SCHEDULE 14A
(RULE 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934
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I-TRAX, INC.
(Name of Registrant as Specified in Its Charter)
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0-11.
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[I-TRAX LOGO] [CHD Meridian LOGO]
MERGER PROPOSED - YOUR VOTE IS VERY IMPORTANT
The boards of directors of I-trax, Inc. and Meridian Occupational
Healthcare Associates, Inc., doing business as CHD Meridian Healthcare, have
approved a merger of the two companies. Upon the completion of the merger,
I-trax will conduct the historic business of CHD Meridian through a subsidiary.
We believe the merged companies will create more stockholder value than the
companies could achieve independently.
Upon completion of the merger, each share of CHD Meridian common stock will
be converted into the right to receive:
o the number of shares of I-trax common stock obtained by dividing
10,000,000 by the number of shares of CHD Meridian outstanding or
issuable upon exercise of stock options at the merger's effective time
(we refer to this number of shares as the CHD Meridian Shares Deemed
Outstanding);
o the number of shares of I-trax Series A convertible preferred stock
(which we refer to in this proxy statement as I-trax convertible
preferred stock), each of which is convertible into 10 shares of
I-trax common stock, obtained by dividing 400,000 by the CHD Meridian
Shares Deemed Outstanding; and
o cash in the amount obtained by dividing $35 million by the CHD
Meridian Shares Deemed Outstanding, subject to certain adjustments
and, if applicable, tax withholding.
In addition, in April 2005, each CHD Meridian stockholder will receive, for
each share of CHD Meridian common stock held at the merger's effective time,
such CHD Meridian stockholder's pro rata portion of 3,859,200 shares of I-trax
common stock (less any shares used to satisfy CHD Meridian's indemnity
obligations) if the historic business of CHD Meridian following the merger meets
certain financial performance goals described in this proxy statement.
I-trax stockholders will continue to hold their existing shares after the
merger.
CHD Meridian intends to offer to purchase shares of its common stock for
cash from certain executives, other employees, holders of fewer than 3,300
shares, and non-accredited investors, effective immediately prior to the merger.
CHD Meridian also plans to offer to terminate certain existing employee stock
options for cash effective immediately prior to the merger. Cash spent for such
repurchases or terminations will reduce the $35 million otherwise payable by
I-trax in the merger. Such purchases or terminations will also reduce the number
of CHD Meridian Shares Deemed Outstanding, thereby increasing the percentage of
the shares of I-trax common stock shares of I-trax convertible preferred stock
payable to each of the remaining CHD Meridian stockholders. Please refer to
section titled "The Merger and Other Proposals - Questions and Answers About the
Merger" beginning on page 1 of this proxy statement for a further discussion of
this subject.
In connection with the merger, the board of directors of I-trax has
approved the issuance of an additional 1,100,000 shares of convertible preferred
stock to third party investors in a private placement for cash. I-trax will use
the proceeds of this private placement to fund a portion of the cash I-trax is
required to deliver in the merger and to provide additional working capital.
The shares of I-trax common stock to be issued in the merger, together with
the shares of I-trax common stock issuable upon conversion of all of the shares
of convertible preferred stock to be issued in the merger and in the related
private placement to fund a portion of the cash to be delivered by I-trax in the
merger, will represent approximately 61% of the outstanding I-trax common stock
after the merger.
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We are asking I-trax stockholders to:
1. Approve the issuance of up to 13,859,200 shares of common stock and 400,000
shares of convertible preferred stock in the merger;
2. Approve the merger of DCG Acquisition, Inc., a wholly-owned subsidiary of
I-trax, with and into CHD Meridian;
3. Approve the sale of up to 1,100,000 shares of convertible preferred stock
to raise a portion of the cash consideration to be used in the merger and
for working capital; and
4. Ratify and approve the issuance, in a private placement that closed on
October 31, 2003, of 1,400,000 shares of common stock and warrants to
purchase 840,000 shares of common stock, and approve the issuance of the
840,000 shares of common stock upon the exercise of such warrants.
A special meeting of I-trax stockholders will be held on:
Wednesday March 17, 2004
10:00 a.m., local time
at the offices of
Ballard Spahr Andrews & Ingersoll, LLP
1735 Market Street, 51st Floor
Philadelphia, Pennsylvania 19103
I-TRAX'S BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT I-TRAX
STOCKHOLDERS VOTE TO:
1. APPROVE THE ISSUANCE OF UP TO 13,859,200 SHARES OF COMMON STOCK AND 400,000
SHARES OF CONVERTIBLE PREFERRED STOCK IN
THE MERGER;
2. APPROVE THE MERGER OF DCG ACQUISITION, INC., A WHOLLY-OWNED SUBSIDIARY OF
I-TRAX, WITH AND INTO CHD MERIDIAN;
3. APPROVE THE SALE OF UP TO 1,100,000 SHARES OF CONVERTIBLE PREFERRED STOCK
TO RAISE A PORTION OF THE CASH CONSIDERATION TO BE USED IN THE MERGER AND
FOR WORKING CAPITAL; AND
4. RATIFY AND APPROVE THE ISSUANCE, IN A PRIVATE PLACEMENT THAT CLOSED ON
OCTOBER 31, 2003, OF 1,400,000 SHARES OF COMMON STOCK AND WARRANTS TO
PURCHASE 840,000 SHARES OF COMMON STOCK AND APPROVE THE ISSUANCE OF 840,000
SHARES OF COMMON STOCK UPON EXERCISE OF SUCH WARRANTS.
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/s/ Frank A. Martin
Frank A. Martin
Chief Executive Officer
I-trax, Inc.
We are asking CHD Meridian stockholders to consider and vote upon the adoption
of the merger agreement. A special meeting of CHD Meridian stockholders will be
held on:
Wednesday March 17, 2004
9:00 a.m., local time
at the offices of
CHD Meridian
40 Burton Hills Boulevard
Suite 200
Nashville, Tennessee 37215
CHD MERIDIAN'S BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT CHD MERIDIAN
STOCKHOLDERS VOTE FOR THE ADOPTION OF THE MERGER AGREEMENT.
/s/ Haywood D. Cochrane, Jr.
----------------------------
Haywood D. Cochrane, Jr.
Chief Executive Officer
CHD Meridian
CONSIDER THE RISKS DESCRIBED ON PAGES 13 THROUGH 24 OF THIS PROXY STATEMENT.
Neither the Securities and Exchange Commission nor any state securities
regulators have approved the capital stock to be issued pursuant to the
transactions described in this proxy statement or determined if this proxy
statement is accurate or adequate. Any representation to the contrary is a
criminal offense.
Joint proxy statement dated February 6, 2004 and first mailed to
stockholders on or about February 9, 2004.
This proxy statement incorporates important business and financial
information about I-trax, including I-trax's Annual Report on Form 10-KSB for
the fiscal year ended December 31, 2002, Quarterly Reports on Form 10-QSB for
the fiscal quarters ended March 31, June 30 and September 30, 2003 and several
Current Reports on Form 8-K filed since January 1, 2003. These reports are
attached to this proxy statement in Annex G. In addition, any information
incorporated by reference into this proxy statement is available without charge
to I-trax stockholders upon written or oral request by contacting I-trax's
secretary at One Logan Square, Suite 2615, 130 N. 18th Street, Philadelphia,
Pennsylvania 19103 or by telephone at 215-557-7488 x116.
[I-TRAX LOGO]
NOTICE OF SPECIAL MEETING
OF STOCKHOLDERS
TO BE HELD ON WEDNESDAY, MARCH 17, 2004
AT 10:00 A.M., LOCAL TIME
To the Stockholders of I-trax, Inc.:
A special meeting of stockholders of I-trax will be held on Wednesday,
March 17, 2004, at 10:00 a.m., local time, at the offices of Ballard Spahr
Andrews & Ingersoll, LLP, 1735 Market Street, 51st Floor, Philadelphia, PA 19103
to consider and vote upon:
1. the approval of the issuance of up to 13,859,200 shares of
I-trax common stock, par value $.001, and 400,000 shares of
I-trax convertible preferred stock, par value $.001, to be
delivered in connection with the Merger Agreement, dated as of
December 26, 2003, as amended by the Amendment to Merger
Agreement, dated February 4, 2004, among CHD Meridian, I-trax,
DCG Acquisition, Inc., a wholly-owned subsidiary of I-trax,
and CHD Meridian Healthcare, LLC, a wholly-owned subsidiary of
I-trax;
2. the approval of the merger of DCG Acquisition, Inc., a
wholly-owned subsidiary of I-trax, with and into CHD Meridian;
3. the approval of the sale of up to 1,100,000 shares of I-trax
convertible preferred stock, par value $.001, to raise a
portion of the cash consideration to be used in the merger,
and for working capital; and
4. the ratification and approval of the issuance, in a private
placement that closed on October 31, 2003, of 1,400,000 shares
of I-trax common stock and warrants to purchase 840,000 shares
of I-trax common stock, which includes warrants to purchase
700,000 shares issued in the private placement and 140,000
shares issued to affiliates of the placement agent, and the
approval of the issuance of the 840,000 shares of common stock
upon the exercise of such warrants.
Holders of record of I-trax common stock at the close of business on
February 5, 2004, will be entitled to notice of and to vote at the I-trax
special meeting or any adjournment or postponement thereof.
If you attend the meeting, you must register before entering.
/s/ Yuri Rozenfeld
-----------------------------
Yuri Rozenfeld
General Counsel and Secretary
February 6, 2004
YOUR VOTE IS IMPORTANT. WHETHER OR NOT YOU PLAN TO ATTEND THE I-TRAX SPECIAL
MEETING, PLEASE COMPLETE, DATE AND RETURN YOUR PROXY CARD IN THE ENCLOSED
ENVELOPE PROMPTLY AND BY FOLLOWING THE INSTRUCTIONS INCLUDED WITH YOUR PROXY
CARD.
[CHD Meridian LOGO]
NOTICE OF SPECIAL MEETING
OF STOCKHOLDERS
TO BE HELD ON WEDNESDAY, MARCH 17, 2004
AT 9:00 A.M., LOCAL TIME
To the Stockholders of Meridian Occupational Healthcare Associates, Inc., doing
business as CHD Meridian Healthcare:
A special meeting of stockholders of CHD Meridian Healthcare will be
held on Wednesday, March 17, 2004, at 9:00 a.m., local time, at the offices of
CHD Meridian Healthcare, 40 Burton Hills Boulevard, Suite 200, Nashville,
Tennessee 37215 to consider and vote upon a proposal to adopt the Merger
Agreement, dated as of December 26, 2003, as amended by the Amendment to Merger
Agreement, dated February 4, 2004, among CHD Meridian, I-trax, Inc., DCG
Acquisition, Inc., a wholly-owned subsidiary of I-trax, and CHD Meridian
Healthcare, LLC, a wholly-owned subsidiary of I-trax.
Holders of record of CHD Meridian common stock at the close of business
on February 5, 2004, will be entitled to notice of and to vote at the CHD
Meridian special meeting or any adjournment or postponement thereof.
If you attend the meeting, you must register before entering.
/s/ Shannon W. Farrington
---------------------
Shannon W. Farrington
Corporate Secretary
February 6, 2004
YOUR VOTE IS IMPORTANT. WHETHER OR NOT YOU PLAN TO ATTEND THE CHD
MERIDIAN SPECIAL MEETING, PLEASE COMPLETE, DATE AND RETURN YOUR PROXY CARD IN
THE ENCLOSED ENVELOPE PROMPTLY AND BY FOLLOWING THE INSTRUCTIONS INCLUDED WITH
YOUR PROXY CARD.
TABLE OF CONTENTS
Page
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QUESTIONS AND ANSWERS ABOUT THE MERGER.......................................................................2
MERGER SUMMARY...............................................................................................2
I-TRAX SUMMARY SELECTED FINANCIAL DATA.......................................................................2
CHD MERIDIAN SUMMARY SELECTED FINANCIAL DATA.................................................................2
I-TRAX SUMMARY SELECTED UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL DATA...............................2
RISK FACTORS.................................................................................................2
Risks Related to the Merger and the Merged Companies After the Merger....................................2
Risks Related to I-trax..................................................................................2
Risks Related to CHD Meridian Healthcare Business........................................................2
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS...................................................2
DESCRIPTION OF I-TRAX........................................................................................2
DESCRIPTION OF CHD MERIDIAN..................................................................................2
CHD Meridian's Business..................................................................................2
Management's Discussion and Analysis of Financial Condition and Results of Operations of CHD Meridian....2
Quantitative And Qualitative Disclosures About Market Risk...............................................2
Contractual Obligations..................................................................................2
THE MERGER...................................................................................................2
General..................................................................................................2
Background of the Merger.................................................................................2
Reasons for the Merger; Recommendations of the Boards of Directors.......................................2
Recommendation of the Board of Directors of I-trax.......................................................2
Recommendation of the Board of Directors of CHD Meridian.................................................2
Financing of the Cash Portion of the Merger Consideration................................................2
Effect of the Issuances of I-trax Common Stock and Convertible Preferred Stock on the Rights of
Existing I-trax Stockholders.............................................................................2
Cash Bonus Plan for Certain Non-executive CHD Meridian Employees After the Merger........................2
Material United States Federal Income Tax Consequences of the Merger.....................................2
Regulatory Matters Relating to the Merger................................................................2
Dissenters' Rights.......................................................................................2
Federal Securities Laws Consequences.....................................................................2
Registration Rights......................................................................................2
Accounting Treatment.....................................................................................2
Stock Exchange Listing...................................................................................2
Fees and Expenses of the Merger..........................................................................2
INTERESTS OF OFFICERS AND DIRECTORS IN THE MERGER............................................................2
I-trax...................................................................................................2
CHD Meridian.............................................................................................2
Ownership of I-trax Common Stock.........................................................................2
Pro forma Ownership of I-trax Common Stock Following the Merger..........................................2
THE MERGER AGREEMENT.........................................................................................2
Structure of the Merger..................................................................................2
Timing of Closing........................................................................................2
Merger Consideration and Related Adjustments.............................................................2
Treatment of CHD Meridian Stock Options..................................................................2
Earn-Out Payment.........................................................................................2
Appointment of CHD Meridian Stockholder Representative...................................................2
Procedure For Payment....................................................................................2
The Board of I-trax......................................................................................2
Pre-Closing Covenants....................................................................................2
Post-Closing Covenants...................................................................................2
i
Representations and Warranties...........................................................................2
Conditions to the Completion of The Merger...............................................................2
Remedies for Breach of the Merger Agreement..............................................................2
Termination of the Merger Agreement......................................................................2
Amendment and Third Party Beneficiaries..................................................................2
Expenses.................................................................................................2
OPINION OF I-TRAX'S FINANCIAL ADVISOR........................................................................2
RATIFICATION AND APPROVAL OF I-TRAX'S ISSUANCE OF PRIOR COMMON STOCK AND WARRANT ON OCTOBER 31, 2003.........2
MARKET PRICE AND DIVIDEND INFORMATION........................................................................2
MERIDIAN OCCUPATIONAL HEALTHCARE ASSOCIATES, INC. FINANCIAL DATA.............................................2
CHD MERIDIAN SUPPLEMENTARY FINANCIAL INFORMATION.............................................................2
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION.................................................2
INFORMATION ABOUT THE MEETINGS AND VOTING....................................................................2
Matters Relating To The Special Meetings.................................................................2
Vote Necessary To Approve I-trax and CHD Meridian Proposals..............................................2
Voting By Proxy..........................................................................................2
How To Vote By Proxy.....................................................................................2
Other Business; Adjournments.............................................................................2
CERTAIN LEGAL INFORMATION....................................................................................2
Authorized Capital Stock.................................................................................2
Number of Directors......................................................................................2
Term, Classification and Selection of Board Of Directors.................................................2
Removal of Directors.....................................................................................2
Stockholder Action By Written Consent....................................................................2
Special Meetings of Stockholders.........................................................................2
Amendment of Certificate of Incorporation and Bylaws.....................................................2
DESCRIPTION OF I-TRAX CAPITAL STOCK..........................................................................2
General..................................................................................................2
I-trax Common Stock......................................................................................2
I-trax Preferred Stock...................................................................................2
6% Convertible Senior Debenture..........................................................................2
Exchange Agent, Transfer Agent And Registrar.............................................................2
EXPERTS 2
FUTURE I-TRAX STOCKHOLDER PROPOSALS..........................................................................2
WHERE YOU CAN FIND MORE INFORMATION..........................................................................2
ii
ANNEXES
Annex A - Merger Agreement and Amendment to Merger Agreement
Annex B - Opinion of Bryant Park Capital, Inc.
Annex C - Escrow Agreement
Annex D - Certificate of Designations for Series A Convertible Preferred Stock of I-trax, Inc.
Annex E - Section 262 of the Delaware General Corporation Law
Annex F - Form of Letter of Transmittal
Annex G - Annual Report on Form 10-KSB Fiscal year ended December 31, 2002
Quarterly Reports on Form 10-QSB Fiscal quarters ended March 31, 2003,
June 30, 2003, and September 30, 2003
Current Reports on Form 8-K Filed on February 12, 2003, February
19, 2003, April 22, 2003, May 19, 2003,
August 15, 2003, October 17, 2003,
November 17, 2003, December 29, 2003,
December 30, 2003 and February 2, 2004
Proxy Statement on Schedule 14A Filed on April 25, 2003
iii
QUESTIONS AND ANSWERS ABOUT THE MERGER
Q: What Will Happen In The Merger?
A: We are proposing to merge our two companies so that, when the merger
transactions are completed, the operations of Meridian Occupational
Healthcare Associates, Inc. (doing business as CHD Meridian
Healthcare), which we refer to throughout this proxy statement as CHD
Meridian, will be carried on by CHD Meridian Healthcare, LLC, a newly
formed, wholly-owned subsidiary of I-trax, Inc. For tax and other
reasons, the merger is structured as a two-step transaction. In the
first step, DCG Acquisition, Inc., a wholly-owned subsidiary of
I-trax, will merge with and into CHD Meridian, which will become a
subsidiary of I-trax, and the common stock of CHD Meridian will be
converted into the right to receive merger consideration. In the
second step, CHD Meridian will merge with and into CHD Meridian
Healthcare, LLC. For tax purposes, it is anticipated that the
transaction will be treated as if the plan of reorganization had
provided for a statutory merger of CHD Meridian directly into I-trax.
Q: What Will CHD Meridian Stockholders Receive In The Merger?
A: Upon completion of the merger, each share of CHD Meridian common stock
will be converted into the right to receive:
o the number of shares of I-trax common stock obtained by
dividing 10,000,000 by the number of shares of CHD Meridian
outstanding or issuable upon exercise of stock options at
the merger's effective time (we refer to this number of
shares as the CHD Meridian Shares Deemed Outstanding);
o the number of shares of I-trax convertible preferred stock,
each of which is convertible into 10 shares of I-trax common
stock, obtained by dividing 400,000 by the CHD Meridian
Shares Deemed Outstanding; and
o cash in the amount obtained by dividing $35 million by the
CHD Meridian Shares Deemed Outstanding, subject to certain
adjustments and, if applicable, tax withholding.
In addition, in April 2005, each former CHD Meridian stockholder will
receive, for each share of CHD Meridian common stock held at the
merger's effective time, such CHD Meridian stockholder's pro rata
portion of 3,859,200 shares of I-trax common stock (less any shares
used to satisfy CHD Meridian's indemnity obligations) if the historic
business of CHD Meridian following the merger meets certain financial
performance goals described in this proxy statement.
CHD Meridian intends to offer to purchase for cash shares of its
common stock from certain executives, other employees, holders of
fewer than 3,300 shares, and non-accredited investors, effective
immediately prior to the merger. CHD Meridian also plans to offer to
terminate certain existing employee stock options for cash effective
immediately prior to the merger. Cash spent for such repurchases and
such option terminations will reduce the $35 million of cash otherwise
payable in the merger. However, any such transactions will also reduce
the number of CHD Meridian Shares Deemed Outstanding, thereby
increasing the percentage of shares of I-trax common stock and I-trax
convertible preferred stock payable to each of the remaining CHD
Meridian stockholders. The net effect of these transactions will be to
alter the cash/equity mix payable to CHD Meridian stockholders at the
merger's effective time. The stockholders who receive and accept such
offers will receive only cash for their shares (or options) and,
therefore, a disproportionately larger share of cash than the
remaining CHD Meridian stockholders. The remaining CHD Meridian
stockholders will receive a disproportionately larger share of the
equity and a disproportionately smaller share of cash. The merger
agreement limits the amount of cash to be used for such transactions
to $11 million, and CHD Meridian expects to use such sum for such
repurchases and terminations.
1
The following table sets forth the approximate portion of merger
consideration that each CHD Meridian stockholder would receive at the
merger's effective time for each share of CHD Meridian common stock
owned, assuming (1) no change in the 243,182 CHD Meridian Shares
Deemed Outstanding on the date of this proxy statement and (2) that,
as a result of transactions described in the preceding paragraph,
35,297 shares (and/or options to purchase shares) are repurchased or
terminated (leaving 207,885 CHD Meridian Shares Deemed Outstanding at
the merger's effective time) in exchange for approximately $10.2
million.
CHD Meridian Shares Deemed Outstanding
(1) 243,182 (2) 207,885
-------------------- -----------------------
Shares of I-trax common stock (a) 41 48
Shares of I-trax convertible preferred stock (b) 1.64 1.92
Cash $143.93 $119.49
(a) Common stock will be rounded to the nearest share.
(b) Convertible preferred stock will be rounded to the nearest
one-hundredth of a share.
There is no assurance that any CHD Meridian stockholder to whom an
offer of share repurchase or option termination is made will accept
such offer and, therefore, CHD Meridian stockholders will not know
until the merger's effective time the exact mix of cash and equity
payable in the merger.
Throughout this proxy statement, we refer to the I-trax common stock,
including the 3,859,200 shares potentially payable in April 2005,
I-trax convertible preferred stock and the cash to be received by the
CHD Meridian stockholders at the merger's effective time, as the
merger consideration.
Q: What Will Happen To I-trax Stockholders In The Merger?
A: I-trax stockholders will continue to hold their existing shares after
the merger.
Q: When Are The Stockholders' Special Meetings?
A: Each company's special meeting will take place on March 17, 2004 at
the time and the respective location specified on the cover page of
this proxy statement.
Q: What Do I Need To Do Now?
A: Mail your signed proxy card in the enclosed return envelope, as soon
as possible, so that your shares may be represented at the respective
special meeting of your company. To assure that we obtain your vote,
please give your proxy as instructed on your proxy card even if you
currently plan to attend your special meeting in person.
I-TRAX'S BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT I-TRAX
STOCKHOLDERS VOTE TO:
1. APPROVE THE ISSUANCE OF UP TO 13,859,200 SHARES OF COMMON
STOCK AND 400,000 SHARES OF CONVERTIBLE PREFERRED STOCK IN
THE MERGER;
2. APPROVE THE MERGER OF DCG ACQUISITION, INC., A WHOLLY-OWNED
SUBSIDIARY OF I-TRAX, WITH AND INTO CHD MERIDIAN;
3. APPROVE the SALE OF UP TO 1,100,000 SHARES of the
convertible preferred stock TO RAISE A PORTION OF THE CASH
CONSIDERATION TO BE USED IN the merger AND FOR WORKING
CAPITAL; AND
2
4. RATIFY AND APPROVE THE ISSUANCE, IN A PRIVATE PLACEMENT THAT
CLOSED ON OCTOBER 31, 2003, OF 1,400,000 SHARES OF COMMON
STOCK AND WARRANTS TO PURCHASE 840,000 SHARES OF COMMON
STOCK AND APPROVE THE ISSUANCE OF 840,000 SHARES OF COMMON
STOCK UPON EXERCISE OF SUCH WARRANTS.
CHD MERIDIAN'S BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT CHD
MERIDIAN STOCKHOLDERS VOTE FOR ADOPTION OF THE MERGER AGREEMENT.
Q: What Should I Do If I Want To Change My Vote?
A: If you are the record owner of your shares, you can send in a
later-dated, signed proxy card to your company's Secretary or you can
attend your special meeting in person and vote. You may also revoke
your proxy by sending a notice of revocation to your company's
Secretary at the address under "Merger Summary - The Companies" below.
If your shares are held in street name through your broker, you must
contact your broker to change your vote.
Q: What Vote Is Required To Approve The Merger?
A: Adoption of the merger agreement by the CHD Meridian stockholders
requires the affirmative vote of the holders of a majority of the
total votes entitled to be cast by holders of CHD Meridian common
stock. Abstentions will have the same effect as votes against the CHD
Meridian proposal. Because holders of the aggregate number of shares
of CHD Meridian common stock representing approximately 72% of the
total votes entitled to be cast have entered into voting agreements
with I-trax pursuant to which they have agreed to vote in favor of the
merger, we expect the merger agreement to be adopted by the CHD
Meridian stockholders. Approval by the I-trax stockholders of each of
the issuance of common stock and convertible preferred stock in the
merger, the merger of DCG Acquisition, Inc., a wholly-owned subsidiary
of I-trax, with and into CHD Meridian, and the sale of convertible
preferred stock to raise a portion of the cash consideration to be
used in the merger and for working capital requires the affirmative
vote of the majority of the votes cast on such proposal, provided that
the total votes cast represent over 50% of the voting stock present in
person or by proxy at the meeting. Holders of the aggregate number of
shares of I-trax common stock representing approximately 13.3% of the
total votes to be cast have entered into voting agreements with CHD
Meridian pursuant to which they have agreed to vote in favor of the
merger.
Q: If My Shares Are Held In "Street Name" By My Broker, Will My Broker
Vote My Shares For Me?
A: If you do not provide your broker with instructions on how to vote
your "street name" shares, your broker will not be permitted to vote
them. You should therefore be sure to provide your broker with
instructions on how to vote your shares.
Q: Should I-trax Stockholders Send In Their Stock Certificates?
A: No. I-trax stockholders will keep their existing certificates.
Q: When Do You Expect The Merger To Be Completed?
A: We are hoping to complete the merger as quickly as practicable. In
addition to stockholder approvals, the waiting period under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976 must have
expired, and we must satisfy certain other conditions to closing. We
expect to complete the merger by March 30, 2004.
Q: Whom Do I Call If I Have Questions About The Special Meetings Or The
Merger?
A: I-trax stockholders should call Yuri Rozenfeld, the general counsel of
I-trax, at (215) 557-7488 x 116. CHD Meridian stockholders should call
Shannon W. Farrington, the chief financial officer of CHD Meridian, at
(615) 665-9500.
3
MERGER SUMMARY
This Merger Summary highlights selected information from this proxy
statement and may not contain all of the information that is important to you.
To understand the merger fully and for a more complete description of the legal
terms of the merger, you should carefully read this proxy statement (including
the appendices) and the documents we refer to. See "Where You Can Find More
Information" on page 128.
The Companies (See Pages 24 and 26)
I-TRAX, INC.
One Logan Square
130 North 18th Street, Suite 2615
Philadelphia, Pennsylvania 19103
(215) 557-7488
I-trax provides personalized health management solutions for focused
disease and lifestyle/wellness management programs, which improve the health of
the populations its serves, while reducing the cost of care. I-trax delivers the
solutions through its Health-e-Lifesm Program, a health management program that
enables corporations to offer all of their employees' life style, disease and
risk reduction programs. The program is deployed through I-trax's Care
Communications Center. I-trax's programs are fully integrated and use a
single-data platform that allows all caregivers to share records that enable
true coordination of care.
CHD MERIDIAN HEALTHCARE
40 Burton Hills Boulevard
Suite 200
Nashville, Tennessee 37215
(615) 665-9500
CHD Meridian is a leading provider of outsourced, employer-sponsored
healthcare services to Fortune 1,000 companies and the Federal government. CHD
Meridian's programs are designed to allow employers to contract directly for a
wide range of employee-related healthcare services delivered at or near the
worksite. CHD Meridian offers programs in four areas: (1) primary care services;
(2) pharmacy services and benefits; (3) staffing and management of on-site
occupational health facilities; and (4) corporate health staffing and management
services. CHD Meridian currently maintains contracts with 90 leading U.S.
employers serving approximately 650,000 lives.
Reasons for the Merger (See Page 36)
The combination of I-trax and CHD Meridian offers a unique opportunity to
provide total population health management for the self-insured employer. I-trax
provides personalized health management solutions for focused disease and
lifestyle/wellness management programs. CHD Meridian provides on-site healthcare
for Fortune 1,000 companies. With a nominal increase in variable costs, the
combined company can offer to CHD Meridian's current customers the benefit of
I-trax's solutions and the ability to participate in medical cost savings
provided to these customers while enjoying increased profit margins. For new
customers, the combination is an opportunity for employers to manage not only
employees who use on-site facilities, but also the entire employer population
through an integrated and comprehensive program. Potential clients could turn to
the combined company as a single vendor for primary care, pharmacy, occupational
health, disease management and health interventions. The companies believe that
this will increase productivity, reduce absenteeism, improve health status of
both active employees and retirees, and reduce overall costs for customers of
the merged companies.
The Merger (See Page 33)
The merger is structured as a two-step transaction. In the first step, DCG
Acquisition, Inc., a wholly-owned subsidiary of I-trax, will merge with and into
CHD Meridian. The CHD Meridian stockholders will receive the merger
consideration in exchange for their shares of CHD Meridian common stock in the
first step of the merger. In the second step, CHD Meridian will merge with and
into CHD Meridian Healthcare, LLC. The merger agreement is attached as Annex A
to this proxy statement. We urge you to read the merger agreement as it is the
principal legal document that governs the merger.
What CHD Meridian Stockholders Will Receive (See Pages 1, 39, 46 and 52)
Please refer to the summary of the merger consideration presented above in
response to the question: "What Will CHD Meridian Stockholders Receive in the
Merger?"
Financing of Cash Portion of Merger Consideration (See Page 39)
I-trax expects to distribute in the merger total cash consideration of $35
million, subject to certain adjustments and, if applicable, tax witholding.
4
I-trax expects to fund the cash portion of the merger consideration by
obtaining a senior credit facility with a national lender, which allows a
closing date draw of $16 million, and by raising between $15 and $25 million
through a private placement of additional shares of its convertible preferred
stock. As of the date this proxy statement is being mailed, I-trax has received
a loan commitment, subject to customary conditions, for the senior credit
facility and subscriptions for $20 million of its convertible preferred stock.
I-trax is seeking stockholder approval of the issuance of the shares of its
convertible preferred stock in the private placement at its special meeting of
stockholders.
Opinion of Financial Advisor (See Page 61)
In connection with the merger, I-trax's board of directors received the
opinion of Bryant Park Capital, Inc. to the effect that, as of December 28,
2003, the merger consideration is fair, from a financial point of view, to
I-trax. This opinion, which is attached as Annex B, sets forth assumptions made,
matters considered, and limitations on the review undertaken in connection with
the opinion. WE URGE YOU TO READ THIS OPINION IN ITS ENTIRETY. The opinion of
BryanT Park CapItal was provided solely to the I-trax Board and does not
constitute a recommendation to any PERSON on how to vote on THE MERGER OR ANY
MATTER RELATING TO THE MERGER.
Per Share Market Price Information (See Page 72)
I-trax's common stock is listed on the American Stock Exchange. On December
26, 2003, the last full trading day before the announcement of the merger
agreement, I-trax common stock closed at $3.45 per share. On February 5, 2004,
the most recent practicable date prior to the mailing of this proxy statement,
the last reported closing price per share of I-trax common stock on the American
Stock Exchange was $4.26.
Ownership of I-trax after the Merger (See Page 49)
Immediately after the merger, (a) stockholders of CHD Meridian at the
effective time of the merger will own approximately 39% of the I-trax common
stock (assuming all shares of convertible preferred stock were converted and
without counting any shares potentially payable in April 2005); (b) purchasers
of convertible preferred stock sold to raise a portion of the merger
consideration will own approximately 22% of the I-trax common stock (assuming a
sale of 800,000 shares of convertible preferred stock and assuming conversion);
and (c) I-trax stockholders immediately before the merger's effective time will
own approximately 39% of the I-trax common stock (on the same assumptions). This
information is based on the number of shares of I-trax common stock outstanding
on February 5, 2004 and does not take into account issuances of I-trax common
stock upon conversion or exercise of I-trax's outstanding options, warrants and
convertible debt.
Board of Directors of I-trax after the Merger (See Page 46 and Page 55)
After the merger, the board of directors of I-trax will have 10 members and
will include Haywood D. Cochrane, Jr., the current chief executive officer of
CHD Meridian.
Interests of Officers and Directors in the Merger (See Page 46)
When you consider our boards of directors' recommendations that you vote in
favor of the relevant proposals, you should be aware that a number of our
officers and directors will be entitled to receive certain benefits if the
merger occurs that they will not be entitled to receive if the merger does not
occur.
Material United States Federal Income Tax Consequences of the Merger
(See Page 40)
The transaction has been structured to qualify as a tax-free
reorganization. Assuming the transaction is a tax-free reorganization, a CHD
Meridian stockholder who exchanges CHD Meridian shares for I-trax common stock,
I-trax convertible preferred stock and cash in the merger generally will
recognize gain (but not loss) in an amount equal to the lesser of (1) the excess
(if any) of (i) the amount of cash and the fair market value of the I-trax
common stock and convertible preferred stock received in the exchange over (ii)
the stockholder's adjusted tax basis in the CHD Meridian shares; and (2) the
amount of cash received in the exchange. CHD Meridian stockholders are urged to
consult their tax advisors as to the consequences of participation in the
merger.
Accounting Treatment (See Page 45)
The merger will be accounted for under the purchase method of accounting,
with I-trax treated as the acquirer.
5
Dissenters' Rights (See Page 43)
The holders of I-trax common stock will not have any right to an appraisal
of the value of their shares in connection with the merger or the other matters
being submitted to a vote of stockholders at the I-trax special meeting. The
holders of CHD Meridian common stock will have appraisal rights for their shares
if they do not vote in favor of the merger and comply with procedures required
under Delaware law.
Regulatory Approvals (See Page 43)
Pursuant to the Hart-Scott-Rodino Antitrust Improvements Act of 1976, the
merger cannot be completed until after we have given certain information and
materials to the Federal Trade Commission and the required waiting period has
expired or been terminated. We plan to submit the pre-merger notification and
report forms on or before February 17, 2004. If we submit the pre-merger
notification and report forms on February 17, 2004, the waiting period would be
scheduled to expire at midnight on March 18, 2004 unless earlier terminated or
extended by a request for additional information.
We are not required to effect the merger unless the Hart-Scott-Rodino
waiting period has expired or been terminated.
Conditions to the Completion of the Merger (See Page 58)
The completion of the merger depends on satisfying numerous material
conditions, which are discussed in detail later in this proxy statement.
Termination of the Merger Agreement (See Page 60)
Either I-trax or CHD Meridian can terminate the merger agreement with prior
authorization of its board of directors if I-trax stockholders do not approve
the issuance of common stock and convertible preferred stock in the merger or if
CHD Meridian stockholders do not adopt the merger agreement. In addition, either
party can terminate the merger agreement if the conditions to such party's
consummation of the merger are not satisfied by April 30, 2004, provided that
such party's breach of any of its respective warranties, representations or
covenants is not the reason the condition has not been satisfied. If the only
condition not satisfied on April 30, 2004 is that I-trax cannot reasonably
determine that the issuance of I-trax common stock and convertible preferred
stock as merger consideration is exempt from registration under Section 4(2) of
the Securities Act of 1933, then I-trax may extend the date after which I-trax
or CHD Meridian may terminate the merger agreement if conditions remain
unsatisfied from April 30, 2004 to July 31, 2004, provided that I-trax promptly
files a registration statement on Form S-4 registering the shares of common
stock and convertible preferred stock to be issued in the merger and issuable
upon conversion of such convertible preferred stock.
Either party can terminate the agreement if the other party breaches any of
its representations, warranties or covenants and does not remedy the breach
within 30 days of notice of the breach. I-trax and CHD Meridian can also agree
to terminate the merger agreement for any reason.
CHD Meridian can terminate the merger agreement if the closing price of
I-trax's common stock is less than $2.25 per share for ten consecutive trading
days.
Stockholder Votes Required (See Page 121)
For I-trax stockholders: I-trax stockholders are being asked to consider
and vote on the following at the special meeting:
1. Approval of the issuance of up to 13,859,200 shares of common stock
and 400,000 shares of convertible preferred stock in the merger;
2. Approval of the merger of DCG Acquisition, Inc., a wholly-owned
subsidiary of I-trax, with and into CHD Meridian;
3. Approval of the sale of up to 1,100,000 shares of convertible
preferred stock to raise a portion of the cash consideration to be
used in the merger and for working capital; and
4. Ratification and approval of the issuance, in a private placement that
closed on October 31, 2003, of 1,400,000 shares of common stock and
warrants to purchase 840,000 shares of common stock and approve the
issuance of the 840,000 shares of common stock upon the exercise of
such warrants.
Each proposal requires the affirmative vote of the majority of the votes
cast on such proposal, provided that the total votes cast represent over 50% of
the voting stock present in person or by proxy at the meeting. As of January 20,
2004, directors and
6
executive officers of I-trax and their affiliates owned an aggregate of 13.3% of
the outstanding shares of I-trax common stock, which they have indicated they
intend to vote in favor of the I-trax proposals.
For CHD Meridian stockholders: Adoption of the merger agreement requires
the approval of the holders of a majority of the total votes entitled to be cast
by holders of CHD Meridian common stock. As of February 5, 2004, directors and
executive officers of CHD Meridian and their affiliates owned an aggregate
number of shares of CHD Meridian common stock representing approximately 80% of
the total votes entitled to be cast, which they have indicated they intend to
vote in favor of adoption of the merger agreement. Of these, holders of the
aggregate number of shares of CHD Meridian common stock representing
approximately 72% of the total votes entitled to be cast have entered into
voting agreements with I-trax pursuant to which they have agreed to vote in
favor of the merger.
I-TRAX COMMON STOCK AND WARRANT ISSUANCE RATIFICATION SUMMARY
This Summary highlights selected information from this proxy statement and
may not contain all of the information that is important to you. To understand
the common stock and warrant issuance fully, you should carefully read this
proxy statement and the documents we refer to. See "Where You Can Find More
Information" on page 128.
On October 31, 2003, I-trax closed a private placement to accredited
investors in which I-trax sold as a unit two shares of common stock and a
warrant to purchase an additional share of common stock exercisable at $3.00 for
a unit purchase price of $5.00. I-trax issued a total of 1,400,000 shares of
I-trax common stock and warrants to purchase 700,000 shares of common stock in
the private placement. As part of this private placement, I-trax also issued
warrants to purchase 140,000 shares of common stock to affiliates of the
placement agent. The American Stock Exchange has advised I-trax that the
Exchange will require I-trax to seek stockholder ratification and approval of
the issuances of I-trax common stock and warrants to acquire I-trax common stock
in the private placement I-trax closed on October 31, 2003 because this private
placement may be integrated with the merger under the American Stock Exchange's
rules.
Our Recommendations to Stockholders (See Page 38)
To I-trax Stockholders:
I-TRAX'S BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU VOTE TO:
1. APPROVE THE ISSUANCE OF UP TO 13,859,200 SHARES OF COMMON STOCK AND
400,000 SHARES OF CONVERTIBLE PREFERRED STOCK IN THE MERGER;
2. APPROVE THE MERGER OF DCG ACQUISITION, INC., A WHOLLY-OWNED SUBSIDIARY
OF I-TRAX, WITH AND INTO CHD MERIDIAN;
3. APPROVE THE SALE OF UP TO 1,100,000 SHARES OF CONVERTIBLE PREFERRED
STOCK TO RAISE A PORTION OF THE CASH CONSIDERATION TO BE USED IN THE
MERGER AND FOR WORKING CAPITAL; AND
4. RATIFY AND APPROVE THE ISSUANCE, IN A PRIVATE PLACEMENT THAT CLOSED ON
OCTOBER 31, 2003, OF 1,400,000 SHARES OF COMMON STOCK AND WARRANTS TO
PURCHASE 840,000 SHARES OF COMMON STOCK AND APPROVE THE ISSUANCE OF
THE 840,000 SHARES OF COMMON STOCK UPON THE EXERCISE OF SUCH WARRANTS.
To CHD Meridian Stockholders:
CHD MERIDIAN'S BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU VOTE FOR
ADOPTION OF THE MERGER AGREEMENT.
7
I-TRAX SUMMARY SELECTED FINANCIAL DATA
The table below contains summary selected historical financial
information for I-trax as of and for the years ended December 31, 2002 and 2001
and for the nine months ended September 30, 2003 and September 30, 2002. The
information as of and for the years ended December 31, 2002 and 2001 has been
prepared using the audited consolidated financial statements of I-trax. The
information as of and for the nine months ended September 30, 2003 and September
30, 2002 has been prepared using the unaudited condensed consolidated financial
statements of I-trax. This information is only a summary, and you should read it
in conjunction with I-trax historical financial statements and related notes and
Management's Discussion and Analysis of Financial Condition and Results of
Operations contained in I-trax's Annual Report on Form 10-KSB for the fiscal
year ended December 31, 2002, and Quarterly Reports on Form 10-QSB for the
fiscal quarters ended March 31, June 30 and September 30, 2003 filed with the
Securities and Exchange Commission and attached to this proxy statement in Annex
G.
Statement of Operations Data
Nine months
ended Nine months ended
September 30, September 30, Year ended Year ended
2003 2002 December 31, December 31,
(unaudited) (unaudited) 2002 2001
----------------- ------------------ ----------------- ------------------
(In thousands, except per share amounts)
Revenue $ 3,668 $ 1,776 $ 3,932 $ 613
Cost of revenue 977 952 1,229 100
General and administrative (1) 3,095 4,254 5,956 8,707(d)
Depreciation and amortization 1,318 1,197 2.045 799
Research and development -- 320 410 818
Marketing and publicity 1,677(c) 367 774 990
Impairment charge related to intangible -- -- 1,648 --
assets
Acquired in progress research and -- -- -- 1,643
development
Operating loss (3,399) (5,314) (8,130) (12,444)
Total other income (expenses) (1,917) (924) (1,295) (1,915)
Loss before provision for income taxes (5,316) (6,238) (9,425) (14,359)
Net loss $ (5,316)(e) $ (6,238) $ (9,425) $ (14,359)
================= ================== ================= ==================
Adjusted net loss (b) $ (5,316) $ (6,238) $ (9,425) $ (13,719)
================= ================== ================= ==================
Basic and diluted loss per common
share (a) $ (.53) $ (.76) $ (1.04) $ (2.71)
================= ================== ================= ==================
Effect of pro forma adjustment (b) $ -- $ -- $ -- $ .12
================= ================== ================= ==================
Adjusted net loss per common share (a) $ (.53) $ (.76) $ (1.04) $ (2.59)
================= ================== ================= ==================
Weighted average number of shares 10,111,766 8,207,741 9,096,958 5,291,403
outstanding (a) ================= ================== ================= ==================
(1) Includes salary and related benefits which are stated separately on I-trax's Form 10-KSB and Forms 10-QSB.
8
Balance Sheet Data
September 30, December 31,
2003 2002
(unaudited)
---------------- -----------------
(In thousands)
Cash $ 245 $ 360
Office equipment and furniture, net 925 413
Goodwill, net 8,424 8,424
Intangible assets, net 1,907 2,748
Debt issuance costs, net 77 249
Total assets 13,887 14,407
Total current liabilities 3,282 3,640
Total liabilities 4,029 6,008
Total stockholders' equity 9,858 8,399
Nine months Nine months
ended ended
September 30, September 30, Year ended Year ended
2003 2002 December 31, December 31,
(unaudited) (unaudited) 2002 2001
----------------- ----------------- ----------------- -----------------
(In thousands, except per share amounts)
Reported net loss $ (5,316) $ (6,238) $ (9,425) $ (14,359)
Add back goodwill amortization -- -- -- 641
Adjusted net loss (5,316) (6,238) (9,425) (13,719)
(a) Per share and weighted average information has been adjusted to reflect
a 1-for-5 reverse stock split effected as of January 3, 2003.
(b) Effective January 1, 2002, I-trax adopted SFAS No. 142, "Goodwill and
Other Intangible Assets," which addresses accounting for goodwill and
intangible assets subsequent to their acquisition. This statement
eliminates the amortization of goodwill and requires that goodwill be
reviewed annually for impairment. SFAS No. 142 was effective for fiscal
years beginning after December 15, 2001. I-trax ceased amortizing
goodwill on January 1, 2002 and the following table reflects the
adjusted net loss to exclude goodwill amortization for the year ended
December 31, 2001.
(c) Includes a non-cash charge of $1,467 resulting from the issuance of
common stock, granting of warrants and contribution of common stock by
certain stockholders of I-trax to an investor relations firm.
(d) Includes a non-cash charge of $3,915 of stock based compensation.
(e) For the nine months ended September 30, 2003, EBITDA amounted to a
negative $1,781, which includes a non-cash charge of $1,467 and a $200
non-recurring charge for costs of a previously uncompleted acquisition,
and $500 of other income comprised of proceeds from a life insurance
policy of a deceased officer and director.
9
CHD MERIDIAN SUMMARY SELECTED FINANCIAL DATA
The table below contains summary selected historical financial information
for CHD Meridian as of and for the years ended December 31, 2002, 2001, 2000,
1999 and 1998 and for the nine months ended September 30, 2003 and September 30,
2002. The information as of and for the years ended December 31, 2002, 2001 and
2000 has been prepared using the audited consolidated financial statements of
CHD Meridian. The information as of and for the years ended December 31, 1999
and 1998 and the nine months ended September 30, 2003 and September 30, 2002 has
been prepared using unaudited financial statements of CHD Meridian. This
information is only a summary, and you should read it in conjunction with CHD
Meridian's historical financial statements and related notes and Management's
Discussion and Analysis of Financial Condition and Results of Operations set
forth below.
AS OF OR FOR THE
NINE MONTHS ENDED AS OF OR FOR THE YEAR ENDED
SEPTEMBER 30, DECEMBER 31,
-------------------------- ----------------------------------------------------------------
2003 2002 2002 2001 2000 1999 1998
-------------------------- -------------------------------------- -------------------------
(unaudited) (unaudited)
-------------------------- -------------------------------------- -------------------------
(In thousands except share amounts)
-------------------------------------------------------------------------------------------
Statement of Operations Data:
Net revenue $ 86,588 $ 78,634 $ 107,124 $ 100,411 $ 96,671 $ 34,725 $ 28,334
Amortization and depreciation 1,125 1,447 1,854 2,117 1,886 1,489 1,147
Operating income (loss) 3,634 1,777 2,137 1,287 746 (3,840) (3,736)
Impairment of intangible assets -- -- -- -- -- 6,779 --
Net income (loss) from
continuing
Operations 2,908 1,605 1,924 893 188 (10,917) (3,690)
Earnings per share $ 13.56 $ 7.70 $ 9.23 $ (8.20) $ 5.84 $ (94.56) $ (57.93)
Weighted average number
of shares outstanding 214,422 208,415 208,415 208,415 208,415 100,727 98,805
Balance Sheet Data:
Cash and cash equivalents $ 12,157 $ 4,540 $ 7,621 $ 3,155 $ 1,908 $ 14 $ 4,995
Total assets 46,622 38,246 42,517 38,480 43,645 20,418 23,829
Long term liabilities 2,548 2,907 2,896 2,725 7,934 4,682 8,055
Shareholders' equity $ 26,128 $ 23,001 $ 23,320 $ 21,396 $ 23,104 $ 7,557 $ 11,010
10
I-TRAX SUMMARY SELECTED UNAUDITED PRO FORMA CONDENSED
COMBINED FINANCIAL DATA
The following summary selected unaudited pro forma condensed combined
financial data of I-trax has been derived from the pro forma condensed combined
financial information included elsewhere in this proxy statement and should be
read in conjunction with the pro forma condensed combined financial information
and related notes thereto and present the effect of the merger, which is to be
accounted for as a purchase.
The following summary selected unaudited pro forma condensed combined
statements of operations data for the nine months ended September 30, 2003 and
year ended December 31, 2002 are presented as if the merger had occurred at the
beginning of such respective periods. The following summary selected unaudited
pro forma condensed combined balance sheet data as of September 30, 2003 gives
effect to the merger as if it had occurred on September 30, 2003.
The summary selected unaudited pro forma condensed combined financial
data are based on the estimates and assumptions set forth in the notes to such
statements, which are preliminary and have been made solely for purposes of
developing such pro forma information. The summary selected unaudited pro forma
condensed combined financial data are not necessarily an indication of the
results that would have been achieved had the transaction been consummated as of
the dates indicated or that may be achieved in the future.
