was
established under provisions of Section 401(k) of the Internal Revenue Code.
Substantially all full-time regular employees of the Company are eligible to
participate in the plan. Under the plan's provisions, an employee may
contribute, on a tax-deferred basis, up to 15% of total cash compensation within
a calendar year, subject to Internal Revenue Code limitations. Matching
contributions and discretionary contributions can be made by the Company. The
Company made matching contributions of $440,000 for the nine months ended
September 30, 2003.
6. Commitments and Contingencies
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 for the Nine Months Ended September 30, 2003 that
accounted for 11% of total revenue.
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. September 30, 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 $3,254,000 at September 30, 2003.
Litigation
The Company is 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.
-13-
CONSOLIDATED FINANCIAL STATEMENTS
Meridian Occupational Healthcare Associates, Inc. and Subsidiaries
(d/b/a CHD Meridian Healthcare)
Years ended December 31, 2002, 2001 and 2000 with Report of Independent Auditors
-14-
Meridian Occupational Healthcare Associates, Inc.
and Subsidiaries (d/b/a CHD Meridian Healthcare)
Consolidated Financial Statements
Years ended December 31, 2002, 2001 and 2000
Contents
Report of Independent Auditors................................................16
Consolidated Financial Statements
Consolidated Balance Sheets...................................................17
Consolidated Statements of Operations.........................................18
Consolidated Statements of Stockholders' Equity...............................19
Consolidated Statements of Cash Flows.........................................20
Notes to Consolidated Financial Statements....................................21
-15-
Report of Independent Auditors
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, 2002, 2001 and 2000, and
the related consolidated statements of operations, stockholders' equity, and
cash flows for the years then ended. 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 auditing standards generally accepted
in the 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, 2002,
2001 and 2000, and the consolidated results of their operations and their cash
flows for the years then ended in conformity with accounting principles
generally accepted in the United States.
As discussed in Note 2, in 2002 the Company changed its method of accounting for
goodwill and other intangible assets.
As discussed in Note 3, in 2001 the Company changed its method of accounting for
discontinued operations.
/s/ Ernst & Young LLP
Nashville, Tennessee
March 13, 2003
-16-
Meridian Occupational Healthcare Associates, Inc.
and Subsidiaries (d/b/a CHD Meridian Healthcare)
Consolidated Balance Sheets
(in thousands, except share data)
December 31
2002 2001 2000
----------------------------------------------------
Assets
Current assets:
Cash and cash equivalents $ 7,621 $ 3,155 $ 1,908
Accounts receivable, less allowance for doubtful accounts
of $639, $834, and $1,199 at December 31, 2002, 2001 and
2000, respectively 14,373 13,595 16,532
Income tax receivable 529 649 -
Net assets of discontinued operations - 1,009 4,569
Other current assets 1,069 484 508
----------------------------------------------------
Total current assets 23,592 18,892 23,517
Property and equipment, net 3,063 2,977 2,786
Goodwill 8,181 8,181 8,047
Customer lists, net 7,645 8,394 8,899
Non-compete agreements, net - - 60
Other intangibles, net - - 256
Other long-term assets 36 36 80
----------------------------------------------------
Total assets $ 42,517 $ 38,480 $ 43,645
====================================================
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 5,796 $ 5,548 $ 6,014
Accrued employee benefits 3,496 2,954 2,008
Deferred revenue 1,644 2,444 1,341
Income taxes payable - - 270
Net liabilities of discontinued operations 1,299 - -
Other accrued liabilities 4,066 3,413 2,974
----------------------------------------------------
Total current liabilities 16,301 14,359 12,607
Line of credit - - 6,030
Other long-term liabilities 2,896 2,725 1,904
Stockholders' equity:
Preferred stock, 153,500 authorized shares, none
outstanding - - -
Common stock, $0.001 par value; authorized 250,000
shares, 208,415 shares issued and outstanding at
December 31, 2002, 2001 and 2000 - - -
Additional paid-in capital 66,944 66,944 66,944
Accumulated deficit (43,624) (45,548) (43,840)
----------------------------------------------------
Total stockholders' equity 23,320 21,396 23,104
----------------------------------------------------
Total liabilities and stockholders' equity $ 42,517 $ 38,480 $ 43,645
====================================================
See accompanying notes to consolidated financial statements.
-17-
Meridian Occupational Healthcare Associates, Inc.
and Subsidiaries (d/b/a CHD Meridian Healthcare)
Consolidated Statements of Operations
(in thousands)
Year ended December 31
2002 2001 2000
-----------------------------------------------------
Net revenues $ 107,124 $ 100,411 $ 96,671
Costs and expenses:
Operating expenses 88,858 82,950 79,037
General and administrative expenses 14,275 14,057 15,002
Depreciation and amortization 1,854 2,117 1,886
-----------------------------------------------------
Total costs and expenses 104,987 99,124 95,925
-----------------------------------------------------
Operating income 2,137 1,287 746
Other (income) expense:
Interest, net (124) 255 198
Other, net - - (8)
-----------------------------------------------------
Total other (income) expense (124) 255 190
-----------------------------------------------------
Income from continuing operations before income taxes 2,261 1,032 556
Provision for income taxes 337 139 368
-----------------------------------------------------
Income from continuing operations 1,924 893 188
Gain on discontinued operations, net of income taxes of $80
and $418 at December 31, 2001 and 2000, respectively - 527 814
Gain (loss) on disposal of discontinued operations, net of
income tax benefit (expense) of $506 and $(134) at
December 31, 2001 and 2000, respectively - (3,128) 216
-----------------------------------------------------
Net income (loss) $ 1,924 $ (1,708) $ 1,218
=====================================================
See accompanying notes to consolidated financial statements.
-18-
Meridian Occupational Healthcare Associates, Inc.
and Subsidiaries (d/b/a CHD Meridian Healthcare)
Consolidated Statements of Stockholders' Equity
(in thousands, except share data)
Additional Total
Common Stock Preferred Stock Paid-in Accumulated Stockholders'
Shares Amount Shares Amount Capital Deficit Equity
--------------------------------------------------------------------------------------------
Balance at December 31, 1999 14,609 $ - 104,044 $52,022 $ 500 $ (44,965) $ 7,557
Repurchase of common stock (14,981) - - - (648) (93) (741)
Conversion of preferred stock to
common stock 104,043 - (104,044) (52,022) 52,022 - -
Issuance of common stock in
conjunction with acquisition 104,044 - - - 15,000 - 15,000
Options exercised 700 - - - 70 - 70
Net income - - - - - 1,218 1,218
------------------------------------------------------------------------------------------
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
==========================================================================================
See accompanying notes to consolidated financial statements.