Unaudited Pro Forma Condensed Statements of Operations Data
Nine months
ended Year Ended
September 30, December 31,
2003 2002
(unaudited)
(unaudited)
---------------- ----------------
Revenue $ 90,256 $111,056
Cost of revenue
Operating expenses 72,490 90,087
General and administrative 13,411 21,030
Depreciation and amortization 8,499 11,974
Marketing and publicity 1,677(a) 774
Research and development -- 410
Impairment charges related to intangible assets -- 1,648
Loss from operations (5,821) (14,867)
Interest expense and other financing costs 2,700 2,104
Net loss before provision for income taxes (8,516) (17,158)
Provision for income taxes 788 337
Net loss (9,304)(b) (17,495)
Dividends applicable to preferred stockholders (12,000) (12,000)
Net loss applicable to common stock (21,304) (29,495)
Net loss per share - basic (.29) (.94)
Net loss per share - diluted (.29) (.94)
Shares used in computed basic loss per share 32,511,766 31,496,958
Shares used in computed diluted loss per share 32,511,766 31,496,958
(a) Includes a non-cash charge of $1,467 resulting from the issuance of
common stock, granting of warrants and contribution of I-trax common
stock by certain stockholders of I-trax to an investor relations firm.
(b) For the nine months ended September 30, 2003, EBITDA amounted to
$2,678, which includes a non-cash charge of $1,467 resulting from the
issuance of common stock, granting of warrants and contribution of
common stock by certain stockholders of I-trax to an investor relations
firm, a $200 non-recurring charge for
11
costs of a previously uncompleted acquisition, and $500 of other income
comprised of proceeds from a life insurance policy of a deceased
officer and director.
Pro Forma Combined Condensed Balance Sheet Data
September 30,
2003
(unaudited)
--------------
Cash and cash equivalents $ 13,687
Working capital 10,172
Total assets 126,132
Long-term debt, less current portion 19,245
Stockholders' equity 86,884
12
RISK FACTORS
--------------------------------------------------------------------------------
You should consider the following risk factors in determining how to
vote at your company's special meeting.
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 20, 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.
13
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 at the special meetings. See "The Merger -
Regulatory Matters Relating to Merger" below for a description of the regulatory
approvals necessary in connection with 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
3,859,200 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 will 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 3,473,280 and
3,859,200. 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, 3,859,200
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, warranties or covenants 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 incurred as a result of that breach. Even if the number of
such shares is not sufficient to cover the full amount of the losses incurred 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 risk factor. In the case of a breach of representation, warranty
or covenant 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 incurring that loss must make a claim in writing for such
losses by August 14, 2004, after which any such claim would be time barred.
14
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
between 2020 and 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 I-trax
I-trax has a history of operating losses and anticipates continued
operating losses.
I-trax has used substantial cash to fund its operating losses, and
I-trax has never earned a profit. Through September 30, 2003, I-trax has used
approximately $15.4 million of cash to fund its operating activities. Moreover,
I-trax expects to use additional cash to fund its operating losses through the
fourth quarter of 2003 and possibly beyond. I-trax's ability to achieve
profitability in I-trax's historic business will depend, in part, on:
o the commercial success of I-trax's services and software applications;
o successful deployment and retention of I-trax's services and software
applications by its customers; and
o I-trax's sales and marketing activities.
The success of I-trax's historic business model depends on attracting
customers, such as public health agencies, hospitals, health plans, self-insured
employers, and colleges and universities, to I-trax's population health
management solutions. Although I-trax believes that this business model will be
successful, I-trax cannot assure you that it will achieve or sustain
profitability or that the operating losses in I-trax's historic business will
not increase in the future.
I-trax may require additional capital improve its products and
services.
Although at the closing of the merger the merged companies will have
access to proceeds from the senior credit facility and may receive proceeds from
sales of I-trax convertible preferred stock to fund working capital in addition
to paying the merger consideration, the merged companies have a loss on a pro
forma combined basis and additional funds may be required to complete planned
product development efforts and expand sales and marketing activities. If
necessary, I-trax expects to obtain such funds from operations and financings
activities. Financing activities may include equity or debt financings,
strategic alliances with corporate partners and others, or through other
sources. I-trax cannot provide assurance that additional funding will be
available on acceptable terms, if at all. If adequate funds are not available,
I-trax may have to delay, scale-back or eliminate certain operations or attempt
to obtain funds through arrangements with collaborative partners or others.
These results, in turn, could cause the relinquishment of rights to certain of
I-trax technologies, products or potential markets, dilution of stockholder
ownership in the business, or the loss of what I-trax believes is a current
competitive advantage in technology enabled population health management field.
Therefore, the inability to obtain adequate funds could have a material adverse
impact on I-trax's business, financial condition and results of operations.
The disease and population health management business is relatively
new and the sales cycle is long and complex.
The disease and population health management business, although growing
rapidly, is a relatively new component of the healthcare industry and has many
new entrants. Many companies use the generic label of "disease management" to
characterize activities ranging from the sale of medical supplies and drugs to
services aimed at managing demand for healthcare services. Because this industry
is relatively new, potential purchasers take a long
15
time to evaluate and decide whether to purchase such services. Further, the
sales and implementation process for I-trax services and software applications
is lengthy, involves a significant technical evaluation and requires I-trax's
customers to commit a great deal of time and money. Finally, the sale and
implementation of I-trax solutions are subject to delays due to customers'
internal budgets and procedures for approving large capital expenditures and
deploying new services and software applications within their organizations. The
sales cycle for I-trax's products and services, therefore, is unpredictable and
has generally ranged from 3 to 24 months from initial contact to contract
signing. The time it takes to implement I-trax's solutions is also difficult to
predict and has lasted as long as 18 months from contract execution to the
commencement of live operation. During the sales cycle and the implementation
period, I-trax may expend substantial time, effort and money preparing contract
proposals, negotiating the contract and implementing the solution without
receiving any related revenue.
I-trax's limited operating experience may cause it to misjudge the
industry in which it is operating.
I-trax has only recently begun to design, build and offer disease
management and comprehensive health management solutions. I-trax's enterprise
software applications have been operational for less than four years, I-trax's
web-based solutions have been operational for less than two years and I-trax's
disease management and comprehensive health management solutions have been
operational for only one year. Accordingly, I-trax has a limited operating
history in its business. Furthermore, I-trax is also facing other risks and
challenges, including a lack of meaningful historical financial data upon which
to plan future budgets, increasing competition, the need to develop strategic
relationships, and other risks described below. I-trax cannot guarantee that it
will be able to successfully implement its business model. A person who is
considering acquiring I-trax common stock must consider the risks,
uncertainties, expenses and difficulties frequently encountered by companies in
their early stages of development. As a result of the absence of meaningful
history and experience in I-trax's business, it may easily misjudge the nature
or size of its perceived markets, or the amount of work or capital necessary to
complete its products or to implement its business plan.
I-trax may be unable to implement its business strategy to deploy its
products effectively and attract customers.
Although I-trax believes that there is significant demand for its
services and products in the overall healthcare market, there are many reasons
why I-trax may be unable to execute its historical business strategy, including
its possible inability to:
o deploy its services and software applications on a large scale;
o attract a sufficiently large number of public health agencies,
hospitals, health plans, self-insured employers and colleges and
universities to subscribe for I-trax's services and software
applications;
o increase awareness of its brand;
o strengthen user loyalty;
o develop and improve its services and software applications;
o continue to develop and upgrade its services and software
applications; and
o attract, retain and motivate qualified personnel.
The healthcare industry is subject to cost pressures which may make it
difficult to sell I-trax's services.
The healthcare industry is currently under pressure by governmental and
private-sector revenue sources to cut increasing costs. These pressures will
continue and possibly intensify. Although I-trax believes that its services and
software applications assist public health agencies, hospitals, health plans and
self-insured employers to control the high costs associated with the treatment
of chronic diseases, the pressures to reduce costs immediately may
16
hinder I-trax's ability (or may increase the length of time I-trax requires) to
obtain new contracts. In addition, the focus on cost reduction may pressure
I-trax's customers to restructure contracts and reduce its fees.
Government regulation could adversely affect the combined companies'
business.
Many of I-trax's existing and potential clients are subject to
considerable state and Federal government regulations. Many of these regulations
are vaguely written and subject to differing interpretations that may, in
certain cases, result in unintended consequences that may affect I-trax's
ability to deliver its services effectively. Regulatory and legislative efforts
currently focus on the confidentiality of patient identifiable medical
information, as evidenced by such legislation as the Health Insurance
Portability and Accountability Act of 1996 (or HIPAA). While I-trax believes
that its ability to obtain patient identifiable medical information for disease
management purposes from certain of its clients is protected in recently
released Federal regulations governing medical record confidentiality, state
legislation or regulations will preempt Federal legislation if state legislation
or regulations are more restrictive. Accordingly, new Federal or state
legislation or regulations restricting the availability of this information for
disease management purposes would have a material negative effect on the merged
companies.
Although I-trax is not directly subject to many of the regulations
governing healthcare delivery, its clients, such as public health agencies,
hospitals, health plans, and self-insured employers, must comply with
regulations including the licensing and reimbursement requirements of Federal,
state and local agencies. Further, certain of I-trax's professional healthcare
employees, such as doctors and nurses, are subject to individual licensing
requirements. All of I-trax healthcare professionals who are subject to
licensing requirements are licensed in the state in which they are physically
present. Multiple state licensing requirements for healthcare professionals who
provide services telephonically over state lines may require us to license some
of our healthcare professionals in more than one state. I-trax continually
monitors the developments in telemedicine. There is no assurance, however, that
new judicial decisions or Federal or state legislation or regulations would not
increase the requirement for multi-state licensing of all central operating unit
call center health professionals, which would significantly increase I-trax's
administrative costs.
I-trax is indirectly affected by changes in the laws governing health
plan, hospital and public health agency reimbursement under governmental
programs such as Medicare and Medicaid. There are periodic legislative and
regulatory initiatives to reduce the funding of the Medicare and Medicaid
programs in an effort to curtail or reduce overall federal healthcare spending.
Federal legislation has and may continue to significantly reduce Medicare and
Medicaid reimbursements to most hospitals. These reimbursement changes are
negatively affecting hospital revenues and operations. There can be no assurance
that such legislative initiatives or government regulations would not adversely
affect I-trax operations or reduce demand for its services.
Various Federal and state laws regulate the relationship among
providers of healthcare services, other healthcare businesses and physicians.
The "fraud and abuse" provisions of the Social Security Act provide civil and
criminal penalties and potential exclusion from the Medicare and Medicaid
programs for persons or businesses who offer, pay, solicit or receive
remuneration in order to induce referrals of patients covered by federal
healthcare programs (which include Medicare, Medicaid, TriCare and other
Federally funded health programs). Although I-trax believes that its business
arrangements with its clients are in compliance with these statutes, these fraud
and abuse provisions are broadly written and the full extent of their
application is not yet known. I-trax is therefore unable to predict the effect,
if any, of broad enforcement interpretation of these fraud and abuse provisions.
I-trax's dependence on the Internet and Internet-related technologies
subjects I-trax to frequent change and risks.
I-tax's web-based software applications that form the backbone of its
disease management and comprehensive health management solutions depend on the
continuous, reliable and secure operation of internet servers and related
hardware and software. In the past, several large internet commerce companies
have suffered highly publicized system failures, which depressed their stock
prices, caused significant negative publicity and sometimes led to litigation.
It is possible that I-trax may also suffer service outages from time to time. To
the extent that I-trax's service is interrupted, I-trax's users will be
inconvenienced and I-trax's reputation may be diminished. If access to I-trax
system becomes unavailable at a critical time, users could allege I-trax is
liable, which could depress I-trax stock price, cause significant negative
publicity and possibly lead to litigation. Although I-trax's
17
computer and communications hardware is protected by physical and software
safeguards, I-trax is still vulnerable to fire, storm, flood, power loss,
telecommunications failures, physical or software break-ins and similar events.
I-trax will not have redundancy for all of its computer and telecommunications
facilities. A catastrophic event could have a significant negative effect on
I-trax's business, results of operations, and financial condition.
I-trax also depends on third parties to provide certain of its clients
with Internet and online services necessary for access to I-trax servers. It is
possible that I-trax's clients will experience difficulties with Internet and
other online services due to system failures, including failures unrelated to
I-trax's systems. Any sustained disruption in Internet access provided by third
parties could have a material adverse effect on I-trax's business, results of
operations and financial condition.
Finally, I-trax retains confidential healthcare information on its
servers. It is, therefore, critical that I-trax's facilities and infrastructure
remain secure and are perceived by clients to be secure. Although I-trax
operates its software applications from a secure facility managed by a reputable
third party, I-trax's infrastructure may be vulnerable to physical break-ins,
computer viruses, programming errors or similar disruptive problems. A material
security breach could damage I-trax's reputation or result in liability to
I-trax.
I-trax may be sued by its users if I-trax provides inaccurate health
information on its website or inadvertently discloses confidential
health information to unauthorized users.
Because users of I-trax website will access health content and services
relating to a medical condition they may have or may distribute I-trax's content
to others, third parties may sue I-trax for defamation, negligence, copyright or
trademark infringement, personal injury or other matters. I-trax could also
become liable if confidential information is disclosed inappropriately. These
types of claims have been brought, sometimes successfully, against online
services in the past. Others could also sue I-trax for the content and services
that will be accessible from its website through links to other websites or
through content and materials that may be posted by I-trax users in chat rooms
or on bulletin boards. Any such liability will have a material adverse effect on
I-trax reputation and its business, results of operations or financial position.
I-trax's business will be adversely affected if it loses a key
employee or fails to recruit and retain other skilled employees.
Frank A. Martin, I-trax's chairman and chief executive officer, is an
integral part of I-trax's business and the merged companies' future success
greatly depends upon his retention. I-trax's failure to retain Mr. Martin could
significantly reduce the merged companies' ability to compete and succeed in the
future.
The merged companies' future success also depends on their ability to
attract, retain and motivate highly skilled employees. As merged companies
secure new contracts and implement their services and products, they will need
to hire additional personnel in all operational areas. The merged companies may
be unable to attract, assimilate or retain such highly qualified personnel.
I-trax has in the past experienced, and it expects to experience in the future,
difficulty in hiring and retaining highly skilled employees with appropriate
qualifications. If I-trax does not succeed in attracting new personnel or
retaining and motivating current personnel, its business will be adversely
affected.
I-trax may be unable to compete successfully against companies
offering similar products.
Many healthcare companies are offering disease management services and
healthcare focused software solutions. Further, a vast number of Internet sites
offer healthcare content, products and services. In addition, traditional
healthcare providers compete for consumers' attention both through traditional
means as well as through new Internet initiatives. Although I-trax believes its
technology-enabled service solutions are unique and better than those of its
competitors', I-trax competes for customers with numerous other businesses.
Many of these potential competitors are likely to enjoy substantial
competitive advantages compared to I-trax, including:
18
o greater name recognition and larger marketing budgets and resources;
o larger customer and user bases;
o larger production and technical staffs;
o substantially greater financial, technical and other resources; and
o a wider array of online products and services.
To be competitive, I-trax must continue to enhance its products and
services, as well as its sales and marketing channels, and its financial
condition.
I-trax may be exposed to liability claims.
I-trax maintains professional malpractice, errors and omissions and
general liability insurance for all of its locations and operations. Although
I-trax's management believes that these insurance policies are adequate in
amount and coverage for I-trax's current operations, there can be no assurance
that coverage is sufficient to cover all future claims or will continue to be
available in adequate amounts or at a reasonable cost.
I-trax Health Management Solutions, Inc., or Health Management,
I-trax's operating subsidiary, had engaged in the physician practice management
business. Although I-trax has not been engaged in that business since 1998,
Health Management may be subject to unknown liabilities arising from such prior
business operations, which may have a material adverse effect on I-trax's
business, operations, financial condition, or prospects.
Member-Link Systems, Inc., or Member-Link, a company I-trax acquired in
1999 by way of a merger with Health Management, was engaged in the business of
marketing, selling and installing eImmune(R) and AsthmaWatch(R) applications.
Since beginning its operations in 1996 until March 15, 2000, Member-Link and
Health Management did so without obtaining product or professional liability
insurance. Accordingly, if any customer of Member-Link or Health Management
should in the future claim that the software applications Member-Link and Health
Management sold prior to obtaining insurance on March 15, 2000 were defective,
the merged companies would not have the protection of insurance in satisfying or
defending against such claims. At this time I-trax is not aware of any such
claims. Any such claims, however, could have a material adverse effect on
I-trax's business, results of operations, financial condition and prospects.
I-trax clients may sue it if any of its software applications or
services are defective, fails to perform properly or injures the user. Even
though I-trax currently has insurance, claims could require I-trax to spend
significant time and money in litigation, to pay significant damages and to
reserve for such liability on I-trax's financial statements. At this time I-trax
is not aware of any such claims. However, any such claims, whether or not
successful, could seriously damage I-trax's reputation and business, results of
operations or financial position.
If I-trax's intellectual property rights are undermined by third
parties, its business will suffer.
I-trax's intellectual property is important to its business. I-trax
relies on a combination of copyright, trademark and trade secret laws,
confidentiality procedures and contractual provisions to protect its
intellectual property. I-trax's efforts to protect its intellectual property may
not be adequate. I-trax's competitors may independently develop similar
technology or duplicate its products or services. Unauthorized parties may
infringe upon or misappropriate I-trax's products, services or proprietary
information. In addition, the laws of some foreign countries do not protect
proprietary rights as well as the laws of the United States do, and the global
nature of the Internet makes it difficult to control the ultimate destination of
I-trax's products and services. In the future, litigation may be necessary to
enforce I-trax's intellectual property rights or to determine the validity and
scope of the proprietary rights of others. Any such litigation would probably be
time-consuming and costly. I-trax could be subject to intellectual property
infringement claims as the number of I-trax's competitors grows and the content
and functionality of software applications and services overlap with competitive
offerings. Defending against these claims, even if not meritorious, could be
expensive and divert the merged companies' attention from operating the
19
merged companies. If I-trax becomes liable to third parties for infringing their
intellectual property rights, it could be required to pay a substantial damage
award and be forced to develop noninfringing technology, obtain a license or
cease selling the applications that contain the infringing technology. I-trax
may be unable to develop noninfringing technology or obtain a license on
commercially reasonable terms, or at all. I-trax also intends to rely on a
variety of technologies that it will license from third parties, including any
database and Internet server software, which will be used to operate I-trax's
applications. These third-party licenses may not be available to I-trax on
commercially reasonable terms. The loss of or inability to obtain and maintain
any of these licenses could delay the introduction of enhancements to I-trax's
software applications, interactive tools and other features until equivalent
technology could be licensed or developed. Any such delays could materially
adversely affect I-trax's business, results of operations and financial
condition.
Provisions of I-trax's certificate of incorporation could impede a
takeover of I-trax and the merged companies even though a takeover may
benefit I-trax stockholders.
I-trax's board of directors has and will continue to have after the
merger the authority, without further action by the stockholders, to issue from
time to time, shares of preferred stock in one or more classes or series, and to
fix the rights and preferences of such preferred stock, subject, however, to the
limitations contained in the certificate of designations to be filed with
respect to the I-trax convertible preferred stock. I-trax is subject to
provisions of Delaware corporate law which, subject to certain exceptions, will
prohibit I-trax from engaging in any "business combination" with a person who,
together with affiliates and associates, owns 15% or more of I-trax common stock
(referred to as an interested stockholder) for a period of three years following
the date that such person became an interested stockholder, unless the business
combination is approved in a prescribed manner. Additionally, I-trax's bylaws
establish an advance notice procedure for stockholder proposals and for
nominating candidates for election as directors. These provisions of Delaware
law and of I-trax's certificate of incorporation and bylaws may have the effect
of delaying, deterring or preventing a change in I-trax's control, may
discourage bids for I-trax common stock at a premium over market price and may
adversely affect the market price, and the voting and other rights of the
holders of I-trax common stock.
The loss of any of I-trax's very limited number of customers will have
a material adverse effect on I-trax' business.
Historically, a very limited number of customers has accounted for a
significant percentage of I-trax's revenues. In 2001, I-trax's largest customer,
Walter Reed Army Medical Center, accounted for 84% of I-trax revenues. In 2002,
I-trax's largest customers, UICI, Inc. and Aetna Health Management, Inc.
accounted for 42% and 30% of I-trax's revenues, respectively. And for the nine
months ended September 30, 2003, I-trax's two largest customers, UICI and Aetna
Health Management accounted for 38% and 11% of I-trax's revenues, respectively.
I-trax anticipates that its results of operations in any given period will
continue to depend to a significant extent upon a small number of customers.
Accordingly, if I-trax were to lose the business of even a single customer,
I-trax's results of operations would be materially and adversely affected.
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 expects 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
20
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 CHD
Meridian's 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's 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. See "Interest of Officers and Directors in the Merger" below. Finally,
although CHD Meridian believes that its management team has reasonable depth,
the loss of one or several of these individuals, could have an adverse effect on
the merged companies' business.
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
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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 the
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 its 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
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 the corporate practice
of medicine, which vary from state to state. The corporate practice of medicine
doctrine prohibits a corporation, other than a professional corporation, from
practicing medicine or employing physicians. Some states also prohibit a
non-physician from splitting or sharing fees charged by a physician for medical
services. The services that CHD Meridian provides to its clients include
establishing and managing medical clinics. Most physician services at clinics
that are 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 that entitle CHD Meridian to require
such physician-owned corporations 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
22
medicine doctrine and with fee-splitting and fee-sharing prohibitions. There
remains, however, potential exposure to claims that this structure violates the
corporate practice of medicine doctrine or fee-splitting or fee-sharing
prohibitions, although CHD Meridian does not believe that it does. 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 the 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 is subject to
various regulations under the Medicare and Medicaid programs, 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 CHD Meridian, and also generated a
claim against CHD Meridian for repayment of an allegedly preferential transfer
previously received from the client. Because of the risks to CHD Meridian
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.
23
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
Medicare Part D coverage as well as integrated plans offering all Medicare
benefits). There will be an annual open period during which Medicare
beneficiaries will choose their drug plan from among those available in their
area of residence. In any areas where there are fewer than two private plan
choices, the government will make a drug plan available directly.
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 CHD Meridian's 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.
CAUTIONARY STATEMENT CONCERNING
FORWARD-LOOKING STATEMENTS
This proxy statement and its attachments incorporate forward-looking
statements as such term is defined in the Private Securities Litigation Reform
Act of 1995.
Statements regarding aspects of I-trax's and CHD Meridian's businesses
and our expectations as to the merger set forth in this proxy statement may
constitute forward looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. The words "anticipates," "believes,"
"estimates," "expects," "intends," "may," "plans," "projects," "will," "would"
and similar expressions are intended to identify forward-looking statements,
although not all forward-looking statements contain these identifying words.
Although we believe that our expectations are based on reasonable assumptions
within the bounds of our knowledge of our business and operations, there can be
no assurance that actual results will not differ materially from our
expectations. Factors that might cause or contribute to such differences
include, but are not limited to, whether I-trax and CHD Meridian will in fact
satisfy the conditions to closing and complete the merger described in this
proxy statement, the ability of our two companies to integrate our businesses
successfully, demand for the merged companies' products and services,
uncertainty of future profitability and changing economic conditions. These and
other risks pertaining to I-trax, CHD Meridian and the merged companies after
the merger are described in detail above under the caption "Risk Factors" and,
with respect to I-trax, in its periodic reports filed with the Securities and
Exchange Commission, which are incorporated by reference or attached to this
proxy statement.
DESCRIPTION OF I-TRAX
I-trax enables better healthcare through personalized health management
programs.
We believe that our personalized disease and lifestyle management
solutions enable organizations to evolve from fragmented care management
practices into a cohesive and efficient system of healthcare. Our solutions are
fully integrated, use a single-data platform that allows all caregivers to share
records, and enable our clients to provide true coordination of care. We believe
that by facilitating real-time communication between all stakeholders within
today's complex healthcare system, our solutions reduce costs and enable
improved delivery of care.
24
We deliver our solutions through our proprietary Health-e-LifeSM
Program. The Program is designed to deliver lifestyle, disease and risk
reduction interventions to an entire population by utilizing predictive science,
technology, clinical expertise, and personal care coordination.
Predictive Science. Our Health-e-LifeSM Program incorporates predictive
science to analyze our clients' medical claims and pharmacy and clinical data to
predict future healthcare costs. We believe this is an essential step to
effective disease and lifestyle management. Experts agree that predictive
science provides a comprehensive advantage to health plans, employers and
providers, and leads to cost effective medical management and greater
profitability. Using predictive science, we analyze our clients' entire
populations to accurately predict our clients' future healthcare costs,
including avoidable costs, the health conditions that will drive those costs and
the people within our clients' populations who are at risk for those conditions.
Armed with this information, I-trax is able to target the most appropriate
resources to achieve the best savings and return on investment.
Technology Solutions. All technology components of our Health-e-LifeSM
Program utilize a single data platform--Medicive(R) Medical Enterprise Data
System--a proprietary software architecture developed to collect, store,
retrieve and analyze a broad range of information used in the healthcare
industry.
Further, our web accessible solutions include portals for key
stakeholders in the care delivery process--consumers, physicians and care
managers--thus permitting real-time sharing of information and support the
adherence to our health and disease intervention programs. The key technology we
use for effective care coordination include:
o Health-e-Coordinator(TM), a web-based care management application;
o MyFamilyMD(TM), a consumer health management portal;
o CarePrime(R), a clinical care application for physicians and
clinicians; and
o I-talk(TM), interactive smart voice technology.
Interventions and Clinical Expertise. Our personalized health and
disease interventions include intensive programs for individuals who suffer
from, or are at high risk for, active or chronic disease and tailored programs
for individuals who are at low risk. Depending on the individual's level of
risk, our custom tailored interventions include self-help programs available
through the web or person-assisted programs administered through our Care
Communication Center, which is staffed by trained nurses and other healthcare
professionals 24 hours per day, 7 days per week. All interventions include
lifestyle and risk reduction programs that follow evidence-based clinical
guidelines to optimize health, fitness, productivity and quality of life.
We have designed and are implementing interventions for a number of
specific chronic conditions, including congestive heart failure (CHF), coronary
artery disease (CAD), asthma, diabetes, cancer management, cystic fibrosis,
lower back pain and chronic obstructive pulmonary disease (COPD).
Care Communication Center. Our Care Communications Center is staffed
with trained nurses and other healthcare professionals 24 hours per day, 7 days
per week. Through the Center, we effect targeted interventions to improve the
health management of the populations we serve. The Center helps consumers make
informed decisions about their health and provides ongoing support for those
with chronic diseases. Our demand management and nurse triage services
incorporate nationally recognized, evidence-based clinical guidelines to ensure
that all caregivers and consumers are following the best practices.
Everything we do is built on information, which drives decision-making
and results. Information guides the identification of consumers, the utilization
of protocols that provide high quality and cost effective care, the
communication among the key stakeholders and ultimately the return on capital
invested in providing healthcare. When all of these components are in place, we
believe that consumer satisfaction will increase and the costs of providing
quality healthcare will decrease.
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DESCRIPTION OF CHD MERIDIAN
CHD Meridian's Business
CHD Meridian is the nation's largest provider of outsourced,
employer-sponsored healthcare services. Our programs are designed to allow
employers to contract directly for a wide range of employee related healthcare
services delivered at or near the work site. Specifically, we develop and manage
customer-specific healthcare delivery models that address the pharmacy, primary
care, occupational health, and corporate health demands of our clients. Pursuant
to the terms of our multi-year agreements, employers may elect to offer their
employees and retirees services on an integrated or stand-alone basis, through
on-site or off-site delivery platforms, or as a component of or complement to
pre-existing health plan options.
Our target market consists of both large and mid-sized employers and
business consortia, which due to their scale and focus on controlling healthcare
expenditures, are more likely to derive immediate and tangible benefit from
outsourced support services for non-core functions organized around employee
health benefits. We operate approximately 160 locations in 32 states and
maintain contracts with 90 leading employers, which pay us directly for our
services. Our customers include automotive and automotive parts manufacturers,
consumer products manufacturers and large financial institutions. As evidenced
by exceptionally high client retention rates, we have established strong
customer relationships supported by increasing recognition among clients of the
critical nature of our services, the tangible benefits achieved by employer and
employee constituents, and the utilization of multi-year service contracts.
CHD Meridian's outsourced suite of healthcare benefit management
solutions to our employer clients consist of the following:
Pharmacy Services. CHD Meridian operates employer-sponsored pharmacies
that offer, on an exclusive basis, prescription services directly to a company's
covered population. By leveraging prescription volume across our client base and
utilizing our ability to procure pharmaceuticals as a captive class of trade, we
purchase products at considerable savings for our clients and thus significantly
and positively affect our customers' fastest-growing healthcare cost category.
CHD Meridian's pharmacy services also use sophisticated information
technologies. These technologies may be integrated with clients' existing
pharmacy management programs and plans and improve employee convenience with
respect to prescription fulfillment. Further, these technologies and the
pharmacy's proximity to the employee can be utilized to deliver to the employee
additional information and services, including I-trax's disease management
programs. CHD Meridian currently operates 24 pharmacies.
Primary Care Services. CHD Meridian also operates healthcare centers
that return control of costs, quality, and access to the employer. These health
centers are designed to integrate within existing healthcare plans and to offer
employers a way to contract directly for primary care health services. CHD
Meridian's health centers generally service only a single employer and offer
health management programs addressing the specific primary care needs of the
employee base, including optometry services as well as limited prevention and
disease management programs. In addition, CHD Meridian offers customized
solutions in network management and absence management, including non-work
related case management and disability management. Physicians, nurses, and other
related staff are dedicated to the customer's employee population, allowing
employees, retirees, and their dependents to receive cost-effective,
high-quality care on a more accessible and convenient basis. CHD Meridian
currently operates 17 primary care centers.
Occupational Health Services. CHD Meridian provides professional
staffing and management of on-site occupational health facilities that address
the occupational health, workers compensation, and minor illness needs of the
employer's workforce. These programs are designed to operate across the entire
array of occupational health regulatory environments and emphasize work-related
injury cost-reduction, treatment, medical surveillance or testing, disability
management, case management, return-to-work coordination, medical community
relations or oversight, on-site physical therapy, and injury prevention/
ergonomic assessment and intervention. In general, CHD Meridian's occupational
health programs improve compliance, enhance employee productivity, and allow for
greater employer control of occupational health costs. CHD Meridian currently
operates 77 occupational health facilities.
26
Corporate Health Services. For non-industrial client work environments
without significant injury rates (e.g., financial services, advertising or
consulting), but nonetheless large workforces that require general and
specialized medical services, CHD Meridian offers unique workplace programs that
combine preventative care, occupational health, medical surveillance or testing,
travel medicine, and health education for clients. We currently operate 47
corporate healthcare facilities.
Management's Discussion and Analysis of Financial Condition and
Results of Operations of CHD Meridian
The following discussion and analysis should be read together with our
financial statements and the notes to our financial statements included below
under section titled "Meridian Occupational Healthcare Associates, Inc.
Financial Data."
This Management's Discussion and Analysis of Financial Condition and
Results of Operations of Meridian Occupational Healthcare Associates, Inc.
(doing business as CHD Meridian) contains forward-looking statements as such
term is defined in the Private Securities Litigation Reform Act of 1995. The
words "anticipates," "believes," "estimates," "expects," "intends," "may,"
"plans," "projects," "will," "would" and similar expressions are intended to
identify forward-looking statements, although not all forward-looking statements
contain these identifying words. Although we believe that our expectations are
based on reasonable assumptions within the bounds of our knowledge of our
business and operations, there can be no assurance that actual results will not
differ materially from our expectations. Factors that might cause or contribute
to such differences include, but are not limited to, whether I-trax and CHD
Meridian will in fact satisfy the conditions to closing and complete the merger
described in this proxy statement, the ability of our two companies to integrate
our businesses successfully, demand for the merged companies' products and
services, uncertainty of future profitability and changing economic conditions.
These and other risks pertaining to I-trax, CHD Meridian and the merged
companies after the merger are described in detail above under the caption "Risk
Factors" and, with respect to I-trax, in its periodic reports filed with the
Securities and Exchange Commission, which are attached in Section Five below.
CHD Meridian's Business Overview
CHD Meridian provides outsourced, employer-sponsored healthcare
services. Our programs are designed to allow employers to contract directly for
a wide range of employee related healthcare services delivered at or near the
work site. Specifically, we develop and manage customer-specific healthcare
delivery models that address, depending on customer's need, the pharmacy,
primary care, occupational health, and corporate health demands of our
customers.
CHD Meridian's Corporate Overview
CHD Meridian is a Delaware corporation, which began operations on
November 16, 1996. All of our current operations consist of employer-sponsored
healthcare. CHD Meridian currently conducts business through five wholly owned
subsidiaries. Physician services are provided at CHD Meridian's locations under
service agreements with affiliated physician associations (Physician Groups),
which are professional corporations that hire licensed physicians who provide
medical services. Pursuant to the terms of such 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 its employer
clients and the Physician Groups, including administrative services, support
personnel, facilities, marketing, and non-medical services in exchange for a
management fee. The Physician Groups are consolidated with Meridian Occupational
Healthcare Associates, Inc. and subsidiaries in the CHD Meridian's consolidated
financial statements presented below.
CHD Meridian's Customers
As of January 20, 2004, CHD Meridian served approximately 90 clients at
160 locations in 32 states. Customers are typically large self-insured employers
that have a significant employee, retiree and dependent population in a
concentrated geographic area. Marketing efforts are directed at this market.
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Ongoing Acquired Operations. In 1996, CHD Meridian acquired certain
assets and liabilities of NHS National Health Services, Inc., a leading provider
of employer-sponsored corporate and occupational health centers in New York in
exchange for $4,437,000 in cash, the assumption of $1,242,000 in liabilities,
and a $1,000,000 promissory note. Also in 1996, CHD Meridian acquired all of the
outstanding shares of American Occupational Health Management, Inc., a leading
provider of employer-sponsored occupational health centers in West Virginia in
exchange for $1,122,500 in cash and 2,255 shares of CHD Meridian's Series A
convertible preferred stock. In addition, in 1998, CHD Meridian remitted cash
and Series A convertible preferred stock of $388,000 and $390,000 respectively,
related to contingent consideration for this transaction. In 1997, CHD Meridian
acquired all of the capital stock of Medicenter, Inc., a leading provider of
employer-sponsored primary care centers and pharmacies in Oklahoma in exchange
for $2,200,000 in cash.
In 2000, CHD Meridian acquired the stock of Corporate Health
Dimensions, Inc., a leading provider of employer-sponsored primary care,
pharmacy and occupational health centers in New York in exchange for 104,044
shares of common stock.
Discontinued Operations. In 1996 and 1997, CHD Meridian provided
occupational health services through free-standing occupational health clinics
in the Northern California marketplace. The clinics associated with this
business were acquired through various acquisitions. In 1996, CHD Meridian
acquired certain assets of: (1) Natomi Hospitals of California, Inc., in
California in exchange for the assumption of four operating leases; (2) San Jose
Medical Clinic, Inc. for $375,000 in cash; (3) The Advantage Group for
$10,566,000 in cash and the assumption of $432,000 in liabilities; and (4)
Sierra Pacific Medical Center for $2,267,000 in cash and the assumption of
$472,000 in liabilities. In 1998, CHD Meridian divested all of the assets
associated with the free-standing clinics in Northern California to Novacare,
Inc. for $8,000,000 in cash and a $2,000,000 promissory note. The sale of the
California free-standing occupational health operations was accounted for as
discontinued operations for the years ended December 31, 1998, 1999 and 2000.
In 1999, CHD Meridian acquired certain assets from PHP Healthcare
Corporation associated with three government sponsored primary care centers and
pharmacies for the Department of Defense for $4,572,000 in cash and the
assumption of $2,533,000 in liabilities. In 2001, CHD Meridian was notified of
the cancellation of the contracts related to these centers. The contract
cancellation was accounted for as discontinued operations in the accompanying
consolidated financial statements.
Results of Operations
Year Ended December 31, 2002 Compared to Year Ended December 31, 2001.
Net revenues for 2002 were $107.1 million, an increase of $6.7 million
or 6.7% from $100.4 million for 2001. The increase in net revenues is primarily
attributable to the addition of a new pharmacy, as well as an increase in the
size of existing primary care and pharmacy contracts.
Operating expenses are primarily comprised of salaries and benefits,
pharmaceutical and medical supplies, lab and radiology fees, and professional
liability insurance directly related to the operation of our health facilities
and pharmacies. Operating expenses for 2002 were $88.9 million an increase of
7.1% from $83.0 million for 2001. The increase is attributable to a $4.8 million
increase in the purchase of pharmaceuticals for the addition of a new pharmacy,
an increase in our professional liability insurance expense of $2.0 million, and
a decrease in our professional fees of $0.9 million related to the movement of
contracted providers to employed providers for services rendered in several of
our health facilities. We expect that in future periods our professional
liability insurance expense will continue to increase based upon market
conditions, and our other operating expenses will increase or decrease in
proportion to volume of business.
General and administrative expenses were $14.3 million for 2002 as
compared to $14.1 million for 2001, an increase of 1.4%. The increase was
attributable to a $0.3 million increase in lease expense related to a new lease
for corporate office space in Nashville and a $0.4 million increase in other
travel related expenses, offset by $0.3 million decrease in salaries and
benefits related to reductions in headcount for duplicative functions in the
corporate headquarters of Corporate Health Dimensions, Inc. that existed
elsewhere in CHD Meridian and a $0.2 million
28
decrease in insurance expenses. We expect to continue to leverage our general
and administrative functions as growth continues, but also anticipate
cost-of-living increases in salaries and benefits.
Depreciation and amortization expenses were $1.9 million in 2002 as
compared to $2.1 million in 2001. The decrease is primarily attributable to the
adoption of SFAS 142 on January 1, 2002 to discontinue the amortization of
goodwill. During 2001, CHD Meridian had amortization expense associated with
goodwill of $0.2 million. We do not expect that there will be significant
changes in depreciation and amortization in the future.
Net interest income for 2002 was $0.1 million increasing by $0.4
million or 144% from net interest expense of ($0.3 million) for 2001. During
2001 and 2002, CHD Meridian incurred interest expense on amounts outstanding on
a term loan with Bank of America. The balance was paid throughout 2002, with the
final balance being paid during the fourth quarter of 2002. Daily excess cash
was invested in overnight funds through Bank of America. Since CHD Meridian paid
off its term loan with Bank of America, we do not expect to incur any
significant interest expense charges in the future except in connection with the
senior credit facility I-trax and CHD Meridian expect to secure in connection
with the merger.
During 2001, CHD Meridian discontinued its operations related to two
primary care centers and pharmacies operated on behalf of the Department of
Defense. This was accounted for under SFAS 144 in the accompanying financial
statements. The gain on discontinued operations of $0.5 million (net of taxes)
for the year ended December 31, 2001 was reclassified and reflected separately
in CHD Meridian's consolidated statements of operations. CHD Meridian also
recorded a loss on disposal of the discontinued operations of $3.1 (net of
taxes) million for the year ended December 31, 2001, which consisted primarily
of the write-down of the equipment and intangible assets. CHD Meridian also
recorded a gain on disposal of discontinued operations of $0.01 million before
taxes related to early termination of a lease for the California operations,
which were sold in 1998.
Year Ended December 31, 2001 Compared to Year Ended December 31, 2000.
Net revenues for 2001 were $100.4 million, an increase of $3.7 million
or 3.8% from $96.7 million for 2001. The increase in net revenues is primarily
attributable to the addition of a new primary care and pharmacy center, the
addition of a new multi-site occupational health client, an increase in CHD
Meridian's volume based performance incentive on pharmaceutical purchases, as
well as an increase in the size of existing primary care and pharmacy contracts
and corporate health contracts offset by a closure of a primary care center.
Operating expenses are primarily comprised of salaries and benefits,
pharmaceutical and medical supplies, lab and radiology fees, and professional
liability insurance directly related to the operation of our health facilities
and pharmacies. Operating expenses for 2001 were $83.0 million an increase of
5.1% from $79.0 million for 2000. The increase is primarily attributable to a
$3.9 million increase in salaries and benefits related to the opening of new
facilities and expansion of existing facilities and an increase of $1.0 million
in professional liability insurance expense offset by a reduction in
professional fees of $0.4 million related to the movement of contracted
providers to employed providers for services rendered in one of our health
facilities, and a reduction in lease and rental expense of $0.3 million related
to the closure of a primary care center.
General and administrative expenses were $14.1 million for 2001 as
compared to $15.0 million for 2000, a decrease of 6.0%. The decrease was
attributable to a decrease in salaries and benefits expense and lease expense
related to reductions in headcount and the related office space for duplicative
functions in the corporate headquarters of Corporate Health Dimensions, Inc.
Depreciation and amortization expenses were $2.1 million in 2001, as
compared to $1.9 million in 2000. This increase is primarily related to an
increase in the property and equipment purchased in 2000 and 2001 related to the
data center development in Nashville.
Net interest income for 2001 was $0.3 million increasing by $0.1
million or 29% from $0.2 million for 2000. The increase is related to the number
and size of the term loan outstanding during 2001 versus 2000. Daily excess cash
was invested in overnight funds through Bank of America.
29
During 2000, CHD Meridian discontinued its operations related to two
primary care centers and pharmacies operated on behalf of the Department of
Defense. This was accounted for under SFAS 144 in the accompanying financial
statements. The gain on discontinued operations of $1.2 million for the year
ended December 31, 2000 was reclassified and reflected separately in CHD
Meridian's consolidated statements of operations. CHD Meridian also recorded a
gain on disposal of discontinued operations of $0.4 million before taxes related
to early termination of a lease for the California operations, which were sold
in 1998.
Nine Months Ended September 30, 2003 Compared to the Nine Months Ended
September 30, 2002.
Net revenue for the nine months ended September 30, 2003 was $86.6
million, an increase of $8.0 million or 10.2% from $78.6 million for the nine
months ended September 30, 2002. The increase is attributable primarily to new
site openings and, to a lesser extent, existing site expansion. We expect that
in future periods we will generate a significant portion of our revenue
increases in the pharmacy and primary care markets.
Operating expenses are primarily comprised of salaries and benefits,
pharmaceutical and medical supplies, lab and radiology fees, and professional
liability insurance directly related to the operation of our health facilities
and pharmacies. Operating expenses for the nine months ended September 30, 2003
were $71.5 million, an increase of 9.6% from $65.3 million for the nine months
ended September 30, 2002. The increase is primarily attributable to a $5.2
million increase in the purchase of pharmaceuticals for the addition of two new
pharmacies and growth in a third pharmacy and an increase in our professional
liability insurance expense of $0.9 million. We expect that in future periods
our professional liability insurance expense will continue to increase based
upon market conditions, and our other operating expenses will increase or
decrease in proportion to volume of business.
General and administrative expenses were $10.3 million for the nine
months ended September 30, 2003 as compared to $10.2 million for the nine months
ended September 30, 2002, an increase of 1.6%. The net increase was primarily
attributable to a $0.9 million increase in salaries and benefits related to
additions in headcount to manage the clinical side of our pharmacy business and
for cost of living adjustments for corporate staff, offset partially by a $0.5
million reduction in professional liability insurance expense. We expect to
continue to leverage our general and administrative functions as growth
continues, but do expect that there will be increases in the salaries and
benefits expenses due to cost of living increases.
Depreciation and amortization expenses were $1.1 million for the nine
months ended September 30, 2003, as compared to $1.4 million for the nine months
ended September 30, 2002. The decrease is primarily attributable to a reduction
in the total fixed asset base for items that became fully depreciated during
2002 and fixed assets that were disposed of during 2002.
Net interest income for the nine months ended September 30, 2003 was
$62,000 decreasing by $31,000 or 34.0% from net interest income of $93,000 for
the nine months ended September 30, 2002. The decrease is attributable to a
reduction in the overall interest rate received on overnight investments.
Liquidity and Capital Resources
CHD Meridian's primary cash needs during 2003, 2002 and 2001 have been
to fund working capital requirements and capital expenditures. In addition in
2001, CHD Meridian used cash to pay principal and interest on the outstanding
portion of the term loan. CHD Meridian's primary source of liquidity has been
cash flows generated from operating activities. As of September 30, 2003, CHD
Meridian had net working capital (current assets less current liabilities) of
$10.4 million. Current liabilities are primarily comprised of trade payables,
payroll and benefit related accruals and deferred revenue.
CHD Meridian also maintains a $6.5 million credit facility from Bank of
America that is scheduled to expire on November 15, 2005. We expect to
restructure the facility in connection with the merger. The credit facility has
a $2.3 million letter of credit portion with the remainder being a term loan
revolver. A letter of credit of $2.0 million has been issued for the benefit of
AIG, the Lexington Group, CHD Meridian's medical malpractice carrier. The credit
facility is secured by substantially all of CHD Meridian's assets. At no time
may the borrowings on the credit facility exceed 75% of the Company's assets.
Borrowings, at CHD Meridian's election, may be either
30
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 and December 31, 2002, the Company had no debt outstanding on the term
loan.
Sources and Uses of Cash
Cash flows provided by operating activities were $5.1 million and $3.2
million for the nine months ended September 30, 2003 and the year ended December
31, 2002, respectively. CHD Meridian purchased approximately $0.5 million and
$1.2 million of property and equipment during the nine months ended September
30, 2003 and the year ended December 31, 2002, respectively. These purchases
primarily related to investments into our information systems data center
located in Nashville. The remaining $2.3 million of the total net change in cash
of $4.4 million cash during 2002 was generated from operations of the Department
of Defense contracts that were discontinued during the year.
Critical Accounting Policies
Concentration of Credit Risk. CHD Meridian'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. CHD Meridian continually
reviews collectibility of its accounts receivable and maintains allowances for
doubtful accounts. Since December 31, 2000, CHD Meridian has written off $0.5
million of accounts receivable against the allowance for doubtful accounts.
During 2003 and 2002, a large customer for which CHD Meridian operated
primary care centers, pharmacies and occupational health centers, represented
11% of CHD Meridian's net revenue for the nine-month period ended September 30,
2003 and year ended December 31, 2002.
Estimated Medical Professional Liability Claims. CHD Meridian is
insured for medical professional liability claims on a claims-made basis through
commercial insurance policies. It is CHD Meridian'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. CHD Meridian evaluates the
financial condition of its insurers and reinsurers and monitors its credit risk
related to insolvencies. Certain of CHD Meridian's policy years were insured by
two companies who are either insolvent or under regulatory supervision. CHD
Meridian's provision for losses from professional liability claims assumes these
policy years to be self-insured. CHD Meridian estimated liability for its
self-insured retention related to medical professional claims was $3.7 million
and $3.1 million at September 31, 2003 and December 31, 2002, respectively.
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 issued Statement of Financial Accounting Standards
No. 142, "Goodwill and Other Intangible Assets," or 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. CHD Meridian performed a transitional goodwill impairment test, noting
no impairment. Impairment is measured 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. CHD Meridian evaluates impairment of its customer lists through SFAS No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets," or
Statement 144, as discussed below.
31
Discontinued Operations. During 2001, CHD Meridian was notified of the
cancellation of two government contracts, located in Fairfax and Woodbridge,
Virginia. 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 1998, CHD Meridian divested 11 freestanding
occupational healthcare clinics located in Northern California (California
Operations). The sale of the California Operations met the requisite
requirements to be accounted for as discontinued operations under Statement 144.
The accompanying financial statements of CHD Meridian have recorded both of
these events as required under Statement 144.
Revenue Recognition and Accounts Receivable. Revenue is recorded at
estimated net amounts to be received from employers for services rendered. Pass
through pharmaceutical ingredients purchased solely on behalf of our customers
are recorded net. The allowance for doubtful accounts represents management's
estimate of potential credit issues associated with amounts due from employers.
Quantitative And Qualitative Disclosures About Market Risk
Interest Rate Risk. CHD Meridian has limited exposure to financial
market risks, including changes in interest rates. An increase or decrease in
interest rates may significantly increase or decrease interest expense on our
debt obligations due to the variable nature of our debt obligations.
Foreign Currency Risk. CHD Meridian does not have any exposure to
changes in foreign currency exchange rates or weak economic conditions in the
foreign markets, as it does not presently have significant operations outside
the United States.
Contractual Obligations
CHD Meridian leases corporate office space, operating facilities, and
equipment under various operating lease agreements. Long-term liabilities
represent $2.4 million related to professional liability costs made for asserted
and unasserted claims based on actuarially projected estimates, which are based
upon historical loss payment patterns. The remaining amount represents client
deposits related to up front working capital on several contracts.
Payments due by period
Contractual Obligations (In thousands)
------------------------------------------------------------------------------------------------------------------
Total Less than 1 year 1-3 years 3-5 years More than 5
years
Operating Lease Obligations $ 5,788 $ 1,167 $ 1,901 $ 1,521 $ 1,199
Other Long Term Liabilities 2,896 -- -- -- 2,896
------------ ------------------ -------------- -------------- -----------------
Total $ 8,684 $ 1,167 $ 1,901 $ 1,521 $ 4,095
32
THE MERGER
General
The I-trax board of directors is using this proxy statement to solicit
proxies from the holders of I-trax common stock for use at the I-trax special
meeting. The CHD Meridian board of directors is also using this proxy statement
to solicit proxies from the holders of CHD Meridian common stock for use at the
CHD Meridian special meeting.
I-trax Merger Proposal
At the I-trax special meeting, I-trax stockholders will be asked to
vote on a proposal to approve the issuance of I-trax common stock and
convertible preferred stock in the merger, approve the merger of DCG
Acquisition, Inc., a wholly-owned subsidiary of I-trax, with and into CHD
Meridian, approve the sale of I-trax convertible preferred stock to raise a
portion of the cash consideration to be used in the merger and ratify and
approve the issuance, in a private placement that closed on October 31, 2003, of
1,400,000 shares of common stock and warrants to purchase 840,000 shares of
common stock and approve the issuance of 840,000 shares of common stock upon
exercise of such warrants. We sometimes refer to these proposals together as the
I-trax merger proposals.
CHD Meridian Merger Proposal
At the CHD Meridian special meeting, holders of CHD Meridian common
stock will be asked to consider and vote upon a proposal to adopt the merger
agreement. We sometimes refer to this proposal as the CHD Meridian proposal.
Background of the Merger
The respective management groups of I-trax and CHD Meridian review, on
a continuing basis, the strategic focus of their companies in light of the
changing competitive environment of the healthcare industry with the objective
of identifying alternative strategies to enhance stockholder value. Each company
believes it has attractive future prospects on a stand-alone basis. However, the
management of I-trax and CHD Meridian have also explored possible joint
ventures, business combinations and other strategic alternatives as a means of
attaining a more competitive position in their respective areas of focus in the
healthcare industry. The boards of directors of I-trax and CHD Meridian have
been updated regularly concerning such matters.
Many CHD Meridian stockholders have held their investments in the
business for eight years or more. During that entire period, CHD Meridian has
been privately held, and the investment has been illiquid. In recent years, some
of CHD Meridian's stockholders have expressed an interest in obtaining liquidity
for their investment. Other stockholders have been content to continue to hold
the investment in its current form. As a result, in recent years CHD Meridian
has considered a number of alternatives, including merger, sale and
recapitalization, that might meet the goal of liquidity for those stockholders
seeking that end. In this connection, CHD Meridian held discussions with various
parties, including both strategic and financial buyers, and received acquisition
or merger proposals with valuations ranging from approximately $45 million to
$90 million. None of these proposals went as far as a signed letter of intent.
In the fall of 2003, prior to commencement of negotiations with I-trax, CHD
Meridian was seriously considering the possibility of an internal
recapitalization transaction, involving the payment of significant cash to
stockholders by way of dividends and / or stock repurchases. This transaction
would have been funded through a combination of excess cash on CHD Meridian's
balance sheet and new borrowing. It would also have made it possible for some
stockholders to be cashed out, while others would acquire ownership of a larger
percentage of the CHD Meridian's equity.
At the same time as CHD Meridian was considering a possible merger,
sale or recapitalization transaction, CHD Meridian's clients were advising CHD
Meridian on how it could better meet the clients' needs. One recurring theme was
the desire of clients for more a more comprehensive range of population health
management services, particularly for predictive modeling, appropriate off-site
intervention capabilities and multiple access points to
33
improve care outcomes and reduce or avoid future healthcare costs. To provide
its clients with a more complete solution, CHD Meridian began a survey of the
relevant health management tools available from various sources.
I-trax's Health-e-LifeSM Program is designed for self-insured employers
and I-trax has been offering its solutions within this market space for
approximately one year. With this focus in mind, a member of I-trax's board of
directors introduced I-trax to CHD Meridian in the first quarter of 2003. CHD
Meridian concluded that I-trax offered the best comprehensive health management
tools available in the market, and that the I-trax service offerings were
exactly the complement to CHD Meridian's current capabilities that its clients
were seeking. The two companies completed preliminary due diligence on each
other's business and concluded that there were significant potential synergies
which could be achieved in combining their businesses. CHD Meridian's current
business model is predicated on opening, staffing and operating on-site clinics
for self-insured employers. Such clinics deliver a broad range of services,
including primary care, occupational health, closed pharmacies and corporate
health. I-trax's services will enable CHD Meridian to offer its self-insured
employer clients better means of predicting the health status of their employee
and retiree populations, improving the health of their employees and retirees in
a cost-effective way through active health management, and predicting their
future healthcare costs. Also, because of the partial geographic coverage that
is inherent in a walk-in pharmacy or clinic, CHD Meridian's reach extends, on
average, to only about 25% of its clients' employees and dependents. I-trax's
Health-e-LifeSM Program, conversely, is designed to reach 100% of a self-insured
employer's employees and dependents by using its software applications and care
communications center staffed with registered nurses and other health care
professionals. Following several joint sales presentations to potential clients,
the managements of I-trax and CHD Meridian concluded that there was significant
benefit to combining the companies.
Merger discussions started in October 2003. The I-trax board of
directors first considered a possible merger with CHD Meridian at its meeting
held on October 3, 2003. At that meeting, Frank A. Martin, I-trax's chairman and
chief executive officer, advised the board that I-trax management started
preliminary discussions with CHD Meridian. Mr. Martin described to the board CHD
Meridian's business and leadership role in on-site corporate health services for
primary care, occupational health and closed pharmacy. Mr. Martin also noted
that the companies had identified significant potential synergies, including the
potential of expanding I-trax products and services to CHD Meridian's clients.
After discussion, the I-trax board authorized I-trax's management to commence
due diligence, establish a timeline for the potential acquisition, financing,
and potential structures for the transaction. The board also requested that
management consult with a financial advisor regarding the possible merger. The
CHD Meridian board also met in early October and received an update from
management on all of the strategic alternatives under consideration, including
the commencement of discussions with I-trax.
I-trax and CHD Meridian executed a letter of intent concerning the
merger on October 8, 2003 following their respective board meetings. The letter
of intent was first amended on October 28, 2003 to change the proposed timeline
of the merger.
The I-trax board of directors convened a special meeting on October 30,
2003. At the meeting, Mr. Martin reviewed with the board the status of the
negotiations with CHD Meridian, the results of I-trax's due diligence efforts
and discussions with potential equity investors regarding financing the
acquisition. The board considered and weighed further the benefits of the
transaction and several strategic alternatives. Upon further discussion, the
board authorized Mr. Martin to proceed with negotiating a definitive merger
agreement.
The CHD Meridian board met on November 18, 2003 and again on November
19, 2003 to receive management's update on the progress of discussions with
I-trax. There was detailed discussion of proposed transaction terms, including
the proposed earn-out provision of the merger agreement.
The letter of intent was amended for the second time on November 21,
2003 to clarify certain proposed financial terms of the merger, and for the
third and final time on December 12, 2003, to further extend the time line for
the proposed merger.
On December 18, 2003, the I-trax board of directors held another
meeting at which members of the I-trax management team made presentations
concerning the proposed merger. In particular, Frank A. Martin, chief executive
officer of I-trax, presented the proposed terms of the merger, the open issues
still to be resolved, and the advantages and disadvantages of the proposed
merger, which the directors discussed at some length. Yuri
34
Rozenfeld, general counsel of I-trax, discussed with the board the status of the
draft merger agreement. Bryant Park Capital, I-trax's financial advisor, also
made a presentation to the board, which included its preliminary financial
analysis of the effects of the merger. I-trax's board then discussed at length
the matters presented by management and by Bryant Park Capital, including the
factors discussed in "Our Reasons for the Merger - Recommendations of Our Board
of Directors." After discussion and due consideration and additional questions
posed by the directors to management and Bryant Park Capital, the I-trax
directors unanimously approved the concept of the merger, subject to further
review and consideration. The board authorized management to finalize the terms
of a merger agreement for future board consideration.
The I-trax board of directors met again on December 24, 2003, after
having received the draft merger agreement. At the meeting, Mr. Martin and Mr.
Rozenfeld described the principal terms of the merger agreement. Mr. Martin also
discussed with the board the following three primary issues, which had been
resolved since the last board meeting:
o The amount of cash CHD Meridian was required to have at the merger's
effective time before any adjustment would be made to the cash
consideration;
o The terms of the earn-out; and
o How the indemnification in favor of I-trax from the escrowed earn-out
shares would be calculated.
At the meeting, Mr. Martin also discussed with the directors the amount of due
diligence regarding CHD Meridian and the proposed transaction which had been
done by I-trax.
A discussion among the I-trax board members then followed about the
terms of the merger agreement. In particular, the directors discussed the
parties' representations and warranties contained in the merger agreement, the
earn-out applicable to a portion of the merger consideration, and the bank
financing and the equity financing necessary to consummate the merger. Bryant
Park Capital also provided an updated financial analysis as to the effects of
the merger, which analysis reflected an expected equity capital raise of
approximately $25 million. After discussion and due consideration, the I-trax
board of directors unanimously approved the merger agreement and all related
transactions, and authorized management to enter into the merger agreement,
subject to any further non-economic modifications to the merger agreement that
may be approved by I-trax's general counsel and its chief executive officer and
subject further to receipt from Bryant Park Capital of its opinion as to the
fairness of the merger consideration to I-trax from a financial point of view.
Following such approval, David Bock, a member of the compensation
committee of the board, reported on how the compensation committee believed that
management should be rewarded if the merger were completed. Mr. Bock proposed
that the board allocate $800,000, comprised of $500,000 in cash and $300,000 in
I-trax common stock or options to acquire I-trax common stock, to be used to
compensate I-trax officers and other employees for their work in connection with
completing the CHD Meridian merger and subsequent integration of the merged
companies. This bonus pool will be created and distributed at the effective time
of the merger. See "Interest of Officers and Directors in the Merger."
Between and in addition to the specific board meetings mentioned above,
Haywood D. Cochrane, Jr., CHD Meridian's chief executive officer, updated
members of the CHD Meridian board of directors at numerous times between the
middle of October and the middle of December as to the status of discussions
with I-trax regarding the merger. The CHD Meridian board of directors also
convened an additional meeting on December 24, 2003. The day before the meeting,
Mr. Cochrane sent to the board of directors the current draft of the merger
agreement, the form of voting agreement that I-trax had requested from principal
CHD Meridian stockholders, and also a spreadsheet showing in detail the proposed
allocation of merger proceeds to CHD Meridian stockholders and option holders.
At the meeting, Mr. Cochrane summarized the terms of the merger agreement. R.
Riley Sweat, Managing Director, Health Care Investment Banking at Raymond James
& Associates, who acted as financial advisor to CHD Meridian in connection with
the I-trax merger and various other strategic alternatives, spoke about various
financial aspects of the merger. Messrs. Cochrane and Sweat, along with Stephen
P. Rothman, Esq., CHD Meridian's outside counsel, responded to questions from
directors. Among other topics, the discussion focused on the split of cash and
35
equity consideration among CHD Meridian stockholders, management and option
holders, the function of the voting agreements that I-trax had requested from
principal CHD Meridian stockholders and that CHD Meridian had requested from
I-trax management stockholders, the extent to which each party would become
committed to the merger by execution of the merger agreement and the voting
agreements, and the right of CHD Meridian stockholders to have the resale of
their I-trax stock registered promptly after consummation of the merger. After
motion duly made and seconded, the directors present unanimously approved the
I-trax merger and the merger agreement, and authorized Mr. Cochrane to finalize,
execute and deliver the merger agreement.
On December 26, 2003, I-trax learned that one of the expected
subscribers to the convertible preferred stock had decided not to invest, which
brought the aggregate expected amount of equity down from $25 million to $20
million. Also on December 26, 2003, Bryant Park Capital distributed an update to
its December 24, 2003 financial presentation, which reflected the decision of
the potential investor not to invest. I-trax then convened another board meeting
on the morning of December 28, 2003, to determine whether this development had
any effect on the board's decision to go forward with the merger. After
discussion and the posing of questions to management and Bryant Park Capital by
the board, the directors asked whether Bryant Park Capital, in light of the
present facts and circumstances, was prepared to render a fairness opinion to
the I-trax board of directors. Bryant Park Capital confirmed that it was and
rendered to I-trax's board of directors an oral opinion, which was confirmed by
delivery of a written opinion dated December 28, 2003, to the effect that, as of
December 28, 2003 and based on and subject to the matters described in the
opinion, the consideration to be paid by I-trax in the merger was fair to I-trax
from a financial point of view. That opinion is attached to this proxy statement
as Annex B. See also "Opinion of I-trax's Financial Advisor."
Reasons for the Merger; Recommendations of the Boards of Directors
Reasons Common to Both I-trax and CHD Meridian for the Merger
The combination of I-trax and CHD Meridian offers a unique opportunity
to provide total population health management in the market sector most affected
by rising healthcare costs: the self-insured employer. The self-insured employer
also has the strongest incentive to spend money on active health maintenance
programs that will reduce later need for critical care, and therefore contain
healthcare costs while also maximizing health. I-trax provides personalized
health management solutions for focused disease and lifestyle/wellness
management programs, which improve the health of the populations I-trax serves,
while reducing the cost of care. CHD Meridian is the leader in on-site
healthcare for Fortune 1,000 companies, a primary target for I-trax's disease
and health management programs. The addition of I-trax's capabilities to CHD
Meridian's service offerings will respond to a specific and frequent request of
the large employers that are CHD Meridian's clients, for a more comprehensive
range of population health management services, particularly for predictive
modeling, appropriate off-site intervention capabilities and multiple access
points to improve care outcomes and reduce or avoid downstream healthcare costs.
We believe that with a nominal increase in variable costs, the merged
company can offer to CHD Meridian's current clients the value added benefit of
I-trax's solutions and participate in medical cost savings provided to certain
of these customers while enjoying improved gross profit margins. CHD Meridian
currently serves approximately 650,000 lives. This represents only approximately
25% of CHD Meridian clients' employees, dependents and retirees. We believe that
the combination of the two companies will allow the merged company to access a
larger portion of the employer population base with a "per member per month"
pricing model that affords substantially greater profit margins. A penetration
of a larger population affords a substantial expansion of services delivered to
CHD Meridian's existing client base.
We believe that the combination of I-trax and CHD Meridian will allow
employers better to manage healthcare provided to employees who use on-site
facilities and provide an integrated, comprehensive program for the entire
employee base. We believe that this should result in savings because clients
will have one vendor for primary care, pharmacy, occupational health and disease
management and health interventions. The combination of these services will
increase productivity, reduce absenteeism, improve health status of both active
employees and retirees, and reduce overall costs.
36
In addition, the components of I-trax's disease and health management
program will offer multiple entry points for corporate customers that may want
to "unbundle" the solution. This could substantially shorten the sales cycle
currently experienced by CHD Meridian and provide an opportunity to build a more
comprehensive program as the relationship grows with the customer over time.
Each of our boards of directors, in reaching its decision on the
merger, consulted with its financial and legal advisors and its senior
management, reviewed a significant amount of information and considered a number
of factors. The most relevant information reviewed and factors considered are
set forth below:
o the reasons described in this section and the risks described above
under "Risk Factors";
o the strategic and financial alternatives available to each of I-trax
and CHD Meridian in the healthcare industry;
o the strategic fit between CHD Meridian and I-trax, and the belief that
the merged company has the potential to enhance stockholder value
through additional opportunities;
o the opportunity for the I-trax and CHD Meridian stockholders to
participate in a larger, more competitive company;
o information concerning the financial performance, business operations,
debt capacity and asset quality of CHD Meridian and I-trax and of the
two companies on a combined basis;
o the likely impact of the merger on each company's employees and
customers;
o the expected effect of the merger on our existing relationships with
third parties;
o the interests of officers and directors of each company in the merger,
as described under "Interests of Officers and Directors in the
Merger"; and
o the qualification of the merger as a tax-free transaction for United
States federal income tax purposes.
I-trax's Reasons for the Merger
The disease and population health management business, although growing
rapidly, is a relatively new segment of the overall healthcare industry and has
many entrants. Many companies use the generic label of "disease management" to
characterize activities ranging from the sale of medical supplies and drugs to
services aimed at managing demand for healthcare services. Although we believe
that I-trax is competing effectively within the disease and population health
management business, I-trax's board of directors and management believe that the
company could benefit from developing and offering employers a solution that
would integrate on-site healthcare services with disease and population health
management. The combination would also strengthen significantly I-trax's
position in the industry, thus we believe further improving I-trax ability to
secure new business. After pursuing the merger and related transactions,
I-trax's board of directors also considered the opinion of Bryant Park Capital
that, as of December 28, 2003, and subject to the assumptions and limitations
set forth in the opinion, the consideration to be paid by I-trax in the merger
was fair from a financial point of view to I-trax, and the financial
presentations made by Bryant Park Capital to the I-trax board of directors.
Bryant Park Capital's opinion was prepared solely for the benefit and use of
I-trax's board of directors. Bryant Park Capital's opinion is not intended to,
and does not, constitute a recommendation to any person on how to vote on the
merger or any other matter relating to the merger. It should be understood that
Bryant Park Capital has not updated its opinion and has no duty to update such
opinion.
37
CHD Meridian's Reasons for the Merger
In addition to the reasons common to CHD Meridian and I-trax as
described above, additional reasons for the merger from the CHD Meridian
perspective include:
o the ability to enhance liquidity through the merger with a company
that has publicly traded securities;
o the fact that a part cash/part stock transaction establishes a
suitable compromise between elements of the CHD Meridian stockholder
base who desire liquidity and those who are prepared to retain their
investment; and
o the requests of CHD Meridian's clients for a more comprehensive range
of population health management services, particularly for predictive
modeling, appropriate off-site intervention capabilities and multiple
access points to improve care outcomes and reduce or avoid downstream
healthcare costs.
The foregoing discussion of the information and factors considered by
the companies' boards of directors is not intended to be exhaustive. In view of
the wide variety of the material factors considered in connection with our
respective evaluations of the merger and the complexity of these matters, our
boards of directors did not find it practicable to, and did not, quantify or
otherwise attempt to assign any relative weight to the various factors
considered. In addition, our boards of directors did not undertake to make any
specific determination as to whether any particular factor, or any aspect of any
particular factor, was favorable or unfavorable to our boards of directors'
ultimate determination, but rather, our boards of directors conducted an overall
analysis of the factors described above, including discussions with and
questioning of our respective management and legal and financial advisors. In
considering the factors described above, individual members of our boards of
directors may have given different weight to different factors.
There can be no assurance that any of the potential savings, synergies
or opportunities considered by our boards of directors will be achieved through
consummation of the merger. See sections titled "Risk Factors" and "Cautionary
Statement Concerning Forward-Looking Statements" above.
Recommendation of the Board of Directors of I-trax
I-TRAX'S BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT I-TRAX
STOCKHOLDERS VOTE TO:
1. APPROVE THE ISSUANCE OF UP TO 13,859,200 SHARES OF COMMON STOCK AND
400,000 SHARES OF CONVERTIBLE PREFERRED STOCK IN THE MERGER;
2. APPROVE THE MERGER OF DCG ACQUISITION, INC., A WHOLLY-OWNED SUBSIDIARY
OF I-TRAX, WITH AND INTO CHD MERIDIAN;
3. APPROVE THE SALE OF UP TO 1,100,000 SHARES OF CONVERTIBLE PREFERRED
STOCK TO RAISE A PORTION OF THE CASH CONSIDERATION TO BE USED IN THE
MERGER AND FOR WORKING CAPITAL; AND
4. RATIFY AND APPROVE THE ISSUANCE, IN A PRIVATE PLACEMENT THAT CLOSED ON
OCTOBER 31, 2003, OF 1,400,000 SHARES OF COMMON STOCK AND WARRANTS TO
PURCHASE 840,000 SHARES OF COMMON STOCK AND APPROVE THE ISSUANCE OF
THE 840,000 SHARES OF COMMON STOCK UPON THE EXERCISE OF SUCH WARRANTS.
38
Recommendation of the Board of Directors of CHD Meridian
CHD MERIDIAN'S BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT CHD
MERIDIAN STOCKHOLDERS VOTE FOR ADOPTION OF THE MERGER AGREEMENT.
Financing of the Cash Portion of the Merger Consideration
Part of the consideration that CHD Meridian stockholders will receive
in the merger is cash in the amount of $35 million, subject to certain
adjustments. I-trax and its subsidiaries, which after the merger will include
CHD Meridian, intend to borrow approximately $16 million of the cash
consideration through a senior loan facility. In addition, I-trax expects to
raise between $15 and $25 million through a private placement of additional
shares of its convertible preferred stock at least $15 million of which will be
used to fund the cash consideration. We will pay the costs of the merger from
the excess proceeds of the financings and available cash of the merged
companies. Please see section titled "The Merger Agreement - Merger
Consideration and Related Adjustments" below for a more detailed discussion.
Senior Loan Facility. I-trax and CHD Meridian have received a loan
commitment, subject to customary conditions, from a national bank pursuant to
which I-trax and its subsidiaries, which will include CHD Meridian, will be able
to borrow up to $16 million at the closing of the merger. The loan will be
senior to all other indebtedness of I-trax. I-trax, CHD Meridian and the
national bank have begun to negotiate definitive loan documents. If the merger
is consummated, I-trax will borrow $16 million and use such funds toward payment
of the cash portion of the merger consideration.
Convertible Preferred Stock Offering. I-trax has received subscriptions
for 800,000 shares of its convertible preferred stock at a purchase price of
$25.00 per share. The convertible preferred stock is convertible into I-trax
common stock at the price of $2.50 per share. The offering was made and the
shares of convertible preferred stock will be issued in a private placement
exempt from registration pursuant to Section 4(2) of the Securities Act of 1933,
as amended, or Securities Act, and the rules promulgated thereunder. All of the
purchasers are accredited investors as such term is defined in Rule 501
promulgated under the Securities Act.
The closing of the offering is expected to occur contemporaneously with the
closing of the merger. I-trax has reserved a sufficient number of shares of
convertible preferred stock for issuance in the private placement and common
stock for issuance upon exercise of the convertible preferred stock. The
remainder of the proceeds will be used for working capital of the merged
companies.
I-trax is asking its stockholders to approve the issuance of up to
1,100,000 shares of convertible preferred stock. This approval covers the
800,000 shares of convertible preferred stock for which subscriptions have been
received, provides up to an additional 200,000 shares of convertible preferred
stock for which additional subscriptions may be received after the date of this
proxy statement, up to 50,000 shares of convertible preferred stock (or 5% of
the aggregate shares of convertible preferred stock sold to third party
investors) issuable upon exercise of a warrant which I-trax is required to pay
to the placement agent at the closing, and an additional 50,000 shares of
convertible preferred stock which could be payable as a penalty for a delay in
I-trax's compliance with its obligation to file a registration statement on Form
S-3 with the Securities and Exchange Commission following the merger. See "The
Merger- Registration Rights," and "The Merger - Fees and Expenses of the Merger"
for a further discussion of these matters.
If I-trax is not successful in obtaining the senior loan facility in an
amount of at least $16 million, or if it fails to obtain cash proceeds from the
private placement of convertible preferred stock of at least $15 million, I-trax
can terminate the merger agreement.
In addition to normal and customary conditions to closing, the closing
of the sale of convertible preferred stock is subject to the following
conditions:
o No event shall have occurred which has led I-trax to believe (or which
should have led I-trax to believe in the exercise of reasonable
business judgment) that any material assumption underlying the
39
financial forecast delivered by I-trax to the investors is untrue or
is more likely than not to become untrue.
o The expected pro forma net income of I-trax and CHD Meridian and their
respective subsidiaries for calendar year 2003, measured in accordance
with generally accepted accounting principles before any expenses for
interest, taxes, depreciation and amortization (and excluding certain
adjustments), equals at least $5,500,000.
Effect of the Issuances of I-trax Common Stock and Convertible Preferred Stock
on the Rights of Existing I-trax Stockholders
In the event that the merger is consummated, current I-trax
stockholders will experience significant dilution of their equity ownership. The
following table shows the dilutive effect of the merger on I-trax common
stockholders as of January 20, 2004 (excluding the shares of common stock placed
in escrow). The table, however, does not reflect any further dilution that may
result from the exercise or conversion of I-trax's currently outstanding
warrants, options and convertible debt or shares, options or warrants that may
be issued in the future.
Percentage of
Number of Shares Outstanding
----------------- -----------------
Number of shares of I-trax common stock issued and outstanding at 13,952,376 38.8%
February 5, 2004
Number of shares of I-trax common stock to be issued in the merger 10,000,000 27.8
Number of shares of I-trax common stock issuable upon conversion of
convertible preferred stock to be issued in the merger 4,000,000 11.1
Estimated maximum number of shares of I-trax common stock issuable upon
conversion of convertible preferred stock to be sold to raise a
portion of the cash consideration to be used in the merger (a) 8,000,000 22.3
----------------- -----------------
Maximum number of shares of I-trax common stock to be issued and 35,952,376 100.0%
outstanding immediately following the closing of the merger ================= =================
(a) Excludes the common stock issuable upon conversion of 200,000 shares of
convertible preferred stock for which I-trax has not received
subscriptions, 50,000 shares of convertible preferred stock reserved
for issuance of placement agent warrants, and 50,000 shares of
convertible preferred stock reserved for penalties that may be
associated with I-trax's failing to file a registration statement on
Form S-3 covering the resale of I-trax common stock issuable upon the
conversion of the convertible preferred stock to be sold to raise a
portion of the cash merger consideration.
Cash Bonus Plan for Certain Non-executive CHD Meridian Employees After
the Merger
CHD Meridian plans to establish a cash bonus plan with a $352,000 bonus
pool and to offer certain non-executive employees of CHD Meridian the
opportunity to participate in such plan. Cash awards under the plan will be
contingent upon CHD Meridian's meeting certain financial performance goals in
its 2004 calendar year. Plan participants will not earn awards if CHD Meridian
terminates their employment for cause prior to the payment of the bonus or if
they resign without good reason (as defined in the plan) prior to December 31,
2004. I-trax will assume CHD Meridian's obligations under the plan at the
merger's effective time.
Material United States Federal Income Tax Consequences of the Merger
Generally
The following discussion addresses certain material U.S. Federal income
tax consequences of the merger, focusing primarily on those that generally are
applicable to CHD Meridian stockholders. The following discussion does not deal
with all U.S. Federal income tax consequences that may be relevant to CHD
Meridian stockholders in light of their particular circumstances, such as
stockholders who are dealers in securities, banks, insurance
40
companies, tax-exempt organizations, subject to alternative minimum tax, holding
their shares as part of a hedge, straddle, or other risk reduction transaction,
non-U.S. persons, dissenting from the merger, or who acquired their CHD Meridian
shares through stock option or stock purchase programs or otherwise as
compensation. In addition, it does not address the tax consequences of the
merger under state, estate, local, or foreign tax laws or the tax consequences
of transactions completed before, after or contemporaneously with the
transactions constituting the merger, such as the exercise of options or rights
to purchase CHD Meridian shares in anticipation of the merger, the repurchase of
shares of stock by CHD Meridian prior to the merger, or any exchanges of I-trax
stock among former CHD Meridian stockholders.
Furthermore, the discussion of the tax impact on CHD Meridian
stockholders is limited to CHD Meridian stockholders that hold their CHD
Meridian shares as capital assets and does not consider the tax treatment of CHD
Meridian stockholders that hold CHD Meridian shares through a partnership or
other pass-through entity. CHD Meridian stockholders are urged to consult their
own tax advisors regarding the tax consequences to them of the merger based on
their own circumstances, including the applicable U.S. Federal, state, estate,
local, and foreign tax consequences to them of the merger.
The following discussion is based on the Internal Revenue Code of 1986,
as amended (or the Code), applicable Treasury Regulations, judicial decisions,
and administrative rulings and practice, all as of the date of this proxy
statement, all of which are subject to change. Any such change could be applied
to transactions that were completed before the change, and could affect the
accuracy of the statements and conclusions in this discussion and the tax
consequences of the merger to CHD Meridian, I-trax, and/or their respective
stockholders.
Neither CHD Meridian nor I-trax has requested nor will request a ruling
from the Internal Revenue Service with regard to any of the tax consequences of
the merger. It is a condition to CHD Meridian's obligation to close the first
step of the merger that Irell & Manella LLP, counsel to CHD Meridian, render its
opinion to CHD Meridian, subject to certain assumptions (including that the
second step of the merger will take place), qualifications and limitations,
that, among other things, the merger will constitute a reorganization under
Section 368(a) of the Code.
Based on our belief that the merger will constitute a reorganization,
and subject to the limitations and qualifications referred to in this
discussion, the following U.S. Federal income tax consequences will result from
the merger:
Single Statutory Merger
Although the transaction has been structured as a two-step merger, it
is intended that the two steps will be executed pursuant to an integrated plan,
such that the transaction will qualify as a single statutory merger of CHD
Meridian under ss.368(a)(1)(A) of the Code. Moreover, because CHD Meridian
Healthcare, LLC intends to elect to be disregarded as an entity separate from
its owner (I-trax), it is expected that the transaction will be treated as a
statutory merger of CHD Meridian directly into I-trax, such that the legal
requirements for qualification as a "reorganization" under Section 368 of the
Code will be fewer than if the transaction were structured in a different
manner.
Gain Recognition
A CHD Meridian stockholder who exchanges CHD Meridian shares for I-trax
common stock, I-trax convertible preferred stock and cash in the merger
generally will recognize gain (but not loss) in an amount equal to the lesser
of:
o the excess (if any) of (a) the amount of cash and the fair market
value of the I-trax common stock and convertible preferred stock
received in the exchange (including shares held in escrow) over (b)
the stockholder's adjusted tax basis in the CHD Meridian shares; and
o the amount of cash received in the exchange.
41
Such gain generally will be capital gain, and will be long-term capital
gain with respect to any CHD Meridian shares that have been held by the CHD
Meridian stockholder for more than one year as of the time of the exchange.
Nevertheless, any gain recognized by a CHD Meridian stockholder pursuant to the
merger may be taxed as an ordinary dividend if such stockholder actually or
constructively owns a sufficient amount of I-trax shares after the merger so as
not to qualify for exchange treatment under the rules set forth in Section 302
of the Code. A CHD Meridian stockholder who exchanges CHD Meridian shares for
I-trax common stock, I-trax convertible preferred stock and cash pursuant to the
merger will not be permitted to recognize a loss in the exchange.
Tax Basis
The aggregate tax basis of the I-trax common stock and I-trax
convertible preferred stock received by CHD Meridian stockholders in the merger
(including shares held in escrow) will be equal to the aggregate tax basis of
the CHD Meridian shares exchanged for I-trax common stock and convertible
preferred stock, decreased by the aggregate amount of cash received in the
exchange, and increased by the aggregate amount of gain (if any) recognized in
the exchange. Such aggregate tax basis will be allocated among the shares of
I-trax common stock and I-trax convertible preferred stock received in
proportion to their relative fair market values as of the time of the exchange.
Holding Period
The holding period of the I-trax common stock and convertible preferred
stock received by a CHD Meridian stockholder in the merger (including shares
held in escrow) will include the holding period of the CHD Meridian shares that
were exchanged for those I-trax shares.
Escrow Shares
For federal income tax purposes, the CHD Meridian stockholders will be
considered owners of the shares of I-trax common stock that are held in the
escrow established by the merger agreement from the effective time of the first
step of the merger. No gain or loss will be recognized by a CHD Meridian
stockholder upon the release of any shares from escrow or upon the return of any
escrowed shares to I-trax that were allocated to such stockholder as of such
effective time. In the event any escrowed shares are returned to I-trax, the tax
basis of a CHD Meridian stockholder for the returned shares shall be reallocated
to the other shares of I-trax received by such stockholder in the merger.
Consequences if the Merger Does Not Qualify as a Reorganization
If the merger should fail to qualify as a "reorganization" for U.S.
federal income tax purposes, either because the second step of the merger does
not take place or for some other reason, it is expected that the transaction
would be treated as a fully taxable purchase of shares of CHD Meridian by
I-trax. In that event, a CHD Meridian stockholder would recognize the full
amount of its capital gain (or loss) realized on the exchange, computed by
reference to the amount by which the sum of the value of the I-trax common stock
and convertible preferred stock on the date of the exchange (including shares
held in escrow) and the amount of cash received exceeds (or is less than) the
stockholder's adjusted tax basis in the CHD Meridian shares exchanged. A CHD
Meridian stockholder's initial tax basis in its I-trax common stock and
convertible preferred stock received in the merger would be equal to the fair
market value of that stock on the date of the merger, and that stockholder's
holding period for such stock would begin on the day after the date of the
exchange.
Dividends on I-trax Convertible Preferred Stock
The I-trax convertible preferred stock provides that dividends are
payable on conversion or liquidation of the stock and that I-trax may pay such
dividends in cash or in common stock. If I-trax has current or accumulated
earnings and profits in the year of payment of a dividend, such dividend should
be taxable as dividend income to the holder, even if the dividend is payable in
common stock and even if the payment coincides with a conversion of the
convertible preferred stock into common stock.
42
Backup Withholding
Cash payments made to CHD Meridian stockholders pursuant to the merger
may, under certain circumstances, be subject to backup withholding at a rate of
28 percent. However, backup withholding will not apply to a CHD Meridian
stockholder who either (i) furnishes a correct taxpayer identification number
and certifies that he or she is not subject to backup withholding by completing
the requisite forms that will be included as part of the letter of transmittal,
or (ii) otherwise proves to I-trax and the exchange agent that the CHD Meridian
stockholder is exempt from backup withholding.
THE FOREGOING DISCUSSION IS INTENDED TO PROVIDE ONLY A SUMMARY OF THE
MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER, AND IS NOT INTENDED
TO BE A COMPLETE ANALYSIS OR DISCUSSION OF ALL POTENTIAL U.S. FEDERAL INCOME TAX
CONSEQUENCES OF THE MERGER. AS DESCRIBED ABOVE, THIS DISCUSSION DOES NOT ADDRESS
CERTAIN CATEGORIES OF STOCKHOLDERS, NOR DOES IT ADDRESS STATE, ESTATE, LOCAL OR
FOREIGN TAX CONSEQUENCES. IN ADDITION, THIS DISCUSSION DOES NOT ADDRESS TAX
CONSEQUENCES THAT MAY VARY WITH, OR ARE CONTINGENT UPON, INDIVIDUAL
CIRCUMSTANCES. CHD MERIDIAN STOCKHOLDERS ARE URGED TO CONSULT THEIR TAX ADVISERS
TO DETERMINE THEIR PARTICULAR U.S. FEDERAL INCOME, STATE, ESTATE, LOCAL, FOREIGN
OR OTHER TAX CONSEQUENCES RESULTING FROM THE MERGER, IN LIGHT OF THEIR
INDIVIDUAL CIRCUMSTANCES.
Regulatory Matters Relating to the Merger
U.S. Antitrust Review
Under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, or the
Hart-Scott-Rodino Act, and the rules promulgated thereunder, the merger may not
be consummated until notifications have been given and certain information and
materials have been furnished to and reviewed by the U.S. Department of Justice
and the Federal Trade Commission and specified waiting period requirements have
been satisfied or have been terminated. On or before February 17, 2004, I-trax
and CHD Meridian will file the premerger notification forms required by the
Hart-Scott-Rodino Act with the DOJ and FTC. If I-trax and CHD Meridian file the
premerger notification forms on February 17, 2004, then the applicable waiting
period would be scheduled to expire at midnight on March 18, 2004. At any time
prior to or after the consummation of the merger, the DOJ or the FTC could take
action under the Federal antitrust laws, including seeking to enjoin the merger
or seeking conditions thereon. State antitrust authorities and private parties
in certain circumstances may bring legal action under the antitrust laws seeking
to enjoin the merger or impose conditions.
I-trax and CHD Meridian believe that the merger promotes competition
and does not raise serious concerns under U.S. antitrust laws. However, there
can be no assurance that the antitrust review process will move rapidly or that
a challenge to the merger on antitrust grounds will not be made or, if a
challenge is made, that it would not be successful.
Dissenters' Rights
The holders of CHD Meridian common stock will have appraisal or dissenters'
rights under Delaware law in connection with the merger. If a holder has not
voted shares of CHD Meridian common stock in favor of adopting the merger
agreement, such holder has the right to demand appraisal of, and to be paid the
fair value for, such shares of CHD Meridian common stock. Such appraisal will be
made by the Delaware Court of Chancery if the surviving entity or one or more
stockholders who has complied with the procedures required under Delaware law to
preserve appraisal rights petitions the Court to do so in a timely manner. The
value of the CHD Meridian common stock for this purpose will exclude any element
of value arising from the accomplishment or expectation of the merger. For a
holder of CHD Meridian common stock to exercise its right to an appraisal, such
holder must deliver to CHD Meridian a written demand for an appraisal of the
shares of CHD Meridian common stock prior to the time the vote is taken on the
merger at the CHD Meridian special meeting as provided by Delaware law. Annex E
to this proxy statement sets forth the pertinent provisions of Delaware law
addressing appraisal rights. Simply voting against the merger will not be
considered a demand for appraisal rights. If a CHD Meridian stockholder fails to
deliver a
43
written demand prior to the time the vote is taken on the merger at the CHD
Meridian special meeting, such holder will lose the right to an appraisal. In
addition, if such holder votes shares of CHD Meridian common stock in favor of
the merger agreement, such holder will lose the right to an appraisal with
respect to such shares. The preceding discussion is not a complete statement of
the law pertaining to appraisal or dissenters' rights under the Delaware General
Corporation Law and is qualified in its entirety by the provisions of Delaware
law attached as Annex E to this proxy statement.
I-trax stockholders will not have any right to appraisal of the value
of their shares or any dissenters' rights in connection with the merger or in
connection with the other matters being submitted to a vote of stockholders at
the special meeting.
Federal Securities Laws Consequences
This proxy statement does not cover the resale of the I-trax common
stock or the I-trax convertible preferred stock to be received by the
stockholders of CHD Meridian upon completion of the merger, and no person is
authorized to make any use of this proxy statement in connection with any such
resale.
The shares of I-trax capital stock to be issued in the merger have not
been registered under the Securities Act. Consequently, such shares can be
issued only if such issuance is exempt from the applicable registration
requirement. I-trax and CHD Meridian are anticipating that they will rely on the
exemption contained in Section 4(2) of the Securities Act for sales not
involving any public offering. To be able to rely on the safe harbor provisions
of Regulation D promulgated under the Securities Act, among other things, the
number of CHD Meridian stockholders and option holders who are not "accredited
investors" or otherwise excluded from the number of purchasers (as determined
under Rule 501 promulgated under the Securities Act) must not be greater than 35
at the effective time of the merger. Currently, there are approximately 100 CHD
Meridian stockholders and option holders. CHD Meridian management is confident,
however, that a sufficient number of stockholders and option holders will accept
the cash repurchase offers described below to permit closing of the merger in
compliance with Regulation D.
To comply with the requirements Section 4(2) of the Securities Act, CHD
Meridian anticipates offering to purchase from selected stockholders their
shares of CHD Meridian common stock immediately prior to the merger at a cash
purchase price of $287.85 per share in cash. In addition, CHD Meridian
anticipates offering to pay $287.85 in cash (less the option exercise price) in
exchange for the termination of each outstanding option to purchase a share of
CHD Meridian common stock immediately prior to the merger. The merger agreement
permits expenditures of up to $11 million for such transactions. The amount
spent in such transactions will reduce the cash portion of the merger
consideration payable at closing, but because the number of CHD Meridian Shares
Deemed Outstanding will be reduced by virtue of such transactions, the number of
shares of I-trax capital stock per share of CHD Meridian common stock payable to
remaining CHD Meridian stockholders at the effective time of the merger will
increase. CHD Meridian stockholders and option holders are not obligated to
accept the CHD Meridian purchase offer.
In addition to the purchases of CHD Meridian common stock and
termination of options referred to in the preceding paragraph, CHD Meridian will
also purchase shares from certain executive officers as described in "Interest
of Officers and Directors in the Merger."
If, as anticipated, the I-trax capital stock is issued in the merger
pursuant to the exemption contained in Section 4(2) of the Securities Act for
sales not involving any public offering, then such shares of capital stock will
be "restricted securities" that may only be resold pursuant to an effective
registration statement under the Securities Act or an exemption from the
registration requirements of the Securities Act. Under Rule 144 promulgated
under the Securities Act, any person (or persons whose shares are aggregated)
who has beneficially owned restricted securities for at least one year is
entitled to sell, within any three-month period, a number of those securities
that does not exceed the greater of 1% of the then-outstanding shares of the
issuer in the same class or the average weekly trading volume in the public
market during the four calendar weeks preceding the filing of the seller's Form
144, provided that certain requirements concerning the availability of public
information concerning the issuer, the manner of sale and the filing of the
seller's Form 144 are satisfied. A person who is not an affiliate, has not been
an
44
affiliate within three months prior to the sale and has beneficially owned
restricted securities for at least two years is entitled to sell those
securities under Rule 144(k) without regard to any of the other limitations
described above.
In the event that I-trax cannot reasonably determine that the issuance
of I-trax common stock and convertible preferred stock as merger consideration
will be exempt from registration under Section 4(2) of the Securities Act by
April 30, 2004 and this remains the only unsatisfied condition to consummation
of the merger, I-trax has the option to file a registration statement on Form
S-4 registering the shares of I-trax common stock to be issued in the merger as
well as the shares of I-trax common stock issuable upon conversion of the I-trax
convertible preferred stock to be issued in the merger. If I-trax chooses to
file a registration statement on Form S-4, then the date after which either
party may terminate the merger agreement if the conditions to such party's
consummation of the merger are not satisfied, provided that such party's breach
of any of its respective warranties, representations or covenants is not the
reason the condition has not been satisfied, will be extended from April 30,
2004 to July 31, 2004. Shares issued pursuant to such registration statement on
Form S-4 will be freely transferable by individuals who are not affiliates of
I-trax.
Registration Rights
I-trax has agreed to register under the Securities Act, at I-trax's
sole cost and expense, the resale of the shares of I-trax common stock
distributed to the CHD Meridian stockholders in the merger, as well as the
shares of common stock issuable upon conversion of the convertible preferred
stock. I-trax has agreed to keep such registration statement effective for two
years. While effectiveness of this registration is maintained, the shares of
I-trax common stock covered by the registration statement may be resold by the
holder and, upon resale, will become freely transferable. However, shares of
common stock held by a person who is deemed to be an "affiliate" (as this term
is defined under the Securities Act) of CHD Meridian prior to the merger or of
I-trax after the merger may only be resold by them in accordance with the
volume, manner-of-sale and notice requirements of Rules 144 under the Securities
Act. Persons who may be deemed to be I-trax's or CHD Meridian's affiliates
generally include individuals or entities that control, are controlled by, or
are under common control with, I-trax or CHD Meridian, as applicable and include
executive officers and directors of the applicable company. For further
discussion, see the section entitled "The Merger Agreement - Post-Closing
Covenants - Registration Statement."
If I-trax fails to file with the Securities and Exchange Commission a
registration statement covering the resale of I-trax common stock issuable upon
conversion of the convertible preferred stock purchased by third party investors
within 30 days of the closing of the merger, I-trax will be obligated to issue
to such investors, at no additional cost, as compensation for such failure
additional shares of convertible preferred stock in an amount equal to one
percent of the convertible preferred stock purchased from I-trax and held by
such investors and, until such registration statement has been filed, additional
shares of convertible preferred stock in an amount equal to one percent of the
convertible preferred stock purchased for every subsequent 30 days I-trax does
not file such registration statement.
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 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 2004
earnings will include CHD Meridian's 2004 earnings only after the effective time
of the merger.
Stock Exchange Listing
I-trax will file an application with the American Stock Exchange to
have the shares of I-trax common stock to be issued in the merger and the shares
of I-trax common stock issuable upon conversion of any convertible preferred
stock issued in the merger and to be sold to raise a portion of the cash
consideration to be used in the merger listed on the American Stock Exchange
under the ticker symbol "DMX." I-trax has agreed in the merger agreement to use
reasonable commercial efforts to cause I-trax common stock issued in the merger
and issuable upon conversion of convertible preferred stock issued in the merger
to be approved for listing on the American Stock Exchange.
45
Fees and Expenses of the Merger
The merged companies will incur certain one-time costs, some of which
will be charged to operations and some will be deemed to be part of the purchase
price of CHD Meridian. Currently, I-trax estimates that I-trax will incur
approximately $1,568,000 of direct transactional costs, which will be
capitalized and included as part of the purchase price. These costs consist
principally of professional fees, Securities Act registration costs and other
regulatory costs. I-trax also estimates that I-trax will incur approximately
$2,564,000 of costs related to the sale of I-trax convertible preferred stock to
third party investors, of which $1,200,000 will be in cash and $1,364,000 in
equity. These costs will also be capitalized. Lastly, I-trax expects to charge
$800,000 to operations of which $500,000 will be cash and $300,000 in common
stock for a bonus pool for I-trax employees directly involved in negotiating and
completing the merger transaction. These amounts are preliminary estimates and
are therefore subject to change. Additional unanticipated transactional costs
may be incurred in addition to the anticipated expenses incurred in the
integration of our businesses.
INTERESTS OF OFFICERS AND DIRECTORS IN THE MERGER
In considering the recommendations of I-trax's board of directors and
CHD Meridian's board of directors with respect to the merger, stockholders of
I-trax and CHD Meridian should be aware that the officers and directors of
I-trax and CHD Meridian have interests in the merger that are different from, or
in addition to, their interests as stockholders of I-trax and CHD Meridian
generally. I-trax's board of directors and CHD Meridian's board of directors
were aware of these interests and considered them, among other matters, in
adopting the merger agreement and the transactions contemplated by the merger
agreement. Two executive officers of I-trax, Frank A. Martin and John R.
Palumbo, were also members of I-trax's nine-person board of directors when that
board approved the merger and will continue as executive officers of the merged
companies after completion of the merger. Similarly, two executive officers of
CHD Meridian, Haywood D. Cochrane, Jr. and Charles D. (Chip) Phillips, were
members of CHD Meridian's seven-person board of directors when the CHD Meridian
board approved the merger. Both will likewise continue as executive officers of
the merged companies after completion of the merger. In addition, under the
terms of the merger agreement, I-trax has agreed to make Mr. Cochrane a member
of the I-trax board of directors at the effective time of the merger.
I-trax
The compensation committee of I-trax's board of directors has allocated
$800,000, comprised of $500,000 in cash and $300,000 in I-trax common stock or
options to acquire common stock, to be used to compensate I-trax officers and
other employees for their work in connection with completing the CHD Meridian
merger and subsequent integration of the merged companies. This bonus pool will
be created and distributed at the merger effective time of the merger. The
compensation committee of I-trax's board of directors has not yet determined the
manner in which the bonus pool will be allocated among I-trax officers and other
employees.
CHD Meridian
Haywood D. Cochrane Jr., the chief executive officer of CHD Meridian,
Charles D. (Chip) Phillips, the chief operating officer, and Shannon W.
Farrington, the chief financial officer of CHD Meridian, are the owners of
7,400, 12,232 and 2,475 shares, or options to acquire shares, of CHD Meridian
common stock, respectively. CHD Meridian has agreed to redeem 5,592, 7,812 and
2,475 of their shares or options, respectively, immediately prior to the
effective time of the merger at a cash purchase price of $287.85 per share. This
amount represents the value of the merger consideration without the earn-out
shares, based on the $2.50 price of I-trax common stock that was used in
connection with the merger negotiations and does not reflect option exercise
prices. In addition, Messrs. Cochrane and Phillips are negotiating a
reallocation agreement among them and certain other CHD Meridian stockholders
pursuant to which, among other things, Messrs. Cochrane and Phillips would,
following the effective time of the merger, exchange all of the convertible
preferred stock they receive in the merger (3,478.85 and 8,504.70 shares,
respectively) for 34,788 and 85,047 shares of I-trax common stock, respectively,
received in the merger by the other parties to such reallocation agreement. The
reallocation agreement being negotiated would also allow Messrs. Cochrane and
Phillips to obtain from such other stockholders the earn-out shares (to the
extent CHD Meridian Healthcare, LLC, operating the historic business of CHD
Meridian, meets certain financial performance goals-See "The Merger Agreement -
Earn-out Payment") calculated as if the shares, or options to
46
acquire shares, of CHD Meridian common stock redeemed from them immediately
before the effective time of the merger had not been so redeemed but, rather,
such shares, or options to acquire shares, had been converted into the right to
receive merger consideration.