-19-
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
2002 2001 2000
--------------------------------------------------
Operating activities
Net income from continuing operations $ 1,924 $ 893 $ 188
Adjustments to reconcile net income from continuing operations
to net cash provided by operating activities:
Depreciation and amortization 1,854 2,117 1,886
Loss on disposal of fixed assets 72 - -
Changes in operating assets and liabilities, net of effects
of acquisitions:
Accounts receivable (778) 2,955 (4,414)
Other current assets (585) (581) 1,285
Accounts payable (17) (466) (3,773)
Income taxes receivable 120 (270) 270
Deferred revenue (800) 1,103 24
Other accruals and liabilities 1,195 1,377 (166)
Other long-term liabilities 171 521 (108)
--------------------------------------------------
Net cash provided by (used in) operating activities 3,156 7,649 (4,808)
--------------------------------------------------
Investing activities
Purchase of property and equipment (1,170) (1,266) (1,026)
Proceeds from sale of fixed assets 172 - 4,074
Cash paid for acquisitions - (43) (917)
Increase in other assets - - (54)
--------------------------------------------------
Net cash provided by (used in) investing activities (998) (1,309) 2,077
--------------------------------------------------
Financing activities
(Payments) borrowings under line of credit, net - (6,030) 4,230
Payments on debt and capital lease obligations - (22) (125)
Repurchase of common stock - - (741)
Proceeds from exercise of common stock options - - 70
--------------------------------------------------
Net cash provided by (used in) financing activities - (6,052) 3,434
--------------------------------------------------
Discontinued operations
Cash flows of discontinued operations 2,308 959 1,191
--------------------------------------------------
Net cash provided by discontinued operations 2,308 959 1,191
--------------------------------------------------
Net change in cash and cash equivalents 4,466 1,247 1,894
Cash and cash equivalents at beginning of year 3,155 1,908 14
--------------------------------------------------
Cash and cash equivalents at end of year $ 7,621 $ 3,155 $ 1,908
==================================================
Supplemental cash flow information:
Cash paid for interest $ - $ 350 $ 352
==================================================
Cash paid for income taxes $ 217 $ 1,392 $ 170
Supplemental non-cash investing and financing information:
Conversion of Series A and Series B preferred stock to
104,043 shares of common stock $ - $ - $ 52,022
See accompanying notes to consolidated financial statements.
-20-
Meridian Occupational Healthcare Associates, Inc.
and Subsidiaries (d/b/a CHD Meridian Healthcare)
Notes to Consolidated Financial Statements
December 31, 2002
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 the nation's largest 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 88 clients at 156 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.
-21-
Meridian Occupational Healthcare Associates, Inc.
and Subsidiaries (d/b/a CHD Meridian Healthcare)
Notes to Consolidated Financial Statements
December 31, 2002
1. Reporting Entity and Principles of Consolidation (continued)
Principles of Consolidation (continued)
Consolidation of the Physician Groups with CHD Meridian is necessary to present
fairly the financial position and results of operations of CHD Meridian. Control
of the Physician Groups is perpetual and other than temporary because of the
nominee shareholder model and the management agreements between the entities.
The net tangible assets of the Physician Groups were not material at December
31, 2002, 2001 or 2000. All significant intercompany accounts and transactions
have been eliminated in consolidation.
2. Summary of Significant Accounting Policies
Revenue Recognition and Accounts Receivable
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.
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 2002, 2001 and 2000 that accounted for 11%, 11%
and 10% 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.
-22-
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)
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.
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.
-23-
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)
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 3, management has determined that
there was no impairment of long-lived assets at December 31, 2002, 2001 or 2000.
Stock Option Plan
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.
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.
-24-
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)
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, 2002, 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 $3,098,000, $2,178,000 and $1,373,000
at December 31, 2002, 2001 and 2000, respectively.
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.
-25-
Meridian Occupational Healthcare Associates, Inc.
and Subsidiaries (d/b/a CHD Meridian Healthcare)
Notes to Consolidated Financial Statements (continued)
3. 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 and $1,232,000 for the years ended December 31, 2001 and
2000 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, 2001, the net assets of
discontinued operations consisted of accounts receivable ($2,509), net of
severance accruals of ($201) and contract staffing accruals of ($1,299). At
December 31, 2002, the net liabilities of discontinued operations consisted of
the contract staffing accruals. 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 2000, one of two
remaining leases was cancelled through an early payment settlement, resulting in
a gain on discontinued operations of $350,000, which represents the difference
between the obligation and the settlement payment. During 2001, the remaining
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 2002.
4. Business Combinations
2000 Acquisition
Effective January 1, 2000, the Company acquired all of the assets and
liabilities of Corporate Health Dimensions, Inc. in exchange for 104,044 shares
of common stock.
-26-
Meridian Occupational Healthcare Associates, Inc.
and Subsidiaries (d/b/a CHD Meridian Healthcare)
Notes to Consolidated Financial Statements (continued)
4. Business Combinations (continued)
2000 Acquisition (continued)
The aggregate purchase price of $15,000,000 for this acquisition is summarized
as follows (in thousands):
Fair value of tangible assets acquired $ 11,581
Liabilities assumed (10,749)
Goodwill 5,723
Customer lists 8,445
---------------
Common stock issued $ 15,000
---------------
Corporate Health Dimensions, Inc. operated and managed on-site healthcare
clinics for large employers. Their delivery model for employer-sponsored
healthcare services was very similar to the Company's model. They operated in
the primary care, pharmacy and occupational areas and had been a competitor on
most large contracts prior to the merger. From a strategic standpoint, Corporate
Health Dimensions, Inc. was the only nationwide competitor for the Company, and
thus, an excellent candidate for merger. Their client list was a complement to
the Company's own client list, and together established the combined Company as
the single source for on-site healthcare for Fortune 1000 companies.
5. Property and Equipment
Property and equipment consist of the following (in thousands):
December 31
2002 2001 2000
------------------------------------------------------
Furniture and equipment $ 6,089 $ 5,894 $ 4,709
Leasehold improvements 180 264 183
------------------------------------------------------
6,269 6,158 4,892
Less accumulated depreciation (3,206) (3,181) (2,106)
------------------------------------------------------
$ 3,063 $ 2,977 $ 2,786
======================================================
Depreciation expense was $1,105,000, $1,083,000 and $895,000 for the years ended
December 31, 2002, 2001 and 2000, respectively.
-27-
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
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,
2002 2001 2000
--------------------------------------------------
Reported net income (loss) $1,924 $(1,708) $1,218
Add: goodwill amortization - 200 153
--------------------------------------------------
Pro forma adjusted net income (loss) $1,924 $(1,508) $1,371
==================================================
The Company's separately identifiable intangible assets, which consists of
customer lists, are as follows:
December 31,
2002 2001 2000
----------------------------------------------------
Amortized intangible assets:
Carrying amount $ 10,691 $ 10,691 $ 10,679
Accumulated amortization (3,046) (2,297) (1,464)
----------------------------------------------------
Net $ 7,645 $ 8,394 $ 9,215
====================================================
Amortization expense for the year ended December 31, 2002 was $749,000.