There is no assurance that such reallocation agreement will be
implemented; however, implementation will not increase the aggregate merger
consideration payable by I-trax. If implemented, such reallocation agreement
(together with the redemptions of shares from Messrs. Cochrane and Phillips)
would have the following effects as compared to the treatment Messrs. Cochrane
and Phillips would have received in the merger in the absence of such
redemptions and such reallocation agreement (exclusive of earn out shares):
Merger Without Share Merger With Share
Redemption or Reallocation Agreement Redemption and Reallocation Agreement
------------------------------------ --------------------------------------
Convertible
Convertible Redemption and Preferred
Cash Common Stock Preferred Stock Merger Cash Common Stock Stock
------------- -------------- ---------------- ------------------ ---------------- --------------
Mr. Cochrane $1,065,052 304,303 12,173 $ 1,825,693 121,760 --
Mr. Phillips 1,760,503 503,004 20,122 2,776,823 297,665 --
Ms. Farrington 356,217 101,777 4,071 705,233 -- --
------------- -------------- ---------------- ------------------ ---------------- --------------
TOTAL $2,825,555 807,307 32,295 $ 5,307,749 419,424 --
The merger agreement requires I-trax to maintain in effect for at least
48 months liability insurance no less favorable than that in effect prior to the
merger in favor of the CHD Meridian officers and directors. I-trax also commits
to observe indemnification provisions now existing in the certificate of
incorporation or bylaws of CHD Meridian for the benefit of current CHD Meridian
directors and officers, and also certain indemnification provisions in favor of
Michael J. Hardies, CHD Meridian's chairman of the board, who also served as
owner of the stock of various affiliated professional corporations.
Ownership of I-trax Common Stock
The table below sets forth, as of January 20, 2004, the number of
shares and percentage of I-trax common stock beneficially owned by:
o I-trax's chief executive officer, four other most highly compensated
executive officers based on compensation earned during 2003;
o each director;
o all directors and executive officers as a group; and
o each person who is known by I-trax to own beneficially five percent or
more of I-trax's outstanding common stock.
Beneficial ownership was determined in accordance with Rule 13d-3 under
the Exchange Act of 1934, as amended. Under this rule, certain shares may be
deemed to be beneficially owned by more than one person (if, for example,
persons share the power to vote or the power to dispose of the shares). In
addition, shares are deemed to be beneficially owned by a person if the person
has the right to acquire the shares, such as upon exercise of options or
warrants, within 60 days of January 20, 2004, the date as of which the
information is provided. In computing the percentage ownership of any person,
the number of shares includes the amount of shares beneficially owned by such
person (and only such person) by reason of any acquisition rights. As a result,
the percentage of outstanding shares of any person as shown in the following
table does not necessarily reflect the person's actual voting power at any
particular date.
47
To I-trax's knowledge, except as indicated in the footnotes to this
table and under applicable community property laws, the persons named in the
table have sole voting and investment power with respect to all shares shown as
beneficially owned by them.
Shares of Options and
Common Stock Warrants
Beneficially Exercisable
Executive Officers and Directors* Owned Within 60 Days Total Percent of Class
---------------------------------------------- ---------------- ----------------- ---------------- -----------------
Frank A. Martin (1) 1,323,134 551,756 1,874,890 12.9
Gary Reiss (2) 354,472 606,258 960,730 6.6
David R. Bock (1) 570,165 -- 570,165 4.1
John R. Palumbo 37,080 128,333 165,413 1.2
Yuri Rozenfeld (3) 22,156 85,253 107,409 **
Anthony Tomaro 6,136 99,401 105,537 **
Philip D. Green (4) 1,200 69,280 70,480 **
William S. Wheeler 10,000 10,000 20,000 **
Michael M.E. Johns, M.D. -- 20,000 20,000 **
Arthur N. Leibowitz, M.D. -- 20,000 20,000 **
David Nash, M.D. -- 10,000 10,000 **
R. Dixon Thayer -- -- -- **
All executive officers and directors as a
group (12 persons) 1,854,178 1,600,281 3,454,456 22.2
Shares of
Common Stock Warrants
Beneficially Exercisable
5% Stockholders Owned Within 60 Days Total Percent of Class
---------------------------------------------- ---------------- ----------------- ---------------- -----------------
Woodglen Group, L.P. (5) 631,108 225,000 856,108 6.0
John Blazek * 852,619 -- 852,619 6.1
----------------------------------------------
* Executive officers, directors and five percent stockholder can be
reached at I-trax, Inc., One Logan Square, Suite 2615, 130 N. 18th
Street, Philadelphia, Pennsylvania 19103.
** Less than 1% of the outstanding shares of common stock.
(1) Messrs. Martin and Bock are members and managing directors of The
Nantucket Group, LLC, or Nantucket. Nantucket is the general partner
of Nantucket Healthcare Ventures I, L.P. or Nantucket Ventures, an
owner of 470,165 shares. Nantucket has sole voting and sole
dispositive power with respect to these shares. Therefore, Messrs.
Martin and Bock may be deemed to have beneficial ownership of the
shares held by Nantucket Ventures. Messrs. Martin and Bock disclaim
beneficial ownership of the shares held by Nantucket Ventures, except
to the extent of their respective pecuniary interest in Nantucket
Ventures. Mr. Bock own directly 100,000 shares. Mr. Martin own
directly and with his wife 852,969 shares. The address for Nantucket
Ventures is c/o The Nantucket Group, LLC, One Logan Square, Suite
2615, 130 N. 18th Street, Philadelphia, Pennsylvania 19103.
(2) Includes 3,800 shares held in the name of Mr. Reiss' wife.
(3) Mr. Rozenfeld is a partner of The Spartan Group Limited Partnership,
an owner of 6,000 shares. Mr. Rozenfeld has shared voting and shared
dispositive power with respect to the shares held by Spartan. Mr.
Rozenfeld
48
may be deemed to have beneficial ownership of the shares
held by Spartan. Mr. Rozenfeld disclaims beneficial ownership of the
shares held by Spartan, except to the extent of his pecuniary interest
in Spartan. Mr. Rozenfeld owns 16,156 shares directly.
(4) Mr. Green is an affiliate of Health Industry Investments, LLC and Akin
Gump Health Strategies, LLC, holders of options to purchase 20,000 and
6,400 shares, respectively, exercisable as of March 20, 2004.
(5) Woodglen Associates, LLC is the general partner of Woodglen Group,
L.P., and, as such, has sole voting and sole dispositive power with
respect to the shares it holds. Its address is 101 East Street Road,
Kennett Square, Pennsylvania 19348.
Pro forma Ownership of I-trax Common Stock Following the Merger
The table below sets forth, as of January 20, 2004, on a pro forma
basis as if the merger had occurred on such date, the number of shares and
percentage of I-trax common stock beneficially owned by:
o the chief executive officer, four other most highly compensated
executive officers based on compensation earned during 2003 and each
director of I-trax;
o three executive officers of CHD Meridian that will join I-trax as
executive officers following the merger;
o all directors and executive officers of I-trax following the merger as
a group; and
o all executive officers and directors of CHD Meridian before the merger
as a group.
For purposes of the following table, outstanding I-trax common stock
includes (1) 10,000,000 share of I-trax common stock and 4,000,000 shares of
I-trax common stock issuable upon conversion of I-trax convertible preferred
stock issued to CHD Meridian stockholders at the merger effective time and (2)
8,000,000 shares of I-trax common stock issuable upon conversion of I-trax
convertible preferred stock issued to third party investors in the financing to
be completed to raise a portion of the cash consideration. The table does not
include up to 3,859,200 additional shares of I-trax common stock that may be
issued upon satisfaction of the earn-out condition.
In addition, beneficial ownership was determined in accordance with
Rule 13d-3 under the Exchange Act of 1934, as amended. Under this rule, certain
shares may be deemed to be beneficially owned by more than one person (if, for
example, persons share the power to vote or the power to dispose of the shares).
In addition, shares are deemed to be beneficially owned by a person if the
person has the right to acquire the shares, such as upon exercise of options or
warrants, within 60 days of January 20, 2004, the date as of which the
information is provided. In computing the percentage ownership of any person,
the number of shares deemed outstanding includes the amount of shares
beneficially owned by such person (and only such person) by reason of any
acquisition rights. As a result, the percentage of outstanding shares of any
person as shown in the following table does not necessarily reflect the person's
actual voting power at any particular date.
To I-trax's knowledge, except as indicated in the footnotes to this
table and under applicable community property laws, the persons named in the
table have sole voting and investment power with respect to all shares shown as
beneficially owned by them.
49
Shares of Options and
Common Stock Warrants
Beneficially Exercisable Percent of
Executive Officers and Directors Owned Within 60 Days Total Class
------------------------------------------------ ---------------- ----------------- ------------ --------------
Frank A. Martin *(1) 1,323,134 551,756 1,874,890 5.1
Gary Reiss * (2) 354,472 606,258 960,730 2.6
David R. Bock * (1) 570,165 -- 570,165 1.6
John R. Palumbo * 37,080 128,333 165,413 1.2
Yuri Rozenfeld * (3) 22,156 85,253 107,409 ***
Anthony Tomaro * 6,136 99,401 105,537 ***
Philip D. Green * (4) 1,200 69,280 70,480 ***
William S. Wheeler * 10,000 10,000 20,000 ***
Michael M.E. Johns, M.D. * -- 20,000 20,000 ***
Arthur N. Leibowitz, M.D. * -- 20,000 20,000 ***
David Nash, M.D. * -- 10,000 10,000 ***
R. Dixon Thayer * -- -- -- ***
Joel Ackerman ** (5) (10) 4,259,634 -- 4,259,634 11.8
Eileen Sweeney ** (6) (10) 2,379,094 -- 2,379,094 6.6
Brad Cooper ** (7) (10) 1,586,041 -- 1,586,041 4.4
W. David Swenson ** (8) (10) 1,175,572 -- 1,175,572 3.3
Michael J. Hardies, M.D. ** (9) (10) 1,511,826 -- 1,511,826 4.2
Haywood D. Cochrane, Jr. ** (10) 121,760 -- 121,760 ***
Charles D. (Chip) Phillips ** (10) 297,665 -- 297,665 ***
Shannon W. Farrington ** (10) -- -- -- ***
All post-merger executive officers and
directors of I-trax as a group (15 persons) 2,273,603 1,600,281 3,873,884 10.3
All pre-merger CHD Meridian executive officers
and directors as a group (8 persons) 11,331,592 -- 11,331,592 31.5
* Executive officers and directors of I-trax can be reached at I-trax,
Inc., One Logan Square, Suite 2615, 130 N. 18th Street,
Philadelphia, Pennsylvania 19103.
** Executive officers and directors of CHD Meridian can be reached at CHD
Meridian, 40 Burton Hills Boulevard, Suite 200, Nashville, Tennessee
37215.
*** Less than 1% of the outstanding shares of common stock.
(1) Messrs. Martin and Bock are members and managing directors of The
Nantucket Group, LLC, or Nantucket. Nantucket is the general partner
of Nantucket Healthcare Ventures I, L.P. or Nantucket Ventures, an
owner of 470,165 shares. Nantucket has sole voting and sole
dispositive power with respect to these shares. Therefore, Messrs.
Martin and Bock may be deemed to have beneficial ownership of the
shares held by Nantucket Ventures. Messrs. Martin and Bock disclaim
beneficial ownership of the shares held by Nantucket Ventures, except
to the extent of their respective pecuniary interest in Nantucket
Ventures. Mr. Bock own directly 100,000 shares. Mr. Martin own
directly and with his wife 852,969 shares. The address for Nantucket
Ventures is c/o The Nantucket Group, LLC, One Logan Square, Suite
2615, 130 N. 18th Street, Philadelphia, Pennsylvania 19103.
(2) Includes 3,800 shares held in the name of Mr. Reiss' wife.
(3) Mr. Rozenfeld is a partner of The Spartan Group Limited Partnership,
an owner of 6,000 shares. Mr. Rozenfeld has shared voting and shared
dispositive power with respect to the shares held by Spartan. Mr.
50
Rozenfeld may be deemed to have beneficial ownership of the shares
held by Spartan. Mr. Rozenfeld disclaims beneficial ownership of the
shares held by Spartan, except to the extent of his pecuniary interest
in Spartan. Mr. Rozenfeld owns 16,156 shares directly.
(4) Mr. Green is an affiliate of Health Industry Investments, LLC and Akin
Gump Health Strategies, LLC, holders of options to purchase 20,000 and
6,400 shares, respectively, exercisable as of June 20, 2003.
(5) Mr. Ackerman is a director of CHD Meridian and an affiliate of
Warburg, Pincus Ventures, L.P. Upon the closing of the merger,
Warburg, Pincus Ventures will hold 3,005,009 shares and 1,254,625
shares issuable upon conversion of I-trax convertible preferred stock.
Mr. Ackerman may be deemed to have beneficial ownership of the shares
held by Warburg, Pincus Ventures. Mr. Ackerman disclaims beneficial
ownership of the shares held by Warburg, Pincus Ventures, except to
the extent of his pecuniary interest in Warburg, Pincus Ventures.
(6) Ms. Sweeney is a director of CHD Meridian and an affiliate of Centre
Reinsurance, Ltd. Upon the closing of the merger, Centre Reinsurance
will hold 1,678,360 shares and 700,734 shares issuable upon conversion
of I-trax convertible preferred stock. Ms. Sweeney may be deemed to
have beneficial ownership of the shares held by Centre Reinsurance.
Ms. Sweeney disclaims beneficial ownership of the shares held by
Centre Reinsurance, except to the extent of her pecuniary interest in
Centre Reinsurance.
(7) Mr. Cooper is a director of CHD Meridian and an affiliate of CHD
Investors, LLC. Upon the closing of the merger, CHD Investors will hold
1,118,891 shares and 467,150 shares issuable upon conversion of I-trax
convertible preferred stock. Mr. Cooper may be deemed to have
beneficial ownership of the shares held by CHD Investors. Mr. Cooper
disclaims beneficial ownership of the shares held by CHD Investors,
except to the extent of his pecuniary interest in CHD Investors.
(8) Mr. Swenson is a director of CHD Meridian and an affiliate of Coleman,
Swenson, Hoffman, Booth IV, L.P. and Franklin Capital Associates III,
L.P. Upon the closing of the merger, Coleman Swenson and Franklin
Capital Associates will hold, respectively, 158,871 and 670,451 shares
of common stock and, respectively, 66,330 and 279,920 shares issuable
upon conversion of I-trax convertible preferred stock. Mr. Swenson may
be deemed to have beneficial ownership of the shares held by Coleman
Swenson and Franklin Capital Associates. Mr. Cooper disclaims
beneficial ownership of the shares held by Coleman Swenson and Franklin
Capital Associates, except to the extent of his pecuniary interest in
Coleman Swenson or Franklin Capital Associates.
(9) Mr. Hardies is a director, chairman and chief medical officer of CHD
Meridian. Upon the closing of the merger, Mr. Hardies will hold
1,066,535 shares and 445,291 shares issuable upon conversion of I-trax
convertible preferred stock.
(10) Please refer to section title "Interest of Officers and Directors in
the Merger - CHD Meridian" above for information about the anticipated
exchanges of I-trax common stock and I-trax convertible preferred stock
between certain CHD Meridian stockholders after the merger. Such
exchanges are reflected in this table.
51
THE MERGER AGREEMENT
The following summary of the merger agreement is qualified by reference
to the complete text of the merger agreement, dated as of December 26, 2003, and
the amendment to the merger agreement, dated February 4, 2004, which are
incorporated by reference and attached as Annex A. Throughout this proxy
statement, we refer to the merger agreement and the amendment to the merger
agreement collectively as the merger agreement.
Structure of the Merger
The merger will be a two-step transaction. In step one, DCG
Acquisition, Inc., a wholly-owned subsidiary of I-trax, will merge with and into
CHD Meridian. CHD Meridian stockholders will receive the merger consideration in
exchange for their shares of CHD Meridian common stock in the first step of the
merger. In step two, CHD Meridian will merge with and into CHD Meridian
Healthcare, LLC, a wholly-owned subsidiary of I-trax. Upon the effectiveness of
the second merger, all shares of CHD Meridian common stock will be cancelled.
Timing of Closing
The closing of the merger will take place on the second business day
after all closing conditions set forth in the merger agreement have been
satisfied or waived, unless I-trax and CHD Meridian agree to a different date.
Upon the closing of the merger, I-trax will file a certificate of merger with
the Secretary of State of the State of Delaware for the first step of the merger
transaction and, as soon as practicable after the first step, for the second
step of the merger transaction. The effective time for each step of the merger
transaction will be the time the certificate of merger is filed for such step.
Merger Consideration and Related Adjustments
The total merger consideration to be received at the closing by holders
of CHD Meridian securities in the merger is 10,000,000 shares of I-trax common
stock, 400,000 shares of I-trax convertible preferred stock (each of which is
convertible into 10 shares of I-trax common stock) and $35 million of cash. The
$35 million in cash will be reduced by (1) the aggregate amount CHD Meridian
incurs or commits to incur to redeem or purchase, as the case may be, any shares
of CHD Meridian common stock or any options to acquire shares of CHD Meridian
common stock during the period beginning on December 26, 2003 and ending at the
effective time of the first step of the merger (but which may not exceed $11
million); and (2) the amount, if any, by which the actual cash balance of CHD
Meridian, as of the effective time of the first step of the merger, measured in
accordance with GAAP, minus any unpaid accrued fees and expenses of attorneys,
accountants and investment professionals incurred by CHD Meridian in the merger,
is less than $13,258,338. Throughout this section, we refer to the $35 million,
after adjustments, as the adjusted cash consideration. The following are
examples of how the adjusted cash consideration will be computed:
Example 1 Example 2 Example 3
Amount spent for redemption/ repurchase/option
termination $10,150,000 $10,150,000 $10,150,000
Cash balance at merger's effective time (a) $13,500,000 $13,258,338 $13,000,000
Adjusted cash consideration $24,850,000 $24,850,000 $24,591,662
(a) Before taking into account redemption/repurchase/option termination
payments and calculated, in accordance with the merger agreement, net
of all deposits and payments in transit at the merger's effective
time.
The merger agreement provides that each share of CHD Meridian common
stock outstanding immediately prior to the effective time of the first step of
the merger will at such effective time be converted into the right to receive
the number of shares of I-trax common stock obtained by dividing 10,000,000 by
the CHD Meridian Shares Deemed Outstanding, the number of shares of I-trax
convertible preferred stock obtained by dividing 400,000 by the CHD Meridian
Shares Deemed Outstanding, and the amount of cash obtained by dividing the
adjusted cash consideration by the CHD Meridian Shares Deemed Outstanding,
subject to any required tax withholding. Any
52
shares of CHD Meridian common stock held in treasury by CHD Meridian will be
cancelled. I-trax has reserved a sufficient number of shares of convertible
preferred stock and common stock for issuance in the merger and a sufficient
number of shares of common stock for issuance upon conversion of the convertible
preferred stock.
CHD Meridian intends to offer to purchase for cash shares of its common
stock from certain executives, other employees, holders of fewer than 3,300
shares, and non-accredited investors, effective immediately prior to the merger.
CHD Meridian also plans to offer to terminate certain existing employee stock
options for cash effective immediately prior to the merger. Cash spent for such
repurchases and such option terminations will reduce the $35 million of cash
otherwise payable in the merger as described above. However, any such
transactions will also reduce the number of CHD Meridian Shares Deemed
Outstanding, thereby increasing the percentage of shares of I-trax common stock
and convertible preferred stock payable to each of the remaining CHD Meridian
stockholders. The net effect of these transactions will be to alter the
cash/equity mix payable to CHD Meridian stockholders at the merger's effective
time. The stockholders who receive and accept such offers will receive only cash
for their shares (or options), and therefore a disproportionately larger share
of the cash as described above than remaining CHD Meridian stockholders, and the
remaining CHD Meridian stockholders will receive a disproportionately larger
share of the equity and a disproportionately smaller share of the cash. The
merger agreement limits the amount of cash to be used for such transactions to
$11 million, and CHD Meridian expects to use such sum for such repurchases and
terminations.
The following table sets forth the approximate portion of merger
consideration that each CHD Meridian stockholder would receive at the merger's
effective time for each share of CHD Meridian common stock owned (1) assuming no
change in the 243,182 CHD Meridian Shares Deemed Outstanding on the date of this
proxy statement and (2) assuming that, as a result of transactions described in
the preceding paragraph, 35,297 shares (and/or options to purchase shares) are
repurchased or terminated (leaving 207,885 CHD Meridian Shares Deemed
Outstanding at the merger's effective time) in exchange for approximately $10.2
million.
CHD Meridian Shares Deemed Outstanding
(1) 243,182 (2) 207,885
-------------------- -----------------------
Shares of I-trax common stock (a) 41 48
Shares of I-trax convertible preferred stock (b) 1.64 1.92
Cash $143.93 $119.49
(a) Common stock will be rounded to the nearest share.
(b) Convertible preferred stock will be rounded to the nearest
one-hundredth of a share.
There is no assurance that any CHD Meridian stockholder to whom an
offer of share repurchase or option termination is made will accept such offer
and, therefore, CHD Meridian stockholders will not know until the merger's
effective time the exact mix of cash and equity payable in the merger. The
offers referred to in the preceding two paragraphs are not part of the merger
agreement.
I-trax will not issue any fractional shares of common stock in the
merger. The number of shares of I-trax common stock each holder of CHD Meridian
will be entitled to receive will be rounded to the nearest share. I-trax will
issue fractional shares of convertible preferred stock in the merger. The number
of shares of I-trax convertible preferred stock each holder of CHD Meridian
common stock will be entitled to receive will be rounded to the nearest
one-hundredth of one share.
As a result of the merger, all shares of CHD Meridian common stock will
no longer be outstanding and shall be canceled.
53
Treatment of CHD Meridian Stock Options
At the effective time, each outstanding option to purchase a share of
CHD Meridian common stock will be converted into the right to receive an option
to purchase the merger consideration distributable for one share of CHD Meridian
common stock including the right to participate in any earn-out payment
(discussed below) at the exercise price in effect immediately prior to the
effective time of the first step of the merger. Each converted option will be
subject to the same terms and conditions, including exercise rights, termination
dates and restrictions, as were applicable to such option prior to the effective
time of the first step of the merger.
Earn-Out Payment
In April 2005, the former CHD Meridian stockholders will receive, for
each share of CHD Meridian common stock held at the merger's effective time, the
number of shares of I-trax common stock obtained by dividing 3,859,200 (less any
shares used to satisfy CHD Meridian's indemnity obligation) by the CHD Meridian
Shares Deemed Outstanding if CHD Meridian Healthcare, LLC, operating the
historic business of CHD Meridian, meets certain financial performance goals
described below. Throughout this proxy statement, we refer to this contingent
payment as the earn-out. At the effective time of the first merger, I-trax will
deposit 3,859,200 shares of I-trax common stock in escrow to cover the possible
additional issuance. These 3,859,200 shares are in addition to the 10,000,000
shares of I-trax common stock being delivered to CHD Meridian stockholders at
the closing of the merger. If CHD Meridian breaches any of its representations,
warranties or covenants and I-trax is harmed by the breach, then I-trax may be
able to recover a portion of additional shares in escrow to cover the cost or
damage to I-trax of such breach if I-trax makes a claim against the shares on or
before August 14, 2004. The indemnification of I-trax is discussed in more
detail in the section entitled "Remedies for Breach of the Merger Agreement"
below.
For the CHD Meridian stockholders to receive any earn-out shares of
I-trax common stock, for the period from January 1, 2004 to December 31, 2004,
CHD Meridian Healthcare, LLC, conducting the historic business of CHD Meridian
(and including the financial results of CHD Meridian during such period prior to
the merger) must record earnings before interest, taxes, depreciation and
amortization, or EBITDA, of at least $8.1 million. If CHD Meridian Healthcare,
LLC records EBITDA of between $8.1 and $9 million, then the number of shares to
be distributed to the former CHD Meridian stockholders will be determined by
multiplying the total number of shares of I-trax common stock remaining in
escrow after the release of shares, if any, to I-trax as indemnification by a
fraction, the numerator of which is CHD Meridian Healthcare, LLC's EBITDA and
the denominator of which is $9 million. If CHD Meridian Healthcare, LLC records
EBITDA greater than $9 million for the period from January 1, 2004 to December
31, 2004, then all shares remaining in escrow will be distributed to the former
CHD Meridian stockholders. However, even if the financial conditions are
satisfied, if I-trax makes an indemnity claim against the shares in escrow on or
before August 14, 2004 that has not been resolved on April 1, 2005, then the
I-trax common stock in escrow subject to such claim will not be released until
the claim is resolved. If the claim is ultimately resolved against I-trax, then
shares subject to the pending claim will be delivered to the former CHD Meridian
stockholders.
Appointment of CHD Meridian Stockholder Representative
Pursuant to the merger agreement, the stockholders of CHD Meridian will
be deemed to have appointed an agent for certain matters. We refer to this agent
throughout this section as the CHD Meridian Representative. At the effective
time of the first merger, Haywood D. Cochrane, Jr. will be the appointed CHD
Meridian Representative. The CHD Meridian Representative's duties as agent will
be to act on behalf of the CHD Meridian stockholders with respect to the escrow
agreement covering the shares of I-trax common stock in escrow. The CHD Meridian
Representative will also act on behalf of the CHD Meridian stockholders with
respect to all claims in connection with the earn-out, the shares of I-trax in
escrow, the escrow agreement, I-trax's obligation to report the merger as a
tax-free reorganization on tax returns and filings, the indemnification of
I-trax for the breach of a representation, warranty or covenant made by CHD
Meridian, breach of any representations, warranties or covenants made by I-trax
and I-trax's obligation to keep the registration statement on Form S-3
registering the resale of shares of I-trax common stock issued in the merger and
issuable upon conversion of the I-trax convertible preferred stock issued in the
merger effective for two years. The CHD Meridian Representative may resign by
providing notice to I-trax and the former CHD Meridian stockholders and may
appoint a successor. The individuals and/or entities who held a majority of the
CHD Meridian common stock at the closing of the merger can, by affirmative vote
or written consent, appoint a successor to the CHD Meridian Representative if
the representative dies, is incapacitated or resigns without appointing a
successor and can, by
54
affirmative vote or written consent, remove and replace the CHD Meridian
Representative.
The CHD Meridian Representative will not be liable for anything he may
do or refrain from doing in connection with his duties, except as a result of
his own gross negligence, willful misconduct or bad faith. The CHD Meridian
Representative may consult with counsel and will not be liable for following
counsel's advice in good faith. By adopting the merger agreement, the CHD
Meridian stockholders will be deemed to have agreed jointly and severally to
indemnify the CHD Meridian Representative for any adverse consequences he
suffers as a result of serving as the CHD Meridian Representative. If the CHD
Meridian Representative incurs legal or other professional expenses on behalf of
the CHD Meridian stockholders in connection with determining the earn-out or
asserting or defending claims arising out of the merger agreement, then the CHD
Meridian stockholders immediately prior to the merger will be responsible to pay
their pro rata share of those expenses and will be required to advance such
funds at the CHD Meridian Representative's reasonable request. However, the
maximum amount for which a former CHD Meridian stockholder will have to
indemnify the CHD Meridian Representative is the amount of merger consideration
the former CHD Meridian stockholder received. If a former CHD Meridian
stockholder does not meet its indemnification obligations, the CHD Meridian
Representative can borrow funds from other former CHD Meridian stockholders and
repay the borrowed amount, with interest at 10% per year, when the shares of
I-trax common stock in escrow are released with the portion of such escrow
shares that the defaulting former CHD Meridian stockholder would otherwise would
be entitled to receive.
Procedure For Payment
I-trax has appointed an exchange agent to handle the exchange of CHD
Meridian stock certificates for I-trax common stock and convertible preferred
stock certificates in the merger. I-trax will make the payment of the cash
portion of the merger consideration by check or wire at the effective time of
first step of the merger. Together with this proxy statement, I-trax will send
to each CHD Meridian stockholder a letter of transmittal, substantially in the
form of Annex F attached to this proxy statement, to be used to exchange CHD
Meridian stock certificates for shares of I-trax common stock and I-trax
convertible preferred stock and to receive the cash portion of the merger
consideration. The letter of transmittal will contain instructions explaining
the procedure for surrendering CHD Meridian stock certificates. You should not
return any stock certificates with the enclosed proxy card.
Holders of CHD Meridian stock who surrender their stock certificates to
the exchange agent, together with a properly completed letter of transmittal,
will receive the appropriate merger consideration. Holders of unexchanged shares
of CHD Meridian stock will not be entitled to receive any dividends or other
distributions on I-trax common stock or I-trax convertible preferred stock
payable by I-trax after the effective time of the first step of the merger until
they surrender their stock certificates in accordance with the letter of
transmittal.
Stockholders of I-trax will keep their I-trax share certificates
without exchange after the merger.
The Board of I-trax
I-trax has agreed to take the necessary action so that, as of the
effective time of the merger, Haywood D. Cochrane, Jr., the chief executive
officer of CHD Meridian, will become a member of the I-trax's board of
directors.
Pre-Closing Covenants
For the period from December 26, 2003 until the earlier of the closing
of the merger or the termination of the merger agreement, I-trax and CHD
Meridian have each undertaken to perform certain covenants in the merger
agreement. The principal covenants are as follows:
General. I-trax and CHD Meridian have each agreed to use its
reasonable efforts to take all actions and do all things necessary, proper or
advisable to consummate the transactions contemplated by the merger agreement.
55
Regulatory Matters and Approvals. I-trax and CHD Meridian have each
agreed to make any filings with, give any notices to and to use its reasonable
efforts to get any required approvals, consents and authorizations, including:
Delaware Law. In accordance with the Delaware General
Corporate Law and the Delaware Limited Liability Company Act, each of
I-trax and CHD Meridian will convene special meetings of its
stockholders to vote upon the matters referred to in this proxy
statement. Each of I-trax and CHD Meridian has agreed to use reasonable
efforts to obtain its stockholders' approval of the merger and related
transactions. However, these covenants are qualified by the fact that
both I-trax's and CHD Meridian's directors and officers do not need to
do anything that will violate their fiduciary duty or other legal
requirement.
Securities Laws. I-trax and CHD Meridian have agreed to
prepare, including providing each other with any assistance or
information necessary for preparation, and distribute proxy materials
for I-trax's and CHD Meridian's special meetings of stockholders and to
include all information in the proxy materials that is necessary for
the issuance of I-trax common stock and convertible preferred stock as
merger consideration to qualify for an exemption from registration
under Section 4(2) of the Securities Act. I-trax has agreed to take all
actions necessary under Federal and state securities law in connection
with the issuance of I-trax common stock and convertible preferred
stock as merger consideration.
Hart-Scott-Rodino Act. I-trax and CHD Meridian have agreed to
take all actions necessary under the Hart-Scott-Rodino Act and to use
reasonable efforts to get an early termination of the applicable
waiting period under the Act.
Operations of the Two Companies Pending Closing. I-trax and CHD
Meridian have each agreed to restrictions on its activities pending the closing
of the merger. In general, I-trax and CHD Meridian each agreed not to engage in
activities outside of its ordinary course of business without written approval
of the other party. In particular, I-trax and CHD Meridian have agreed that:
o Neither I-trax nor CHD Meridian will authorize or effect any change of
its bylaws or charter;
o CHD Meridian will not grant options, warrants or other rights to
obtain capital stock, or, issue, sell or otherwise dispose of capital
stock, other than upon the conversion of options, warrants or other
rights outstanding when the merger agreement was signed;
o I-trax will not grant options, warrants or other rights to obtain
capital stock, or issue, sell or otherwise dispose of capital stock,
other than upon the conversion of options, warrants or other rights
outstanding when the merger agreement was signed, under I-trax's
current equity compensation plans or issuances at fair market value as
determined by I-trax's board of directors;
o Neither I-trax nor CHD Meridian will declare, set aside or pay
dividends or redeem, repurchase or otherwise acquire any of its
outstanding capital stock, except that CHD Meridian may repurchase, by
written agreement approved by I-trax and for cash consideration
determined fair by the CHD Meridian board, up to an aggregate of $11
million of its outstanding common stock and common stock options;
o Neither I-trax nor CHD Meridian will issue any note, bond or other
debt security, or create, incur, assume or guarantee any indebtedness
for borrowed money or capitalized lease obligation or grant any
security interest with respect to any of its assets;
o Neither I-trax nor CHD Meridian will make any change to the employment
terms for any of its officers and directors; and
o Neither CHD Meridian nor its subsidiaries will incur more than $50,000
or more individually, or $100,000 or more in the aggregate, in
expenditures not set forth in the budget CHD Meridian
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attached as an exhibit to the merger agreement nor will CHD Meridian
or any of its subsidiaries delay payment of its account payable or
accrued liability that is not in CHD Meridian's ordinary course of
business.
Exclusivity. I-trax and CHD Meridian have agreed not to solicit,
initiate or encourage any proposal or offer to acquire all or substantially all
of the assets of I-trax, CHD Meridian or any of their subsidiaries, including
acquisitions structured as mergers, consolidations or share exchanges, nor will
I-trax or CHD Meridian, unless fiduciary duty requires, participate in any
negotiations or discussions regarding, furnish any information with respect to,
assist or participate in, or otherwise facilitate any effort by a person or
entity to do the foregoing. However, I-trax can engage in such
acquisition-related activities if they will not impair the merger transaction
with CHD Meridian, I-trax promptly informs CHD Meridian of such activities and
CHD Meridian can participate to the extent it reasonably requests. I-trax and
CHD Meridian have also each agreed to notify the other promptly if any person or
entity contacts it regarding an acquisition proposal or offer.
Listing of I-trax Common Stock. I-trax has agreed to make commercially
reasonable efforts to get the I-trax common stock issued in the merger and
issuable upon conversion of the I-trax convertible preferred stock issued in the
merger approved for listing on the stock market or exchange where shares of
I-trax common stock are then listed.
Post-Closing Covenants
Following the closing of the merger, I-trax and CHD Meridian have each
undertaken to perform certain covenants in the merger agreement. The principal
covenants are as follows:
Insurance and Indemnification. I-trax has agreed to:
o provide for a period of four years, the former officers and directors
of CHD Meridian with liability insurance coverage no less favorable
than the liability insurance they had immediately prior to the closing
of the merger;
o observe any indemnification provisions existing in CHD Meridian's
certificate of incorporation or bylaws at the time the merger
agreement was signed for anyone who served as an officer or director
of CHD Meridian prior to the closing of the merger; and
o provide any CHD Meridian stockholder who becomes an officer or
director with reasonable coverage under the I-trax directors and
officers liability insurance policy while such person is an officer or
director and for the applicable statute of limitations period after
such person ceases to be an officer or director.
Registration Statement. I-trax has agreed, subject to compliance with
the Securities Act and the regulations promulgated thereunder, to file a
registration statement on Form S-3 covering the resale of the I-trax common
stock issued in the merger and issuable upon conversion of the I-trax
convertible preferred stock issued in the merger, and to use commercially
reasonable efforts to cause the registration statement to become effective
promptly. I-trax has also agreed to keep the registration statement effective
for two years. Both I-trax and CHD Meridian have agreed to have their executive
officers enter into lock-up agreements prohibiting the sale of their I-trax
stock during the first 90 days the registration statement is effective. I-trax
will bear the costs in connection with the preparation and filing of the
registration statement. I-trax will also, at its expense, supply the former CHD
Meridian stockholders with copies of the registration statement, any prospectus
contained therein and other related documents reasonably requested. The former
CHD Meridian stockholders will bear the costs of any underwriting or brokerage
discounts applicable to the shares being registered as well as the fees and
expenses of their counsel. I-trax will indemnify the former CHD Meridian
stockholders and their affiliates for any liability or expenses caused by an
untrue or allegedly untrue statement of material fact in the registration
statement or any amendments thereto or caused by an omission of a material fact
required to make statements in the registration statement or any amendments
thereto not misleading unless the untrue statement or omission conforms with
information furnished by the former CHD Meridian stockholders to assist with
preparation of the registration statement.
57
Tax-Free Reorganization Treatment. I-trax and CHD Meridian have each
agreed to use its best efforts (both before and after the merger) to cause the
merger to constitute a tax-free reorganization within the meaning of Section
368(a) of the Internal Revenue Code of 1986 and not to take any actions (before
or after the merger) that would, to its knowledge, cause the merger not to
constitute a tax-free reorganization. Unless otherwise required by law, I-trax
and CHD Meridian each agreed to report the merger as a tax-free reorganization
on tax returns and not take any action or position that is inconsistent with
this characterization in any audit, administrative proceeding, litigation or
otherwise.
Representations and Warranties
I-trax and CHD Meridian have made various customary mutual
representations and warranties in the merger agreement about themselves and
their subsidiaries, including representations and warranties related to
corporate standing and power, corporate authority to enter into, and carry out
the obligations under, the merger agreement, the absence of certain changes or
events, compliance with laws, environmental, health and safety matters,
employees and employee benefits, contracts, leases or business arrangements,
including with stockholders and their affiliates, absence of officers' and
directors' involvement in certain legal proceedings and absence of untrue
statements of material fact or omissions of material facts in the
representations and warranties. In addition, I-trax also made representations
and warranties relating to its filings with the SEC and that it was not
acquiring the shares of CHD Meridian common stock with the intent of
distributing them.
The representations and warranties contained in the merger agreement
will survive the closing of the merger and will continue in full force and
effect until August 14, 2004. See the section below entitled "Remedies for
Breach of the Merger Agreement" for a discussion of the remedies for a breach of
a representation or warranty in the merger agreement.
Conditions to the Completion of The Merger
Each of I-trax and CHD Meridian's respective obligations to complete
the merger is subject to the satisfaction or waiver of various conditions, the
most significant of which are:
Conditions to Obligation of Each of I-trax and CHD Meridian to Close:
o the other party must have received certain third party consents set
forth in the merger agreement;
o the representations and warranties contained in the merger agreement
made by the other party must be true and correct in all respects as of
the closing date of the merger and such party shall not have added,
after December 26, 2003, matters or events to its disclosure schedule
to the merger agreement that, in total, have a negative financial
impact of greater than $250,000;
o the other party must have performed and complied with all covenants
contained in the merger agreement through the closing of the merger
agreement;
o there must be no pending or threatened action, suit or proceeding
against the other party or its subsidiaries, an unfavorable outcome of
which would prevent the consummation of the merger or cause any of the
transactions in connection with the merger to be rescinded;
o all material governmental authorizations, approvals and consents
required for the parties to effect the merger must have been received;
o each party must have received a legal opinion from counsel to the
other party in the forms set forth as exhibits to the merger
agreement;
o I-trax must have sold convertible preferred stock to third parties
with gross proceeds of at least $15 million;
58
o an escrow agreement regarding the 3,859,200 shares of I-trax common
stock to be held in escrow until the satisfaction of certain
post-closing conditions must have been executed and delivered;
o the senior facility under which I-trax may borrow at least $16 million
on the closing date of the merger must have closed; and
o the waiting period under the Hart-Scott-Rodino Act must have expired
or been terminated.
Conditions to Obligation of I-trax to Close:
o the merger agreement must be adopted by CHD Meridian's stockholders;
o there must be no pending or threatened action, suit or proceeding
against CHD Meridian, an unfavorable outcome of which would adversely
affect the right of I-trax to own and control the surviving entities
in the merger transactions or adversely affect the right of CHD
Meridian to own and operate its businesses;
o resignations of officers and directors of CHD Meridian, effective as
of the closing of the merger, must be received, unless, after
consultation with CHD Meridian, I-trax specifies otherwise within five
business days of the closing of the merger;
o I-trax must have reasonably determined that the issuance of the I-trax
common stock and convertible preferred stock will be exempt from
registration under Section 4(2) the Securities Act; and
o CHD Meridian and its subsidiaries must have caused any of its
employees that have borrowed money to repay any such outstanding
loans.
Conditions to Obligation of CHD Meridian to Close:
o the issuance of shares of common stock and convertible preferred stock
as merger consideration must be approved by I-trax's stockholders;
o there must be no pending or threatened action, suit or proceeding
against I-trax, an unfavorable outcome of which would adversely affect
the right of the CHD Meridian stockholders to own the merger
consideration or adversely affect the right of I-trax to own the
combined assets and operations of I-trax and CHD Meridian after the
merger;
o an opinion of Irell & Manella LLP that the merger will qualify as a
tax-free reorganization within the meaning of Section 368(a) of the
Internal Revenue Code of 1986 must have been received;
o Mr. Cochrane must have been elected to the board of directors of
I-trax; and
o I-trax common stock must continue to be listed on the American Stock
Exchange, I-trax must not have received any notice of delisting and
there shall be no basis for delisting I-trax common stock.
Remedies for Breach of the Merger Agreement
The representations and warranties contained in the merger agreement
will survive the closing of the merger and will continue in full force and
effect until August 14, 2004. Any claim based on a representation or warranty
made in the merger agreement will be time barred unless submitted in writing
before August 14, 2004.
Indemnification for Benefit of I-trax. If CHD Meridian breaches a
warranty, representation or covenant before it expires, I-trax
59
may seek indemnification against the shares of I-trax common stock placed in
escrow. I-trax may recover the number of shares out of escrow with a value equal
to the adverse consequences I-trax suffers as a result of the breach, subject to
a total limit of the lesser of (1) 3,200,000 shares or (2) shares valued,
measured at the time of the final resolution of the applicable claim,
$8,000,000. I-trax, however, can only recover indemnification claims against the
shares held in escrow after I-trax has suffered adverse consequences in excess
of $500,000 and then only to the extent I-trax has suffered adverse consequences
in excess of $500,000. For purposes of the indemnification, the shares of I-trax
common stock in escrow will be valued at the average of the closing price of
I-trax common stock for the ten consecutive trading days ending on the date of
final resolution of the claim in question. Any shares released from escrow to
indemnify I-trax will be charged on a pro rata basis to the former CHD Meridian
stockholders who are entitled to receive the shares on in April 2005. The shares
in escrow will be the sole remedy I-trax has for a breach of any representations
or warranties by CHD Meridian. If the shares in escrow are not sufficient to
cover the full amount of the adverse consequences I-trax suffers because of a
breach by CHD Meridian, I-trax will not have a claim or right against the former
CHD Meridian stockholders.
Matters Involving Third Parties. If a third party brings a claim
against I-trax pursuant to which I-trax may be able to make a claim for
indemnification against the shares of I-trax common stock in escrow, the CHD
Meridian Representative will be entitled to defend I-trax against such third
party claim using counsel of his choice that I-trax reasonably finds
satisfactory, subject to certain conditions set forth in the merger agreement.
Indemnification for Benefit of CHD Meridian. If I-trax breaches a
warranty, representation or covenant before it expires, CHD Meridian
stockholders may seek indemnification against I-trax as such stockholders are
third-party beneficiaries of I-trax's warranties, representations and covenants.
Termination of the Merger Agreement
Termination by Either I-trax or CHD Meridian. Either I-trax or CHD
Meridian can terminate the merger agreement with prior authorization of its
board of directors if:
o I-trax stockholders do not approve the issuance of common stock and
convertible preferred stock in the merger or CHD Meridian stockholders
do not adopt the merger agreement;
o the other party breaches any of it's representations, warranties or
covenants, notice of the breach is provided to the other party and the
breach is not remedied within 30 days of notice of the breach; or
o the conditions to such party's consummation of the merger are not
satisfied by April 30, 2004, provided that such party's breach of any
of its respective warranties, representations or covenants is not the
reason the condition has not been satisfied. If the only condition not
satisfied on April 30, 2004 is that I-trax cannot reasonably determine
that the issuance of I-trax common stock and convertible preferred
stock as merger consideration is exempt from registration under
Section 4(2) of the Securities Act, then I-trax may extend the date
after which I-trax or CHD Meridian may terminate the merger agreement
if conditions remain unsatisfied from April 30, 2004 to July 31, 2004,
if I-trax promptly files a registration statement on Form S-4
registering the shares of common stock issued in the merger and upon
conversion of the convertible preferred stock to be issued in the
merger.
I-trax and CHD Meridian can also mutually agree to terminate the merger
agreement.
Termination by CHD Meridian. 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.
Amendment and Third Party Beneficiaries
I-trax and CHD Meridian may mutually amend, in writing, any provision
of this merger agreement at any time prior to the effective time of the first
step of the merger with the prior authorization of each of its respective boards
of directors. However, any amendment effected subsequent to stockholder approval
of the merger and
60
related transaction will be subject to the restrictions set forth in the
Delaware General Corporation Law. All amendments to the merger agreement must be
in writing signed by each party.
The merger does not confer any rights or remedies upon any person or
entity other than the parties to the merger agreement and their respective
successors and permitted assigns, except that the CHD Meridian stockholders are
the beneficiaries of (1) the provisions of the merger agreement concerning
delivery of the merger consideration, (2) the obligation of I-trax to keep the
registration statement on Form S-3 registering the resale of the I-trax common
stock issued in the merger and upon conversion of the I-trax convertible
preferred stock issued in the merger effective for two years, (3) the continuing
obligation of I-trax to report the merger on all tax returns and filings as a
tax-free reorganization, and (4) the representations and warranties made by
I-trax in the merger agreement. In addition, CHD Meridian officers and
directors, CHD Meridian stockholders who becomes officers or directors of I-trax
and their respective legal representatives are the beneficiaries of the
post-closing covenant in the merger agreement concerning insurance and
indemnification.
Expenses
Each party will each bear its own costs and expenses incurred in
connection with the merger agreement and transactions contemplated thereby. If
the merger is consummated, all such expenses will, in effect, be borne by the
merged companies except to the extent that the cash portion of the merger
consideration is reduced by virtue of the transaction costs incurred by CHD
Meridian. See "The Merger - Fees and Expenses of the Merger" above.
OPINION OF I-TRAX'S FINANCIAL ADVISOR
Pursuant to an engagement letter dated June 26, 2003, as amended,
I-trax engaged Bryant Park Capital to act as its financial advisor. As part of
the engagement, Bryant Park Capital was asked to render an opinion to I-trax's
board of directors as to the fairness to I-trax, from a financial point of view,
of the consideration to be paid by I-trax in the merger. Bryant Park Capital is
an investment-banking firm and is regularly engaged in the valuation of
businesses and securities in connection with mergers and acquisitions,
competitive biddings and valuations for corporate and other purposes. I-trax
first engaged Bryant Park Capital as an advisor in April 2003 to assist I-trax
in a strategic investor search. No fees were paid in connection with that
engagement. In addition, prior to engaging Bryant Park Capital to provide the
services described in this proxy statement, I-trax interviewed and considered
two additional candidates. Upon due consideration of numerous factors, including
proposed engagement fees, experience and depth of resources, I-trax selected
Bryant Part Capital to perform the fairness analysis presented in this proxy
statement. Bryant Part Capital's experience in providing such analysis and full
understanding of the healthcare industry proved of particular importance. Bryant
Park Capital did not advise I-trax, and rendered no opinion or financial
analysis, with respect to the private placement that closed on October 31, 2003.
On December 28, 2003, at a meeting of I-trax's board of directors,
Bryant Park Capital rendered to I-trax's board of directors an oral opinion,
which opinion was confirmed by delivery of a written opinion dated December 28,
2003, to the effect that, as of that date and based on and subject to the
matters described in the opinion, the consideration to be paid by I-trax in the
merger was fair to I-trax from a financial point of view. The actual merger
consideration was determined separately by arms' length negations between I-trax
and CHD Meridian.
The full text of Bryant Park Capital's written opinion, dated December
28, 2003, to I-trax's board of directors, which sets forth the procedures
followed, assumptions made, matters considered and limitations on the review
undertaken, is attached as Annex B to this proxy statement. I-trax's
stockholders are urged to read such opinion carefully in its entirety before
making a decision as to whether to vote for the merger. Bryant Park Capital's
opinion was provided to I-trax's board of directors in connection with its
evaluation of the merger and relates only to the fairness to I-trax, from a
financial point of view, of the consideration to be paid by I-trax in the
merger. Bryant Park Capital's opinion does not address any other aspect of the
merger and is not intended to constitute, and does not constitute, a
recommendation as to how any person should vote in connection with the merger or
as to any other matters relating to the merger. Bryant Park Capital's opinion
does not address the relative merits of the merger or any other business
strategies or transactions discussed by I-trax's board of directors as
alternatives to the merger or the underlying business decision of I-trax's board
of directors to proceed with or effect the merger. The summary of Bryant Park
Capital's opinion contained in this proxy statement is qualified in its entirety
by reference to the full text of the opinion.