Estimated amortization expense for each of the succeeding five fiscal years is
as follows:
Year ending December 31
2003 $ 637,833
2004 609,688
2005 609,688
2006 609,688
2007 609,688
-28-
Meridian Occupational Healthcare Associates, Inc.
and Subsidiaries (d/b/a CHD Meridian Healthcare)
Notes to Consolidated Financial Statements (continued)
7. Long-Term Debt
In January 2000, Bank of America purchased the Company's line of credit from
First Union and extended the maturity date to May 2000. 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 $1 million letter of credit portion
with the remainder being a term loan revolver. The letter of credit of $1
million has been issued for the benefit of The Reciprocal Alliance, the
Company's medical malpractice carrier. 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, 2002, and 2001, the Company had no debt
outstanding on the term loan. At December 31, 2000, the Company had $6,030,000
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, 2002.
8. Income Taxes
Income tax expense is comprised of the following for the years ended December 31
(in thousands):
2002 2001 2000
--------------------------------------------------------
Current:
Federal $ - $ (128) $ 162
State 337 267 206
Deferred - - -
--------------------------------------------------------
Income tax expense $ 337 $ 139 $ 368
========================================================
-29-
Meridian Occupational Healthcare Associates, Inc.
and Subsidiaries (d/b/a CHD Meridian Healthcare)
Notes to Consolidated Financial Statements (continued)
8. Income Taxes (continued)
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 has not recorded a provision for current
federal income tax for the years ended December 31, 2002, 2001 and 2000. At
December 31, 2002, 2001 and 2000, the Company has a cumulative NOL carryforward
for federal income tax purposes of $18.2 million, $19.8 million, and $19.5
million, respectively, which expires between 2011 and 2021. At December 31,
2002, 2001 and 2000, the Company has cumulative NOL carryforwards for state
income tax purposes of $33.7 million, $25.0 million, and $16.3 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 (in thousands):
2002 2001 2000
-------------------------------------------------------
Deferred tax assets:
Net operating loss carryforwards $ 7,880 $ 7,989 $ 7,462
Allowance for doubtful accounts 249 325 436
Accrued expenses 1,712 1,805 1,546
Amortization 1,387 1,549 1,679
Other 331 323 382
-------------------------------------------------------
Total gross deferred tax assets 11,559 11,991 11,505
Less: Valuation allowance (11,248) (11,775) (11,367)
-------------------------------------------------------
Total deferred tax assets 311 216 138
Deferred tax liability:
Depreciation (311) (216) (138)
-------------------------------------------------------
Net deferred tax asset (liability) $ - $ - $ -
=======================================================
-30-
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, 2002, 2001 and 2000 differs from the amount computed by applying
the statutory rate of 34% due to the following (in thousands):
2002 2001 2000
-----------------------------------------------------
Tax at federal statutory rate $ 769 $ 351 $ 189
State income taxes 223 176 136
Nondeductible amortization 225 309 285
Other 24 129 69
Change in valuation allowance (904) (826) (311)
-----------------------------------------------------
Income tax provision (benefit) $ 337 $ 139 $ 368
=====================================================
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, 2002, the
Company has not issued any of the preferred series stock.
On January 1, 2000, all holders of Meridian common stock, representing 14,609
shares, exchanged their shares for $593,000. Thereafter, just prior to the
acquisition of Corporate Health Dimensions, Inc., all holders of Series A and
Series B preferred stock converted their shares into 104,043 shares of Meridian
common stock at a conversion price of $500 per preferred share. Effective
January 1, 2000, Meridian issued an additional 104,044 shares of common stock to
the shareholders of Corporate Health Dimensions stock in exchange for 100% of
the outstanding shares of Corporate Health Dimensions stock.
-31-
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
The Company's 1997 Stock Incentive Plan (the "Plan"), provides for qualified and
non-qualified incentive stock option grants which 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.
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, 2002, 2001
and 2000, respectively.
-32-
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)
A summary of the status of the Company's options issued to employees is as
follows at December 31, 2002, 2001 and 2000:
Weighted Average
Number of Shares Exercise Price
--------------------- -------------------
Outstanding at December 31, 1999 5,503 $ 100
Granted 31,397 143
Canceled (998) 108
Exercised (700) 100
-----------------------------------------
Outstanding at December 31, 2000 35,202 137
Granted 2,890 143
Canceled (1,545) 139
Exercised - -
-----------------------------------------
Outstanding at December 31, 2001 36,547 $ 137
Granted - -
Canceled (455) 141
Exercised - -
-----------------------------------------
Outstanding at December 31, 2002 36,092 $ 137
=========================================
Available for future grant 628
===================
Exercisable at December 31, 2002 18,276 $ 136
=========================================
Exercisable at December 31, 2001 10,363 $ 130
=========================================
Exercisable at December 31, 2000 1,986 $ 100
=========================================
-33-
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.
Matching contributions and discretionary contributions can be made by the
Company. The Company made matching contributions of $498,000, $565,000 and
$181,000 for the years ended December 31, 2002, 2001 and 2000, 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, 2002, are as follows (in
thousands):
Year ending December 31
2003 $ 1,167
2004 1,055
2005 846
2006 815
2007 706
Thereafter 1,199
---------------
$ 5,788
===============
Rent expense on operating leases for the years ended December 31, 2002, 2001 and
2000 was $2,753,000, $3,117,000, and 3,557,000, respectively.
12. Commitments and Contingencies
Litigation
The Company is 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.
-34-
Meridian Occupational Healthcare Associates, Inc.
and Subsidiaries (d/b/a CHD Meridian Healthcare)
Notes to Consolidated Financial Statements (continued)
12. Commitments and Contingencies (continued)
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.
-35-
Unaudited Pro Forma Condensed Combined Financial Information of I-trax, Inc. and
its Subsidiaries and Meridian Occupational Healthcare Associates, Inc. and
Subsidiaries (d/b/a CHD Meridian Healthcare)
General
On December 26, 2003, I-trax, Inc. ("I-trax") entered into a merger
agreement with Meridian Occupational Healthcare Associates, Inc. and
Subsidiaries (d/b/a CHD Meridian Healthcare) ("CHD Meridian"), a privately held
company and a leading provider of outsourced, employer-sponsored healthcare
services to Fortune 1,000 companies.
The merger agreement provides for delivery of: 10,000,000 shares of
I-trax common stock, 400,000 shares of I-trax convertible preferred stock and
cash. CHD Meridian stockholders will also receive additional shares of I-trax
common stock if CHD Meridian, continuing its operations following the closing of
the merger as a subsidiary of I-trax, achieves certain calendar 2004 milestones
for earnings before interest, taxes, depreciation and amortization (or EBITDA).
If EBITDA exceeds $8.1 million, the number of such additional I-trax common
shares payable will be 3,600,000; the number of such shares increases
proportionately up to a maximum of 4,000,000 such additional I-trax common
shares if EBITDA exceeds $9.0 million.
The amount of cash payable as part of the merger consideration will be
$35 million less (1) the amount, if any, by which CHD Meridian's cash at closing
is less than $13.2 million and (2) the amount CHD Meridian spends to redeem any
of its outstanding common stock or options to acquire common stock, which may
equal up to $11 million.
I-trax expects to fund the cash portion of the merger consideration by
selling 800,000 shares of convertible preferred stock at $25 per share and
convertible into common stock at a price of $2.50 per share, for gross proceeds
of $20 million, and obtaining a senior credit facility with a national lender,
which allows a closing date draw of least $16 million.