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In arriving at its opinion, Bryant Park Capital reviewed the December
24, 2003 draft of the merger agreement, as well as certain publicly available
business and financial information relating to I-trax and CHD Meridian. Bryant
Park Capital also reviewed certain other information relating to I-trax and CHD
Meridian, including financial forecasts, provided to or discussed with Bryant
Park Capital by I-trax and CHD Meridian and met with the management of I-trax
and CHD Meridian to discuss the businesses and prospects of I-trax and CHD
Meridian. Bryant Park Capital also considered certain financial and stock market
data, as applicable, of I-trax and CHD Meridian and compared those data with
similar data for other publicly and privately held companies in businesses
similar to I-trax and CHD Meridian and considered, to the extent publicly
available, the financial terms of other business combinations and transactions
which have been effected or announced. Bryant Park Capital also considered such
other information, financial studies, analyses and investigations and financial,
economic and market criteria that it deemed relevant.
In connection with its review, Bryant Park Capital did not assume any
responsibility for independent verification of any of the information that it
reviewed or considered and relied on that information being complete and
accurate in all material respects and upon the assurances of the management of
I-trax and CHD Meridian that no relevant information was omitted or was
undisclosed to it. Bryant Park Capital was advised, and assumed, that the
financial forecasts for I-trax and CHD Meridian were reasonably prepared on
bases reflecting the best currently available estimates and judgments of the
respective managements of I-trax and CHD Meridian as to the future financial
performance of I-trax and CHD Meridian. With respect to forecasts regarding
certain cost savings, operating efficiencies and other financial synergies,
Bryant Park Capital was advised, and assumed, that such synergies will be
realized in the amounts and in the time periods currently estimated. Bryant Park
Capital expressed no view as to the reasonableness of such forecasts or the
assumptions upon which they are based. In addition, Bryant Park Capital has not
made an independent evaluation or appraisal of the assets or liabilities
(contingent or otherwise) of I-trax or CHD Meridian, nor has it been furnished
with any such evaluations or appraisals. Bryant Park Capital is not expressing
any opinion as to what the value of the I-trax common stock and I-trax
convertible preferred stock will be, at any future time, including when issued
to CHD Meridian stockholders pursuant to the merger or the prices at which such
I-trax common stock and I-trax convertible preferred will trade subsequent to
the announcement of the merger. Bryant Park Capital expresses no view as to the
Federal, state or local tax consequences of the merger.
In arriving at Bryant Park Capital's opinion, it had assumed with
I-trax's consent, among other things, the following: (a) that all 4,000,000
shares of I-trax common stock originally contemplated to be placed in escrow
will be paid to the stockholders of CHD Meridian pursuant to the earn-out (as
described above in this section and the merger agreement) and (b) that, as of
the effective time of the merger, CHD Meridian will have a net cash balance of
not less than $13,258,338, provided that if it has a lower cash balance the cash
component of the merger consideration will be reduced dollar-for-dollar by the
amount that such cash balance is less than $13,258,338.
Bryant Park Capital also assumed, with I-trax's consent, that, in the
course of obtaining the necessary regulatory and third party approvals, consents
and releases for the merger, no modification, delay, limitation, restriction or
condition would be imposed that would have a material adverse effect on the
merger and that the merger would be consummated in accordance with applicable
laws and regulations and the terms of the merger agreement as set forth in the
December 24, 2003 draft of the merger agreement, without waiver, amendment or
modification of any material term, condition or agreement and without waiver by
any party of any of the conditions to its obligations under the merger agreement
and without any material alteration of the consideration as a result of the
indemnification provisions in the merger agreement. Bryant Park Capital has also
assumed that the representations and warranties of the parties contained in the
merger agreement will be true and correct.
Bryant Park Capital's opinion was necessarily based on information
available to it, and financial, economic, market and other conditions and
circumstances as they existed and could be evaluated, on the date of Bryant Park
Capital's opinion. It should be understood that, although subsequent
developments may affect Bryant Park Capital's opinion, Bryant Park Capital has
not updated, revised or reaffirmed its opinion and does not have any obligation
to update, revise or reaffirm its opinion.
In preparing its opinion to I-trax's board of directors, Bryant Park
Capital performed a variety of financial and comparative analyses, including
those described below. The summary of Bryant Park Capital's analyses described
below is not a complete description of the analyses underlying its opinion. The
preparation of a fairness opinion is a complex process involving various
62
determinations as to the most appropriate and relevant methods of financial
analysis and the application of those methods to the particular circumstances
and, therefore, a fairness opinion is not readily susceptible to partial
analysis or summary description. In arriving at its opinion, Bryant Park Capital
made qualitative judgments as to the significance and relevance of each analysis
and factor that it considered. Accordingly, Bryant Park Capital believes that
its analyses must be considered as a whole and that selecting portions of its
analyses and factors or focusing on information presented in tabular format,
without considering all analyses and factors or the narrative description of the
analyses, could create a misleading or incomplete view of the processes
underlying its analyses and opinion.
Bryant Park Capital has acted as financial advisor to I-trax in
connection with the merger and will receive a fee, which is contingent upon
consummation of the merger. Bryant Park Capital has received a fee based upon
the request of I-trax to prepare and deliver Bryant Park Capital's opinion.
I-trax has also agreed to reimburse Bryant Park Capital for its reasonable fees
and expenses in connection with its engagement letter. It has also agreed to
indemnify and hold harmless Bryant Park Capital and its affiliates for
liabilities relating to and arising out of its engagement letter. Bryant Park
Capital and its affiliates have in the past provided financial and investment
banking advice to I-trax and its affiliates, including with regard to possible
financing sources in connection with the merger, and may in the future provide
financial or investment banking services to I-trax and its affiliates unrelated
to the merger. Bryant Park Capital has not received from I-trax any fees for
such prior financial and investment banking advice, except as disclosed in this
paragraph. To the extent Bryant Park Capital is engaged by I-trax to provide
investment banking advice in the future, Bryant Park Capital will receive a
separate fee for such services.
In its analyses, Bryant Park Capital considered industry performance,
general business, economic, market and financial conditions and other matters
existing as of the date of its opinion, many of which are beyond the control of
I-trax. No company, transaction or business used in Bryant Park Capital's
analyses as a comparison is identical to I-trax, CHD Meridian or the merger, and
an evaluation of the results of those analyses is not entirely mathematical.
Rather, the analyses involve complex considerations and judgments concerning
financial and operating characteristics and other factors that could affect the
acquisition, public trading or other values of the companies, business segments
or transactions analyzed. The estimates contained in Bryant Park Capital's
analyses and the ranges of valuations resulting from any particular analysis are
not necessarily indicative of actual values or predictive of future results or
values, which may be significantly more or less favorable than those suggested
by the analyses. In addition, analyses relating to the value of businesses or
securities do not purport to be appraisals or to reflect the prices at which
businesses or securities actually may be sold. Accordingly, the estimates used
in, and the results derived from, Bryant Park Capital's analyses are inherently
subject to substantial uncertainty. The type and amount of consideration payable
in the merger was determined through negotiation among the parties to the
transactions, and the decision to enter into the transactions was solely that of
I-trax's board of directors. Bryant Park Capital's opinion and financial
analyses were only one of many factors considered by I-trax's board of directors
in its evaluation of the transaction and should not be viewed as determinative
of the views of I-trax's board of directors or I-trax's management with respect
to the merger or the consideration to be paid in connection with the merger.
The following is a summary of the material financial analyses
underlying Bryant Park Capital's opinion dated December 28, 2003 delivered to
I-trax's board of directors in connection with the Merger. The financial
analyses summarized below include information presented in tabular format. In
order to fully understand Bryant Park Capital's financial analyses, the tables
must be read together with the text of each summary. The tables alone do not
constitute a complete description of the financial analyses. Considering the
data in the tables below without considering the full narrative description of
the financial analyses, including the methodologies and assumptions underlying
the analyses, could create a misleading or incomplete view of Bryant Park
Capital's financial analyses.
63
CHD Meridian Comparable Companies Analysis
Using publicly available information, Bryant Park Capital reviewed the
market values and trading multiples of the following six selected publicly held
companies in the health care industry:
o Cross Country Healthcare, Inc.
o Medical Staffing Network, Inc.
o Accredo Health, Inc.
o Chronimed Inc.
o America Service Group, Inc.
o HealthExtras, Inc.
Bryant Park Capital reviewed (a) enterprise values of the selected
companies, calculated as equity value plus net debt, as a multiple of calendar
year 2003 and calendar year 2004 estimated earnings before interest, taxes,
depreciation and amortization, commonly referred to as EBITDA, and calendar year
2003 and calendar year 2004 estimated earnings before interest and taxes,
commonly referred to as EBIT, and (b) ratios of stock price to calendar year
2003 and calendar year 2004 estimated earnings per share. All multiples were
based on closing stock prices on December 22, 2003. Estimated financial data
were based on publicly available research analysts' estimates in the case of the
selected companies, and internal estimates of CHD Meridian's management in the
case of CHD Meridian. Bryant Park Capital then applied a range of selected
multiples derived from the selected companies to corresponding financial data of
CHD Meridian in order to derive an implied equity reference range for CHD
Meridian. Bryant Park Capital then added the implied reference range implied
from its Synergies Discounted Cash Flow Analysis (as described below) to the
implied equity reference range for CHD Meridian in order to derive an implied
equity reference range for CHD Meridian that included synergies. Bryant Park
Capital then compared the equity reference range for CHD Meridian implied by
this analysis, both including and excluding synergies, to the consideration to
be paid by I-trax in the proposed merger. This analysis indicated the following:
Implied Equity Reference Range for CHD Assumed Aggregate Consideration to be Paid by I-trax in the
Meridian (excluding synergies) Merger
------------------------------------------ ----------------------------------------------------------------
$91,557,000 to $101,630,000 Pre-earn-out $70,000,000
Implied Equity Reference Range for CHD Post-earn-out based on I-trax
Meridian (including synergies) stock price of $2.50 $80,000,000
------------------------------------------
Post-earn-out based on I-trax $92,600,000
$109,720,000 to $124,491,000 closing stock price as of 12/22/03
64
CHD Meridian Control Transaction Analysis
Using publicly available information, Bryant Park Capital reviewed the
transaction values and implied transaction multiples in the following nine
recently announced selected transactions in the health care industry:
Target Acquiror
------ --------
StatusOne Health Systems, Inc. American Healthways, Inc.
Health Net Employer Services, Inc. First Health Group Corp.
One Call Medical, Inc. TA Associates, Inc.
Kessler Rehabilitation Corp. Select Medical Corp.
SunScript Pharmacy Corp. (a subsidiary of Sun
Healthcare Group Inc.) Omnicare Inc.
MATRIX Rehabilitation, Inc. (a subsidiary of
Beverly Enterprises, Inc.) Benchmark Medical Holdings, Inc.
Choice Source Therapeutics, Inc. Caremark Rx, Inc.
Apex Therapeutic Care, Inc. Curative Health Services, Inc.
Vitality Home Infusion Services, Inc. MIM Corp.
Bryant Park Capital reviewed enterprise values, calculated as equity
value plus net debt, as a multiple of latest 12 months EBITDA and latest 12
months EBIT for the target companies in each of the foregoing transactions. All
multiples for the selected transactions were based on publicly available
information at the time of announcement of the relevant transaction and
estimated financial data for CHD Meridian was based on internal estimates of CHD
Meridian's management. Bryant Park Capital then applied a range of selected
multiples derived from the selected transactions to corresponding calendar year
2003 financial data of CHD Meridian in order to derive an implied equity
reference range for CHD Meridian. Using publicly available information, Bryant
Park Capital reviewed the premiums implied by the announced transaction values
relative to the closing stock prices of targets in such transactions one trading
day prior to public announcement of such transactions, in transactions announced
over the last two years in which the target company had an equity value between
$50 and $100 million. Bryant Park Capital then applied a range of premiums
derived from these transactions to the equity reference range implied from the
CHD Meridian Comparable Companies Analysis in order to derive an implied equity
reference range for CHD Meridian. Bryant Park Capital then compared the equity
reference range for CHD Meridian implied by this analysis to the consideration
to be received in the merger. This analysis indicated the following:
Implied Equity Reference Range for Assumed Aggregate Consideration to be Paid by I-trax in the
CHD Meridian Merger
-------------------------------------- ------------------------------------- ---------------------------
$86,660,000 to $92,390,000 Pre-earn-out $70,000,000
Post-earn-out based on I-trax stock
price of $2.50 $80,000,000
Post-earn-out based on I-trax
closing stock price as of 12/22/03 $92,600,000
65
CHD Meridian Discounted Cash Flow Analysis
Bryant Park Capital performed a discounted cash flow analysis of CHD
Meridian to calculate the estimated present value of the unlevered, after-tax
free cash flows that CHD Meridian could generate over fiscal years 2004 through
2008. Estimated financial data for CHD Meridian were based on internal estimates
of CHD Meridian's management. Bryant Park Capital calculated a range of
estimated terminal values by applying EBITDA multiples ranging from 7.0x to 9.0x
to CHD Meridian's fiscal year 2008 estimated EBITDA. The present value of the
cash flows and terminal values were calculated using discount rates ranging from
14% to 16%. Bryant Park Capital then added the implied reference range implied
from its Synergies Discounted Cash Flow Analysis to the implied equity reference
range for CHD Meridian in order to derive an implied equity reference range for
CHD Meridian that included synergies. Bryant Park Capital then compared the
equity reference range for CHD Meridian implied by this analysis, both including
and excluding synergies, to the proposed aggregate consideration to be paid by
I-trax in the merger. This analysis indicated the following:
Implied Equity Reference Range for Assumed Aggregate Consideration to be Paid by I-trax in the
CHD Meridian (excluding synergies) Merger
-------------------------------------- -----------------------------------------------------------------
$78,900,000 to $97,658,000 Pre-earn-out $70,000,000
Implied Equity Reference Range for Post-earn-out based on I-trax stock
CHD Meridian (including synergies) price of $2.50 $80,000,000
--------------------------------------
Post-earn-out based on I-trax $92,600,000
$97,062,000 to $120,519,000 closing stock price as of 12/22/03
Synergies Discounted Cash Flow Analysis
Bryant Park Capital also performed a discounted cash flow analysis of
the synergies generated by the proposed merger as estimated by managements of
I-trax and CHD Meridian to calculate the estimated present value of the
unleveraged, after-tax free cash flows that such synergies could generate over
fiscal years 2004 through 2008. Bryant Park Capital calculated a range of
estimated terminal values with regard to such synergies by applying perpetual
growth rates ranging from 2% to 3%. The present value of the cash flows and
terminal values were calculated using discount rates ranging from 30% to 35%.
This analysis indicated the following:
Implied Reference Range for Assumed Synergies
-------------------------------------------------------
$18,163,000 to $22,861,000
66
I-trax Comparable Companies Analysis
Using publicly available information, Bryant Park Capital reviewed the
market values and trading multiples of the following five selected publicly held
companies in the disease management industry:
o American Healthways, Inc.
o Curative Health Services, Inc.
o Landacorp, Inc.
o Matria Healthcare, Inc.
o Q-Med, Inc.
Bryant Park Capital reviewed (a) enterprise values of the selected
companies, calculated as equity value plus net debt, as a multiple of estimated
calendar year 2003 EBITDA, estimated calendar year 2004 EBITDA, and estimated
calendar year 2004 EBIT, and (b) ratios of stock price to estimated calendar
year 2004 earning per share. All multiples were based on closing stock prices on
December 22, 2003. Estimated financial data were based on publicly available
research analysts' estimates in the case of the selected companies and internal
estimates of I-trax's management in the case of I-trax. Bryant Park Capital then
applied a range of selected multiples derived from the selected companies to
corresponding one year forward financial data of I-trax in order to derive an
implied per share equity reference range for I-trax. Bryant Park Capital then
compared the per share equity reference range for I-trax implied by this
analysis to a price per share of I-trax common stock of $2.50 and of $3.20, the
closing price on December 22, 2003. This analysis indicated the following:
Price per Share of I-trax Common
Implied Per Share Equity Reference Range Price per Share of I-trax Common Stock On
for I-trax Stock of $2.50 December 22, 2003
------------------------------------------ ------------------------------------- -----------------------------------
$2.41 to $2.55 $2.50 $3.20
I-trax Discounted Cash Flow Analysis
Bryant Park Capital performed a discounted cash flow analysis of I-trax
to calculate the estimated present value of the unlevered, after-tax free cash
flows that I-trax could generate over fiscal years 2004 through 2008. Estimated
financial data for I-trax were based on internal estimates of I-trax's
management. Bryant Park Capital calculated a range of estimated terminal values
by applying EBITDA multiples ranging from 7.5x to 9.5x to I-trax's fiscal year
2008 estimated EBITDA. The present value of the cash flows and terminal values
were calculated using discount rates ranging from 25% to 30%. Bryant Park
Capital then compared the per share equity reference range for I-trax implied by
this analysis to a price per share of I-trax common stock of $2.50 and of $3.20,
the closing price on December 22, 2003. This analysis indicated the following:
Implied Per Share Equity Reference Range Price per Share of I-trax Common Price per Share of I-trax Common
for I-trax Stock of $2.50 Stock On December 22, 2003
------------------------------------------ ------------------------------------- -----------------------------------
$2.25 to $3.04 $2.50 $3.20
67
Contribution Analysis
Bryant Park Capital analyzed and compared the implied estimated
percentage contribution of each of I-trax and CHD Meridian (a) for the calendar
years 2004 and 2005 to the estimated pro forma revenues, EBITDA and EBIT of the
merged companies but before taking into account any synergies that may be
realized from the merger, and (ii) to the pro forma equity valuation and
enterprise valuation, calculated as equity value plus net debt, at a price per
share of I-trax common stock of $2.50 and of $3.20, the closing price on
December 22, 2003. Estimated financial data were based on internal estimates of
I-trax's management in the case of I-trax and on internal estimates of CHD
Meridian's management in the case of CHD Meridian. The following table presents
the results of this analysis:
Implied Estimated Percentage Contribution
I-trax CHD Meridian
-------------------------------------------------- ------------------------- ------------------------
Pro Forma Revenue
CY 2004E 6.0% 94.0%
CY 2005E 7.9% 92.1%
Pro Forma EBITDA
CY 2004E 22.0% 78.0%
CY 2005E 32.0% 68.0%
Pro Forma EBIT
CY 2004E 3.5% 96.5%
CY 2005E 25.5% 74.5%
Pro Forma Equity Valuation
At price of $2.50 per share 30.3% 69.7%
At price per share on December 22, 2003 34.1% 65.9%
Pro Forma Enterprise Valuation
At price of $2.50 33.9% 66.1%
At price per share on December 22, 2003 37.8% 62.2%
Pro Forma Analysis of the Merger
Bryant Park Capital analyzed the potential pro forma effects of the
merger on the projected financial data of I-trax for calendar years 2004, 2005
and 2006, both before and after giving effect to potential synergies generated
by the proposed merger. Estimated financial data were based on internal
estimates of I-trax's and CHD Meridian's management. The pro forma results were
calculated as if the merger would close on December 31, 2003. The following
table presents the pro forma impact of the merger on earnings per share for
I-trax for estimated calendar years 2004, 2005 and 2006:
Accretion/(Dilution) Percentage
Pro Forma Earnings per Share 2004E 2005E 2006E
------------------------------------ ------------------- ----------------- -------------
Excluding Synergies 190% (21%) (38%)
Including Synergies 397% 64% 27%
68
Other Factors
In rendering its opinion, Bryant Park Capital reviewed and considered
other factors, including:
o historical trading prices and trading volumes for I-trax common
stock during the 52-week and three-year periods preceding
December 22, 2003;
o the trading volumes for I-trax common stock at various prices
during the three-year period preceding December 22, 2003;
o the relationship between movements in I-trax common stock and
movements in a price-weighed index of selected disease management
companies comparable to I-trax and the S&P 600 Health Care Sector
Index during the three-year period preceding December 22, 2003;
o historical and projected financial information for I-trax and CHD
Meridian as provided by management of I-trax and CHD Meridian;
o projected synergies generated by the proposed merger as provided
by managements of I-trax and CHD Meridian; and
o an implied reference range for shares of I-trax common stock and
I-trax convertible preferred stock to be issued to CHD Meridian
based on the implied reference ranges for I-trax and CHD
Meridian, as compared to the number of shares of I-trax common
stock and I-trax convertible preferred stock to be issued in the
merger.
Conclusion
This summary is not a complete description of Bryant Park Capital's
opinion to I-trax's board of directors of the financial analysis performed and
factors considered by Bryant Park Capital in connection with its opinion. The
preparation of a fairness opinion is a complex analytical process involving
various determinations as to the most appropriate and relevant methods of
financial analysis and the application of those methods to the particular
circumstances and, therefore, a fairness opinion is not readily susceptible to
summary description. Bryant Park Capital believes that its analyses and this
summary must be considered as a whole and that selecting portions of its
analysis and factors or focusing on information presented in tabular form,
without considering all analyses and factors or the narrative description of the
analyses and factors, could create a misleading or incomplete view of the
process underlying Bryant Park Capital's analyses and opinion. The opinion of
Bryant Park Capital was provided solely to the I-trax board of directors and
does not constitute a recommendation to any person on how to vote on the merger
or any matter relating to the merger.
In the amendment to the merger agreement dated February 4, 2004, the
number of earn-out shares was reduced from 4,000,000 to 3,859,200. Management
believes that this reduction in the aggregate potential merger consideration
does not materially change the terms of the merger.
69
RATIFICATION AND APPROVAL OF I-TRAX'S ISSUANCE OF PRIOR COMMON STOCK AND
WARRANT ON OCTOBER 31, 2003
I-trax is seeking stockholder ratification and approval of its issuance
of 1,400,000 shares of I-trax common stock and warrants to purchase 840,000
shares of I-trax common stock in a private placement that closed on October 31,
2003. In addition, I-trax is seeking approval of the issuance of 840,000 shares
of I-trax common stock upon exercise of the warrants.
Issuance of I-trax Common Stock and Warrants
On August 14, 2003, I-trax commenced a private placement in which
I-trax sold as a unit two shares of I-trax common stock and a warrant to
purchase an additional share of I-trax common stock exercisable at $3.00 per
share for a unit purchase price of $5.00. The private placement was completed in
five rolling closings, the last of which occurred on October 31, 2003. A total
of approximately 73 accredited investors purchased units in the offering. I-trax
issued 1,400,000 shares of common stock and warrants to acquire an additional
700,000 shares of common stock in this private placement. The issuance was
exempt from registration under Section 4(2) of the Securities Act and the rules
promulgated thereunder. Westminster Securities Corporation acted as the
placement agent in the private placement. As consideration for placing the
securities in this offering, I-trax paid Westminster a placement agent fee equal
to 12% of gross proceeds in the private placement and issued to thirteen
Westminster employees or their affiliates warrants to acquire 140,000 shares of
I-trax common stock exercisable at $2.50 per share. The issuance of warrants to
the employees and affiliates of Westminster Securities was also exempt from
registration under Section 4(2) of the Securities Act and the rules promulgated
thereunder. Accordingly, the aggregate number of warrants issued covered 840,000
shares of common stock.
The proceeds I-trax received upon completion of the private placement,
net of expenses of the offering, were $3,047,000 and were used for working
capital, expanding I-trax's sales force and improvement of I-trax's software
applications.
As of the date this proxy statement is being first mailed to I-trax
stockholders, none of the warrants issued in the private placement or to
affiliates Westminster Securities has been exercised.
The issuance of the I-trax common stock had, and the exercise of the
warrants will have, the effect of diluting the equity ownership of our
stockholders.
Description of Warrants
The warrants that were issued in the private placement have a term of
five years beginning as of the date of issue and are exercisable at $3.00 per
share. I-trax has reserved a sufficient number of shares of I-trax common stock
for issuance upon exercise of the warrants. If the closing price of I-trax
common stock, as reported by the American Stock Exchange or such other exchange
or quotation service on which the common stock may be traded following the
issuance of the warrants, is three times its exercise price or more (as adjusted
for any stock splits or reverse splits) for a period of ten consecutive trading
days, and the shares of I-trax common stock issuable upon exercise of the
warrants have been and are registered for immediate resale by the holder, I-trax
may, within ten days of the last such trading day, deliver to the holders, at
the holders' addresses as on file with I-trax, written notice of the I-trax's
intent to redeem the warrants for a price of $.05 for each share then issuable
upon the exercise of the warrants. Each holder will then have a period of 30
days following receipt of such notice to exercise the warrant in accordance with
its terms. If a holder does not exercise the warrant within the 30 day period,
the warrant will be deemed to have been redeemed by I-trax and the holder will
only be entitled to receive from I-trax the redemption price of $.05 for each
share of I-trax common stock which would have been issuable upon the exercise of
the warrant immediate prior to its deemed redemption. No holder will possess any
rights as a stockholder solely by reason of ownership of the warrants. I-trax
common stock is described in the section titled "Description of I-trax Capital
Stock" below.
70
Reason for Stockholder Ratification of Issuance
The American Stock Exchange has advised I-trax that the Exchange is
likely to integrate the issuance of I-trax common stock and I-trax convertible
preferred stock in the merger transaction with the unit private placement, thus
requiring I-trax to seek stockholder ratification and approval of the issuances
of I-trax common stock and warrants to acquire I-trax common stock in the
private placement that closed on October 31, 2003. The rules of the American
Stock Exchange require that stockholder approval be obtained for transactions
involving the sale, issuance, or potential issuance by a company of common stock
(or securities convertible into common stock) at a price less than the greater
of book or market value which together with sales by officers, directors or
principal shareholders of the company equals 20% or more of the currently
outstanding common stock. As a result, if the merger is consummated, the private
placement would be considered part of transaction involving the issuance of more
than 20% of currently outstanding common stock and, therefore, stockholder
approval would be required. If we do not obtain shareholder ratification of the
issuance of the common stock and warrants, we may be in violation of the rules
of the American Stock Exchange.
I-TRAX'S BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT I-TRAX
STOCKHOLDERS VOTE TO:
1. APPROVE THE ISSUANCE OF UP TO 13,859,200 SHARES OF COMMON STOCK
AND 400,000 SHARES OF CONVERTIBLE PREFERRED STOCK IN THE MERGER;
2. APPROVE THE MERGER OF DCG ACQUISITION, INC., A WHOLLY-OWNED
SUBSIDIARY OF I-TRAX, WITH AND INTO CHD MERIDIAN;
3. APPROVE the SALE OF UP TO 1,100,000 SHARES of the convertible
preferred stock TO RAISE A PORTION OF THE CASH CONSIDERATION TO
BE USED IN the merger AND FOR WORKING CAPITAL; AND
4. RATIFY AND APPROVE THE ISSUANCE, IN A PRIVATE PLACEMENT THAT
CLOSED ON OCTOBER 31, 2003, OF 1,400,000 SHARES OF COMMON STOCK
AND WARRANTS TO PURCHASE 840,000 SHARES OF COMMON STOCK AND
APPROVE THE ISSUANCE OF 840,000 SHARES OF COMMON STOCK UPON
EXERCISE OF SUCH WARRANTS.
71
MARKET PRICE AND DIVIDEND INFORMATION
I-trax common stock trades on the American Stock Exchange under the
symbol "DMX." The following table sets forth the high and low closing prices for
I-trax common stock for the periods indicated. All closing prices have been
adjusted to reflect a 1-for-5 reverse stock split effected as of close of
business on January 3, 2003.
High Low
---- ---
2004
First Quarter (through February 5, 2004) $ 4.44 $ 3.91
2003
Fourth Quarter 4.490 2.600
Third Quarter 3.790 2.600
Second Quarter 3.000 1.510
First Quarter 5.000 1.370
2002
Fourth Quarter 4.300 2.500
Third Quarter 5.100 2.750
Second Quarter 6.625 4.150
First Quarter 7.650 5.100
2001
Fourth Quarter 8.350 1.800
Third Quarter 5.500 1.800
Second Quarter 5.155 2.900
First Quarter 15.000 3.440
On December 26, 2003, the last full trading day prior to the
announcement of the signing of the merger agreement, the last reported closing
price per share of I-trax common stock on the American Stock Exchange was $3.45.
On February 5, 2004, the most recent practicable date prior to the mailing of
this proxy statement, the last reported closing price per share of I-trax common
stock on the American Stock Exchange was $4.26. Stockholders are urged to obtain
current market quotations prior to making any decision with respect to the
merger.
There is currently no established market for the I-trax convertible
preferred stock and we do not anticipate that there will be a market for the
convertible preferred stock.
There is no established market for shares of CHD Meridian common stock.
As of January 20, 2003, there were approximately 55 holders of CHD Meridian
common stock.
Neither I-trax nor CHD Meridian have ever paid cash dividends or their
common stock and do not anticipate paying cash dividend in the future.
72
CHD MERIDIAN EQUITY COMPENSATION PLAN INFORMATION
(a) (b) (c)
Number of securities
remaining available for
Number of securities to Weighted average future issuance under
be issued upon exercise exercise price of equity compensation plans
of outstanding options, outstanding options, (excluding securities
Plan Category warrants and rights warrants and rights reflected in column (a))
---------------------------- -------------------------- ------------------------ ----------------------------
Equity compensation plans
approved by security holders 10,935 $ 133.83 1,253
Equity compensation plans
not approved by security holders -- -- --
-------------------------- ------------------------ ----------------------------
TOTAL 10,935 $ 133.83 1,253
73
MERIDIAN OCCUPATIONAL HEALTHCARE ASSOCIATES, INC.
FINANCIAL DATA
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)
74
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.................................................76
Consolidated Statement of Operations.......................................77
Consolidated Statement of Stockholders' Equity.............................78
Consolidated Statement of Cash Flows.......................................79
Notes to Consolidated Financial Statements.................................80
75
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).
76
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).
77
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).
78
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
Months Ended 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).
79
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.
80
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 Proxy.
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.
81
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
===================== ===================
82
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.
83
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
84
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.......................................86
Consolidated Financial Statements
Consolidated Balance Sheets..........................................87
Consolidated Statements of Operations................................88
Consolidated Statements of Stockholders' Equity......................89
Consolidated Statements of Cash Flows................................90
Notes to Consolidated Financial Statements...........................91
85
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.
Nashville, Tennessee
March 13, 2003
86
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.
87
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.
88
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.
89
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.
90
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.
91
Meridian Occupational Healthcare Associates, Inc.
and Subsidiaries (d/b/a CHD Meridian Healthcare)
Notes to Consolidated Financial Statements (continued)
1. Reporting Entity and Principles of Consolidation (continued)
Principles of Consolidation (continued)
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.
92
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.
93
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.
94
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.
95
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.
96
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.
97
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
98
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
=================== ================ ===================
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
99
Meridian Occupational Healthcare Associates, Inc.
and Subsidiaries (d/b/a CHD Meridian Healthcare)
Notes to Consolidated Financial Statements (continued)
8. Income Taxes (continued)
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) $ - $ - $ -
================= =================== =================
100
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.
101
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.
102
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
===================== ===================
103
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.
104
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.
105
CHD MERIDIAN SUPPLEMENTARY FINANCIAL INFORMATION
The table below contains summary selected quarterly financial data for
CHD Meridian as of and for the years ended December 31, 2002 and 2001, and for
the nine months ended September 30, 2003. The information as of and for the
years ended December 31, 2002 and 2001 has been prepared using the audited
consolidated financial statements of CHD Meridian. The information as of and for
the periods ended September 30, 2003 is unadudited, butt has been prepared using
general accounting principals and is consistent with the information presented
for other periods presented. This information is only a summary, and you should
read it in conjunction with CHD Meridian's historical financial statements and
related notes and Management's Discussion and Analysis of Financial Condition
and Results of Operations.
Third Second First Fourth Third Second First Fourth Third Second First
Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
--------------------------- --------------------------------------- -------------------------------------
2003 2002 2001
--------------------------- --------------------------------------- -------------------------------------
(In thousands)
Net revenues 29,960 29,214 27,414 28,490 26,214 26,755 25,665 26,745 24,341 24,622 24,703
-------- --------- -------- -------- --------- --------- ---------- --------- --------- ------- ---------
Operating income 1,170 1,071 1,393 360 471 682 624 (918) 776 720 709
Income from continuing
operations 728 951 1,229 319 419 618 568 (230) 247 643 233
-------- --------- -------- -------- --------- --------- ---------- --------- --------- ------- ---------
Gain on Discontinued
operations, net of tax
(a) - - - - - - - (43) 135 278 157
Gain (Loss) on
disposal of
discontinued
operations, net of tax
benefit of $506 (a) - - - - - - - (3,128) - - -
Net income (loss) 728 951 1,229 319 419 618 568 (3,401) 382 921 390
======== ========= ======== ======== ========= ========= ========== ========= ========= ======= =========
(a) During 2001, CHD Meridian discontinued its operations related to two
primary care centers and pharmacies operated on behalf of the
Department of Defense. This was accounted for under SFAS 144 in the
accompanying financial statements. The gain on discontinued operations
of $0.6 million for the year ended December 31, 2001 was reclassified
and reflected separately in the accompanying Consolidated Statements of
Operations. CHD Meridian also recorded a loss on disposal of the
discontinued operations of $3.7 million for the year ended December 31,
2001, which consisted predominantly of the write-down of the equipment
and intangible assets. CHD Meridian also recorded a gain on disposal of
discontinued operations of $0.4 million before taxes related to early
termination of a lease for the California operations, which were sold
in 1998.
106
I-TRAX AND CHD MERIDIAN
COMPARATIVE PER SHARE DATA
(UNAUDITED)
Set forth below are the net income and book value per common share data
separately for I-trax and CHD Meridian on a historical basis, for I-trax on a
pro forma combined basis and on a pro forma combined basis per CHD Meridian
equivalent share. Neither CHD Meridian nor I-trax have ever paid any dividends
on their common stock and do not anticipate paying cash dividends in the
foreseeable future.
The CHD Meridian equivalent share pro forma information shows the
effect of the merger from the perspective of an owner of CHD Meridian common
stock.
You should read the information below together with the historical
financial statements and related notes of CHD Meridian contained in this proxy
statement and the historical financial statements and related notes of I-trax
contained in the annual reports and other information that I-trax has filed with
the SEC and incorporated by reference into this proxy statement and attached in
Annex G to this proxy statement. The unaudited pro forma combined data below is
for illustrative purposes only. The companies may have performed differently had
they always been combined. You should not rely on this information as being
indicative of the historical results that would have been achieved had the
companies always been combined or the future results that the combined company
will experience after the merger.
As of and for the nine As of and for the Year
months ended ended December
September 30, 2003 31, 2002
--------------------------------------------------------------------------------------------------------------------------
I-TRAX HISTORICAL PER COMMON SHARE DATA:
Earnings (loss) per share - continuing operations $ (.53) $ (1.04)
Book value per common share .83 .90
CHD MERIDIAN HISTORICAL PER COMMON
SHARE DATA:
Earnings (loss) per share - continuing operations 13.56 9.23
Book value per common share 125.79 111.89
UNAUDITED PRO FORMA COMBINED
Earnings (loss) per share - continuing operations (.66) (.94)
Book value per common share 2.53 --
107
UNAUDITED PRO FORMA CONDENSED COMBINED
FINANCIAL INFORMATION
General
I-trax entered into a merger agreement with CHD Meridian, a privately
held company and a leading provider of outsourced, employer-sponsored healthcare
services to Fortune 1,000 companies on December 26, 2003, as amended.
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 3,473,280; the number of such shares increases
proportionately up to a maximum of 3,859,200 such additional I-trax common
shares if EBITDA 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 of CHD Meridian contained in this proxy statement and 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 and attached to this proxy in Annex G.
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.
108
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.
109
PRO FORMA CONDENSED COMBINED BALANCE SHEET
SEPTEMBER 30, 2003
(UNAUDITED)
(In thousands, except per share price.)
Meridian Pro Forma
I-trax, Inc. Occupational Consolidated
and Healthcare I-trax, Inc.
I-trax, Inc. Subsidiaries Associates, and
and September 30, Inc., and Pro Forma Subsidiaries
Subsidiaries Activity 2003 Subsidiaries Adjustments (Unaudited)
September 30, Adj. Adjustment as adjusted September 30, Adj. (Unaudited) September 30,
2003 (a) Ref. (b) (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.)
110
(Continues from previous page.)
Meridian Pro Forma
Occupational Consolidated
I-trax, Inc I-trax, Inc and Healthcare I-trax, Inc. and
and Subsidiaries Associates, Inc. Pro Forma Subsidiaries
Subsidiaries Activity September 30 and 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.)
111
(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.
112
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 consolidated I-trax,
Subsidiaries for Associates, Inc. and Inc. and Subsidiaries
the nine months Subsidiaries for the for the nine months
ended September 30, nine months ended Pro Forma ended
2003 (Unaudited) September 30, Adj. adjustments September 30, 2003
(a) 2003 (Unaudited) (b) Ref. (Unaudited) (c) (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.)
113
(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.
114
PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME (LOSS)
YEAR ENDED DECEMBER 31, 2002
(UNAUDITED)
(In thousands, except per share price.)
Meridian
Occupational
Healthcare Pro Forma
I-trax, Inc. and Associates, Inc. and consolidated I-trax,
Subsidiaries for Subsidiaries for the Inc. and Subsidiaries
the nine months year ended Pro Forma for the year ended
ended December 31, December 31, Adj. adjustments December 31, 2002
2002 (a) 2002 (Unaudited) (b) Ref. (Unaudited) (c) (Unaudited)
------------------- ---------------------- ------ ---------------- ----------------------
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.)
115
(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.
116
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.
117
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 to 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's 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 preliminarily to allocate the purchase price over the estimated
fair values of the assets and liabilities acquired with the excess assigned
to goodwill.
H. To give effect to 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.
118
INFORMATION ABOUT THE MEETINGS AND VOTING
The I-trax board of directors is using this proxy statement to solicit
proxies from the holders of I-trax common stock for use at the I-trax special
meeting. The CHD Meridian board of directors is also using this proxy statement
to solicit proxies from the holders of CHD Meridian common stock for use at the
CHD Meridian special meeting. We are first mailing this proxy statement and
accompanying forms of proxies to I-trax and CHD Meridian stockholders on or
about February 9, 2004.
Matters Relating To The Special Meetings
Time and Place
I-TRAX CHD MERIDIAN
Wednesday, March 17, 2004 Wednesday, March 17, 2004
10:00 a.m., local time 9:00 a.m., local time
at the offices of at the offices of
Ballard Spahr Andrews & Ingersoll, LLP CHD Meridian
1735 Market Street, 51st Floor 40 Burton Hills Boulevard, Suite 200
Philadelphia, Pennsylvania 19103 Nashville, Tennessee 37215
The Purpose of the Special Meetings is to Vote on the Following Items
I-TRAX CHD MERIDIAN
1. A proposal to approve the issuance of up to 1. A proposal to adopt the merger agreement; and
13,859,200 shares of common stock and 400,000 shares
of convertible preferred stock in the merger;
2. A proposal to approve the merger of DCG Acquisition, 2. Such other matters as may properly come before the
Inc., a wholly-owned subsidiary of I-trax, with and CHD Meridian special meeting.
into CHD Meridian;
3. A proposal to approve the sale of up to 1,100,000
shares of convertible preferred stock to raise a
portion of the cash consideration to be used in
the merger and for working capital;
4. A proposal to ratify and approve the issuance, in
a private placement that closed on October 31,
2003, of 1,400,000 shares of common stock and
warrants to purchase 840,000 shares of common
stock and approve the issuance of the 840,000
shares of common stock upon the exercise of such
warrants; and
5. Such other matters as may properly come before the
I-trax special meeting.
119
Record Date
I-TRAX
Holders of record of I-trax common stock at the close of business on February 5,
2004 will be entitled to notice of and to vote at the special meeting.
CHD MERIDIAN
Holders of record of CHD Meridian common stock at the close of business on
February 5, 2004 will be entitled to notice of and to vote at the special
meeting.
Outstanding Shares Held on Record Date
I-TRAX
As of February 5, 2004, there were approximately 13,952,376 outstanding shares
of I-trax common stock.
CHD MERIDIAN
As of February 5, 2004, there were approximately 232,247 outstanding shares of
CHD Meridian common stock.
Shares Entitled to Vote
I-TRAX
Each share of I-trax common stock that you own as of the record date entitles
you to one vote.
CHD MERIDIAN
Each share of CHD Meridian common stock that you own as of the record date
entitles you to one vote.
Shares held by CHD Meridian in its treasury will not be voted.
Quorum Requirement
I-TRAX
A quorum of stockholders is necessary to hold a valid meeting. The presence in
person or by proxy at the meeting of holders of a majority of the shares of
I-trax common stock entitled to vote at the meeting is a quorum.
Abstentions and broker "non-votes" count as present for establishing a quorum. A
broker non-vote occurs on a proposal when a broker is not permitted to vote on
that proposal without instruction from the beneficial owner of the shares and no
instruction is given.
CHD MERIDIAN
A quorum of stockholders is necessary to hold a valid meeting.
The presence in person or by proxy at the meeting of holders of a majority of
the shares of CHD Meridian common stock entitled to vote at the meeting is a
quorum. Abstentions count as present for establishing a quorum.
120
Shares Beneficially Owned by Directors and Executive Officers as of
February 5, 2004
I-TRAX
I-trax directors and executive officers beneficially own 3,454,456 shares of
I-trax common stock, including exercisable options and warrants. These shares
represent approximately 22.2% of the shares of I-trax common stock outstanding
as of February 5, 2004.
These individuals have indicated that they intend to vote in favor of the I-trax
proposals.
CHD MERIDIAN
CHD Meridian directors and executive officers beneficially own 186,566 shares of
CHD Meridian common stock, including exercisable options. These shares represent
approximately 80% of the shares of CHD Meridian common stock outstanding as of
February 5, 2004.
These individuals have indicated that they intend to vote in favor of the CHD
Meridian proposal.
Vote Necessary To Approve I-trax and CHD Meridian Proposals
I-TRAX
I-trax stockholders are being asked to consider and vote on the following at the
special meeting:
1. Approve the issuance of up to 13,859,200 shares of common stock and 400,000
shares of convertible preferred stock in the merger;
2. Approve the merger of DCG Acquisition, Inc., a wholly-owned subsidiary of
I-trax, with and into CHD Meridian;
3. Approve the sale of up to 1,100,000 shares of convertible preferred stock
to raise a portion of the cash consideration to be used in the merger and
for working capital; and
4. Ratify and approve the issuance, in a private placement that closed on
October 31, 2003, of 1,400,000 shares of common stock and warrants to
purchase 840,000 shares of common stock and approve the issuance of the
840,000 shares of common stock upon the exercise of such warrants.
Each proposal requires the affirmative vote of the majority of the votes cast on
such proposal, provided that the total votes cast represent over 50% of the
voting stock present in person or by proxy at the meeting. Abstentions and
broker non-votes will not be treated as votes cast and have no effect on the
outcome of the vote on the proposals.
CHD MERIDIAN
Adoption of the merger agreement requires the affirmative vote of the holders of
a majority of the outstanding stock of CHD Meridian. Abstentions will have the
same effect as votes against the CHD Meridian proposal. Holders of the aggregate
number of shares of CHD Meridian common stock representing approximately 71% of
the outstanding stock have entered into voting agreements with I-trax pursuant
to which they have agreed to vote in favor of adopting the merger agreement.
Voting By Proxy
You may vote in person at your special meeting or by proxy. We
recommend you vote by proxy even if you plan to attend your special meeting. You
can always change your vote at the meeting.
121
Voting instructions are included on your proxy card. If you properly
give your proxy and submit it in time to vote, one of the individuals named as
your proxy will vote your shares in the manner you have directed. You may vote
for or against the proposal(s) submitted at your special meeting or abstain from
voting.
How To Vote By Proxy
I-TRAX CHD MERIDIAN
Complete, sign, date and return your proxy card in the Complete, sign, date and return your proxy card in the
enclosed envelope. enclosed envelope.
If you submit your proxy but do not make specific choices, your shares
will be voted in favor of all proposals presented in this proxy statement.
I-TRAX'S BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU VOTE TO:
1. APPROVE THE ISSUANCE OF UP TO 13,859,200 SHARES OF COMMON STOCK
AND 400,000 SHARES OF CONVERTIBLE PREFERRED STOCK IN THE MERGER;
2. APPROVE THE MERGER OF DCG ACQUISITION, INC., A WHOLLY-OWNED
SUBSIDIARY OF I-TRAX, WITH AND INTO CHD MERIDIAN;
3. APPROVE THE SALE OF UP TO 1,100,000 SHARES OF CONVERTIBLE
PREFERRED STOCK TO RAISE A PORTION OF THE CASH CONSIDERATION TO
BE USED IN THE MERGER AND FOR WORKING CAPITAL; AND
4. RATIFY AND APPROVE THE ISSUANCE, IN A PRIVATE PLACEMENT THAT
CLOSED ON OCTOBER 31, 2003, OF 1,400,000 SHARES OF COMMON STOCK
AND WARRANTS TO PURCHASE 840,000 SHARES OF COMMON STOCK AND
APPROVE THE ISSUANCE OF THE 840,000 SHARES OF COMMON STOCK UPON
THE EXERCISE OF SUCH WARRANTS.
CHD MERIDIAN'S BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU VOTE
FOR THE ADOPTION OF THE MERGER AGREEMENT.
Revoking Your Proxy. You may revoke your proxy before it is voted by:
o submitting a new proxy with a later date;
o notifying your company's Secretary in writing before the special
meeting that you have revoked your proxy; or
o voting in person at the special meeting.
Voting in Person. If you plan to attend the special meeting of your
company and wish to vote in person, we will give you a ballot at the meeting.
However, if your shares are held in the name of your broker, bank or other
nominee, you must bring an account statement or letter from the nominee
indicating that you are the beneficial owner of the shares on February 5, 2004,
the record date for voting.
Proxy Solicitation. Each company will pay its own costs of soliciting
proxies. In addition to this mailing, I-trax and CHD Meridian employees may
solicit proxies personally, electronically or by telephone.
The extent to which these proxy soliciting efforts will be necessary
depends upon how promptly proxies are submitted. You should submit your proxy by
mail without delay. I-trax will reimburse brokers and other nominees for their
expenses in sending these materials to you and getting your voting instructions.
122
DO NOT SEND IN ANY STOCK CERTIFICATES WITH YOUR PROXY CARDS.
Other Business; Adjournments
We are not currently aware of any other business to be acted upon at
either special meeting other than the matters set forth in this proxy statement.
If, however, other matters are properly brought before either special meeting,
or any adjourned meeting, your proxies will have discretion to vote or act on
those matters according to their best judgment.
CERTAIN LEGAL INFORMATION
CHD Meridian is presently a privately held company, incorporated under
Delaware law. As such, matters related to corporate control, stockholder
meetings, voting of stock, transferability of stock, and to the relative powers
and authority of the stockholders, directors and officers, are generally
governed by Delaware law, by CHD Meridian's certificate of incorporation and
bylaws, and by a Stockholders Agreement dated as of January 1, 2000. I-trax is
also incorporated under Delaware law, but it is publicly held, and corporate
control and similar issues for I-trax are governed by I-trax's certificate of
incorporation and bylaws, which differ in some respects from those of CHD
Meridian, and the rules of the American Stock Exchange, on which I-trax common
stock is traded. Because I-trax common stock is publicly traded, I-trax and its
stockholders do not have a stockholders agreement establishing rights of first
refusal, tag-along rights, drag along rights or preemptive rights analogous to
those established under the Stockholders Agreement. Upon closing of the first
step of the merger, CHD Meridian stockholders will become I-trax stockholders,
the Stockholders Agreement will terminate, and the CHD Meridian's certificate of
incorporation and bylaws will no longer determine the rights of CHD Meridian
stockholders. CHD Meridian stockholders who were entitled under the Stockholders
Agreement to designate certain members of CHD Meridian's board of directors will
not have any contractual right to designate directors of I-trax, but will vote
for directors along with all other I-trax stockholders. The registration rights
held by CHD Meridian stockholders under the Stockholders Agreement will also
terminate. The merger agreement, however, requires I-trax to register the resale
of I-trax common stock received by CHD Meridian stockholders in the merger and
upon conversion of I-trax convertible preferred stock issued to CHD Meridian
stockholders in the merger.
The summary contained in the following chart is not intended to be a
complete description of all differences in corporate governance between CHD
Meridian and I-trax, and is qualified by reference to Delaware law, the CHD
Meridian charter, bylaws and Stockholders Agreement, and the I-trax charter and
bylaws, in each case as in effect on the date of this proxy statement.
SUMMARY OF CERTAIN DIFFERENCES BETWEEN MATERIAL RIGHTS OF
OF I-TRAX AND CHD MERIDIAN STOCKHOLDERS
Authorized Capital Stock
I-TRAX
The authorized capital stock of I-trax consists of 100,000,000 shares of common
stock and 2,000,000 shares of preferred stock.
As of the date of this proxy statement, no shares of any series of I-trax
preferred stock are outstanding. It is anticipated that 400,000 shares of
convertible preferred stock will be issued in the merger. In addition, up to
1,100,000 shares of convertible preferred stock will be issued in the financing
in connection to the merger.
CHD MERIDIAN
The authorized capital stock of CHD Meridian consists of 250,000 shares of
common stock and 93,500 shares of preferred stock.
No shares of CHD Meridian preferred stock are outstanding.
123
Number of Directors
I-TRAX
The I-trax board of directors currently consists of 9 directors.
CHD MERIDIAN
The CHD Meridian board of directors currently consists of 7 directors.
Term, Classification and Selection of Board Of Directors
I-TRAX
The I-trax board of directors is not divided into classes. Each director is
elected at I-trax's annual meeting of stockholders and holds office until his or
her successor is elected and qualified or until his or her earlier resignation
or removal. Vacancies and newly created directorships resulting from increases
in the authorized number of directors may be filled by a majority of the
directors in office, even if less than a quorum, or by the sole remaining
director, and, each director so chosen will hold office until the next annual
meeting and until his or her successor is duly elected and qualified unless he
or she is sooner displaced. If, at the time of filling any vacancy or newly
created directorship, the directors then in office constitute less than a
majority of the whole board, the Court of Chancery may, upon application of
stockholders holding at least ten percent of the total outstanding voting stock,
order an election to be held to fill such vacancies or newly created
directorships, or to replace the directors chosen by the directors then in
office.
CHD MERIDIAN
Under the CHD Meridian Stockholders Agreement, CHD Meridian's board of directors
consists of the chairman of the board, the chief executive officer, the chief
operating officer, two persons designated by Centre Reinsurance Limited and CHD
Investors, LLC, and two persons designated by Warburg, Pincus Ventures, L.P.,
Pacific Venture Group, L.P. and Bessemer Venture Partners. Removal or
replacement of any of the four directors that particular stockholders are
entitled to designate may only be effected with the consent of such
stockholders. Under the Stockholders Agreement, actions of CHD Meridian's board
of directors require a majority of the full number of board members (even if not
all Board members are present at the meeting).
Removal of Directors
I-TRAX
Directors may be removed from office with or without cause by a majority of the
shares entitled to vote at an election of directors.
CHD MERIDIAN
Under the CHD Meridian Stockholders Agreement, removal or replacement of any of
the four CHD Meridian directors that particular stockholders are entitled to
designate may only be effected with the consent of such stockholders.
124
Stockholder Action By Written Consent
I-TRAX
I-trax stockholders may act by written consent in lieu of a meeting of
stockholders if the written consent or consents are signed to I-trax
stockholders holding stock representing the minimum number of votes required to
take such action at a meeting where all stockholders entitled to vote on the
action were present and voted. If the written consent is not unanimous, notice
of the action must be promptly given to stockholders who did not consent in
writing. Election of directors by less than unanimous written consent must
comply with the provisions of the Delaware General Corporation Law.
CHD MERIDIAN
CHD Meridian stockholders may act by written consent in lieu of a meeting of
stockholders if the written consent or consents are signed to CHD Meridian
stockholders holding stock representing the minimum number of votes required to
take such action at a meeting where all stockholders entitled to vote on the
action were present and voted. If the written consent is not unanimous, notice
of the action must be promptly given to stockholders who did not consent in
writing
Special Meetings of Stockholders
I-TRAX
The I-trax bylaws provide that a special meeting of stockholders may be called
by the chairman or president and must be called by president or secretary at the
written request of majority of the board of directors or the holders of a
majority of I-trax's outstanding voting stock.
CHD MERIDIAN
The CHD Meridian bylaws provide that a special meeting of stockholders may be
called by the board of directors, or by the president, and shall be called by
the President at the request of the holders of a majority of the outstanding
shares of capital stock entitled to vote.
Amendment of Certificate of Incorporation and Bylaws
I-TRAX
I-trax's certificate of incorporation may be amended if the change is proposed
by the board and approved by the holders of a majority of the outstanding
shares, provided that the consent of holders of at least a majority of the
outstanding shares of convertible preferred stock, if issued and outstanding, is
required to change the certificate of incorporation so as to adversely affect
the rights, preference or privileges of the convertible preferred stock or any
equity securities of I-trax that rank senior to or on parity with I-trax
convertible preferred stock.
The I-trax bylaws may be amended by the stockholders or directors at any regular
meeting of stockholders or directors or at any special meeting of stockholders
or directors if notice of such amendment is provided in the notice of the
special meeting, provided that the consent of holders of at least a majority of
the outstanding shares of the I-trax convertible preferred stock, if issued and
outstanding, is required to change the bylaws so as to adversely affect the
rights, preference or privileges of the I-trax convertible preferred stock or
any equity securities of I-trax that rank senior to or on parity with the I-trax
convertible preferred stock.
CHD MERIDIAN
CHD Meridian's certificate of incorporation may be amended if the change is
proposed by the board and approved by the holders of a majority of the
outstanding shares. The certificate of incorporation also contains various
protective provisions in favor of the preferred stock, but these have no current
application, as no preferred shares are presently outstanding.
CHD Meridian's board of directors has the power to amend the CHD Meridian
bylaws, provided, however, that the stockholders also have the power to amend
the bylaws, and have the power to enact bylaws which if so expressed may not be
amended or repealed by the board of directors.
125
DESCRIPTION OF I-TRAX CAPITAL STOCK
General
The authorized capital stock of I-trax consists of 100,000,000 shares
of I-trax common stock, par value $0.001 per share, of which, as of February 5,
2004, there were 13,952,376 shares issued and outstanding and 2,000,000 shares
of preferred stock, par value $0.001 per share, none of which, as of February 5,
2004, were outstanding, 1,500,000 shares of which have been reserved for
issuance and, if the merger is completed, will be designated convertible
preferred stock and issued as consideration in the merger and in the financing
in connection with the issuance. All of the outstanding shares of the capital
stock of I-trax are duly authorized, validly issued, fully paid and
nonassessable, and no class is entitled to preemptive rights. As of February 5,
2004, there were no outstanding subscriptions, options, warrants, rights,
contracts or other arrangements or commitments obligating I-trax to issue any
shares of its capital stock or any securities convertible into or exchangeable
for shares of its capital stock, except shares of I-trax common stock (1)
issuable upon conversion of the I-trax convertible preferred stock I-trax, (2)
approximately 478,187 shares issuable upon conversion of I-trax's convertible
debt, and (3) approximately 5,469,286 shares issuable upon exercise of
outstanding warrants and options. The following summary description of the
capital stock of I-trax does not purport to be complete and is qualified in its
entirety by reference to I-trax's certificate of incorporation, including the
certificate of designations relating to the convertible preferred stock, and to
the Delaware General Corporation Law.
I-trax Common Stock
Holders of I-trax common stock are entitled to one vote for each share
held of record on all matters submitted to a vote of I-trax stockholders.
Subject to preferences that may be applicable to any outstanding preferred
stock, holders of common stock are entitled to receive ratably any dividends
declared by I-trax's board of directors out of funds legally available for
dividends. In the event of a liquidation, dissolution or winding up of I-trax,
holders of I-trax common stock are entitled to share ratably in all assets
remaining after payment of liabilities and the liquidation preferences of any
outstanding shares of preferred stock. Holders of common stock have no
preemptive rights.
I-trax Preferred Stock
General
I-trax's preferred stock is issuable in series upon resolution of its
board of directors. I-trax's board of directors is authorized, by resolution or
resolutions and subject to limitations prescribed by law and the provisions of
its certificate of incorporation, to provide for the issuance of shares of
preferred stock, in one or more series or class, and, by filing a statement
pursuant to the General Corporation Law of Delaware, to establish from time to
time the number of shares to be included in each such series or class and to fix
the designations, powers, preferences and rights of the shares of each such
series or class and the qualifications, limitations or restrictions thereof. The
ability of the I-trax board of directors to issue I-trax preferred stock, while
providing flexibility in connection with possible acquisitions and other
corporate purposes, could have the effect of making it more difficult for a
third party to acquire, or of discouraging a third party from acquiring, a
majority of the outstanding voting stock of I-trax. As of the date of this proxy
statement, no shares of I-trax preferred stock are issued and outstanding.
Series A Convertible Preferred Stock
Designation and Amount. The I-trax Series A Convertible Preferred Stock
to be issued as consideration in the merger and in the financing in connection
with the merger, has a par value of $.001 per share and a stated value and a
liquidation preference of $25.00 per share, plus accrued and unpaid dividends.
The authorized number of shares of the I-trax convertible preferred stock is
1,500,000.
Rank. In a liquidation, the Series A Convertible Preferred Stock will
rank as to dividends and rights on liquidation senior to I-trax common stock and
126
all future classes and series of capital stock except those classes or series of
I-trax capital stock created in the future which expressly designated as ranking
senior to or on a parity with the I-trax Series A Convertible Preferred Stock.
Dividends. The Series A Convertible Preferred Stock will accrue, from
issuance, dividends at a rate of 8% per year on the $25.00 per share original
issue price. Dividends will only be payable upon liquidation of I-trax or
conversion of the Series A Convertible Preferred Stock into common stock and
will be payable, at the option of I-trax, in cash or common stock.
Conversion Rights. The holders of shares of Series A Convertible
Preferred Stock will have the right, at their option, to convert any or all of
such shares into shares of I-trax common stock initially at a conversion price
equal to $2.50 per share of common stock, with each share of Series A
Convertible Preferred Stock being valued at $25.00 for such purpose. In
addition, shares of Series A 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, (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, Series A 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 conversion price is subject to antidilution
adjustments in the event of stock splits, stock combinations or
recapitalizations.
Voting Rights. Each share of Series A Convertible Preferred Stock will
have voting rights equal to that number of shares of I-trax common stock into
which such Series A Convertible Preferred Stock could be converted on the record
date for determining the stockholders entitled to vote, voting together with the
holders of shares of I-trax common stock as one class. Initially, the number of
votes per share of Series A Convertible Preferred Stock will be ten.
Protective Provision. The consent of at least a majority of the
outstanding Series A Convertible Preferred Stock will be required to amend any
provision of the I-trax's certificate of incorporation or bylaws, if such
amendment would adversely affect rights, preferences or privileges of the Series
A Convertible Preferred Stock, or any equity securities of I-trax that rank
senior to or on parity with the Series A Convertible Preferred Stock, to affect
them adversely.
Liquidation Rights. Upon any voluntary or involuntary liquidation,
dissolution or winding-up of I-trax, the holders of Series A Convertible
Preferred Stock will be entitled to receive out of I-trax's assets legally
available for distribution a distribution in the amount of $25.00 per share,
plus an amount equal to all accrued and unpaid dividends thereon to the date
fixed for distribution, before any distribution or payment is made to holders of
common stock of I-trax or on any other class of the company stock ranking junior
to the Series A Convertible Preferred Stock.
Restrictions on I-trax. As long as shares of Series A Convertible
Preferred Stock are outstanding, the consent of a majority of the outstanding
shares of Series A Convertible Preferred Stock is required to authorize, issue,
or sell (or to agree to any of the foregoing), a new class or series of equity
securities, or securities or rights of any kind that are convertible into or
exchangeable for equity securities, that rank senior to or on parity with the
convertible preferred stock. In addition, the consent of a majority of the
outstanding shares of Series A Convertible Preferred Stock will be required to
declare, set aside or pay any dividend on any equity securities that the Series
A Convertible Preferred Stock is senior to, other than dividends payable in
equity securities to which the preferred stock is senior, and any dividend on
securities on equity securities the preferred stock ranks in parity with, unless
the Series A Convertible Preferred Stock equally participates in the dividend.
A form of the Certificate of Designations for I-trax Series A
Convertible Preferred Stock is included as Annex D to this proxy statement.
127
6% Convertible Senior Debenture
In February 2002, I-trax sold a 6% convertible senior debenture in the
aggregate principal amount of $2,000,000 to Palladin Opportunity Fund LLC, of
which approximately $741,000 remains outstanding as of February 5, 2004. The
principal amount of the debenture accrues interest at the rate of 6% per annum,
payable semi-annually on July 1 and January 1. I-trax may, at its option, pay
accrued interest in cash or add accrued interest to the principal amount of the
debenture. The outstanding principal and any capitalized interest are payable in
full on or before February 3, 2005. Further, outstanding principal and any
capitalized interest may be converted at any time at the election of the
Palladin into I-trax common stock at a conversion price of $1.75 per share.
Further, the applicable conversion price is subject to anti-dilution adjustment
if I-trax issues securities at an effective per share price of less than the
then applicable conversion price or the then applicable market price.
Exchange Agent, Transfer Agent And Registrar
The exchange agent, transfer agent and registrar for the I-trax common
stock is StockTrans, Inc.
EXPERTS
The financial statements incorporated in this proxy statement by
reference to the Annual Report on Form 10-KSB of I-trax, Inc. for the year ended
December 31, 2002 have been so incorporated in reliance on the reports of
Goldstein Golub Kessler LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting
The financial statements incorporated in this proxy statement by
reference to the Annual Report on Form 10-KSB of I-trax, Inc. for the year ended
December 31, 2001 have been so incorporated in reliance on the reports of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.
Representatives of Goldstein Golub Kessler LLP are expected to attend
the special meeting of I-trax stockholders, will have the opportunity to make a
statement if they desire to do so, and are expected to be available to respond
to appropriate questions.
The consolidated financial statements of CHD Meridian at December 31,
2002, 2001 and 2000 and for each of the three years in the period ended December
31, 2002 included in this proxy statement have been audited by Ernst & Young
LLP, independent auditors, as set forth in their report thereon appearing
elsewhere herein, and are included in reliance upon such report given on the
authority of such firm as experts in accounting and auditing.
FUTURE I-TRAX STOCKHOLDER PROPOSALS
The deadline for receipt of a proposal to be considered for inclusion
in I-trax's proxy statement for the 2004 annual meeting of stockholders has
passed. The deadline for notice to I-trax of a proposal for the 2004 annual
meting of stockholders for which a stockholder will conduct his or her own
solicitation has also passed.
WHERE YOU CAN FIND MORE INFORMATION
I-trax files annual, quarterly and special reports, proxy statements
and other information with the SEC. You may read and copy any reports,
statements or other information we file at the SEC's public reference room at
450 Fifth Street, N.W., Washington, D.C., 20549. Please call the SEC at
1-800-SEC-0330 for further information on the public reference rooms. Our SEC
filings are also available to the public from commercial document retrieval
services and at the web site maintained by the SEC at http://www.sec.gov.
The SEC allows I-trax to incorporate by reference information into this
proxy statement, which means that it can disclose important information to you
by referring you to another document filed separately with the SEC. The
information incorporated by reference is deemed to be part of this proxy
statement, except for any information superseded by information in, or
128
incorporated by reference in, this proxy statement. This proxy statement
incorporates by reference the documents set forth below that we have previously
filed with the SEC. These documents contain important information about our
companies and their finances.
I-TRAX SEC FILINGS
(FILE NO. 001-31584) PERIOD
Annual Report on Form 10-KSB Fiscal year ended December 31, 2002
Quarterly Reports on Form 10-QSB Fiscal quarters ended March 31, 2003, June 30, 2003,
and September 30, 2003.
Current Reports on Form 8-K Filed on February 12, 2003, February 19, 2003, April 22,
2003, May 19, 2003, August 15, 2003, October 17, 2003,
November 17, 2003, December 29, 2003, December 30, 2003
and February 2, 2004
Proxy Statement on Schedule 14A Filed on April 25, 2003
We are also incorporating by reference additional documents that we
file with the SEC between the date of this proxy statement and the date of the
meetings.
I-trax has supplied all information contained or incorporated by
reference in this proxy statement relating to I-trax and CHD Meridian has
supplied all such information relating to CHD Meridian.
We are delivering copies of the I-trax Annual Report on Form 10-KSB for
the fiscal year ended December 31, 2002, the I-trax Form 10-QSB for the fiscal
quarters ended March 31, 2003, June 30, 2003 and September 30, 2003 and the
above-referenced Forms 8-K in Annex G to this proxy statement. You can also
obtain any of the documents incorporated by reference through I-trax or the SEC.
Documents incorporated by reference are available from us without charge,
excluding all exhibits. Stockholders may obtain documents incorporated by
reference in this proxy statement by requesting them in writing or by telephone
from I-trax's Secretary at the following address and telephone number:
I-TRAX, INC.
ONE LOGAN SQUARE
SUITE 2615, 130 N. 18th STREET
PHILADELPHIA, PA 19103
(215) 557-7488 x116
If you would like to request documents from us, please do so by March
1, 2004 to receive them before the meetings.
You can also get more information by visiting I-trax's web site at
www.i-trax.com and CHD Meridian's web site at www.chdmeridian.com. Web site
materials are not part of this document.
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED OR INCORPORATED BY
REFERENCE IN THIS PROXY STATEMENT TO VOTE ON THE I-TRAX PROPOSALS AND THE CHD
MERIDIAN PROPOSAL, AS THE CASE MAY BE. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE
YOU WITH INFORMATION THAT IS DIFFERENT FROM WHAT IS CONTAINED IN THIS PROXY
STATEMENT. THIS PROXY STATEMENT IS DATED FEBRUARY 6, 2004. YOU SHOULD NOT ASSUME
THAT THE INFORMATION CONTAINED IN THIS PROXY STATEMENT IS ACCURATE AS OF ANY
DATE OTHER THAN THAT DATE, AND NEITHER THE MAILING OF THIS PROXY STATEMENT TO
STOCKHOLDERS NOR THE ISSUANCE OF I-TRAX COMMON STOCK OR I-TRAX CONVERTIBLE
PREFERRED STOCK IN THE MERGER SHALL CREATE ANY IMPLICATION TO THE CONTRARY.
129
ANNEX A
-------
MERGER AGREEMENT
BY AND AMONG
I-TRAX, INC., DCG ACQUISITION, INC.,
MERIDIAN OCCUPATIONAL HEALTHCARE ASSOCIATES, inc.
(D/B/A chd MERIDIAN HEALTHCARE),
and
CHDM HEALTHCARE, LLC
DECEMBER 26, 2003
TABLE OF CONTENTS
1. Definitions..............................................................................................5
2. Basic Transaction........................................................................................9
(a) Two-Step Merger................................................................................10
(b) Merger Consideration...........................................................................10
(c) The Closing....................................................................................10
(d) Deliveries at the Closing......................................................................10
(e) Effect of First Merger.........................................................................10
(f) Procedure for Payment..........................................................................12
(g) Closing of Transfer Records....................................................................12
(h) Closing Escrow.................................................................................12
(i) Earn Out.......................................................................................12
(j) CHDM Representative as Limited Agent...........................................................13
(k) Effect of Second Merger........................................................................14
3. Representations and Warranties of I-trax and Acquisition................................................14
(a) Organization...................................................................................14
(b) Authorization of Transaction...................................................................15
(c) Capitalization.................................................................................15
(d) Filings with the SEC...........................................................................16
(e) Financial Statements...........................................................................16
(f) Events Subsequent to November 14, 2003.........................................................16
(g) Noncontravention...............................................................................18
(h) Brokers' Fees..................................................................................18
(i) Tax Matters....................................................................................18
(j) Subsidiaries...................................................................................19
(k) Litigation.....................................................................................19
(l) Legal Compliance...............................................................................19
(m) Title to Assets................................................................................19
(n) Undisclosed Liabilities........................................................................19
(o) Real Property..................................................................................20
(p) Intellectual Property..........................................................................20
(q) Tangible Assets................................................................................21
(r) Contracts......................................................................................21
(s) Notes and Accounts Receivable..................................................................22
(t) Insurance......................................................................................22
(u) Employees......................................................................................22
(v) Employee Benefits..............................................................................22
(w) Guaranties.....................................................................................23
(x) Environmental, Health, and Safety Matters......................................................23
(y) Certain Business Relationships with I-trax.....................................................23
(z) Status of Officers and Directors...............................................................23
(aa) Investment.....................................................................................23
(bb) Disclosure.....................................................................................23
(cc) Definitive Proxy Materials.....................................................................23
4. Representations and Warranties of CHDM..................................................................24
(a) Organization...................................................................................24
(b) Capitalization.................................................................................24
(c) Authorization of Transaction...................................................................24
(d) Noncontravention...............................................................................25
(e) Brokers' Fees..................................................................................25
(f) Title to Assets................................................................................25
(g) Subsidiaries...................................................................................25
(h) Financial Statements...........................................................................25
(i) Events Subsequent to Most Recent Fiscal Month End..............................................26
i
(j) Undisclosed Liabilities........................................................................27
(k) Legal Compliance...............................................................................27
(l) Tax Matters....................................................................................27
(m) Real Property..................................................................................28
(n) Intellectual Property..........................................................................29
(o) Tangible Assets................................................................................29
(p) Contracts......................................................................................29
(q) Notes and Accounts Receivable..................................................................30
(r) Insurance......................................................................................30
(s) Litigation.....................................................................................31
(t) Employees......................................................................................31
(u) Employee Benefits..............................................................................31
(v) Guaranties.....................................................................................32
(w) Environmental, Health, and Safety Matters......................................................32
(x) Certain Business Relationships with CHDM.......................................................32
(y) Status of Officers and Directors...............................................................32
(z) Definitive Proxy Materials.....................................................................32
(aa) Disclosure.....................................................................................32
5. Pre-Closing Covenants...................................................................................32
(a) General........................................................................................32
(b) Notices and Consents...........................................................................33
(c) Regulatory Matters and Approvals...............................................................33
(d) Fairness Opinion...............................................................................33
(e) Financing......................................................................................34
(f) Operation of Businesses........................................................................34
(g) Full Access....................................................................................35
(h) Notice of Developments.........................................................................35
(i) Exclusivity....................................................................................35
(j) Listing of Shares..............................................................................35
(k) Financial Statements Re-characterization.......................................................35
6. Conditions to Obligation to Close.......................................................................35
(a) Conditions to Obligation of I-trax, Acquisition and Acquisition LLC............................36
(b) Conditions to Obligation of CHDM...............................................................37
7. Post-Closing Covenants..................................................................................39
(a) I-trax Common Shares...........................................................................39
(b) Insurance and Indemnification..................................................................39
(c) Registration Statement on Form S-3.............................................................40
(d) General Cooperation............................................................................40
(e) Tax-Free Reorganization Treatment..............................................................40
8. Remedies for Breaches of this Agreement.................................................................41
(a) Survival of Representations and Warranties.....................................................41
(b) Indemnification Provisions for Benefit of I-trax...............................................41
(c) Matters Involving Third Parties................................................................41
(d) Limitations on Liability.......................................................................42
(e) Determination of Adverse Consequences..........................................................42
(f) Basket.........................................................................................42
9. Termination.............................................................................................42
(a) Termination of Agreement.......................................................................42
(b) Effect of Termination..........................................................................43
10. Miscellaneous...........................................................................................43
(a) Press Releases and Public Announcements........................................................43
(b) No Third-Party Beneficiaries...................................................................43
(c) Entire Agreement...............................................................................44
(d) Succession and Assignment......................................................................44
(e) Counterparts...................................................................................44
(f) Headings.......................................................................................44
ii
(g) Notices........................................................................................44
(h) Governing Law..................................................................................45
(i) Amendments and Waivers.........................................................................45
(j) Severability...................................................................................45
(k) Expenses.......................................................................................45
(l) Construction...................................................................................45
(m) Incorporation of Exhibits, Annexes, and Schedules..............................................45
(n) Specific Performance...........................................................................46
(o) Submission to Jurisdiction.....................................................................46
Exhibit A -- First Merger Certificate of Merger
Exhibit B -- Directors and Officers of the First Merger Surviving Corporation
Exhibit C -- Certificate of Designations, Preferences and Rights of Series A
Convertible Preferred Stock of I-trax
Exhibit D -- Form of Letter of Transmittal and Subscription Agreement
Exhibit E -- Form of Escrow Agreement
Exhibit F -- Acquisition LLC EBIDTA Calculation Rules
Exhibit G -- Second Merger Certificate of Merger
Exhibit H -- CHDM and its Subsidiaries Budget
Exhibit I -- Form of Opinion of Counsel to CHDM
Exhibit J -- Form of Opinion of Counsel to I-trax
Exhibit K -- Form of Registration Statement on Form S-3
I-trax Disclosure Schedule -- Exceptions to Representations and Warranties of I-trax and Acquisition
CHDM Disclosure Schedule -- Exceptions to Representations and Warranties of CHDM
iv
MERGER AGREEMENT
Agreement entered into on December 26, 2003, by and among I-trax, Inc.,
a Delaware corporation ("I-trax"), DCG Acquisition, Inc., a Delaware corporation
and a wholly owned subsidiary of I-trax ("Acquisition"), CHDM Healthcare, LLC, a
Delaware limited liability company of which I-trax is the sole member
("Acquisition LLC"), and Meridian Occupational Healthcare Associates, Inc.
(d/b/a CHD Meridian Healthcare), a Delaware corporation ("CHDM"). Each of
I-trax, Acquisition, Acquisition LLC and CHDM are referred to herein
individually as a "Party" and collectively as the "Parties."
This Agreement provides for a two-step reorganization transaction. The
initial step of the reorganization transaction will involve a merger of
Acquisition with and into CHDM, in which merger CHDM will continue as the
surviving corporation. The second step of the reorganization transaction will
involve a statutory merger of the surviving corporation of the initial step of
the reorganization transaction with and into Acquisition LLC, in which merger
Acquisition LLC will continue as the surviving entity. The Parties intend to
complete the initial step and the second step of the reorganization as part of
an integrated plan, such that the two steps will constitute a single transaction
treated as a tax-free reorganization pursuant to Section 368 of the Internal
Revenue Code of 1986, as amended (the "Code").
Now, therefore, in consideration of the premises and the mutual
promises herein made, and in consideration of the representations, warranties
and covenants herein contained, the Parties agree as follows:
1. Definitions.
"2004 EBITDA" has the meaning set forth in Section 2(i) below.
"Accrued CHDM Professional Expenditures" has the meaning set forth in
Section 10(k) below.
"Acquisition" has the meaning set forth in the preface above.
"Acquisition LLC" has the meaning set forth in the preface above.
"Adverse Consequences" means all actions, suits, proceedings, hearings,
investigations, charges, complaints, claims, demands, injunctions, judgments,
orders, decrees, rulings, damages, dues, penalties, fines, costs (including the
costs of investigating or litigating or arbitrating any claim), amounts paid in
settlement, Liabilities, obligations, Taxes, liens, losses, expenses, and fees,
including court costs and reasonable attorneys' fees and expenses associated
with the foregoing, net of any insurance proceeds actually received by the party
suffering such consequences.
"Affiliate" has the meaning set forth in Rule 12b-2 of the regulations
promulgated under the Exchange Act.
"Affiliated Group" means any affiliated group within the meaning of
Code Section 1504(a) or any similar group defined under a similar provision of
state, local or foreign law.
"Authority" means any Federal, state, local or foreign, court,
governmental bureau, commission, board, agency or instrumentality.
"Basis" means any past or present fact, situation, circumstance,
status, condition, activity, practice, plan, occurrence, event, incident,
action, failure to act, or transaction that forms or could form the basis for
any specified consequence.
"Cash Consideration" has the meaning set forth in Section 2(b) below.
"CHDM" has the meaning set forth in the preface above.
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"CHDM Disclosure Schedule" has the meaning set forth in Section 4
below.
"CHDM Material Adverse Effect" means: (i) an adverse effect on the
business, operations, results of operations, properties (including intangible
properties), conditions (financial or otherwise), assets or liabilities
(including contingent liabilities) of CHDM, which would have an economic impact
of more than $500,000; or (ii) a material adverse effect on the ability of CHDM
to perform its obligations under this Agreement and each other agreement
contemplated by this Agreement.
"CHDM Representative" means Haywood D. Cochrane, Jr. or such other
Person that may succeed him according to the procedures set out in Section
2(j)(ii) below.
"CHDM Share" means a share of common stock, $.001 par value, of CHDM.
"CHDM Shares Deemed Outstanding" means the number of CHDM Shares deemed
outstanding immediately prior to the Effective Time, calculated on a fully
diluted basis, including without limitation, CHDM Shares issuable upon
conversion of outstanding preferred stock or the exercise of options to acquire
CHDM Shares, warrants or any other rights to acquire securities of CHDM, but
specifically excluding CHDM Shares in treasury and any CHDM Share or any option
to acquire CHDM Share which is redeemed at or prior to the Effective Time.
"CHDM Stockholder" means any Person who or which holds any CHDM Share.
"Closing" has the meaning set forth in Section 2(c) below.
"Closing Date" has the meaning set forth in Section 2(c) below.
"Code" has the meaning set forth in the preface above.
"Common Shares Consideration" has the meaning set from in Section 2(b)
below.
"Confidential Information" means any information concerning the
businesses and affairs of a Party that is not already generally available to the
public.
"Controlled Group" means a controlled group within the meaning of
Sections 414(b), (c), (m) and (o) of the Code.
"Definitive Proxy Materials" means the Definitive Proxy Materials
relating to the Special I-trax Meeting and Special CHDM Meeting.
"Delaware General Corporation Law" means the General Corporation Law of
the State of Delaware, as amended.
"Dissenting Share" means any CHDM Share that any stockholder who or
which has exercised his, her or its appraisal rights under the Delaware General
Corporation Law holds of record.
"Effective Time" has the meaning set forth in Section 2(e)(i) below.
"Employee Pension Benefit Plan" has the meaning set forth in ERISA
Section 3(2).
"Employee Welfare Benefit Plan" has the meaning set forth in ERISA
Section 3(1).
"Environmental, Health, and Safety Requirements" shall mean all
Federal, state, local and foreign statutes, regulations, ordinances and other
provisions having the force or effect of law, all judicial and administrative
orders and determinations, all contractual obligations and all common law
concerning public health and safety, worker health and safety, and pollution or
protection of the environment, including without limitation all those relating
to the presence, use, production, generation, handling, transportation,
treatment, storage, disposal, distribution, labeling, testing, processing,
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discharge, release, threatened release, control, or cleanup of any hazardous
materials, substances or wastes, chemical substances or mixtures, pesticides,
pollutants, contaminants, toxic chemicals, petroleum products or byproducts,
asbestos, polychlorinated biphenyls, noise or radiation, each as amended and as
now or hereafter in effect.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"Escrow Agent" means a reputable financial institution reasonably
acceptable to I-trax and CHDM Representative.
"Escrow Agreement" has the meaning set forth in Section 2(h) below.
"Escrow Shares" has the meaning set forth in Section 2(h) below.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Exchange Agent" means StockTrans, Inc.
"Financial Statements" has the meaning set forth in Section 4(h) below.
"First Merger" has the meaning set forth in Section 2(a) below.
"First Merger Certificate of Merger" has the meaning set forth in
Section 2(d) below.
"First Merger Surviving Corporation" has the meaning set forth in
Section 2(a) below.
"GAAP" means United States generally accepted accounting principles as
in effect from time to time.
"Hart-Scott-Rodino Act" means the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended.
"I-trax" has the meaning set forth in the preface above.
"I-trax Common Share" means a share of common stock, $.001 par value
per share, of I-trax.
"I-trax Disclosure Schedule" has the meaning set forth in Section 3
below.
"I-trax Material Adverse Effect" means: (i) an adverse effect on the
business, operations, results of operations, properties (including intangible
properties), conditions (financial or otherwise), assets or liabilities
(including contingent liabilities) of I-trax, which would have an economic
impact of more than $250,000; or (ii) a material adverse effect on the ability
of I-trax to perform its obligations under this Agreement and each other
agreement contemplated by this Agreement.
"I-trax Preferred Share" means a share of Series A Preferred Stock,
$.001 par value per share, of I-trax issued pursuant to the Certificate of
Designations, Preferences and Rights of Series A Convertible Preferred Stock of
I-trax attached hereto as Exhibit C.
"I-trax Preferred Designations" means the designations, preferences and
rights of I-trax Preferred Shares attached hereto as Exhibit C.
"I-trax Stockholder" means any Person who or which holds an I-trax
Common Share.
"Intellectual Property" means (i) all inventions (whether patentable or
unpatentable and whether or not reduced to practice), all improvements thereto,
and all patents, patent applications, and patent disclosures, together with all
reissuances, continuations, continuations-in-part, revisions, extensions, and
reexaminations thereof, (ii) all trademarks, service marks, trade dress, logos,
trade names, and corporate names, together with all translations, adaptations,
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derivations, and combinations thereof and including all goodwill associated
therewith, and all applications, registrations, and renewals in connection
therewith, (iii) all copyrightable works, all copyrights, and all applications,
registrations, and renewals in connection therewith, (iv) all mask works and all
applications, registrations, and renewals in connection therewith, (v) all trade
secrets and confidential business information (including ideas, research and
development, know-how, formulas, compositions, manufacturing and production
processes and techniques, technical data, designs, drawings, specifications,
customer and supplier lists, pricing and cost information, and business and
marketing plans and proposals), (vi) all computer software and related code
(including data and related documentation), (vii) all other proprietary rights,
and (viii) all copies and tangible embodiments thereof (in whatever form or
medium).
"Knowledge" means, as to CHDM, the actual knowledge, or the knowledge
which would be obtained after reasonable investigation, of Haywood D. Cochrane,
Jr., Chip Phillips or Shannon Wolcott and means, as to I-trax, the actual
knowledge, or the knowledge which would be obtained after reasonable
investigation, of Frank A. Martin, Anthony Tomaro or Yuri Rozenfeld.
"Liability" means any liability (whether known or unknown, whether
asserted or unasserted, whether absolute or contingent, whether accrued or
unaccrued, whether liquidated or unliquidated, and whether due or to become
due), including any liability for Taxes.
"Merger" has the meaning set forth in Section 2(a) below.
"Merger Consideration" has the meaning set forth in Section 2(b) below.
"Most Recent Balance Sheet" means the balance sheet contained within
the Most Recent Financial Statements.
"Most Recent Financial Statements" has the meaning set forth in Section
4(h) below.
"Most Recent Fiscal Month End" has the meaning set forth in Section
4(h) below.
"Most Recent Fiscal Year End" has the meaning set forth in Section 4(h)
below. "Multiemployer Plan" has the meaning set forth in ERISA Section 3(37).
"Multiemployer Plan" has the meaning set forth in ERISA Section 3(37).
"Ordinary Course of Business" means, with respect to a Person, the
conduct of business consistent with past custom and practice (including with
respect to quantity and frequency) of such Person.
"Party" has the meaning set forth in the preface above.
"Person" means an individual, a partnership, a corporation, an
association, a joint stock company, a trust, a joint venture, an unincorporated
organization, or a governmental entity (or any department, agency, or political
subdivision thereof).
"Plan" has the meaning set forth in Section 3(3) of ERISA.
"Preferred Shares Consideration" has the meaning set from in Section
2(b) below.
"Process Agent" has the meaning set forth in Section 10(o) below.
"Prohibited Transaction" has the meaning set forth in ERISA Section 406
and Code Section 4975.
"Public Reports" has the meaning set forth in Section 3(d) below.
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"Requisite Stockholder Approval" means the affirmative vote or consent
of the holders of a majority of the I-trax Common Shares and the CHDM Shares, in
each case outstanding as of the applicable record date, in favor of this
Agreement, the First Merger and such other matters as are contemplated herein.
"SEC" means the Securities and Exchange Commission.
"Second Merger" has the meaning set forth in Section 2(a) below.
"Second Merger Certificate of Merger" has the meaning set forth in
Section 2(k)(i) below.
"Second Merger Effective Time" has the meaning set forth in Section
2(k)(i) below.
"Second Merger Surviving Company" has the meaning set forth in Section
2(a) below.
"Securities Act" means the Securities Act of 1933, as amended.
"Security Interest" means any mortgage, pledge, lien, encumbrance,
charge, or other security interest, other than (i) landlords, carriers,
warehousemen, mechanic's, materialmen's, and similar liens, (ii) liens for
Taxes, assessments, governmental charges or claims not yet due and payable,
(iii) letters of credit or other instruments in favor of insurers in connection
with insurance policies, (iv) surety and appeal bonds and letters of credit
securing performance under client contracts, (v) any attachment or judgment
lien, unless the judgment it secures shall not, within sixty (60) days after the
entry thereof, have been discharged or the execution thereof stayed pending
appeal, or shall not have been discharged within sixty (60) days after the
expiration of any such stay, (vi) reservations, exceptions, encroachments,
easements, rights of way, covenants, conditions, restrictions, leases and other
title exceptions pertaining to real property (except encumbrances to secure
payment of money), which (individually and in the aggregate) do not materially
impair the use of such property or the value of such property in the business
for which it is used; (vii) Any lien on property acquired after the date hereof;
provided that each such lien shall at all times be confined solely to the item
or items of property so acquired; and the principal amount of indebtedness
secured by each such lien shall at no time exceed the cost of the property so
acquired; and (viii) other liens arising in the Ordinary Course of Business and
not incurred in connection with the borrowing of money.
"Special I-trax Meeting" has the meaning set forth in Section 5(c)(i)
below.
"Special CHDM Meeting" has the meaning set forth in Section 5(c)(i)
below.
"Subsidiary" means any business entity with respect to which a
specified Person (or a Subsidiary thereof) owns more than 50 percent of the fair
market value of the equity interests or has the power to vote or direct the
voting of sufficient voting interests to elect a majority of the directors or
managers.
"Tax" means any Federal, state, local, or foreign income, gross
receipts, license, payroll, employment, excise, severance, stamp, occupation,
premium, windfall profits, environmental (including taxes under Code Section
59A), customs duties, capital stock, franchise, profits, withholding, social
security (or similar), unemployment, disability, real property, personal
property, sales, use, transfer, registration, value added, alternative or add-on
minimum, estimated, or other tax of any kind whatsoever, including any interest,
penalty, or addition thereto, whether disputed or not.
"Tax-Free Reorganization" has the meaning set forth in Section 7(e)
below.
"Tax Return" means any return, declaration, report, claim for refund,
or information return or statement relating to Taxes, including any schedule or
attachment thereto, and including any amendment thereof.
"Third Party Claim" has the meaning set forth in Section 8(c)(i) below.
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2. Basic Transaction.
(a) Two-Step Merger. On and subject to the terms and conditions of this
Agreement, Acquisition will merge with and into CHDM (the "First Merger") at the
Effective Time. CHDM shall be the entity surviving the First Merger (the "First
Merger Surviving Corporation"). As soon as practicable following the First
Merger and on and subject to the terms and conditions of this Agreement, First
Merger Surviving Corporation will merge with and into Acquisition LLC (the
"Second Merger"). Acquisition LLC shall be the entity surviving the Second
Merger (the "Second Merger Surviving Company"). The First Merger and the Second
Merger are referred to, collectively, as the "Merger."
(b) Merger Consideration. The aggregate consideration to be paid by
I-trax in the Merger (the "Merger Consideration") equals: (i) 10,000,000 I-trax
Common Shares (the "Common Shares Consideration"); (ii) 400,000 I-trax Preferred
Shares (the "Preferred Shares Consideration"); and (iii) cash in the amount of
$35,000,000 minus, and without double counting: (A) the expenditure CHDM incurs
or commits to incur to redeem or purchase, as the case may be, any CHDM Share or
any option to acquire CHDM Share during the period beginning on the date hereof
and ending at the Effective Time; and (B) the amount, if any, by which the
actual cash balance of CHDM as of the Effective Time, measured in accordance
with GAAP, minus any unpaid Accrued CHDM Professional Expenditures, is less than
$13,258,338 (the resulting amount, the "Cash Consideration"). For the avoidance
of doubt, such cash balance shall be calculated net of all deposits and payments
in transit at the Effective Time, and shall be deemed to include the aggregate
amount of outstanding promissory notes in favor of CHDM given by employees upon
exercise of options, which notes shall be set off against Merger Consideration
due to such employees.
(c) The Closing. The closing of the transactions contemplated by this
Agreement (the "Closing") shall take place at the offices of Ballard Spahr
Andrews & Ingersoll, LLP, 1735 Market Street, Philadelphia, Pennsylvania,
commencing at 10:00 a.m. local time on the second business day following the
satisfaction or waiver of all conditions to the obligations of the Parties to
consummate the transactions contemplated hereby (other than conditions with
respect to actions the respective Parties will take at the Closing itself) or
such other date as the Parties may mutually determine (the "Closing Date").
(d) Deliveries at the Closing. At the Closing, (i) CHDM will deliver to
I-trax and Acquisition the various certificates, instruments, and documents
referred to in Section 6(a) below, (ii) I-trax and Acquisition will deliver to
CHDM the various certificates, instruments, and documents referred to in Section
6(b) below, (iii) Acquisition and CHDM will file with the Secretary of State of
the State of Delaware a Delaware Certificate of Merger in the form attached
hereto as Exhibit A (the "First Merger Certificate of Merger"); (iv) I-trax will
deliver the Merger Consideration in the manner provided in Section 2(e) and 2(f)
below and (v) I-trax will comply with its covenant under Section 7(c) below
concerning filing a registration statement on Form S-3 covering I-trax Common
Shares issued pursuant to the Merger and the I-trax Common Shares issuable upon
conversion of I-trax Preferred Shares issued pursuant to the Merger.
(e) Effect of First Merger.
(i) General. The First Merger shall become effective at the time
(the "Effective Time") CHDM and Acquisition file the First Merger
Certificate of Merger with the Secretary of State of the State of
Delaware. The First Merger shall have the effects set forth in the
Delaware General Corporation Law. I-trax may, at any time after the
Effective Time, take any action (including executing and delivering any
document) in the name and on behalf of either Acquisition or CHDM in
order to carry out and effectuate the transactions contemplated by this
Agreement.
(ii) Certificate of Incorporation. The Certificate of
Incorporation of the First Merger Surviving Corporation shall be the
Certificate of Incorporation of Acquisition in effect immediately
before the Effective Time without any modification or amendment as a
result of the First Merger.
(iii) Bylaws. The Bylaws of the First Merger Surviving
Corporation shall be the Bylaws of Acquisition in effect immediately
before the Effective Time without any modification or amendment as a
result of the First Merger.
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(iv) Directors and Officers. The directors and officers listed on
Exhibit B attached hereto shall become the directors and officers of
the First Merger Surviving Corporation at and as of the Effective Time.
(v) Conversion of CHDM Shares. At and as of the Effective Time:
(A) each outstanding CHDM Share (other than any Dissenting Share or
CHDM Share held in treasury) shall be converted into the right to
receive: (1) the number of I-trax Common Shares obtained by dividing
the Common Shares Consideration by the number of CHDM Shares Deemed
Outstanding, rounded, with respect to each CHDM Stockholder, to the
nearest whole I-trax Common Share; (2) the number of I-trax Preferred
Shares obtained by dividing the Preferred Shares Consideration by the
number of CHDM Shares Deemed Outstanding, rounded, with respect to each
CHDM Stockholder, to the nearest one-hundredth of one I-trax Preferred
Share and (3) the amount of cash (without interest) determined by
dividing the Cash Consideration by the number of CHDM Shares Deemed
Outstanding rounded, with respect to each CHDM Stockholder, to the
nearest cent, subject, however, to any withholding described in Section
2(e)(vii) below; (B) each Dissenting Share shall be converted into the
right to receive payment from the First Merger Surviving Corporation
with respect thereto in accordance with the provisions of Delaware
General Corporation Law and Section 2(e)(vii) below; and (C) each CHDM
Share held in treasury shall be canceled. No CHDM Share shall be deemed
to be outstanding or to have any rights other than those set forth in
this Section 2(e)(v) after the Effective Time.
(vi) Conversion of CHDM Options. At and as of the Effective Time,
each outstanding option to purchase a CHDM Share will be converted into
an option to purchase the Merger Consideration divided by the CHDM
Shares Deemed Outstanding for an exercise price per CHDM Share equal to
the exercise price in effect immediately prior to the Effective Time.
Each such option as converted will be subject to the same terms and
conditions (including exercise rights, termination dates and
restrictions) as were applicable to such CHDM option at the Effective
Time; provided, however, that in the case of any CHDM option to which
Code Section 421 applies by reason of its qualification under any of
Code Sections 422-424, the exercise price and number of I-trax Common
Shares subject to such option shall be determined in a manner that
meets the requirements for "issuing or assuming a stock option in a
transaction to which Code Section 424(a) applies," within the meaning
of Code Section 424(a).
(vii) Tax Withholdings. I-trax will deduct and withhold, or cause
to be deducted or withheld, from the Merger Consideration deliverable
to any holder of (A) a CHDM Share that received such CHDM Share upon
the exercise of any CHDM option or (B) a CHDM option, an amount
required to be deducted and withheld with respect to the making of such
payment under the Code, or any provision of applicable state, local or
foreign Tax law. To the extent that amounts are so deducted and
withheld, such deducted and withheld amounts will be treated for all
purposes of this Agreement as having been paid to such holders in
respect of which such deduction and withholding was made.
(viii) Dissenting Shares. Notwithstanding any provision of this
Agreement to the contrary, CHDM Shares outstanding as of the Effective
Time and held by CHDM Stockholders who do not vote in favor of the
Merger and who demand in writing appraisal for such CHDM Shares in
accordance with Section 262 of the Delaware General Corporation Law
will not receive the Merger Consideration. Such CHDM Stockholders will
be entitled to receive payment of the appraised value of the CHDM
Shares held by them in accordance with Section 262 of the Delaware
General Corporation Law, except that all Dissenting Shares held by CHDM
Stockholders who fail to perfect or effectively withdraw or lose their
rights to appraisal of such Dissenting Shares under Section 262 of the
Delaware General Corporation Law will thereupon be deemed to have been
converted into and to have become exchangeable for, as of the Effective
Time, the right to receive Merger Consideration, without any interest
thereon, upon surrender, in the manner provided in Section 2(f) below,
of the stock certificate representing such stockholder's CHDM Shares.
The CHDM Representative shall give I-trax prompt notice of any demands
received by CHDM for appraisal of CHDM Shares and I-trax will have the
right to be informed of all negotiations and proceedings with respect
to such demands. Neither CHDM nor the CHDM Representative may, except
with the prior written consent of I-trax, make any payment with respect
to, or settle or make a binding offer to settle, any such demands.
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(ix) Conversion of Capital Stock of Acquisition. At and as of the
Effective Time, each share of common stock, $.001 par value per share,
of Acquisition shall be converted into one share of common stock,
without par value, of the First Merger Surviving Corporation.
(f) Procedure for Payment.
(i) At Closing, (A) CHDM will deliver to I-trax a certified list
of all record holders of outstanding CHDM Shares, including each such
holder's name, address and CHDM Share ownership, (B) each CHDM
Stockholder of record will deliver to I-trax a completed Letter of
Transmittal and Subscription Agreement in the form attached hereto as
Exhibit D together with the applicable stock certificates which
represented such holder's CHDM Shares, and (C) I-trax will deliver to
each CHDM Stockholder, by wire if requested by such CHDM Stockholder,
and otherwise by check or wire, for each CHDM Share owned of record by
such CHDM Stockholder, the pro rata cash portion of the Merger
Consideration as calculated pursuant to Section 2(e)(v) above (less any
withholding described in Section 2(e)(vii) above), and will cause the
Exchange Agent to deliver to each CHDM Stockholder the pro rata stock
portion of the Merger Consideration.
(ii) I-trax will not pay any dividend or make any distribution on
I-trax Common Shares or I-trax Preferred Shares (with a record date at
or after the Effective Time) to any record holder of outstanding CHDM
Shares until the holder surrenders for exchange the certificates
representing the holder's CHDM Shares. I-trax instead will pay the
dividend or make the distribution to the Exchange Agent in trust for
the benefit of such the holder pending surrender and exchange. No
holder of outstanding CHDM Shares will be entitled to any interest or
earnings on the dividend or distribution pending receipt.
(iii) I-trax may cause the Exchange Agent to return any I-trax
Common Shares, I-trax Preferred Shares and dividends and distributions
thereon remaining unclaimed one hundred eighty (180) days after the
Effective Time, and thereafter each remaining record holder of
outstanding CHDM Shares shall be entitled to look to I-trax (subject to
abandoned property, escheat, and other similar laws) as a general
creditor thereof with respect to I-trax Common Shares, I-trax Preferred
Shares and dividends and distributions thereon to which such holder is
entitled upon surrender of the holder's certificates representing
former CHDM Shares.
(iv) I-trax shall pay all charges and expenses of the Exchange
Agent.
(g) Closing of Transfer Records. After the Effective Time, transfers of
CHDM Shares shall not be made on the stock transfer books of the First Merger
Surviving Corporation.