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. This information was derived from the
audited consolidated financial statements of each of I-trax and CHD Meridian for
year 2002 and the unaudited condensed consolidated financial statements of each
of I-trax and CHD Meridian for the nine months ended September 30, 2003. The
information should be read together with the historical financial statements and
related notes contained in I-trax's Annual Report on Form 10-KSB for the fiscal
year ended December 31, 2002, Quarterly Report on Form 10-QSB for the fiscal
quarter ended September 30, 2003 and Current Reports on Form 8-K filed since
January 1, 2003 filed with the Securities and Exchange Commission.
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 above. 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.
-36-
Accounting Treatment
The merger will be 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 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. The operating results of CHD Meridian will be
combined with the results of I-trax from the date of the merger. As a result,
I-trax's earnings for 2004 will not include CHD Meridian's 2004 earnings prior
to the merger.
Periods Covered
The following unaudited pro forma condensed combined balance sheet as
of September 30, 2003, is presented as if the merger had occurred on September
30, 2003. The unaudited pro forma condensed combined statements of operations
for the nine months ended September 30, 2003, and for the year ended December
31, 2002, are presented as if the companies had merged as of January 1, 2002.
-37-
Pro Forma Condensed Combined Balance Sheet September 30, 2003 (Unaudited)
(In thousands, except per share price.)
Meridian Pro Forma
Occupational Consolidated
I-trax, Inc. Healthcare I-trax, Inc.
I-trax, Inc. and Associates, and
and Subsidiaries Inc., and Pro Forma Subsidiaries
Subsidiaries Activity September 30, Subsidiaries Adjustments (Unaudited)
September 30, Adj. Adjustment 2003 as September 30, Adj. (Unaudited) September 30,
2003 (a) Ref. (b) adjusted (c) 2003 (d) Ref. (e) 2003
-------------- ----- ---------- ------------- ------------- ----- ----------- -------------
Current assets
Cash and cash
equivalents $ 245 1 $ 1,676 $ 2,197 $ 12,157 A $ 36,000 $ 13,187
2 175 F (22,899)
4 (300) F (1,568)
5 (50) C (1,200)
8 451 E (11,000)
H (500)
Due from insurance
company 500 6 (500) -- -- --
Accounts receivable,
net 564 564 14,537 15,101
Other current assets 269 269 1,668 1,937
---------------- ----------- ------------- --------------- ------------- -------------
Total current assets 1,578 1,452 3,030 28,362 (1,167) 30,225
---------------- ----------- ------------- --------------- ------------- -------------
Investments in CHD
Meridian F 80,467 -
G (80,467)
Property, equipment
and furniture, net 925 925 2,840 3,765
Deferred marketing
costs, net 944 944 -- 944
Goodwill 8,424 8,424 8,181 G 32,669 49,274
Customer
lists\relations, net 946 946 7,201 G 32,669 40,816
Non-compete
agreements, net 961 961 961
Other intangibles, net 77 77 2 79
Other long term assets 32 32 36 68
---------------- ----------- ------------- --------------- ------------- -------------
Total assets $ 13,887 $ 1,452 $ 15,339 $ 46,622 $ 64,171 $ 126,132
================ =========== ============= =============== ============= =============
(Continues on following page.)
-38-
(Continues from previous page.)
Meridian Pro Forma
Occupational Consolidated
I-trax, Inc. Healthcare I-trax, Inc.
I-trax, Inc. and Associates, and
and Subsidiaries Inc., and Pro Forma Subsidiaries
Subsidiaries Activity September 30, Subsidiaries Adjustments (Unaudited)
September 30, Adj. Adjustment 2003 as September 30, Adj. (Unaudited) September 30,
2003 (a) Ref. (b) adjusted (c) 2003 (d) Ref. (e) 2003
-------------- ----- ---------- ------------- ------------- ----- ----------- -------------
Current liabilities
Credit line payable $ 300 4 $ (300) $ -- $ -- $ --
Accounts payable 710 710 4,812 5,522
Accrued expenses 443 443 9,524 9,967
Due to related parties 548 6 (500) 48 -- 48
Deferred revenue -- -- 2,311 2,311
Promissory notes and
debenture payable 1,220 3 (175) 845 -- 845
7 (200)
Other current
liabilities 61 61 1,299 1,360
---------------- ----------- ------------- ---------------- -------------- --------------
Total current
liabilities 3,282 (1,175) 2,107 17,946 -- 20,053
---------------- ----------- ------------- ---------------- -------------- --------------
Credit lines payable,
long term -- -- A 16,000 16,000
Due to related parties 315 5 (50) 265 -- 265
Promissory notes, net
of discount 398 398 -- 398
Other long term
liabilities 34 34 2,548 2,582
---------------- ----------- ------------- ---------------- -------------- --------------
Total liabilities 4,029 (1,225) 2,804 20,494 16,000 39,298
---------------- ----------- ------------- ---------------- -------------- --------------
Preferred stock -- -- A 20,000 30,000
F 10,000
Common stock and
additional paid
-in-capital 46,020 1 1,676 48,697 66,834 F 46,000 105,796
2 175 C (1,200)
3 175 E (11,000)
7 200 B 12,000
8 451 D 1,364
D (1,364)
G (55,835)
H 300
Accumulated deficit
and other (36,162) (36,162) (40,706) G 40,706 (48,962)
B (12,000)
H (800)
---------------- ----------- ------------- ---------------- -------------- --------------
Total stockholders'
equity 9,858 2,677 12,535 26,128 48,171 86,834
---------------- ----------- ------------- ---------------- -------------- --------------
Total liabilities and
stockholder's equity $ 13,887 $ 1,452 $ 15,339 $ 46,622 $ 64,171 $ 126,132
================ =========== ============= ================ ============== ==============
(Continues on following page.)
-39
(Continues from previous page.)
(a) Represents historical balance sheet of I-trax, Inc. as of September 30,
2003 derived from the unaudited consolidated financial statements
included in the Quarterly Report on Form 10-QSB.
(b) To give effect to certain material transactions as of September 30,
2003, which occurred during October 2003.
(c) Represents the historical balance sheet of I-trax, Inc. as of September
30, 2003 adjusted for certain material transactions which occurred
during October 2003.
(d) Represents historical balance sheet of Meridian Occupational Healthcare
Associates, Inc. and subsidiaries as of September 30, 2003, derived
from the unaudited consolidated financial statements.
(e) 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 September 30, 2003.
See accompanying notes to unaudited pro forma condensed
combined financial information.
-40-
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 2003
(UNAUDITED)
(In thousands, except per share price.)