(h) Closing Escrow. At Closing, the Parties will establish an escrow
with the Escrow Agent for Four Million (4,000,000) I-trax Common Shares (the
"Escrow Shares") that will be delivered at the Effective Time by I-trax to the
Escrow Agent. The Escrow Shares are in addition to the I-trax Common Shares
deliverable to the CHDM Stockholders at Closing under Section 2(b). The Escrow
Agent shall hold and distribute the Escrow Shares in accordance with the terms
of this Section 2(h), Section 2(i) and the escrow agreement (the "Escrow
Agreement") substantially in the form of Exhibit E attached hereto to be entered
into at the Closing by I-trax, the CHDM Representative and the Escrow Agent.
(i) Earn Out. On the earlier of (X) two business days following the
date on which I-trax files its annual report on Form 10-K or Form 10-KSB for the
year ended December 31, 2004, or (Y) April 30, 2005, I-trax and the CHDM
Representative shall cause the Deliverable Escrow Shares (as defined below) to
be delivered to the CHDM Stockholders in accordance with the Escrow Agreement if
CHDM (prior to the Effective Time) and First Merger Surviving Corporation or
Acquisition LLC, as applicable (after the Effective Time), record calendar year
2004 earnings before interest, taxes, depreciation, and amortization ("2004
EBITDA") of not less than $8,100,000. I-trax and the CHDM Representative shall
calculate 2004 EBITDA in accordance with the rules set forth in Exhibit F to
this Agreement. "Deliverable Escrow Shares" means that number of the Escrow
Shares equal to the product of (i) a fraction, the numerator of which is the
lesser of 2004 EBITDA or Nine Million Dollars ($9,000,000) and the denominator
of which is Nine Million Dollars ($9,000,000) multiplied by (ii) 4,000,000
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shares, less (A) any Escrow Shares released to I-trax pursuant to Section 8 and
(B) any Escrow Shares which are subject to a pending claim that has been made
against the Escrow Shares in accordance with Section 8 on or before August 31,
2004; provided, however, that any Escrow Shares subtracted from the Deliverable
Escrow Shares pursuant to clause (B) shall be deliverable to CHDM Stockholders
at a later date if such claim is ultimately resolved against I-trax. Any Escrow
Shares not delivered to CHDM Stockholders in accordance with this Section 2(i),
will be returned to I-trax and canceled.
(j) CHDM Representative as Limited Agent.
(i) At the Effective Time, CHDM Stockholders will be deemed to
have (A) directed I-trax to deliver to the Escrow Agent the Escrow
Shares in accordance with Section 2(h) above, (B) irrevocably appointed
Haywood D. Cochrane, Jr. as the CHDM Stockholders' exclusive agent to
act on the CHDM Stockholders' behalf with respect to any and all claims
under (U) Section 2(i) above, (V) the Escrow Shares and Escrow
Agreement, (W) Section 8 below, (X) the obligation of I-trax to keep
the Form S-3 effective for two years, (Y) the continuing obligation of
I-trax to report the Merger on all Tax returns and filings as a
Tax-Free Reorganization, and/or (Z) the representations and warranties
of I-trax and Acquisition set forth in Section 3 below, and (C)
authorized the CHDM Representative to exercise any rights on behalf of
the CHDM Stockholders under the Escrow Agreement. In such
representative capacity, the CHDM Representative will take, and the
CHDM Stockholders agree that the CHDM Representative will take, any and
all actions which he believes are necessary or appropriate under this
Agreement for and on behalf of the CHDM Stockholders, as fully as if
the CHDM Stockholders were acting on their own behalf, including
without limitation, defending all Third Party Claims, consenting to,
compromising or settling all Third Party Claims, conducting
negotiations with I-trax and its representatives regarding such Third
Party Claims, interacting with I-trax and the Escrow Agent under the
Escrow Agreement with respect to all matters arising under the Escrow
Agreement, taking any and all other actions specified in or
contemplated by this Agreement and engaging counsel, accountants or
other representatives in connection with the foregoing matters.
(ii) The CHDM Representative may resign at any time by providing
written notice to I-trax and the CHDM Stockholders, and may appoint a
successor CHDM Representative by providing notice of such appointment
to I-trax and the CHDM Stockholders before the effective time of his
resignation. In the event of the death or incapacity of the CHDM
Representative, or the resignation of the CHDM Representative without
his appointing a successor, a successor representative will be
appointed by an affirmative vote or written consent of the holders of
the majority of the CHDM Shares outstanding as of the Closing Date at a
meeting of such holders called for such purpose or in an action by
written consent without a meeting. The CHDM Representative may also be
removed and replaced by the vote or written consent of the holders of a
majority of the CHDM Shares outstanding as of the Closing Date. A
meeting for removal or replacement of the CHDM Representative may be
called by any three members of the CHDM Board of Directors as it
existed immediately prior to the First Merger.
(iii) In connection with his duties hereunder, the CHDM
Representative, in his capacity as such, shall be protected in acting
or refraining from acting upon any written notice, request, consent,
certificate, order, affidavit, letter, telegram or other document
furnished to him hereunder and believed by him to be genuine and to
have been signed or sent by the proper party or parties, and the CHDM
Representative shall not be liable for anything he may do or refrain
from doing in connection with his duties hereunder, except as a result
of his own gross negligence, willful misconduct or bad faith. The CHDM
Representative may consult counsel and shall be protected in respect of
any action, claim or proceeding brought against the CHDM Representative
by a CHDM Stockholder if the CHDM Representative took or omitted taking
action in good faith on the advice of such counsel.
(iv) CHDM Stockholders, by adopting this Agreement, shall be
deemed to have agreed jointly and severally to indemnify the CHDM
Representative from and against the entirety of any Adverse
Consequences the CHDM Representative may suffer resulting from, arising
out of, relating to, in the nature of, or caused by his serving as the
CHDM Representative under this Agreement. Without limiting the
generality of the foregoing, should the CHDM Representative incur any
legal, accounting, arbitrator or other professional fees on behalf of
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the CHDM Stockholders in connection with determination of the earn-out
or asserting or defending claims arising out of the representations and
warranties or other provisions of the Merger Agreement, each Person who
holds CHDM Shares immediately prior to the First Merger shall pay its
pro rata share of such expenses, and shall, if so requested by the CHDM
Representative, advance such funds as the CHDM may reasonably request
for that purpose; provided, that in no case, shall a former CHDM
Stockholder be required to pay under this provision an amount in excess
of the aggregate Merger Consideration received by such CHDM
Stockholder. Should any CHDM Stockholder fail to meet its obligation
under this Section 2(j)(iv), the CHDM Representative shall be entitled
to advance funds and/or borrow funds from other CHDM Stockholders, and
to repay the amount so advanced, with interest at 10% per year, at the
time of distribution of the Escrow Shares, from the Escrow Shares that
would otherwise be distributed to the defaulting CHDM Stockholder.
(k) Effect of Second Merger.
(i) General. The Second Merger shall become effective (the
"Second Merger Effective Time") at the time the First Merger Surviving
Corporation and Acquisition LLC file the Second Merger Certificate of
Merger in the form attached hereto as Exhibit G (the "Second Merger
Certificate of Merger") with the Secretary of State of the State of
Delaware. The Second Merger shall have the effects set forth in the
Delaware General Corporation Law. I-trax may, at any time after the
Second Merger Effective Time, take any action (including executing and
delivering any document) in the name and on behalf of either
Acquisition or Acquisition LLC in order to carry out and effectuate the
transactions contemplated by this Agreement.
(ii) Operating Agreement. The Operating Agreement of Acquisition
LLC in effect at and as of the Second Merger Effective Time will be the
Operating Agreement of the Second Merger Surviving Company without any
modification or amendment as a result of the Second Merger.
(iii) Certificate of Formation. The Certificate of Formation of
Acquisition LLC in effect at and as of the Second Merger Effective Time
will be the Certificate of Formation of the Second Merger Surviving
Company without any modification or amendment as a result of the Second
Merger.
(iv) Officers. The officers listed on Exhibit B attached hereto
shall become the officers of the Second Merger Surviving Company at and
as of the Second Merger Effective Time.
(v) Cancellation of First Merger Surviving Corporation Stock. At
the Second Merger Effective Time, all outstanding shares of stock of
the First Merger Surviving Corporation shall be canceled.
(vi) Second Merger Surviving Company Interests. At the Second
Merger Effective Time, each limited liability company interest in
Acquisition LLC shall be converted into a like interest of the Second
Merger Surviving Company.
3. Representations and Warranties of I-trax and Acquisition. I-trax and
Acquisition, jointly and severally, represent and warrant to CHDM that the
statements contained in this Section 3 are correct and complete as of the date
of this Agreement and will be correct and complete as of the Closing Date (as
though made then and as though the Closing Date were substituted for the date of
this Agreement throughout this Section 3), except as set forth in the disclosure
schedule accompanying this Agreement (the "I-trax Disclosure Schedule"). The
I-trax Disclosure Schedule will be arranged in paragraphs corresponding to the
numbered and lettered paragraphs contained in this Section 3.
(a) Organization.
(i) Each of I-trax and its Subsidiaries is a corporation or
limited liability company validly existing and in good standing under
the laws of the State of Delaware and has all requisite corporate power
and authority to own, lease and operate its properties and to carry on
its business as it is now being conducted. Each of I-trax and its
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Subsidiaries is duly authorized to conduct business and is in good
standing under the laws of each jurisdiction where such qualification
is required, except for failures to be so duly authorized or good
standing that would not, individually or in the aggregate, have a
I-trax Material Adverse Effect. Each of I-trax and its Subsidiaries has
full corporate power and authority and all licenses, permits, and
authorizations necessary to carry on the businesses in which it is
engaged and to own and use the properties owned and used by it. I-trax
has delivered to CHDM complete and correct copies of its and its
Subsidiaries' charter, bylaws and other organizational documents and
all amendments thereto to the date hereof. The minute books
(containing, as the case may be, the records of meetings of the
stockholders, the board of directors, and any committees of the board
of directors), the stock certificates and the stock record of I-trax
are correct and complete. I-trax is not in default under or in
violation of any provision of its organizational documents, charter or
bylaws.
(ii) Acquisition is a corporation, duly organized, validly
existing and in good standing under the laws of the State of Delaware.
Acquisition has delivered to CHDM complete and correct copies of its
charter, bylaws and other organizational documents and all amendments
thereto to the date hereof. The minute books (containing, as the case
may be, the records of meetings of the stockholders, the board of
directors, and any committees of the board of directors), the stock
certificates and the stock record of Acquisition are correct and
complete. Acquisition is not in default under or in violation of any
provision of its organizational documents, charter or bylaws.
(b) Authorization of Transaction. Each of I-trax and Acquisition has
full power and authority (including full corporate power and authority) to
execute and deliver this Agreement and to perform its obligations hereunder;
provided, however, that I-trax cannot consummate the Merger unless and until it
receives the Requisite Stockholder Approval. This Agreement constitutes the
valid and legally binding obligation of I-trax and Acquisition, enforceable in
accordance with its terms. Other than filings required by the Delaware General
Corporation Law, Regulation D under the Securities Act, blue sky state filings
and filings required by means the Hart-Scott-Rodino Act, none of I-trax and
Acquisition need give any notice to, make any filing with, or obtain any
authorization, consent, or approval of any government or governmental agency in
order to consummate the transactions contemplated by this Agreement.
(c) Capitalization.
(i) The entire authorized capital stock of I-trax consists of
102,000,000 shares, of which 100,000,000 shares are designated as
common stock, par value $0.001 per share, of which 13,766,817 shares
are issued and outstanding on the date hereof, and of which 2,000,000
shares are designated as preferred stock, par value $0.001 per share,
none of which is issued or outstanding. All of the outstanding shares
of common stock are duly authorized, validly issued, fully paid and
nonassessable and are not subject to any preemptive rights. All I-trax
Common Shares and I-trax Preferred Shares to be issued in the First
Merger in accordance with this Agreement, and I-trax Common Shares
issuable upon conversion of I-trax Preferred Shares will be, when so
issued in accordance with this Agreement or the I-trax Preferred
Designations, duly authorized, validly issued, fully paid and
nonassessable and not subject to any preemptive rights. A sufficient
number of I-trax Common Shares is reserved to permit the conversion of
all I-trax Preferred Shares to be issued in the First Merger in
accordance with this Agreement and the I-trax Preferred Designations.
Except as set forth in Section 3(c) of the I-trax Disclosure Schedule,
there are no outstanding options, warrants or rights to purchase or
acquire from I-trax any capital stock of I-trax, there are no existing
registration covenants with I-trax with respect to outstanding I-trax
Common Shares, and there are no convertible securities or other
contracts, commitments, agreements, understandings, arrangements or
restrictions by which I-trax is bound to issue any additional shares of
its capital stock or other securities.
(ii) The entire authorized capital stock of Acquisition consists
of 1,000 shares of common stock, par value $.001 per share, of which
100 shares are issued and outstanding and owned by I-trax. All of the
outstanding shares of common stock, par value $0.001 per share, of
Acquisition are duly authorized, validly issued, fully paid and
nonassessable and not subject to any preemptive rights.
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(d) Filings with the SEC. I-trax has made all filings with the SEC that
it has been required to make since January 1, 2000 under the Securities Act and
the Exchange Act (collectively the "Public Reports") in accordance within the
time requirements of the Securities Act and the Exchange Act and the rules and
regulations promulgated thereunder. Each of the Public Reports has complied with
the Securities Act and the Exchange Act and the rules and regulations of the SEC
promulgated thereunder applicable to such Public Reports in all material
respects. None of the Public Reports, as of its applicable date, contained any
untrue statement of a material fact or omitted to state a material fact
necessary in order to make the statements made therein, in light of the
circumstances under which they were made, not misleading. I-trax has advised
CHDM that a correct and complete copy of each Public Report (together with all
exhibits and schedules thereto and as amended to date) is available at
http://www.sec.com, a website maintained by the SEC where CHDM Stockholders may
view such Public Reports. I-trax is currently eligible to register on Form S-3
the resale of I-trax Common Shares issuable in the Merger and I-trax Common
Shares issuable upon conversion of the I-trax Preferred Shares issuable in the
Merger.
(e) Financial Statements. The consolidated financial statements of
I-trax and its Subsidiaries (including, if applicable, the notes thereto)
included in the Public Reports have been prepared in accordance with GAAP
applied on a consistent basis throughout the periods covered thereby (except as
may be indicated in the notes thereto or, in the case of unaudited financial
statements, as permitted by Form 10-QSB of the SEC), comply as to form in all
material respects with applicable accounting requirements and the published
rules and regulations of the SEC with respect thereto, present fairly the
results of operations of I-trax and its Subsidiaries for such periods (subject
to normal year-end adjustments, which will not be material individually or in
the aggregate) and the financial condition of I-trax and its Subsidiaries at the
end of such periods, are correct and complete and are consistent with the books
and records of I-trax and its Subsidiaries (which books and records are correct
and complete).
(f) Events Subsequent to November 14, 2003. Except as disclosed in the
Public Reports and in Section 3(f) of the I-trax Disclosure Schedule, since
November 14, 2003 there has not been any: (i) change, event, condition
(financial or otherwise) or state of circumstances or facts in the business,
financial condition or results of operations of I-trax and its Subsidiaries
taken as a whole, which has had or could reasonably be expected to have an
I-trax Material Adverse Effect; (ii) amendment to the Certificate of
Incorporation of I-trax; (iii) payment of dividends or changes in the capital
structure of I-trax; or (iv) other transactions material to I-trax and its
Subsidiaries taken as a whole. Except as disclosed in Section 3(f) of the I-trax
Disclosure Schedule, since November 14, 2003, I-trax has conducted its, and has
caused its Subsidiaries to conduct their, business and affairs only in the
Ordinary Course of Business. Since November 14, 2003 and except as disclosed in
Public Reports filed after November 14, 2003 or in Section 3(f) of the I-trax
Disclosure Schedule:
(i) None of I-trax and its Subsidiaries has sold, leased,
transferred, or assigned any of its assets, tangible or intangible
outside the Ordinary Course of Business;
(ii) None of I-trax and its Subsidiaries has entered into any
agreement, contract, lease, or license (or series of related
agreements, contracts, leases, and licenses) involving more than
$50,000;
(iii) No party (including I-trax or its Subsidiaries) has
accelerated, terminated, modified, or canceled any agreement, contract,
lease, or license (or series of related agreements, contracts, leases,
and licenses) involving more than $50,000 to which I-trax is a party or
by which it is bound;
(iv) None of I-trax and its Subsidiaries has granted any Security
Interest on any of its assets, tangible or intangible;
(v) None of I-trax and its Subsidiaries has made any capital
expenditure (or series of related capital expenditures) involving more
than $50,000;
(vi) None of I-trax and its Subsidiaries has made any capital
investment in, any loan to, or any acquisition of the securities or
assets of, any other Person (or series of related capital investments,
loans, and acquisitions) involving more than $50,000;
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(vii) None of I-trax and its Subsidiaries has issued any note,
bond, or other debt security or created, incurred, assumed, or
guaranteed any indebtedness for borrowed money or capitalized lease
obligation either involving more than $25,000 singly or $50,000 in the
aggregate;
(viii) None of I-trax and its Subsidiaries has delayed or
postponed the payment of accounts payable and other Liabilities outside
the Ordinary Course of Business;
(ix) None of I-trax and its Subsidiaries has canceled,
compromised, waived or released any right or claim (or series of
related rights and claims) involving more than $50,000;
(x) None of I-trax and its Subsidiaries has granted any license
or sublicense of any rights under or with respect to any Intellectual
Property outside the Ordinary Course of Business;
(xi) There has been no change made or authorized in the charter,
bylaws or other organizational documents of I-trax or any Subsidiary;
(xii) None of I-trax and its Subsidiaries has issued, sold, or
otherwise disposed of any of its capital stock, or granted any options,
warrants, or other rights to purchase or obtain (including upon
conversion, exchange, or exercise) any of its capital stock, other than
options to employees granted in the Ordinary Course of Business all of
which are disclosed in Section 3(c) of the I-trax Disclosure Schedule;
(xiii) None of I-trax and its Subsidiaries has declared, set
aside, or paid any dividend or made any distribution with respect to
its capital stock (whether in cash or in kind) or redeemed, purchased,
or otherwise acquired any of its capital stock;
(xiv) None of I-trax and its Subsidiaries has experienced any
damage, destruction, or loss (whether or not covered by insurance) to
its property except where such damage, destruction or loss did not
cause an I-trax Material Adverse Effect;
(xv) None of I-trax and its Subsidiaries has made any loan to, or
entered into any other transaction with, any of its directors,
managers, officers, and employees;
(xvi) None of I-trax and its Subsidiaries has entered into any
employment contract or collective bargaining agreement, written or
oral, or modified the terms of any existing such contract or agreement;
(xvii) None of I-trax and its Subsidiaries has granted any
increase in the base compensation or made any other change in
employment terms of any of its directors, managers, officers, and
employees;
(xviii) None of I-trax and its Subsidiaries has adopted, amended,
modified, or terminated any bonus, profit-sharing, incentive,
severance, or other plan, contract, or commitment for the benefit of
any of its directors, officers, and employees (or taken any such action
with respect to any other Employee Welfare Benefit Plan or Employee
Pension Benefit Plan);
(xix) None of I-trax and its Subsidiaries has made or pledged to
make any charitable or other capital contribution;
(xx) There has not been any other occurrence, event, incident,
action, failure to act, or transaction outside the Ordinary Course of
Business involving I-trax or its Subsidiaries which would have an
economic impact of more than $50,000;
(xxi) None of I-trax and its Subsidiaries has agreed to do any of
the foregoing; and
(xxii) There has not been an I-trax Material Adverse Effect.
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(g) Noncontravention. Except as disclosed on Schedule 3(g) of the
I-trax Disclosure Schedule, neither the execution and the delivery of this
Agreement, nor the consummation of the transactions contemplated hereby, will
(i) violate any constitution, statute, regulation, rule, injunction, judgment,
order, decree, ruling, charge, or other restriction of any government,
governmental agency, or court to which any of I-trax or any of its Subsidiaries
is subject or any provision of their respective certificates of incorporation or
bylaws or (ii) conflict with, result in a breach of, constitute a default under,
result in the acceleration of, create in any party the right to accelerate,
terminate, modify, or cancel, or require any notice under any agreement,
contract, lease, license, instrument, or other arrangement to which any of
I-trax or any of its Subsidiaries is a party or by which it is bound or to which
any of its assets is subject (or result in the imposition of any Security
Interest on any of its assets), excluding from the foregoing clauses (i) and
(ii) violations or conflicts that, individually or in the aggregate, would not
have an I-trax Material Adverse Effect. Other than in connection with the
provisions of the Delaware General Corporation Law, the Securities Act, the
state securities laws, and the Hart-Scott-Rodino Act none of I-trax and its
Subsidiaries needs to give any notice to, make any filing with, or obtain any
authorization, consent, or approval of any government or governmental agency in
order for the Parties to consummate the transactions contemplated by this
Agreement.
(h) Brokers' Fees. Except as disclosed on Schedule 3(h) of the I-trax
Disclosure Schedule, none of I-trax, its Subsidiaries or I-trax Stockholders,
has or will have any Liability or obligation to pay any fees or commissions to
any broker, finder, or agent with respect to the transactions contemplated by
this Agreement.
(i) Tax Matters.
(i) Each of I-trax and its Subsidiaries has filed all Tax Returns
that it was required to file. All such Tax Returns were correct and
complete in all material respects. All Taxes owed by any of I-trax and
its Subsidiaries (whether or not shown on any Tax Return) have been
paid. No claim has ever been made by an Authority in a jurisdiction
where one of I-trax and its Subsidiaries does not file Tax Returns that
it is or may be subject to taxation by that jurisdiction. There are no
Security Interests on any of the assets of I-trax and its Subsidiaries
that arose in connection with any failure (or alleged failure) to pay
any Tax.
(ii) Each of I-trax and its Subsidiaries has withheld and paid
all Taxes required to have been withheld and paid in connection with
amounts paid or owing to any employee, independent contractor,
creditor, stockholder, or other third party.
(iii) No director or officer (or employee responsible for Tax
matters) of I-trax or its Subsidiaries has been informed formally or
informally or has any reason to believe any Authority may assess
additional Taxes for any period for which Tax Returns have been filed
or is aware of any state of facts which could give rise to any claim,
audit, action, suit, proceeding, or investigation which respect to any
Tax for which I-trax could be liable. Schedule 5(i)(iii) of the I-trax
Disclosure Schedule lists all Federal, state, local, and foreign income
Tax Returns filed with respect to I-trax and its Subsidiaries for
taxable periods ended on or after December 31, 2000, indicates those
Tax Returns that have been audited, and indicates those Tax Returns
that currently are the subject of audit. I-trax has delivered to CHDM
correct and complete copies of all Federal income Tax Returns,
examination reports, and statements of deficiencies assessed against or
agreed to by I-trax or any of its Subsidiaries for calendar year 2000
through the Closing Date.
(iv) None of I-trax and its Subsidiaries has waived any statute
of limitations in respect of Taxes or agreed to any extension of time
with respect to a Tax assessment or deficiency.
(v) None of I-trax and its Subsidiaries has made any payments, is
not obligated to make any payments, or is a party to any agreement that
under certain circumstances could obligate it to make any payments that
will not be deductible under Code Section 280G. None of I-trax and its
Subsidiaries has been a United States real property holding corporation
within the meaning of Code Section 897(c)(2) during the applicable
period specified in Code Section 897(c)(1)(A)(ii). None of I-trax and
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its Subsidiaries is a party to any Tax allocation or sharing agreement.
None of I-trax and its Subsidiaries (A) has been a member of an
Affiliated Group filing a consolidated Federal income Tax Return (other
than a group the common parent of which was I-trax) or (B) has any
Liability for the Taxes of any Person (other than I-trax) under
Treasury Regulation Section 1.1502-6 (or any similar provision of
state, local, or foreign law), as a transferee or successor, by
contract, or otherwise.
(vi) The unpaid Taxes of I-trax and its Subsidiaries (A) did not,
as of the fiscal quarter ended September 30, 2003, exceed the reserve
for Tax Liability of I-trax and its Subsidiaries (rather than any
reserve for deferred Taxes established to reflect timing differences
between book and Tax income) set forth on the face of I-trax and its
Subsidiaries consolidated balance sheet at September 30, 2003 (rather
than in any notes thereto) and (B) do not exceed that reserve as
adjusted for the passage of time through the Closing Date in accordance
with the past custom and practice of I-trax and its Subsidiaries in
filing their Tax Returns.
(j) Subsidiaries. Section 3(j) of the I-trax Disclosure Schedule sets
forth for each Subsidiary of I-trax (i) its name and jurisdiction of
incorporation or formation, (ii) the type of entity, (iii) the number of shares
or of authorized capital stock of each class of its capital stock or other
equity interests, (iv) the number of issued and outstanding shares of each class
of its capital stock or other equity interests, and (v) the number of shares of
its capital stock or other equity interests held in treasury. All of the issued
and outstanding shares of capital stock or other equity interests of each
Subsidiary of I-trax have been duly authorized and are validly issued, fully
paid, and nonassessable. I-trax holds of record and owns beneficially all of the
outstanding shares or other equity interests of each Subsidiary of I-trax, free
and clear of any restrictions on transfer (other than restrictions under the
Securities Act and state securities laws), Taxes, Security Interests, options,
warrants, purchase rights, contracts, commitments, equities, claims, and
demands.
(k) Litigation. Section 3(k) of the I-trax Disclosure Schedule sets
forth each instance in which any of I-trax, any of its Subsidiaries or any of
their directors or officers in their capacity as such: (i) (A) is subject to any
outstanding injunction, judgment, order, decree, ruling, or charge or (B) is a
party or, to the Knowledge of I-trax, is threatened to be made a party to any
action, suit, proceeding, hearing, or investigation of, in, or before any court
or quasi-judicial or administrative agency of any Federal, state, local, or
foreign jurisdiction or before any arbitrator; and (ii) identifies if such
instance, including associated litigation costs, is covered by insurance. To the
Knowledge of I-trax, and unless otherwise disclosed on Section 3(k) of the
I-trax Disclosure Schedule, none of the actions, suits, proceedings, hearings
and investigations set forth in Section 3(k) of the I-trax Disclosure Schedule
could result in a I-trax Material Adverse Effect. None of I-trax, any of its
Subsidiaries or directors or officers (or employees with responsibility for
litigation matters) of I-trax or any of its Subsidiaries has any reason to
believe that any such action, suit, proceeding, hearing, or investigation may be
brought or threatened against I-trax.
(l) Legal Compliance. Each of I-trax, its Subsidiaries and their
respective predecessors and Affiliates has complied with all applicable laws
(including rules, regulations, codes, plans, injunctions, judgments, orders,
decrees, rulings, and charges thereunder) of Federal, state, local, and foreign
governments (and all agencies thereof) except where failure to comply with such
laws would not, individually or in the aggregate, have an I-trax Material
Adverse Effect, and no action, suit, proceeding, hearing, investigation, charge,
complaint, claim, demand, or notice has been filed or commenced against any of
them alleging any failure so to comply.
(m) Title to Assets. Each of I-trax and its Subsidiaries has good and
marketable title to, or a valid leasehold interest in, the properties and assets
used by it and located on its premises or, except for properties and assets
disposed of in the Ordinary Course of Business since September 30, 2003, shown
on the of I-trax and its Subsidiaries' consolidated balance sheet at September
30, 2003, free and clear of all Security Interests (other than Security
Interests disclosed on Section 3(r) of the I-trax Disclosure Schedule), except
where failure to have such marketable title or valid leasehold interest,
individually or in the aggregate, would not have an I-trax Material Adverse
Effect.
(n) Undisclosed Liabilities. None of I-trax and its Subsidiaries has
any Liability (and there is no Basis for any present or future action, suit,
proceeding, hearing, investigation, charge, complaint, claim, or demand against
it giving rise to any Liability), except for (i) Liabilities set forth on the
face of I-trax and its Subsidiaries' consolidated balance sheet at September 30,
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2003 (rather than in any notes thereto), (ii) Liabilities which have arisen
after September 30, 2003 in the Ordinary Course of Business (none of which
results from, arises out of, relates to, is in the nature of, or was caused by
any breach of contract, breach of warranty, tort, infringement, or violation of
law), and (iii) Liabilities which, individually or in the aggregate, do not
constitute an I-trax Material Adverse Effect.
(o) Real Property.
(i) None of I-trax and its Subsidiaries owns any real property.
(ii) Section 3(o)(ii) of the I-trax Disclosure Schedule lists and
describes briefly all real property leased or subleased to I-trax or
its Subsidiaries. I-trax has delivered to I-trax correct and complete
copies of the leases and subleases listed in Section 3(o)(ii) of the
I-trax Disclosure Schedule (as amended to date). With respect to each
lease and sublease listed in Section 3(o)(ii) of the I-trax Disclosure
Schedule: (A) the lease or sublease is in full force and effect; (B)
the lease or sublease will continue to be in full force and effect on
identical terms immediately following the consummation of the
transactions contemplated by this Agreement; (C) to the Knowledge of
I-trax, no party to the lease or sublease is in breach or default, and
no event has occurred which, with notice or lapse of time, would
constitute a breach or default or permit termination, modification, or
acceleration thereunder; (D) the Knowledge of I-trax, no party to the
lease or sublease has repudiated any provision thereof; (E) there are
no disputes, oral agreements, or forbearance programs in effect as to
the lease or sublease; (F) with respect to each sublease, to the
Knowledge of I-trax, the representations and warranties set forth in
subsections (A) through (E) above are true and correct with respect to
the underlying lease; (G) none of I-trax and its Subsidiaries has
assigned, transferred, conveyed, mortgaged, deeded in trust, or
encumbered any interest in the leasehold or subleasehold created
thereunder; and (H) to the Knowledge of I-trax, all facilities leased
or subleased thereunder have received all approvals of Authorities
(including licenses and permits) required in connection with the
operation thereof and have been operated and maintained in accordance
with applicable laws, rules, and regulations.
(p) Intellectual Property. Section 3(p) of the Disclosure Schedule
lists all registrations and applications for patents, trademarks and copyrights
by I-trax and all Universal Resource Locators material to the conduct of the
business of I-trax and its Subsidiaries as now conducted. Section 3(p) of the
Disclosure Schedule also identifies each trade name or unregistered trademark or
service mark used by I-trax and its Subsidiaries in connection with any of their
businesses. To the Knowledge of I-trax, each of I-trax and its Subsidiaries has
all right, title and interest in, or a valid and binding license to use, the
Intellectual Property necessary or required to conduct the business of I-trax
and its Subsidiaries as now conducted. None of I-trax and its Subsidiaries is in
default (nor would it be in default but for the giving of notice or lapse of
time or both) under any license, sublicense, agreement, or permission to use
such Intellectual Property and, to the Knowledge of I-trax, there is no
threatened dispute or disagreement with respect to any such license, sublicense,
agreement, or permission except for such defaults, disputes and disagreements
which, individually or in the aggregate, would not have an I-trax Material
Adverse Effect. To the Knowledge of I-trax, such Intellectual Property is not
being infringed or misappropriated by any third party and no such claims have
been brought against any third party. To the Knowledge of I-trax, each item of
Intellectual Property owned or used by I-trax and its Subsidiaries immediately
prior to the Closing will be owned or available for use by First Merger
Surviving Corporation and its Subsidiaries on identical terms and conditions
immediately subsequent to the Closing. To the Knowledge of I-trax, none of
I-trax and its Subsidiaries is infringing any Intellectual Property of any third
party and no litigation is pending and no notice or other claim in writing has
been received by I-trax or its Subsidiaries alleging any such infringement.
Except as set forth in Section 3(p) of the Disclosure Schedule, to the Knowledge
of I-trax, there are no claims against I-trax or any of its Subsidiaries
asserting the invalidity, misuse or unenforceability of any Intellectual
Property. To the Knowledge of I-trax, none of the present or former executive
officers or employees of I-trax or any of its Subsidiaries has any claims
whatsoever (whether direct, indirect or contingent) of right, title or interest
in or to any of the Intellectual Property of I-trax or any of its Subsidiaries.
To the Knowledge of I-trax, none of the present or former executive officers or
employees of I-trax or any of its Subsidiaries are precluded by an agreement
from engaging in the business of I-trax as now conducted.
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(q) Tangible Assets. I-trax owns or leases all buildings, machinery,
equipment, and other tangible assets necessary for the conduct of its businesses
as currently conducted and as currently proposed to be conducted except where
failure to own or lease such assets, individually or in the aggregate, would not
have an I-trax Material Adverse Effect. Each such tangible asset is free from
defects (patent and latent), has been maintained in accordance with normal
industry practice, is in good operating condition and repair (subject to normal
wear and tear), and is suitable for the purposes for which it is used and is
proposed to be used except where such defects would not, individually or in the
aggregate, have an I-trax Material Adverse Effect.
(r) Contracts. Except as executed in connection with the transactions
contemplated herein, Section 3(r) of the I-trax Disclosure Schedule lists the
following contracts and other agreements to which I-trax or any of its
Subsidiaries is a party:
(i) any agreement (or group of related agreements) for the lease
of personal property to or from any Person providing for lease payments
in excess of $50,000 per annum;
(ii) any agreement (or group of related agreements) for the
purchase of raw materials, commodities, supplies, products, or other
personal property, or for the receipt of services, the performance of
which will extend over a period of more than one year, result in a
material loss to I-trax or any of Subsidiaries or involve consideration
in excess of $50,000;
(iii) any agreement (or group of related agreements) for the sale
of raw materials, commodities, supplies, products, or other personal
property, or for the furnishing of services, the performance of which
will extend over a period of more than one year, result in a material
loss to I-trax or any of Subsidiaries or involve consideration in
excess of $50,000;
(iv) any agreement concerning a partnership or joint venture;
(v) any agreement (or group of related agreements) under which it
has created, incurred, assumed, or guaranteed any indebtedness for
borrowed money, or any capitalized lease obligation, in excess of
$50,000 or under which it has granted a Security Interest on any of its
assets, tangible or intangible;
(vi) any agreement concerning confidentiality or noncompetition;
(vii) any agreement with any of the I-trax Stockholders or any of
their Affiliates (other than I-trax);
(viii) any profit sharing, stock option, stock purchase, stock
appreciation, deferred compensation, severance, or other plan or
arrangement for the benefit of its current or former directors,
officers, and employees;
(ix) any collective bargaining agreement;
(x) any agreement for the employment of any individual on a
full-time, part-time, consulting, or other basis providing annual
compensation in excess of $100,000 or providing severance benefits;
(xi) any agreement under which it has advanced or loaned any
amount to any of its directors, officers, and employees outside the
Ordinary Course of Business;
I-trax has delivered to I-trax a correct and complete copy of each agreement
listed in Section 3(r) of the I-trax Disclosure Schedule (as amended to date)
and a written summary setting forth the terms and conditions of each oral
agreement referred to in Section 3(r) of the I-trax Disclosure Schedule. With
respect to each such agreement: (A) the agreement is in full force and effect;
A-21
(B) the agreement will continue to be in full force and effect on identical
terms immediately following the consummation of the transactions contemplated
hereby; (C) I-trax, its Subsidiaries and, to the Knowledge of I-trax, the other
parties thereto, are not in breach or default, and, to the Knowledge of I-trax,
no event has occurred which with notice or lapse of time would constitute a
breach or default, or permit termination, modification, or acceleration, under
the agreement; and (D) to the Knowledge of I-trax, no party has repudiated any
provision of the agreement.
(s) Notes and Accounts Receivable. Section 3(s) of the I-trax
Disclosure Schedule sets a list of all notes and accounts receivable of I-trax
and its Subsidiaries. All such notes and accounts receivable of I-trax and its
Subsidiaries are reflected properly on their books and records, are valid
receivables subject to no setoffs or counterclaims, are current and collectible,
and will be collected in accordance with their terms at their recorded amounts,
subject only to the reserve for bad debts set forth on the face of I-trax and
its Subsidiaries consolidated balance sheet at September 30, 2003 (rather than
in any notes thereto) as adjusted for the passage of time through the Closing
Date in accordance with the past custom and practice of I-trax and its
Subsidiaries, except where the validity and collection of such accounts
receivables and any failure to properly record such notes and accounts
receivables would not, individually or in the aggregate, have an I-trax Material
Adverse Effect.
(t) Insurance.
(i) Section 4(t) of the I-trax Disclosure Schedule sets forth the
following information with respect to each insurance policy (including
policies providing property, casualty, liability, and workers'
compensation coverage and bond and surety arrangements) to which I-trax
or any of its Subsidiaries is a party, a named insured, or otherwise
the beneficiary of coverage: (A) the name of the insurer, the name of
the policyholder, and the name of each covered insured; (B) the policy
number and the period of coverage; (C) the scope (including an
indication of whether the coverage was on a claims made, occurrence, or
other basis) and amount (including a description of how deductibles and
ceilings are calculated and operate) of coverage; and (D) a description
of any retroactive premium adjustments or other loss-sharing
arrangements.
(ii) With respect to each such insurance policy: (A) the policy
is in full force and effect; (B) the policy will continue to be in full
force and effect on identical terms immediately following the
consummation of the transactions contemplated hereby; (C) neither
I-trax, any of its Subsidiaries nor, to the Knowledge of I-trax, any
other party to any such policy is in breach or default (including with
respect to the payment of premiums or the giving of notices), and no
event has occurred which, with notice or the lapse of time, would
constitute such a breach or default, or permit termination,
modification, or acceleration, under the policy; and (D) no party to
the policy has repudiated any provision thereof. Each of I-trax and its
Subsidiaries has been covered during the period of its existence by
insurance in scope and amount customary and reasonable for the
businesses in which it has engaged. Section 3(t) of the I-trax
Disclosure Schedule describes any self-insurance arrangements affecting
any of I-trax and its Subsidiaries.
(u) Employees. Section 3(u) of the I-trax Disclosure Schedule lists
each executive officer of I-trax, such executive's annual base salary as of such
date and such executive's expected base salary for the next calendar year. To
the Knowledge of I-trax, no executive, key employee, or group of employees of
I-trax or its Subsidiaries has any plans to terminate employment with I-trax or
any of its Subsidiaries. None of I-trax and its Subsidiaries is a party to or
bound by any collective bargaining agreement, and has not experienced any
strikes, grievances, claims of unfair labor practices, or other collective
bargaining disputes. None of I-trax and its Subsidiaries has committed any
unfair labor practice. I-trax has no Knowledge of any organizational effort
currently being made or threatened by or on behalf of any labor union with
respect to employees of any of I-trax and its Subsidiaries.
(v) Employee Benefits. None of I-trax and its Subsidiaries is a member
of a Controlled Group. Except as disclosed in Section 3(v) of the I-trax
Disclosure Schedule, none of I-trax and its Subsidiaries maintains any Plan or
any other severance, bonus, stock option, stock appreciation, stock purchase,
restricted stock, retirement, insurance, profit sharing, deferred compensation,
change of control, incentive or fringe benefit plan, agreement or arrangement,
whether written or unwritten, providing benefits for employees or former
employees of I-trax or any of its Subsidiaries (including such arrangements
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contained within the provisions of an individual employment or consulting
agreement). None of I-trax and its Subsidiaries maintains or has ever maintained
an Employee Pension Benefit Plan which is a "defined benefit" or other plan
subject to the funding requirements of Section 302 of ERISA or Code Section 312,
or which is subject to Title IV of ERISA. None of I-trax and its Subsidiaries is
now nor has it ever been obligated to contribute to a Multiemployer Plan. None
of the plans, agreements or arrangements listed in Section 3(v) of the I-trax
Disclosure Schedule is an Employee Welfare Benefit Plan which provides for
benefits or coverage for any former or retired employees or their dependents,
except to the extent required by Code Section 3980B or Section 601 et. seq. of
ERISA. Each plan, agreement or arrangement listed on Section 3(v) of the I-trax
Disclosure Schedule has at all times been maintained and administered in all
material respects in accordance with its terms and the applicable requirements
of the Code and ERISA, including the reporting, disclosure and fiduciary
responsibility requirements thereof. I-trax has delivered or after the Closing
will deliver to I-trax true and complete copies of all plan documents and
summary plan descriptions of the plans, agreements or arrangements listed on
Section 3(v) of the I-trax Disclosure Schedule. I-trax has also delivered to
I-trax true and complete copies of the IRS Form 5500 filed in the most recent
year with respect to any such plan, agreement or arrangement, including all
schedules thereto.
(w) Guaranties. None of I-trax and its Subsidiaries is a guarantor or
otherwise liable for any Liability or obligation (including indebtedness) of any
other Person.
(x) Environmental, Health, and Safety Matters. To the Knowledge of
I-trax, each of I-trax, its Subsidiaries and their respective predecessors and
Affiliates has complied and is in compliance with all Environmental, Health, and
Safety Requirements. Without limiting the generality of the foregoing, each of
I-trax, its Subsidiaries and their respective predecessors and Affiliates has
obtained and complied with, and is in compliance with, all permits, licenses and
other authorizations that are required pursuant to Environmental, Health, and
Safety Requirements for the occupation of its facilities and the operation of
its business, except where such compliance, individually or in the aggregate,
would not have an I-Trax Material Adverse Effect. None of I-trax, its
Subsidiaries and their predecessors and Affiliates has received any written or
oral notice, report or other information regarding any actual or alleged
violation of Environmental, Health, and Safety Requirements, or any liabilities
or potential liabilities (whether accrued, absolute, contingent, unliquidated or
otherwise), including any investigatory, remedial or corrective obligations,
relating to any of them or its facilities arising under Environmental, Health,
and Safety Requirements.
(y) Certain Business Relationships with I-trax. Except as disclosed in
the most recent Proxy Statement filed with the SEC by I-trax prior to the date
of this Agreement, or in Section 3(y) of the I-trax Disclosure Schedules, none
of I-trax Stockholders or any of their Affiliates has been involved in any
contract, lease or business arrangement or relationship with I-trax within the
past 12 months, and none of I-trax Stockholders or any of their Affiliates owns
any asset, tangible or intangible, which is used in the business of I-trax or
any of its Subsidiaries.
(z) Status of Officers and Directors. No officer or director of I-trax
has been involved in legal proceedings that would currently require disclosure
in any registration statement under the Securities Act covering I-trax's
securities under Section 401(f) of Regulation S-K promulgated by the SEC if such
registration statement were to be filed on the date hereof.
(aa) Investment. I-trax is not acquiring the CHDM Shares with a view to
or for sale in connection with any distribution thereof within the meaning of
the Securities Act.
(bb) Disclosure. The representations and warranties contained in this
Section 3 do not contain any untrue statement of a material fact or omit to
state any material fact necessary in order to make the statements and
information contained in this Section 3 not misleading.
(cc) Definitive Proxy Materials. None of the information supplied or to
be supplied by I-trax for inclusion or incorporation by reference in (i) the
Definitive Proxy Materials, or (ii) any other documents to be filed with the SEC
in connection with the transactions contemplated hereby will, at the respective
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times such documents are filed, and, in the case of the Definitive Proxy
Materials, when it is delivered to I-trax Stockholders cause the Definitive
Proxy Materials or such other documents to contain any untrue statement of a
material fact, or omit to state any material fact necessary in order to make the
statements therein not misleading. All documents that I-trax is responsible for
filing with the SEC and any other regulatory agency in connection with the
transactions contemplated by this Agreement will comply as to form in all
material respects with the provisions of applicable law and any applicable rules
or regulations thereunder. I-trax, however, makes no representation with respect
to statements made in the documentation referenced in this Section 3(cc) based
on information supplied by CHDM. The offer and sale by I-trax of the I-trax
Common Shares and I-trax Preferred Shares pursuant to this Agreement will be
exempt from registration under the Securities Act and the applicable state
securities laws, or if not exempt under applicable state securities laws, I-trax
will take such steps as are required to register such shares in compliance with
the applicable state securities laws.
4. Representations and Warranties of CHDM. CHDM represents and warrants
to I-trax and Acquisition that the statements contained in this Section 4 are
correct and complete as of the date of this Agreement and will be correct and
complete as of the Closing Date (as though made then and as though the Closing
Date were substituted for the date of this Agreement throughout this Section 4)
except as set forth in the CHDM Disclosure Schedule (the "CHDM Disclosure
Schedule"). The CHDM Disclosure Schedule will be arranged in paragraphs
corresponding to the lettered and numbered paragraphs contained in this Section
4.
(a) Organization. Each of CHDM and its Subsidiaries is a corporation,
duly organized, validly existing, and in good standing under the laws of the
jurisdiction of its formation and has all requisite corporate power and
authority to own, lease and operate its properties and to carry on its business
as now being conducted. Each of CHDM and its Subsidiaries is duly authorized to
conduct business and is in good standing under the laws of each jurisdiction
where such qualification is required, except for failures to be so duly
authorized or good standing that would not, individually or in the aggregate,
have a CHDM Material Adverse Effect. Each of CHDM and its Subsidiaries has full
corporate power and authority and all licenses, permits, and authorizations
necessary to carry on the businesses in which it is engaged and in which it
proposes to engage and to own and use the properties owned and used by it.
Section 4(a) of the CHDM Disclosure Schedule lists all directors and officers of
CHDM and each of its Subsidiaries. CHDM has delivered to I-trax correct and
complete copies, as applicable, of its and each of its Subsidiary's charters,
bylaws and other organizational documents and all amendments thereto to the date
hereof. The minute books (containing, as the case may be, the records of
meetings of the stockholders, the board of directors, and any committees of the
board of directors), the stock certificates, and the stock records of CHDM are
correct and complete. CHDM is not in default under or in violation of any
provision of its organizational documents, charter or bylaws.
(b) Capitalization. The authorized capital of CHDM consists of 403,500
shares, of which 250,000 shares are designated as common stock, par value $0.001
per share, of which 233,247 shares are issued and outstanding and none of which
are held in treasury, and of which 93,500 shares are designated as Series A
Preferred Stock, without par value per share, and 60,000 shares are designated
as Series B Preferred Stock, without par value per share, none of which is
issued or outstanding. All of the issued and outstanding CHDM Shares have been
duly authorized, are validly issued, fully paid, and nonassessable, and are held
of record by the respective CHDM Stockholders as set forth in Section 4(b) of
the CHDM Disclosure Schedule. Except as set forth in Section 4(b) of the CHDM
Disclosure Schedule, there are no outstanding or authorized options, warrants,
purchase rights, subscription rights, conversion rights, exchange rights,
agreements of sale or other contracts or commitments that could require CHDM to
issue, sell, or otherwise cause to become outstanding any of its capital stock.
Except as set forth in Section 4(b) of the CHDM Disclosure Schedule, there are
no outstanding or authorized equity appreciation, phantom stock, profit
participation, or similar rights with respect to CHDM. Except as set forth in
Section 4(b) of the CHDM Disclosure Schedule, there are no voting trusts,
proxies, or other agreements or understandings with respect to the voting of the
capital stock of CHDM.
(c) Authorization of Transaction. CHDM has full power and authority
(including full corporate power and authority) to execute and deliver this
Agreement and to perform its obligations hereunder; provided, however, that CHDM
cannot consummate the Merger unless and until it receives the Requisite
Stockholder Approval. This Agreement constitutes the valid and legally binding
obligation of CHDM enforceable in accordance with its terms.
A-24
(d) Noncontravention. Except as disclosed on Schedule 4(d) of the CHDM
Disclosure Schedule, neither the execution and the delivery of this Agreement,
nor the consummation of the transactions contemplated hereby, will (i) violate
any constitution, statute, regulation, rule, injunction, judgment, order,
decree, ruling, charge, or other restriction of any government, governmental
agency, or court to which CHDM or any of its Subsidiaries is subject or any
provision of the charter or bylaws of CHDM or any of its Subsidiaries or (ii)
conflict with, result in a breach of, constitute a default under, result in the
acceleration of, create in any party the right to accelerate, terminate, modify,
or cancel, or require any notice under any agreement, contract, lease, license,
instrument, or other arrangement to which CHDM or any of its Subsidiaries is a
party or by which it is bound or to which any of its assets is subject (or
result in the imposition of any Security Interest on any of its assets),
excluding from the foregoing clauses (i) and (ii) violations or conflicts that,
individually or in the aggregate, would not have a CHDM Material Adverse Effect.
Other than in connection with the provisions of the Delaware General Corporation
Law, the Securities Act, the state securities laws and the Hart-Scott-Rodino
Act, none of CHDM and its Subsidiaries needs to give any notice to, make any
filing with, or obtain any authorization, consent, or approval of any government
or governmental agency in order for the Parties to consummate the transactions
contemplated by this Agreement.