Meridian Occupational Pro Forma
I-trax, Inc. and Healthcare Associates, consolidated I-trax,
Subsidiaries for Inc. and Subsidiaries Inc. and Subsidiaries
the nine months for the nine months Pro Forma for the nine months
ended September 30, ended September 20, Adj. adjustments ended September 30,
2003 (Unaudited) (a) 2003 (Unaudited) (b) Ref. (Unaudited) (c) 2003 (Unaudited)
-------------------- -------------------- ---- --------------- ----------------
Revenue $ 3,668 $ 86,588 $ 90,256
Cost and expenses:
Operating expenses 977 71,513 72,490
General and administrative 3,095 10,316 H 13,411
Depreciation and amortization 1,318 1,125 I 6,056 8,499
Marketing and publicity 1,677 -- 1,677
---------------- ------------------ ------------- ---------------
Total costs and expenses 7,067 82,954 6,056 96,077
---------------- ------------------ ------------- ---------------
Operating (loss) income (3,399) 3,634 (6,056) (5,821)
---------------- ------------------ ------------- ---------------
Other income (expenses):
Proceeds from life insurance policy 500 -- 500
Costs in connection with uncompleted
acquisition (200) -- (200)
Amortization of debt issuance costs (295) -- (295)
Interest (expense) income and
financing costs (1,922) 62 J (840) (2,700)
---------------- ------------------ ------------- ---------------
Total other expenses (1,917) 62 (840) (2,695)
---------------- ------------------ ------------- ---------------
Net income (loss) before provision for
income taxes (5,316) 3,696 (6,896) (8,516)
---------------- ------------------ ------------- ---------------
Provision for income taxes -- 788 - 788
---------------- ------------------ ------------- ---------------
Net Income (loss) (5,316) 2,908 (6,896) (9,304)
Less: dividends applicable to preferred
stockholders -- -- -- --
---------------- ------------------ ------------- ---------------
Net income (loss) applicable to common
stock $ (5,316) $ 2,908 $ (6,896) $ (9,304)
================ ================== ============= ===============
Loss per common share:
Basic and diluted $ (0.53) $ (0.29)
================ ================
Weighted average number of shares
outstanding: 10,112 32,512
================ ================
(Continues on following page.)
-41-
(Continues from previous page.)
(a) Represents historical statement of operations of I-trax for the nine
months ended September 30, 2003 derived from the unaudited statements
included in the quarterly report on Form 10-QSB.
(b) Represents historical statement of operations for CHD Meridian and
subsidiaries for the nine months ended September 30, 2003 included in
its unaudited consolidated financial statements.
(c) The pro forma adjustments give effect to the financings of the
acquisition and the acquisition of CHD Meridian as if it were
consummated on January 1, 2002.
See accompanying notes to unaudited pro forma condensed
combined financial information.
-42-
(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 Adj. adjustments the year ended
2002 (a) December 31, 2002 (b) Ref. (Unaudited) (c) December 31, 2002
------------------ ---------------------- ------- ---------------- --------------------
Revenue $ 3,932 $ 107,124 $ 111,056
---------------- -------------------- ------------------
Cost and expenses:
Operating expenses 1,229 88,858 90,087
General and administrative 5,955 14,275 H 800 21,030
Depreciation and amortization 2,045 1,854 I 8,075 11,974
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 8,875 125,923
---------------- -------------------- -------------- ------------------
Operating (loss) income (8,129) 2,137 (8,875) (14,867)
---------------- -------------------- -------------- ------------------
Other income (expenses):
Amortization of debt issuance costs (187) -- (187)
Interest (expense) income and
financing costs (1,108) 124 J (1,120) (2,104)
---------------- -------------------- -------------- ------------------
Total other expenses (1,295) 124 (1,120) (2,291)
---------------- -------------------- -------------- ------------------
Net income(loss) before provision for
income taxes (9,424) 2,261 (9,995) (17,158)
---------------- -------------------- -------------- ------------------
Provision for income taxes -- 337 337
---------------- -------------------- -------------- ------------------
Net Income (loss) (9,424) 1,924 (9,995) (17,495)
Less: dividends applicable to preferred
stockholders -- -- B 12,000 12,000
---------------- -------------------- -------------- ------------------
Net income (loss) applicable to common
stock $ (9,424) $ 1,924 $ (21,995) $ (29,495)
================ ==================== ============== ==================
Loss per common share:
Basic and diluted $ (1.04) $ (0.94)
================ ==================
Weighted average number of shares
outstanding: 9,097 31,497
================ ==================
(Continues on following page.)
-43-
(Continues from previous page.)
(a) Represents historical statement of operations of I-trax for the year
ended December 31, 2002 derived from the audited statements included in
the annual report on Form 10-KSB.
(b) Represents historical statement of operations for CHD Meridian and
subsidiaries for the year ended December 31, 2002 included in its
audited consolidated financial statements.
(c) The pro forma adjustments give effect to the financings of the
acquisition and the acquisition of CHD Meridian as if it were
consummated on January 1, 2002.
See accompanying notes to unaudited pro forma condensed
combined financial information.
-44-
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
The activity adjustments below give effect to material transactions as
if they were consummated as of September 30, 2003.
1. To give effect as of September 30, 2003, the sale of I-trax common
stock during October 2003 in a private placement commenced in August
2003. I-trax realized proceeds of $1,676 after expenses for these
October sales.
2. To give effect as of September 30, 2003, the receipt of $175 during
October 2003 as a result of the exercise of warrants from a debenture
holder.
3. To give effect as of September 30, 2003, the conversion of $175 of
debenture principal into equity during October 2003 from the Company's
debenture holder.
4. To give effect as of September 30, 2003, the repayment of I-trax's
credit line during October 2003 amounting to $300.
5. To give effect as of September 30, 2003, the repayment of $50 to a
related party during October 2003.
6. To give effect as of September 30, 2003, the repayment of $500 of
related party loans during October 2003, using proceeds from a pledged
from a life insurance policy on the life of a deceased senior executive
officer and director of I-trax.
7. To give effect for the granting of 50,000 warrants to I-trax's
debenture holder for extending the maturity date of the debenture for
one year. The warrants were valued at $200 utilizing the Black-Scholes
Model. The value of the warrant is recorded as a discount to the
debenture and will be accreted to interest expense over the remaining
life of the debenture.
8. To give effect to the exercise of 257,692 warrants from the Company's
debenture holder yielding the Company $451.
The pro forma adjustments to the condensed combined balance sheet below
give effect to the financing of the CHD Meridian acquisition and the acquisition
of CHD Meridian as if they were both consummated as of September 30, 2003. The
pro forma adjustments to the condensed combined statement of profit and loss
below give effect to the financing of the CHD Meridian acquisition and the
acquisition of CHD Meridian as if they were both consummated as of January 1,
2002.
A. To give effect to the receipt of $36,000 of cash comprised of a $16,000
draw down from a senior credit facility and $20,000 from the issuance
of 800,000 shares of I-trax's convertible preferred stock at $25 per
share. Each share of preferred stock is convertible into 10 shares of
I-trax's common stock at $2.50 per share.
B. In connection with the expected issuance of convertible preferred
stock, I-trax has recorded the value of a beneficial conversion feature
for the underlying common stock amounting to $12,000 under the
assumption that the acquisition is effected with an estimated market
price of approximately $4.00 per share. The beneficial value, which is
the benefit realized by the preferred stockholder, is treated as a
dividend for purpose of computing earnings per share. The dividend is
computed by multiplying the difference between the current market value
of the underlying common stock ($4.00 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 (8,000,000 shares).
C. To give effect to the placement agent commission fees associated with
the sale of $20,000 of convertible preferred stock computed at 6% of
the gross proceeds or $1,200 in cash.
-45-
D. To give effect to the additional placement agent commission fees
associated with the sale of $20,000 of convertible preferred stock. The
consideration consists of warrants purchase 400,000 shares of common
stock at $2.50 per share. Based on the Black-Scholes model, I-trax has
valued such warrants at $1,364.
E. To give effect to CHD Meridian redeeming approximately $11,000 of
common stock and options from its current stockholders and option
holders.
F. To give effect to the acquisition of CHD Meridian estimated at $80,467.
The pro forma adjustment gives effect to the following items: i)
disbursement of the cash portion of the acquisition in the amount of
$22,899, as adjusted for the redemption of CHD Meridian common stock
and options, and for a minimum cash balance requirement as per the
merger agreement; ii) estimated disbursements in connection with the
costs of the transaction amounting to $1,568; iii) issuance of
10,000,000 shares of I-trax common stock valued at $4.00 per share
(based on an approximate current value; this amount will change based
on the market value on the actual date of closing), or $40,000; iv)
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 expected issuance of the 400,000 shares
of convertible preferred stock, I-trax has also recorded the value of
beneficial conversion feature of the underlying common stock in the
amount of $6,000. The beneficial value to the convertible preferred
stock holders is treated as additional consideration given in the
acquisition. The beneficial value is computed by multiplying the
difference between the current market value of the underlying I-trax
common stock of $4.00 per share less the conversion price of $2.50 per
share by the number of share of I-trax common stock to be issued.
G. To give effect to the consolidation and the elimination of CHD
Meridian's equity and to preliminarily 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 the bonus pool approved by the Compensation Committee
for employees associated with the merger. The bonus pool aggregating to
$800 is composed of $500 in cash and $300 in the form of I-trax common
stock.
I. To give effect to the amortization expense associated with the
estimated amount of customer lists/relations acquired for the nine
months ended September 30, 2003 and the year ended December 31, 2002
over an estimated average useful life of four years.
J. To give effect to the interest expense associated with the draw down of
$16,000 credit line facility, which has been utilized to fund a portion
of the acquisition price as discussed in Note A above.
-46-
RISK FACTORS
Risks Related to the Merger and the Merged Companies After the Merger
The price of I-trax common stock will fluctuate which will affect the
value of shares issued to CHD Meridian stockholders.
The price of I-trax common stock has been and we believe will continue
to be volatile. For example during 2003, the per share price of I-trax common
stock fluctuated from a high of $5.00 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 of 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.
A significant fluctuation in I-trax common stock price will affect,
possibly adversely, the value of the merger consideration. CHD Meridian
stockholders are advised to obtain recent market quotations for I-trax common
stock. CHD Meridian can terminate the merger agreement if the closing price of
I-trax's common stock is less than $2.25 for ten consecutive trading days.
Finally, I-trax common stock is not heavily traded and therefore, the ability to
achieve relatively quick liquidity without a negative impact on the stock price
is limited.
Shares eligible for future sale upon the conversion of outstanding
I-trax convertible debt and upon the exercise of issued options and
warrants may cause dilution.
As of January 29, 2004 (and without taking into account I-trax common
stock to be issued in the merger and upon conversion of I-trax convertible
preferred stock to be issued in the merger and in the related financing),
approximately 5,947,472 shares of I-trax common stock were reserved for issuance
upon conversion or exercise of I-trax's warrants, options and convertible debt.
Our stockholders, therefore, could experience dilution of their investment upon
conversion or exercise, as applicable, of these securities.
We may be unable successfully to integrate our operations and realize
the full cost savings we anticipate.
The merger involves the integration of two companies that have
previously operated independently in different segments of the healthcare
industry. The difficulties of combining the companies' operations include:
o integrating complementary businesses under centralized
management efficiently;
o the necessity of 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 one or more of the combined company's
businesses and the loss of key personnel. The diversion of management's
attention and any delays or difficulties encountered in connection with the
merger and the integration of the two companies' operations could have an
adverse effect on the business, results of operations or financial condition of
the merged company.
Among the factors considered by the CHD Meridian and the I-trax boards
of directors in connection with their respective approvals of the merger
agreement were the opportunities for reduction of operating costs and
improvements in operating efficiencies or 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.
-47-
Obtaining required regulatory approvals may delay consummation of the
merger.
Consummation of the merger is conditioned upon the receipt of all
material governmental authorizations, consents, orders and approvals, including
the expiration or termination of the applicable waiting periods, and any
extension of the waiting periods, under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976. We intend to vigorously pursue all required regulatory
approvals. The requirement for these approvals could delay the consummation of
the merger for a significant period of time after our stockholders have approved
the proposals relating to the merger.
CHD Meridian Stockholders may not receive a portion of the merger
consideration if CHD Meridian does not achieve agreed upon fiscal 2004
financial results.
The merger includes an earn-out component, under which all of the last
4,000,000 shares of I-trax common stock that may potentially be issued to CHD
Meridian stockholders will only be issued if CHD Meridian, and the surviving
entity in the merger that continues to operate the CHD Meridian business, record
calendar year 2004 earnings before interest, taxes, depreciation, and
amortization of not less than $9 million. If the 2004 earnings before interest,
taxes, depreciation, and amortization are less than $8.1 million, none of the
earn-out shares would be earned. For 2004 earnings before interest, taxes,
depreciation, and amortization of between $8.1 million and $9 million, the
number of shares of I-trax common stock earned would be between 3,600,000 and
4,000,000. Although CHD Meridian management believes that the prospects of
achieving the targeted earnings levels are reasonable, there can be no assurance
that these targets will be met. Even if the required financial goals are met,
issuance of the additional earn-out shares also is subject to possible reduction
in the event of claims against the earn-out escrow by I-trax caused by breaches
of the representations or warranties made by CHD Meridian in the merger
agreement. Any escrowed shares not delivered to CHD Meridian stockholders in
accordance with the merger agreement will be returned to I-trax and canceled.
Neither party may have a meaningful remedy after closing of the merger
if the other party has materially breached its representations and
warranties in the merger agreement.
Under the merger agreement, I-trax has agreed that its sole remedy for
any breach of representations or warranties of CHD Meridian will be to reduce
the number of additional shares of common stock potentially issuable to the CHD
Meridian stockholders. At the time of the closing of the merger, 4,000,000
shares of I-trax common stock will be placed in escrow. This escrow serves the
dual purpose of providing additional consideration to the CHD Meridian
stockholders if the financial targets described in the preceding paragraph are
met, and also creating a pool of shares a portion of which I-trax could use to
offset any losses to which it may be subject in the event of a breach of
representations or warranties made by CHD Meridian under the merger agreement.
If any of the representations, warranties or covenants of CHD Meridian in the
merger agreement has been breached, the amount that I-trax can recover is
limited to the lesser of (a) 3,200,000 shares of I-trax common stock, (b) shares
of I-trax common stock with a value, measured at the time of final resolution of
such claim, of $8 million, or (c) shares of I-trax common stock with a value,
measured at the time of final resolution of such claim, equal to the losses
I-trax has suffered from that breach. Even if the number of such shares is not
sufficient to cover the full amount of the losses suffered by I-trax, I-trax is
not entitled to make any further claim against the CHD Meridian stockholders,
regardless of whether all or any of the escrowed shares would otherwise have
been earned in light of the financial targets described in the preceding
paragraph. In the case of a breach of representation or warranty by I-trax,
Haywood D. Cochrane, Jr., in his capacity as representative of the former CHD
Meridian stockholders and on their behalf, could make a claim under the merger
agreement against I-trax. After the merger, however, former CHD Meridian
stockholders will own between 35% and 40% of I-trax common stock, and the
revenues, profits and assets of the former CHD Meridian business will represent
an even larger percentage of the combined businesses. In light of those
circumstances, there can be no assurance that a practical remedy would be
available to compensate the former CHD Meridian stockholders even for a
successful claim. Also, in order to recover for any losses arising from a breach
of the representations, warranties or covenants of the other party in the merger
agreement, the party suffering that loss must make a claim in writing for such
losses by August 14, 2004, after which any such claim would be time barred.
-48-
The merged companies will be limited in their ability to offset taxable
income with I-trax's net operating losses.
As a result of the merger transactions, I-trax will have an ownership
change for certain tax purposes. I-trax has tax net operating losses of
approximately $16.2 million through December 31, 2002, which losses will expire
from 2020 to 2022. The ownership change will cause a substantial limitation on
the ability of I-trax to use such net operating losses to offset future taxable
income. While CHD Meridian will also have an ownership change for tax purposes
as a result of the merger transactions, its tax net operating losses were
already subject to a limitation as a result of a prior ownership change and
should not be further limited as a result of the merger.
Risks Related to CHD Meridian Healthcare Business
CHD Meridian expects increasing competition for contracts to establish
and manage employer-dedicated pharmacies and clinics.
CHD Meridian pioneered the field of employer-dedicated pharmacies and
primary care clinics. Although CHD Meridian has always faced competition from
other methods by which business enterprises can arrange and pay for healthcare
services for their employees, until recently CHD Meridian has rarely experienced
face-to-face bidding for a contract to manage a particular employer's pharmacy
or clinic. CHD Meridian has recently begun to see direct competition for
employer-dedicated pharmacy management contracts, and expect this competition
will increase over time. CHD Meridian believes that it has certain advantages in
such competition, which include its status as the market leader, experience and
valuable know-how that CHD Meridian competitors do not yet have. CHD Meridian
also faces some disadvantages, which include the fact that some of its
competitors and potential competitors are of substantially greater size and
financial resources, including prescription benefit management companies with
revenues in the multiple billions of dollars. CHD Meridian believes that the
potential market for employer-dedicated pharmacies is large enough for CHD
Meridian to meet its growth plans despite increasing competition, but there are
no assurances that CHD Meridian will in fact be able to do so. CHD Meridian's
ability to maintain existing clients, expand services to existing clients, add
new clients so as to meet its growth objectives, and maintain attractive pricing
for its services, will depend on the interplay between these factors of overall
growth in the use of employer-dedicated facilities, entry of new competitors to
the business, and its success or failure in maintaining its 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, CHD Meridian will
continue to face competition for the large employer's healthcare budget from
other kinds of enterprises, including without limitation pharmacy benefit
managers, health insurers, managed health care plans and retail pharmacy chains.
Loss of key management could adversely affect the merged companies side
of the merged companies' business.
CHD Meridian's business has enjoyed a strong and stable management
team, including among others, Haywood D. Cochrane, Jr., CHD Meridian's chief
executive officer, Charles D. (Chip) Phillips, CHD Meridian's president and
chief operating officer, and Shannon W. Farrington, CHD Meridian's chief
financial officer. Following the merger, Mr. Cochrane will join the I-trax board
of directors as vice-chairman, and Mr. Phillips and Ms. Farrington will remain
with the merged companies. Although CHD Meridian believes that the earn out
applicable to a portion of the merger consideration will create an incentive for
these individuals to remain with the merged company and to focus on its success
through 2004 at a minimum, there is no assurance that any of these individuals
will do so. Each of these individuals will receive a portion of the merger
consideration in respect of their equity interests in CHD Meridian at closing,
which could reduce these individuals' incentive to remain with the merged
company. Finally, although CHD Meridian believes that the CHD Meridian
management team has reasonable depth, the loss of one or several of these
individuals, could have an adverse effect on CHD Meridian's business.
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Loss of advantageous pharmaceutical pricing could adversely affect CHD
Meridian's income and the value that CHD Meridian provides to its
clients.
CHD Meridian receives favorable pricing from pharmaceutical
manufacturers as a result of its class of trade designation, which in turn is
based on selling products only to CHD Meridian clients' employees, dependents
and retirees. CHD Meridian also receives rebates from pharmaceutical
manufacturers for driving market share to preferred products. The benefit of
favorable pricing is generally passed on to CHD Meridian 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 CHD Meridian would lose the benefit of this favorable pricing, either due
to legal challenge or to a change in policies of the pharmaceutical
manufacturers. Such a loss would diminish the value that CHD Meridian can
provide to its clients and, therefore, would make its services less attractive.
CHD Meridian also receives volume performance incentives from its pharmaceutical
wholesaler which directly affect CHD Meridian revenue, and the loss of which
could adversely affect CHD Meridian's business.
CHD Meridian's business involves exposure to professional liability
claims, and a failure effectively to manage CHD Meridian's professional
liability risks could have an adverse impact on CHD Meridian's
business.
Under the terms of CHD Meridian's contracts with clients, it is
responsible for procuring professional liability insurance covering the
operations of clinics and pharmacies that it manages. CHD Meridian also
typically indemnifies its clients against vicarious professional liability
claims arising out of acts or omissions of healthcare providers working at the
clinics and pharmacies manage by CHD Meridian. Under the terms of its services
agreements with affiliated professional corporations, CHD Meridian is also
contractually obligated for procuring malpractice insurance on behalf of the
professional corporations and their employed physicians, and CHD Meridian
typically absorbs such claims as are subject to the policy self insured
retention limit or above the policy limits. There also exists the possibility of
vicarious professional liability claims being made directly against CHD
Meridian. As a result of these contractual arrangements, CHD Meridian routinely
incurs significant expenses arising out of professional liability claims. If CHD
Meridian fails to manage the professional liability claims and associated risk
effectively, its business will be adversely affected.
Certain of CHD Meridian's past professional liability insurance policy
years were insured by two insurance companies that are now either insolvent or
under regulatory supervision. As a result, CHD Meridian is effectively partially
uninsured for those periods. CHD Meridian has established reserves in connection
with the six pending claims from such policy years. Although CHD Meridian's
management believes such reserves are reasonable based on CHD Meridian's
historic loss experience, there is no assurance that these reserves will be
sufficient to pay any judgments or settlements. In addition, because CHD
Meridian current professional liability insurance self-insured retention is
$500,000, it is effectively partially uninsured against a variety of claims that
may arise from other years. CHD Meridian has maintained a layer of excess
insurance that begins with losses in excess of $1,000,000 per claim, including
for the years in which its primary insurer is insolvent. CHD Meridian's balance
sheet includes reserves for projected future professional liability expenses
based on its operations to date. But the estimates could prove wrong, and the
size of CHD Meridian's ultimate uninsured liability could exceed the established
reserves. CHD Meridian's 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, it is
necessary that CHD Meridian continue to 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.
CHD Meridian expects to establish a captive insurance company, which,
once established, will be subject it to risks associated with insurance
business, including additional regulatory requirements.
CHD Meridian is planning to establish a captive insurance subsidiary to
insure its professional liability exposure. CHD Meridian believes this approach
that will enhance the company's ability to manage malpractice exposure and
stabilize insurance costs. Although CHD Meridian has hired a manager for the
captive insurer, and has engaged an actuarial consulting firm, its operation of
the captive insurer will nonetheless be subject to the risks associated with any
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insurance business, which include investment risk relating to the performance of
its investment of assets set aside as reserves for future claims, and the
challenges associated with making actuarial estimates of projected future
professional liability losses and loss adjustment expenses. Failure to make an
adequate return on CHD Meridian's investments, or to maintain the principal of
invested funds, or failure to estimate such future loss and loss adjustment
expenses accurately, could have an adverse effect on CHD Meridian and therefore,
of the merged companies. Also, operation of a captive insurer will expose CHD
Meridian to substantial additional regulatory requirements, with attendant risks
if it fails to comply with applicable regulations.
CHD Meridian is subject to complex and extensive legal requirements,
and failure to comply with those requirements could have an adverse
effect on its business.
The healthcare industry is subject to numerous Federal, state, and
local laws, regulations and judicial doctrines. These legal requirements cover,
among other topics, licensure, corporate practice of medicine, privacy of
patient medical records, government healthcare program participation
requirements and restrictions, reimbursement for patient services, and Medicare
and Medicaid fraud and abuse.
There are judicial and statutory prohibitions on "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 that CHD Meridian provides to its clients include
establishing and managing medical clinics. Most physician services at clinics
that managed by CHD Meridian are provided by physicians who are employees of
professional corporations with which CHD Meridian has agreements and under which
it provides non-professional services such as purchasing equipment and supplies,
patient scheduling, billing, collection, accounting, and computer services. The
professional corporations control hiring and supervising physicians and all
medical functions. CHD Meridian has option agreements with the physician-owners
of affiliated professional corporations entitling the company to require them to
sell the stock of the professional corporations to another licensed physician
designated by CHD Meridian. This structure is intended to permit consolidation
of the professional corporations' financial statements with those of CHD
Meridian, while still maintaining sufficient separateness to comply with the
corporate practice of medicine doctrine and with fee-splitting prohibitions.
Although CHD Meridian does not believe so, there remains, however, potential
exposure to claims that this structure violates the corporate practice of
medicine doctrine or fee-splitting prohibitions. If such a claim is successfully
asserted against CHD Meridian in any jurisdiction, it could be subject to civil
and criminal penalties, or could be required to restructure its 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 contracts could be found to be illegal and unenforceable, which could
result in the termination of those contracts and an associated loss of revenue,
or inability to enforce valuable provisions of those contracts.
CHD Meridian personnel have custody of confidential patient records at
various clinics and pharmacies, and its computer servers also contain
confidential health risk assessments completed by employees of clients. Many
patient records are subject to a rule entitled Privacy of Individually
Identifiable Health Information promulgated by the U.S. Department of Health and
Human Services under HIPAA (or HIPAA Privacy Rule), and also to any state laws
that may have more stringent privacy requirements. CHD Meridian attempts to
protect the privacy and security of confidential patient information in
accordance with applicable law, but could face claims of violation of the HIPAA
Privacy Rule, invasion of privacy or similar claims, if its files or computers
were compromised, or if its interpretations of the applicable privacy
requirements, many of which are complex, were incorrect or allegedly incorrect,
or if CHD Meridian fails to maintain a sufficiently effective compliance
program.
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. Violations of these laws and
regulations can 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. Although CHD Meridian's
services and those of its affiliated professional corporations are generally
paid for by employer clients, CHD Meridian does bill the Medicare and Medicaid
programs, and private insurance companies, as agent of its affiliated
professional corporations, to recover reimbursable amounts that offset the
healthcare costs borne by CHD Meridian's clients. CHD Meridian therefore is
subject to various regulations under the Medicare and Medicaid programs,
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including fraud and abuse prohibitions. CHD Meridian believes that it is
compliant with these requirements, but could face claims of non-compliance if
its interpretations of the applicable requirements, many of which are complex,
were incorrect or allegedly incorrect, or if it fails to maintain a sufficiently
effective compliance program.
Although CHD Meridian believes that it complies in all material
respects with applicable law, compliance with laws, regulations and judicial
doctrines can be complex and may be subject to future review and interpretation
by government agencies and others, and there remains a possibility that future
legal actions against CHD Meridian would adversely affect its business.
Deterioration of the financial health of CHD Meridian's clients, many
of which are large U.S. manufacturing enterprises, could adversely
affect its 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 CHD Meridian's employer-dedicated healthcare facilities. Also, if any
CHD Meridian client becomes insolvent, CHD Meridian may not be able to recover
outstanding accounts receivable owed by that client, and may suffer premature
contract termination. CHD Meridian's professional liability insurance is written
on a claims-made basis, and, in order to fund continued coverage of an operation
after termination of a contract, CHD Meridian typically has charged its clients
for tail insurance coverage at the time that a contract terminates. If a client
is insolvent at the time of contract termination, CHD Meridian may not be able
to recoup the cost of tail insurance coverage, or other costs related to
facility shutdown. CHD Meridian has already experienced this in the case of one
major steel manufacturer, for which it formerly managed several facilities,
which became the debtor in a federal bankruptcy proceeding. This resulted in
difficulty in collecting some amounts due to, and also generated a claim against
CHD Meridian for repayment of an allegedly preferential transfer previously
received from the client. Because of the risks associated with client
insolvency, and the concentration of CHD Meridian's client base, its business is
to some extent dependent on the continued health of U.S. manufacturing
industries.
CHD Meridian cannot yet predict the impact of the recently adopted
Medicare prescription drug benefit on its business.
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
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.
This law could affect CHD Meridian's business either positively or
negatively and its ultimate effect is not yet clear. Subsidies for employers
providing retiree drug benefits will decrease the costs to those employers of
providing such benefits, and therefore might be expected to increase the number
of employers willing to provide retiree drug benefits, which would positively
affect our business. On the other hand, it is possible that employers that
presently offer prescription drug benefits will decide no longer to offer those
benefits, 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 the CHD Meridian business would be negatively affected.
Item 7. Exhibits.
23.1 Consent of Ernst & Young LLP.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned hereunto duly authorized.
I-TRAX, INC.
Date: December 2, 2004 By: /s/ Frank A. Martin
-------------------------------------
Name: Frank A. Martin
Title: Chief Executive Officer
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