(e) Brokers' Fees. Except as disclosed on Schedule 4(e) of the CHDM
Disclosure Schedule, none of CHDM, its Subsidiaries and CHDM Stockholders has or
will have any Liability or obligation to pay any fees or commissions to any
broker, finder, or agent with respect to the transactions contemplated by this
Agreement.
(f) Title to Assets. Each of CHDM and its Subsidiaries has good and
marketable title to, or a valid leasehold interest in, the properties and assets
used by it and located on its premises or, except for properties and assets
disposed of in the Ordinary Course of Business since the date of the Most Recent
Balance Sheet, shown on the Most Recent Balance Sheet, free and clear of all
Security Interests (other than Security Interests disclosed on Section 4(f) of
the CHDM Disclosure Schedule), except where failure to have such marketable
title or valid leasehold interest, individually or in the aggregate, would not
have a CHDM Material Adverse Effect.
(g) Subsidiaries. Section 4(g) of the CHDM Disclosure Schedule sets
forth for each Subsidiary of CHDM (i) its name and jurisdiction of incorporation
or formation, (ii) the type of entity, (iii) the number of shares of authorized
capital stock of each class of its capital stock or other equity interests, (iv)
the number of issued and outstanding shares of each class of its capital stock
or other equity interests, the names of the holders thereof, and the number of
shares or other equity interests held by each such holder, and (v) the number of
shares of its capital stock or other equity interests held in treasury. All of
the issued and outstanding shares of capital stock or other equity interests of
each Subsidiary of CHDM have been duly authorized and are validly issued, fully
paid, and nonassessable. Except as disclosed on Section 4(g) of the CHDM
Disclosure Schedule, CHDM holds of record and owns beneficially all of the
outstanding shares or other equity interests of each Subsidiary of CHDM, free
and clear of any restrictions on transfer (other than restrictions under the
Securities Act and state securities laws), Taxes, Security Interests, options,
warrants, purchase rights, contracts, commitments, equities, claims, and
demands.
(h) Financial Statements. Attached to Section 4(h) of the CHDM
Disclosure Schedule are the following financial statements (collectively the
"Financial Statements"): (i) audited consolidated balance sheet and statements
of income, changes in stockholders' equity, and cash flow as of and for the
fiscal years ended December 31, 2000, December 31, 2001 and December 31, 2002
(the "Most Recent Fiscal Year End") for CHDM and its Subsidiaries; (ii)
unaudited balance sheet and statements of income, changes in stockholders'
equity, and cash flow (the "Most Recent Financial Statements") as of and for the
ten months ended October 31, 2003 (the "Most Recent Fiscal Month End") for CHDM
and its Subsidiaries; and (iii) unaudited consolidating balance sheet and
statements of income, changes in stockholders' equity, and cash flow as of and
for the Most Recent Fiscal Year End for CHDM and its Subsidiaries. The Financial
Statements (including, if applicable, the notes thereto) have been prepared in
accordance with GAAP applied on a consistent basis throughout the periods
covered thereby, present fairly the financial condition of CHDM and its
Subsidiaries as of such dates and the results of operations of CHDM and its
Subsidiaries for such periods, are correct and complete, and are consistent with
the books and records of CHDM and its Subsidiaries (which books and records are
correct and complete); provided, however, that the Most Recent Financial
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Statements are subject to normal year-end adjustments (which will not be
material individually or in the aggregate) and lack footnotes and other
presentation items.
(i) Events Subsequent to Most Recent Fiscal Month End. Since the Most
Recent Fiscal Month End and except as disclosed in Section 4(i) of the CHDM
Disclosure Schedule:
(i) None of CHDM and its Subsidiaries has sold, leased,
transferred, or assigned any of its assets, tangible or intangible
outside the Ordinary Course of Business;
(ii) None of CHDM and its Subsidiaries has entered into any
agreement, contract, lease, or license (or series of related
agreements, contracts, leases, and licenses) involving more than
$350,000;
(iii) No party (including CHDM or its Subsidiaries) has
accelerated, terminated, modified, or canceled any agreement, contract,
lease, or license (or series of related agreements, contracts, leases,
and licenses) involving more than $100,000 to which CHDM is a party or
by which it is bound;
(iv) None of CHDM and its Subsidiaries has granted any Security
Interest on any of its assets, tangible or intangible;
(v) None of CHDM and its Subsidiaries has made any capital
expenditure (or series of related capital expenditures) involving more
than $350,000;
(vi) None of CHDM and its Subsidiaries has made any capital
investment in, any loan to, or any acquisition of the securities or
assets of, any other Person (or series of related capital investments,
loans, and acquisitions) involving more than $350,000;
(vii) None of CHDM and its Subsidiaries has issued any note,
bond, or other debt security or created, incurred, assumed, or
guaranteed any indebtedness for borrowed money or capitalized lease
obligation either involving more than $25,000 singly or $350,000 in the
aggregate;
(viii) None of CHDM and its Subsidiaries has delayed or postponed
the payment of accounts payable and other Liabilities outside the
Ordinary Course of Business;
(ix) None of CHDM and its Subsidiaries has canceled, compromised,
waived or released any right or claim (or series of related rights and
claims) involving more than $350,000;
(x) None of CHDM and its Subsidiaries has granted any license or
sublicense of any rights under or with respect to any Intellectual
Property outside the Ordinary Course of Business;
(xi) There has been no change made or authorized in the charter,
bylaws or other organizational documents of CHDM or any Subsidiary;
(xii) None of CHDM and its Subsidiaries has issued, sold, or
otherwise disposed of any of its capital stock, or granted any options,
warrants, or other rights to purchase or obtain (including upon
conversion, exchange, or exercise) any of its capital stock, other than
options to employees granted in the Ordinary Course of Business all of
which are disclosed in Section 4(b) of the CHDM Disclosure Schedule;
(xiii) None of CHDM and its Subsidiaries has declared, set aside,
or paid any dividend or made any distribution with respect to its
capital stock (whether in cash or in kind) or redeemed, purchased, or
otherwise acquired any of its capital stock;
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(xiv) None of CHDM and its Subsidiaries has experienced any
damage, destruction, or loss (whether or not covered by insurance) to
its property except where such damage, destruction or loss did not
cause a CHDM Material Adverse Effect;
(xv) None of CHDM and its Subsidiaries has made any loan to, or
entered into any other transaction with, any of its directors,
managers, officers, and employees;
(xvi) None of CHDM and its Subsidiaries has entered into any
employment contract or collective bargaining agreement, written or
oral, or modified the terms of any existing such contract or agreement;
(xvii) None of CHDM and its Subsidiaries has granted any increase
in the base compensation or made any other change in employment terms
of any of its directors, managers, officers, and employees;
(xviii) None of CHDM and its Subsidiaries has adopted, amended,
modified, or terminated any bonus, profit-sharing, incentive,
severance, or other plan, contract, or commitment for the benefit of
any of its directors, officers, and employees (or taken any such action
with respect to any other Employee Welfare Benefit Plan or Employee
Pension Benefit Plan);
(xix) None of CHDM and its Subsidiaries has made or pledged to
make any charitable or other capital contribution;
(xx) There has not been any other occurrence, event, incident,
action, failure to act, or transaction outside the Ordinary Course of
Business involving CHDM or its Subsidiaries which would have an
economic impact of more than $350,000;
(xxi) None of CHDM and its Subsidiaries has agreed to do any of
the foregoing; and
(xxii) There has not been a CHDM Material Adverse Effect.
(j) Undisclosed Liabilities. None of CHDM and its Subsidiaries has any
Liability (and there is no Basis for any present or future action, suit,
proceeding, hearing, investigation, charge, complaint, claim, or demand against
it giving rise to any Liability), except for (i) Liabilities set forth on the
face of the Most Recent Balance Sheet (rather than in any notes thereto), (ii)
Liabilities which have arisen after the Most Recent Fiscal Month End in the
Ordinary Course of Business (none of which results from, arises out of, relates
to, is in the nature of, or was caused by any breach of contract, breach of
warranty, tort, infringement, or violation of law), and (iii) Liabilities which,
individually or in the aggregate, do not constitute a CHDM Material Adverse
Effect.
(k) Legal Compliance. Each of CHDM, its Subsidiaries and their
respective predecessors and Affiliates has complied with all applicable laws
(including rules, regulations, codes, plans, injunctions, judgments, orders,
decrees, rulings, and charges thereunder) of Federal, state, local, and foreign
governments (and all agencies thereof) except where failure to comply with such
laws would not, individually or in the aggregate, have a CHDM Material Adverse
Effect, and no action, suit, proceeding, hearing, investigation, charge,
complaint, claim, demand, or notice has been filed or commenced against any of
them alleging any failure so to comply.
(l) Tax Matters.
(i) Each of CHDM and its Subsidiaries has filed all Tax Returns
that it was required to file. All such Tax Returns were correct and
complete in all material respects. All Taxes owed by CHDM and its
Subsidiaries (whether or not shown on any Tax Return) have been paid.
No claim has ever been made by an Authority in a jurisdiction where
CHDM or any of its Subsidiaries does not file Tax Returns that it is or
may be subject to taxation by that jurisdiction. There are no Security
Interests on any of the assets of CHDM and its Subsidiaries that arose
in connection with any failure (or alleged failure) to pay any Tax.
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(ii) Each of CHDM and its Subsidiaries has withheld and paid all
Taxes required to have been withheld and paid in connection with
amounts paid or owing to any employee, independent contractor,
creditor, stockholder, or other third party.
(iii) No director or officer (or employee responsible for Tax
matters) of CHDM or its Subsidiaries has been informed formally or
informally or has any reason to believe any Authority may assess
additional Taxes for any period for which Tax Returns have been filed
or is aware of any state of facts which could give rise to any claim,
audit, action, suit, proceeding, or investigation which respect to any
Tax for which CHDM could be liable. Schedule 4(l)(iii) of the CHDM
Disclosure Schedule lists all Federal, state, local, and foreign income
Tax Returns filed with respect to CHDM and its Subsidiaries for taxable
periods ended on or after December 31, 2000, indicates those Tax
Returns that have been audited, and indicates those Tax Returns that
currently are the subject of audit. CHDM has delivered to I-trax
correct and complete copies of all Federal income Tax Returns,
examination reports, and statements of deficiencies assessed against or
agreed to by CHDM or any of its Subsidiaries for calendar year 2000
through the Closing Date.
(iv) None of CHDM and its Subsidiaries has waived any statute of
limitations in respect of Taxes or agreed to any extension of time with
respect to a Tax assessment or deficiency.
(v) None of CHDM and its Subsidiaries has made any payments, is
not obligated to make any payments, or is a party to any agreement that
under certain circumstances could obligate it to make any payments that
will not be deductible under Code Section 280G. None of CHDM and its
Subsidiaries has been a United States real property holding corporation
within the meaning of Code Section 897(c)(2) during the applicable
period specified in Code Section 897(c)(1)(A)(ii). None of CHDM and its
Subsidiaries is a party to any Tax allocation or sharing agreement.
None of CHDM and its Subsidiaries (A) has been a member of an
Affiliated Group filing a consolidated Federal income Tax Return (other
than a group the common parent of which was CHDM) or (B) has any
Liability for the Taxes of any Person (other than CHDM) under Treasury
Regulation Section 1.1502-6 (or any similar provision of state, local,
or foreign law), as a transferee or successor, by contract, or
otherwise.
(vi) The unpaid Taxes of CHDM and its Subsidiaries (A) did not,
as of the Most Recent Fiscal Year End, exceed the reserve for Tax
Liability (rather than any reserve for deferred Taxes established to
reflect timing differences between book and Tax income) set forth on
the face of the Most Recent Balance Sheet (rather than in any notes
thereto) and (B) do not exceed that reserve as adjusted for the passage
of time through the Closing Date in accordance with the past custom and
practice of CHDM or its Subsidiary in filing its Tax Returns.
(m) Real Property.
(i) None of CHDM and its Subsidiaries owns any real property.
(ii) Section 4(m)(ii) of the CHDM Disclosure Schedule lists and
describes briefly all real property leased or subleased to CHDM or its
Subsidiaries. CHDM has delivered to I-trax correct and complete copies
of the leases and subleases listed in Section 4(m)(ii) of the CHDM
Disclosure Schedule (as amended to date). With respect to each lease
and sublease listed in Section 4(m)(ii) of the CHDM Disclosure
Schedule: (A) the lease or sublease is in full force and effect; (B)
the lease or sublease will continue to be in full force and effect on
identical terms immediately following the consummation of the
transactions contemplated by this Agreement; (C) to the Knowledge of
CHDM, no party to the lease or sublease is in breach or default, and no
event has occurred which, with notice or lapse of time, would
constitute a breach or default or permit termination, modification, or
acceleration thereunder; (D) the Knowledge of CHDM, no party to the
lease or sublease has repudiated any provision thereof; (E) there are
no disputes, oral agreements, or forbearance programs in effect as to
the lease or sublease; (F) with respect to each sublease, to the
Knowledge of CHDM, the representations and warranties set forth in
subsections (A) through (E) above are true and correct with respect to
the underlying lease; (G) none of CHDM and its Subsidiaries has
assigned, transferred, conveyed, mortgaged, deeded in trust, or
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encumbered any interest in the leasehold or subleasehold created
thereunder; and (H) to the Knowledge of CHDM, all facilities leased or
subleased thereunder have received all approvals of Authorities
(including licenses and permits) required in connection with the
operation thereof and have been operated and maintained in accordance
with applicable laws, rules, and regulations.
(n) Intellectual Property. Section 4(n) of the CHDM Disclosure Schedule
lists all registrations and applications for patents, trademarks and copyrights
by CHDM and all Universal Resource Locators material to the conduct of the
business of CHDM and its Subsidiaries as now conducted. Section 4(n) of the CHDM
Disclosure Schedule also identifies each trade name or unregistered trademark or
service mark used by CHDM and its Subsidiaries in connection with any of their
businesses. To the Knowledge of CHDM, each of CHDM and its Subsidiaries has all
right, title and interest in, or a valid and binding license to use, the
Intellectual Property necessary or required to conduct the business of CHDM and
its Subsidiaries as now conducted. None of CHDM and its Subsidiaries is in
default (nor would it be in default but for the giving of notice or lapse of
time or both) under any license, sublicense, agreement, or permission to use
such Intellectual Property and, to the Knowledge of CHDM, there is no threatened
dispute or disagreement with respect to any such license, sublicense, agreement,
or permission except for such defaults, disputes and disagreements which,
individually or in the aggregate, would not have a CHDM Material Adverse Effect.
To the Knowledge of CHDM, such Intellectual Property is not being infringed or
misappropriated by any third party and no such claims have been brought against
any third party. To the Knowledge of CHDM, each item of Intellectual Property
owned or used by CHDM and its Subsidiaries immediately prior to the Closing will
be owned or available for use by Second Merger Surviving Company and its
Subsidiaries on identical terms and conditions immediately subsequent to the
Closing. To the Knowledge of CHDM, none of CHDM and its Subsidiaries is
infringing any Intellectual Property of any third party and no litigation is
pending and no notice or other claim in writing has been received by CHDM or its
Subsidiaries alleging any such infringement. Except as set forth in Section 4(n)
of the CHDM Disclosure Schedule, to the Knowledge of CHDM, there are no claims
against CHDM or any of its Subsidiaries asserting the invalidity, misuse or
unenforceability of any Intellectual Property. To the Knowledge of CHDM, none of
the present or former executive officers or employees of CHDM or any of its
Subsidiaries has any claims whatsoever (whether direct, indirect or contingent)
of right, title or interest in or to any of the Intellectual Property of CHDM or
any of its Subsidiaries. To the Knowledge of CHDM, none of the present or former
executive officers or employees of CHDM or any of its Subsidiaries are precluded
by an agreement from engaging in the business of CHDM as now conducted.
(o) Tangible Assets. CHDM owns or leases all buildings, machinery,
equipment, and other tangible assets necessary for the conduct of its businesses
as currently conducted and as currently proposed to be conducted except where
failure to own or lease such assets, individually or in the aggregate, would not
have a CHDM Material Adverse Effect. Each such tangible asset is free from
defects (patent and latent), has been maintained in accordance with normal
industry practice, is in good operating condition and repair (subject to normal
wear and tear), and is suitable for the purposes for which it is used and is
proposed to be used except where such defects would not, individually or in the
aggregate, have a CHDM Material Adverse Effect.
(p) Contracts. Except as executed in connection with the transactions
contemplated herein, Section 4(p) of the CHDM Disclosure Schedule lists the
following contracts and other agreements to which CHDM or any of its
Subsidiaries is a party:
(i) any agreement (or group of related agreements) for the lease
of personal property to or from any Person providing for lease payments
in excess of $350,000 per annum;
(ii) any agreement (or group of related agreements) for the
purchase of raw materials, commodities, supplies, products, or other
personal property, or for the receipt of services, the performance of
which will extend over a period of more than one year, result in a
material loss to CHDM or any of Subsidiaries or involve consideration
in excess of $350,000;
(iii) any agreement (or group of related agreements) for the sale
of raw materials, commodities, supplies, products, or other personal
property, or for the furnishing of services, the performance of which
will extend over a period of more than one year, result in a material
loss to CHDM or any of Subsidiaries or involve consideration in excess
of $350,000;
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(iv) any agreement concerning a partnership or joint venture;
(v) any agreement (or group of related agreements) under which it
has created, incurred, assumed, or guaranteed any indebtedness for
borrowed money, or any capitalized lease obligation, in excess of
$350,000 or under which it has granted a Security Interest on any of
its assets, tangible or intangible;
(vi) any agreement concerning confidentiality or noncompetition;
(vii) any agreement with any of the CHDM Stockholders or any of
their Affiliates (other than CHDM);
(viii) any profit sharing, stock option, stock purchase, stock
appreciation, deferred compensation, severance, or other plan or
arrangement for the benefit of its current or former directors,
officers, and employees;
(ix) any collective bargaining agreement;
(x) any agreement for the employment of any individual on a
full-time, part-time, consulting, or other basis providing annual
compensation in excess of $50,000 or providing severance benefits;
(xi) any agreement under which it has advanced or loaned any
amount to any of its directors, officers, and employees outside the
Ordinary Course of Business;
(xii) any other agreement (or group of related agreements) the
performance of which involves consideration in excess of $350,000.
CHDM has delivered to I-trax a correct and complete copy of each agreement
listed in Section 4(p) of the CHDM Disclosure Schedule (as amended to date) and
a written summary setting forth the terms and conditions of each oral agreement
referred to in Section 4(p) of the CHDM Disclosure Schedule. With respect to
each such agreement: (A) the agreement is in full force and effect; (B) the
agreement will continue to be in full force and effect on identical terms
immediately following the consummation of the transactions contemplated hereby;
(C) CHDM, its Subsidiaries and, to the Knowledge of CHDM, the other parties
thereto, are not in breach or default, and, to the Knowledge of CHDM, no event
has occurred which with notice or lapse of time would constitute a breach or
default, or permit termination, modification, or acceleration, under the
agreement; and (D) to the Knowledge of CHDM, no party has repudiated any
provision of the agreement.
(q) Notes and Accounts Receivable. Section 4(r) of the CHDM Disclosure
Schedule sets forth the list of all notes and accounts receivable of CHDM and
its Subsidiaries. All such notes and accounts receivable of CHDM and its
Subsidiaries are reflected properly on their books and records, are valid
receivables subject to no setoffs or counterclaims, are current and collectible,
and will be collected in accordance with their terms at their recorded amounts,
subject only to the reserve for bad debts set forth on the face of the Most
Recent Balance Sheet (rather than in any notes thereto) as adjusted for the
passage of time through the Closing Date in accordance with the past custom and
practice of CHDM and its Subsidiaries, except where the validity and collection
of such accounts receivables and any failure to properly record such notes and
accounts receivables would not, individually or in the aggregate, have a CHDM
Material Adverse Effect.
(r) Insurance.
(i) Section 4(r) of the CHDM Disclosure Schedule sets forth the
following information with respect to each insurance policy (including
policies providing property, casualty, liability, and workers'
compensation coverage and bond and surety arrangements) to which CHDM
or any of its Subsidiaries is a party, a named insured, or otherwise
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the beneficiary of coverage: (A) the name of the insurer, the name of
the policyholder, and the name of each covered insured; (B) the policy
number and the period of coverage; (C) the scope (including an
indication of whether the coverage was on a claims made, occurrence, or
other basis) and amount (including a description of how deductibles and
ceilings are calculated and operate) of coverage; and (D) a description
of any retroactive premium adjustments or other loss-sharing
arrangements.
(ii) With respect to each such insurance policy: (A) the policy
is in full force and effect; (B) the policy will continue to be in full
force and effect on identical terms immediately following the
consummation of the transactions contemplated hereby; (C) neither CHDM,
any of its Subsidiaries nor, to the Knowledge of CHDM, any other party
to any such policy is in breach or default (including with respect to
the payment of premiums or the giving of notices), and no event has
occurred which, with notice or the lapse of time, would constitute such
a breach or default, or permit termination, modification, or
acceleration, under the policy; and (D) no party to the policy has
repudiated any provision thereof. Each of CHDM and its Subsidiaries has
been covered during the period of its existence by insurance in scope
and amount customary and reasonable for the businesses in which it has
engaged. Section 4(r) of the CHDM Disclosure Schedule describes any
self-insurance arrangements affecting any of CHDM and its Subsidiaries.
(s) Litigation. Section 4(s) of the CHDM Disclosure Schedule sets forth
each instance in which any of CHDM, any of its Subsidiaries or any of their
directors or officers in their capacity as such: (i) (A) is subject to any
outstanding injunction, judgment, order, decree, ruling, or charge or (B) is a
party or, to the Knowledge of CHDM, is threatened to be made a party to any
action, suit, proceeding, hearing, or investigation of, in, or before any court
or quasi-judicial or administrative agency of any Federal, state, local, or
foreign jurisdiction or before any arbitrator; and (ii) identifies if such
instance, including associated litigation costs, is covered by insurance. To the
Knowledge of CHDM, and unless otherwise disclosed on Section 4(s) of the CHDM
Disclosure Schedule, none of the actions, suits, proceedings, hearings and
investigations set forth in Section 4(s) of the CHDM Disclosure Schedule could
result in a CHDM Material Adverse Effect. None of CHDM, any of its Subsidiaries
or directors or officers (or employees with responsibility for litigation
matters) of CHDM or any of its Subsidiaries has any reason to believe that any
such action, suit, proceeding, hearing, or investigation may be brought or
threatened against CHDM.
(t) Employees. Section 4(t) of the CHDM Disclosure Schedule lists each
executive officer of CHDM, such officer's annual base salary as of such date and
such officer's expected base salary for the next calendar year. To the Knowledge
of CHDM, no executive, key employee, or group of employees of CHDM or its
Subsidiaries has any plans to terminate employment with CHDM or any of its
Subsidiaries. None of CHDM and its Subsidiaries is a party to or bound by any
collective bargaining agreement, and has not experienced any strikes,
grievances, claims of unfair labor practices, or other collective bargaining
disputes. None of CHDM and its Subsidiaries has committed any unfair labor
practice. CHDM has no Knowledge of any organizational effort currently being
made or threatened by or on behalf of any labor union with respect to employees
of any of CHDM and its Subsidiaries.
(u) Employee Benefits. None of CHDM and its Subsidiaries is a member of
a Controlled Group. Except as disclosed in Section 4(u) of the CHDM Disclosure
Schedule, none of CHDM and its Subsidiaries maintains any Plan or any other
severance, bonus, stock option, stock appreciation, stock purchase, restricted
stock, retirement, insurance, profit sharing, deferred compensation, change of
control, incentive or fringe benefit plan, agreement or arrangement, whether
written or unwritten, providing benefits for employees or former employees of
CHDM or any of its Subsidiaries (including such arrangements contained within
the provisions of an individual employment or consulting agreement). None of
CHDM and its Subsidiaries maintains or has ever maintained an Employee Pension
Benefit Plan which is a "defined benefit" or other plan subject to the funding
requirements of Section 302 of ERISA or Code Section 412, or which is subject to
Title IV of ERISA. None of CHDM and its Subsidiaries is now nor has it ever been
obligated to contribute to a Multiemployer Plan. None of the plans, agreements
or arrangements listed in Section 4(u) of the CHDM Disclosure Schedule is an
Employee Welfare Benefit Plan which provides for benefits or coverage for any
former or retired employees or their dependents, except to the extent required
by Code Section 4980B or Section 601 et. seq. of ERISA. Each plan, agreement or
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arrangement listed on Section 4(u) of the CHDM Disclosure Schedule has at all
times been maintained and administered in all material respects in accordance
with its terms and the applicable requirements of the Code and ERISA, including
the reporting, disclosure and fiduciary responsibility requirements thereof.
CHDM has delivered or after the Closing will deliver to I-trax true and complete
copies of all plan documents and summary plan descriptions of the plans,
agreements or arrangements listed on Section 4(u) of the CHDM Disclosure
Schedule. CHDM has also delivered to I-trax true and complete copies of the IRS
Form 5500 filed in the most recent year with respect to any such plan, agreement
or arrangement, including all schedules thereto.
(v) Guaranties. Except as disclosed on Schedule 4(v) of the CHDM
Disclosure Schedule, none of CHDM and its Subsidiaries is a guarantor or
otherwise liable for any Liability or obligation (including indebtedness) of any
other Person.
(w) Environmental, Health, and Safety Matters. Except as disclosed on
Schedule 4(w) of the CHDM Disclosure Schedule, to the Knowledge of CHDM, each of
CHDM, its Subsidiaries and their respective predecessors and Affiliates has
complied and is in compliance with all Environmental, Health, and Safety
Requirements. Without limiting the generality of the foregoing, each of CHDM,
its Subsidiaries and their respective predecessors and Affiliates has obtained
and complied with, and is in compliance with, all permits, licenses and other
authorizations that are required pursuant to Environmental, Health, and Safety
Requirements for the occupation of its facilities and the operation of its
business, except where such compliance, individually or in the aggregate, would
not have a CHDM Material Adverse Effect. None of CHDM, its Subsidiaries and
their predecessors and Affiliates has received any written or oral notice,
report or other information regarding any actual or alleged violation of
Environmental, Health, and Safety Requirements, or any liabilities or potential
liabilities (whether accrued, absolute, contingent, unliquidated or otherwise),
including any investigatory, remedial or corrective obligations, relating to any
of them or its facilities arising under Environmental, Health, and Safety
Requirements.
(x) Certain Business Relationships with CHDM. Except as disclosed in
Section 4(x) of the CHDM Disclosure Schedules, none of CHDM Stockholders or any
of their Affiliates has been involved in any contract, lease or business
arrangement or relationship with CHDM within the past 12 months, and none of
CHDM Stockholders or any of their Affiliates owns any asset, tangible or
intangible, which is used in the business of CHDM or any of its Subsidiaries.
(y) Status of Officers and Directors. No officer or director of CHDM
has been involved in legal proceedings that would currently require disclosure
in any registration statement under the Securities Act covering CHDM's
securities under Section 401(f) of Regulation S-K promulgated by the SEC if such
registration statement were to be filed on the date hereof.
(z) Definitive Proxy Materials. None of the information supplied or to
be supplied by CHDM for inclusion or incorporation by reference in (i) the
Definitive Proxy Materials, or (ii) any other documents to be filed with the SEC
in connection with the transactions contemplated hereby will, at the respective
times such documents are filed, and, in the case of the Definitive Proxy
Materials, when it is delivered to CHDM Stockholders, cause the Definitive Proxy
Materials or such othe documents to contain any untrue statement of a material
fact, or omit to state any material fact necessary in order to make the
statements therein not misleading.
(aa) Disclosure. The representations and warranties contained in this
Section 4 do not contain any untrue statement of a material fact or omit to
state any material fact necessary in order to make the statements and
information contained in this Section 3 not misleading.
5. Pre-Closing Covenants. The Parties agree as follows with respect to
the period between the execution of this Agreement and earlier of (x) the
Closing and (y) the termination of this Agreement in accordance with Section 9
below:
(a) General. Each of CHDM, I-trax and Acquisition will use its
reasonable efforts to take all action and to do all things necessary, proper, or
advisable to consummate and make effective the transactions contemplated by this
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Agreement (including satisfaction, but not waiver, of the closing conditions set
forth in Section 6 below).
(b) Notices and Consents. Each of CHDM, I-trax and Acquisition will
give any notices to third parties, and will use its reasonable efforts to obtain
any third party consents, that any of CHDM, I-trax or Acquisition reasonably may
request in connection with the matters referred to in Sections 3(g) and 4(d)
above, with CHDM giving any notices to third parties, and obtaining any third
party consents under Section 4(d) above and I-trax and Acquisition giving any
notices to third parties, and obtaining any third party consents under Section
3(g) above.
(c) Regulatory Matters and Approvals. CHDM, I-trax and Acquisition will
give any notices to, make any filings with, and use its reasonable efforts to
obtain any authorizations, consents, and approvals of governments and
governmental agencies in connection with the matters referred to in Section 3(g)
and Section 4(d) above. Without limiting the generality of the foregoing:
(i) Delaware Law. Each of I-trax and CHDM will call, and will
take all actions necessary in connection with, a special meeting of
I-trax Stockholders and a special meeting of CHDM Stockholders (the
"Special I-trax Meeting" and "Special CHDM Meeting," respectively) as
soon as reasonably practicable, in order that the I-trax Stockholders
and CHDM Stockholders may consider and vote upon the adoption of this
Agreement and the approval of the Merger in accordance with the
Delaware General Corporation Law and the Delaware Limited Liability
Company Act. Each of I-trax and CHDM will use its reasonable efforts to
obtain the Requisite Stockholder Approval, and the written materials
provided to the CHDM Stockholders in connection with obtaining of the
Requisite Stockholder Approval will contain the affirmative
recommendation of the board of directors of CHDM and I-trax in favor of
the adoption of this Agreement and the approval of the Merger;
provided, however, that no director or officer of CHDM or I-trax shall
be required to violate any fiduciary duty or other requirement imposed
by law in connection therewith.
(ii) Securities Act and State Securities Laws. I-trax and CHDM
will prepare and distribute to CHDM Stockholders and I-trax
Stockholders the Definitive Proxy Materials to permit CHDM Stockholders
and I-trax Stockholders to deliver the Requisite Stockholder Approval,
at the Special I-trax Meeting and Special CHDM Meeting. The Definitive
Proxy Materials will contain such information as is required for the
offering and issuance of I-trax Common Shares and I-trax Preferred
Shares to CHDM Stockholders pursuant to the First Merger to qualify for
an exemption from registration under Section 4(2) of the Securities Act
and the regulations promulgated thereunder. Each of I-trax and CHDM
will, and will cause its professional advisors to, provide to the other
Party any information and assistance required or requested in
connection with the foregoing matters. I-trax will take all actions
that may be necessary, proper, or advisable under Federal and state
securities laws in connection with the offering and issuance of I-trax
Common Shares and I-trax Preferred Shares. Each of I-trax and CHDM
will, and will cause its professional advisors to, provide to the other
Party any information and assistance required or requested in
connection with the foregoing matters, including, if required by
applicable securities laws, an opinion by Irella and Manella LLP
supporting any tax matters and consequences to the CHDM Stockholders
described in the Definitive Proxy Materials. I-trax will take all
actions that may be necessary, proper, or advisable under Federal and
state securities laws in connection with the offering and issuance of
I-trax Common Shares and I-trax Preferred Shares.
(iii) Hart-Scott-Rodino Act. Each of the Parties will file any
Notification and Report Forms and related material that it may be
required to file with the Federal Trade Commission and the Antitrust
Division of the United States Department of Justice under the
Hart-Scott-Rodino Act, will use its reasonable efforts to obtain an
early termination of the applicable waiting period, and will make any
further filings pursuant thereto that may be necessary, proper, or
advisable.
(d) Fairness Opinion. I-trax will engage a financial advisor to
consider the fairness, from a financial point of view, of the Merger
Consideration to I-trax.
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(e) Financing. I-trax will use commercially reasonable efforts to enter
into agreements to acquire the financings required for I-trax and Acquisition to
deliver the cash portion of the Merger Consideration as soon as reasonably
practicable on terms and conditions reasonably acceptable to CHDM and I-trax.
I-trax will furnish correct and complete copies of such agreements to CHDM. Any
provision of this Agreement to the contrary notwithstanding, none of I-trax and
CHDM will mail the Definitive Proxy Materials to its stockholders until I-trax
has delivered copies of such agreements to CHDM.
(f) Operation of Businesses. None of CHDM, I-trax and their respective
Subsidiaries will engage in any practice, take any action, or enter into any
transaction outside the Ordinary Course of Business unless such practice, action
or transaction is disclosed in writing to the other Parties and approved in
writing by such other Parties (which approval will not be unreasonably
withheld), except for actions taken in connection with the consummation of the
Merger or the terms of this Agreement. Without limiting the generality of the
foregoing, unless each of the following items is disclosed in writing by CHDM to
I-trax and by I-trax to CHDM and approved in writing by the Party receiving the
disclosure (which approval will not be unreasonably withheld), and except in
connection with the consummation of the Merger or the terms of this Agreement:
(i) None of CHDM, I-trax and their respective Subsidiaries will
authorize or effect any change in its charter or bylaws;
(ii) None of CHDM and its Subsidiaries will grant any options,
warrants, or other rights to purchase or obtain any of its capital
stock or issue, sell, or otherwise dispose of any of its capital stock
(except upon the conversion or exercise of options, warrants, and other
rights currently outstanding and identified in Section 4(b) of the CHDM
Disclosure Schedules);
(iii) None of I-trax and its Subsidiaries will grant any options,
warrants, or other rights to purchase or obtain any of its capital
stock or issue, sell, or otherwise dispose of any of its capital stock,
except (A) upon the conversion or exercise of options, warrants, and
other rights currently outstanding, (B) under I-trax's 2000 and 2001
Equity Compensation Plans as presently in force; or (C) at fair market
value as determined by the Board of Directors of I-trax;
(iv) None of CHDM, I-trax and their respective Subsidiaries will
declare, set aside, or pay any dividend or distribution with respect to
its capital stock (whether in cash or in kind), or redeem, repurchase,
or otherwise acquire any of its capital stock, except, subject to an
aggregate limit of $11,000,000, CHDM may redeem or purchase pursuant to
a written instrument in form and substance satisfactory to I-trax in
its sole discretion, and for cash consideration determined by the Board
of Directors of CHDM (and acceptable to I-trax) to be fair in light of
all relevant facts and circumstances, certain outstanding CHDM options
and CHDM Shares in the manner that could not cause a breach of the
representation and warranty of CHDM in Section 4(j) above;
(v) None of CHDM, I-trax and their respective Subsidiaries will
issue any note, bond, or other debt security or create, incur, assume,
or guarantee any indebtedness for borrowed money or capitalized lease
obligation;
(vi) None of CHDM, I-trax and their respective Subsidiaries will
grant any Security Interest with respect to any of its assets;
(vii) None of CHDM, I-trax and their respective Subsidiaries will
make any capital investment in, make any loan to, or acquire the
securities or assets of any other Person, except $4,000,000 to fund the
proposed captive insurance subsidiary of CHDM;
(viii) None of CHDM, I-trax and their respective Subsidiaries
will make any change in employment terms for any of its directors or
officers;
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(ix) None of CHDM and its Subsidiaries will (A) incur any
expenditures of $50,000 or more individually or $100,000 or more in the
aggregate if such expenditures are not set forth in the CHDM and its
Subsidiaries budget attached to this Agreement as Exhibit H or (B)
delay payment of any account payable or accrued liability in a manner
that is not in CHDM's Ordinary Course of Business; and
(x) None of CHDM and its Subsidiaries will agree to do any of
the foregoing.
(g) Full Access. Each Party will permit representatives of the other
Parties to have full access at all reasonable times and on reasonable notice,
and in a manner so as not to interfere with its normal business operations, to
all of its premises, properties, personnel, books, records (including tax
records), contracts, and documents. Each Party will treat and hold as such any
Confidential Information it receives from the other Party in the course of the
reviews contemplated by this Section 5(g), will not use any such Confidential
Information except in connection with this Agreement, and, if this Agreement is
terminated for any reason whatsoever, agrees to return to the Party providing
such Confidential Information all tangible embodiments (and all copies) thereof
which are in its possession. Any such Confidential Information is further
subject to that certain Confidentiality Agreement dated as of June 16, 2003
between I-trax and CHDM.
(h) Notice of Developments. Each of CHDM, I-trax and Acquisition will
give prompt notice to the others of any material Adverse Consequences or any
breach of any of its respective representations and warranties in Sections 3 and
4 above. No disclosure by any Party pursuant to this Section 5(h), however,
shall be deemed to amend or supplement the CHDM Disclosure Schedule or the
I-trax Disclosure Schedule, as applicable, or to prevent or cure any
misrepresentation, breach of warranty, or breach of covenant. Notwithstanding
the foregoing, but subject to Sections 6(a)(iii) and 6(b)(iii), each Party will
update its respective Disclosure Schedule prior to the Closing so that such
Party's Disclosure Schedule is correct and complete as of the Closing Date.
(i) Exclusivity. None of CHDM, I-trax or Acquisition will (and will
cause or permit any of its Subsidiaries not to): (i) solicit, initiate, or
encourage the submission of any proposal or offer from any Person relating to
the acquisition of all or substantially all of the capital stock or assets of
CHDM, I-trax or any of their Subsidiaries (including any acquisition structured
as a merger, consolidation, or share exchange); or (ii) participate in any
discussions or negotiations regarding, furnish any information with respect to,
assist or participate in, or facilitate in any other manner any effort or
attempt by any Person to do or seek to do any of the foregoing; provided,
however, that any of CHDM, I-trax, Acquisition or their Subsidiaries, and their
directors and officers will remain free to participate in any discussions or
negotiations regarding, furnish any information with respect to, assist or
participate in, or facilitate in any other manner any effort or attempt by any
Person to do or seek to do any of the foregoing to the extent their fiduciary
duties require them to do so. Notwithstanding the limitations set forth in this
Section 5(i), I-trax may engage in any of the actions and activities
contemplated by this Section 5(i) if such actions and activities will not impair
the ability or commitment of I-trax to consummate the transactions contemplated
herein and if I-trax promptly informs CHDM of such actions and activities and
allows CHDM to participate therein to the extent reasonably requested. Each of
CHDM, I-trax and Acquisition shall notify all the others immediately if any
Person makes any proposal or offer contact with respect to any of the foregoing.
(j) Listing of Shares. I-trax shall take reasonable commercial efforts
to have the I-trax Common Shares (including Escrow Shares) and the I-trax Common
Shares issuable upon conversion of the I-trax Preferred Shares issuable pursuant
to the Merger, to be approved for listing on any stock market or exchange on
which I-trax Common Shares are then listed.
(k) Financial Statements Re-characterization. CHDM will use its
reasonable efforts, and will cause its Subsidiaries and independent auditors to
use their respective reasonable efforts, to re-state its Financial Statements to
re-characterize gross net revenue and net revenue line items to exclude from
such items revenue associated with CHDM and its Subsidiaries pharmaceutical
sales and to deliver them to I-trax prior to Closing.
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6. Conditions to Obligation to Close.
(a) Conditions to Obligation of I-trax, Acquisition and Acquisition
LLC. The obligation of I-trax, Acquisition and Acquisition LLC to consummate the
transactions to be performed by each of them respectively in connection with the
Closing is subject to satisfaction of the following conditions:
(i) this Agreement and the First Merger shall have received the
Requisite Stockholder Approval;
(ii) CHDM shall have procured all of the third party consents
specified in Section 5(b) above;
(iii) the representations and warranties set forth in Sections 4
above shall be true and correct in all respects at and as of the
Closing Date and the aggregate negative financial impact of all matters
or events added to the CHDM Disclosure Schedule since the date of
execution of this Agreement must not exceed $250,000;
(iv) CHDM shall have performed and complied with all of its
covenants hereunder in all respects through the Closing;
(v) no action, suit, or proceeding shall be pending or threatened
against CHDM or any of its Subsidiaries before any court or
quasi-judicial or administrative agency of any Federal, state, local,
or foreign jurisdiction or before any arbitrator wherein an unfavorable
injunction, judgment, order, decree, ruling, or charge would (A)
prevent consummation of any of the transactions contemplated by this
Agreement, (B) cause any of the transactions contemplated by this
Agreement to be rescinded following consummation, (C) affect adversely
the right of I-trax to own the capital stock of the First Merger
Surviving Corporation and all of the equity interest of the Second
Merger Surviving Company and to control the First Merger Surviving
Corporation and the Second Merger Surviving Company, or (D) affect
adversely the right of each of CHDM and its Subsidiaries to own its
assets and to operate its businesses (and no such injunction, judgment,
order, decree, ruling, or charge shall be in effect);
(vi) CHDM shall have delivered to I-trax a certificate to the
effect that each of the conditions specified above in Section
6(a)(i)-(v) have been satisfied in all respects, together with a
exhibit identifying all amendments to the CHDM Disclosure Schedule;
(vii) CHDM shall have delivered to I-trax a certificate of CHDM's
Secretary attaching, and certifying that each such attachment is true,
correct, complete and in effect on the Closing Date: (A) CHDM's
Certificate of Incorporation, (B) CHDM's Bylaws, (C) resolutions of the
Board of Directors of CHDM with respect to all transactions
contemplated by this Agreement; and (D) resolutions or minutes of
meeting of CHDM Stockholders approving this Agreement and the First
Merger, and (E) a good standing certificate issued by the Secretary of
State of the State of Delaware date not more than five days prior to
the Closing Date;
(viii) CHDM shall have delivered to I-trax a certificate stating
that each officer of CHDM executing this Agreement and all related
agreements and certificates is an incumbent officer of CHDM;
(ix) CHDM, I-trax and Acquisition shall have received all other
authorizations, consents, and approvals of governments and governmental
agencies referred to in Sections 5(b) and 5(c) above;
(x) I-trax shall have received from counsel to CHDM an opinion in
form and substance as set forth in Exhibit I attached hereto, addressed
to I-trax and dated as of the Closing Date;
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(xi) I-trax shall have received the resignations, effective as of
the Closing, of each director of CHDM, and of each officer of CHDM
other than those whom I-trax shall have specified, after consultation
with CHDM, in writing at least five business days prior to the Closing;
(xii) I-trax shall have closed the sale of I-trax Preferred
Shares the gross proceeds of which are not less than $15,000,000
pursuant to the agreements referred to in Section 5(e) above;
(xiii) I-trax shall have filed the I-trax Preferred Designations
with the Secretary of State of the State of Delaware;
(xiv) Acquisition LLC and each employee of CHDM deemed key in the
reasonable discretion of I-trax and CHDM Representative shall have
entered into employment agreements on mutually acceptable terms;
(xv) I-trax, the CHDM Representative and the Escrow Agent shall
have entered into the Escrow Agreement in form and substance
substantially as attached hereto as Exhibit E hereto;
(xvi) CHDM shall have delivered a certificate of CHDM's Chief
Financial Officer stating the cash balance of CHDM and its Subsidiaries
as of the Closing Date computed in accordance with Section 2(b) above;
(xvii) I-trax shall have determined, in the exercise of its
reasonable judgment, that issuance of I-trax Common Shares and I-trax
Preferred Shares will qualify for exemption from registration under
Section 4(2) of the Securities Act and the regulations promulgated
thereunder;
(xviii) I-trax and CHDM shall have closed on a senior loan
facility pursuant to which not less than $16,000,000 is available to be
borrowed by I-trax and CHDM on the Closing Date;
(xix) The waiting period applicable to the consummation of the
Merger under the Hart-Scott-Rodino Act shall have expired or been
terminated;
(xx) CHDM and its Subsidiaries shall have caused any of its
employee that have borrowed money from CHDM or its Subsidiaries to
repay such loans; and
(xxi) All actions to be taken by CHDM in connection with
consummation of the transactions contemplated hereby and all
certificates, opinions, instruments, and other documents required to
effect the transactions contemplated hereby will be reasonably
satisfactory in form and substance to I-trax.
I-trax may waive any condition specified in this Section 6(a) if it executes a
writing so stating at or prior to the Closing.
(b) Conditions to Obligation of CHDM. The obligation of CHDM to
consummate the transactions to be performed by it in connection with the Closing
is subject to satisfaction of the following conditions:
(i) this Agreement and the First Merger shall have received the
Requisite Stockholder Approval;
(ii) I-trax shall have procured all of the third party consents
specified in Section 5(b) above;
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(iii) the representations and warranties set forth in Section 3
above shall be true and correct in all respects at and as of the
Closing Date and the aggregate negative financial impact of all matters
or events added to the I-trax Disclosure Schedule since the date of
execution of this Agreement must not exceed $250,000;
(iv) I-trax shall have performed and complied with all of its
covenants hereunder in all respects through the Closing;
(v) no action, suit, or proceeding shall be pending or threatened
against I-trax or any of its Subsidiaries before any court or
quasi-judicial or administrative agency of any Federal, state, local,
or foreign jurisdiction or before any arbitrator wherein an unfavorable
injunction, judgment, order, decree, ruling, or charge would (A)
prevent consummation of any of the transactions contemplated by this
Agreement, (B) cause any of the transactions contemplated by this
Agreement to be rescinded following consummation, (C) affect adversely
the right of CHDM Stockholders to own the I-trax Common Shares I-trax
Preferred Shares issued in the First Merger (excluding, however,
fluctuations of price of I-trax Common Shares not below $2.25), or (D)
affect adversely the right of I-trax to own the combined assets and
operations of I-trax and CHDM after the Merger;
(vi) I-trax and Acquisition shall have delivered to CHDM a
certificate to the effect that each of the conditions specified above
in Sections 6(b)(i)-(v) is satisfied in all respects; together with an
exhibit identifying all amendments to the I-trax Disclosure Schedule;
(vii) I-trax and Acquisition shall have delivered to CHDM a
certificate of I-trax's Secretary and Acquisition's Secretary
attaching, and certifying that each such attachment is true, correct,
complete and in effect on the Closing Date, I-trax's and Acquisition's:
(A) certificate of incorporation, (B) Bylaws, (C) resolutions of the
Board of Directors with respect to all transactions contemplated by
this Agreement; and (D) resolutions or minutes of meeting of
stockholders approving this Agreement and the Merger, and (E) a good
standing certificate issued by the Secretary of State of the State of
Delaware date not more than five days prior to the Closing Date;
(viii) I-trax shall have delivered to CHDM a certificate stating
that each officer of I-trax executing this Agreement and all related
agreements and certificates is an incumbent officer of I-trax;
(ix) CHDM, I-trax and Acquisition shall have received all other
authorizations, consents, and approvals of governments and governmental
agencies referred to in Sections 5(b) and 5(c) above;
(x) CHDM shall have received from counsel to I-trax an opinion in
form and substance as set forth in Exhibit J attached hereto, addressed
to CHDM and dated as of the Closing Date and any tax opinion to be
rendered pursuant to Section 5(c)(ii);
(xi) CHDM shall have received a written opinion of Irell &
Manella LLP, in form and substance reasonably satisfactory to CHDM, to
the effect that the transactions contemplated herein will constitute a
reorganization within the meaning of Section 368(a) of the Code; the
Parties agree to make such reasonable written representations as
requested by Irell & Manella LLP for the purpose of rendering such
opinion;
(xii) Haywood D. Cochrane, Jr. shall have been elected to the
Board of Directors of I-trax;
(xiii) I-trax shall have closed the sale of I-trax Preferred
Shares the gross proceeds of which are not less than $15,000,000
pursuant to agreements referred to in Section 5(e) above;
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(xiv) I-trax shall have filed the I-trax Preferred Designations
with the Secretary of State of the State of Delaware;
(xv) I-trax and CHDM shall have closed on a senior loan facility
pursuant to which not less than $16,000,000, is available to be
borrowed by I-trax and CHDM on the Closing Date;
(xvi) I-trax, the CHDM Representative and the Escrow Agent shall
have entered into the Escrow Agreement in form and substance
substantially as attached hereto as Exhibit E hereto;
(xvii) the waiting period applicable to the consummation of the
Merger under the Hart-Scott-Rodino Act shall have expired or been
terminated;
(xviii) I-trax Common Shares shall not have been delisted or
otherwise removed from the stock market or exchange on which I-trax
Common Shares are traded as of the date of this Agreement, I-trax shall
not have received any notice of the delisting or removal of the I-trax
Common Shares from the stock market or exchange on which I-trax Common
Shares are traded as of the date of this Agreement and there shall be
no Basis for the delisting or removal of the I-trax Common Shares from
the stock market or exchange on which I-trax Common Shares are traded
as of the date of this Agreement; and
(xix) all actions to be taken by I-trax in connection with
consummation of the transactions contemplated hereby and all
certificates, opinions, instruments, and other documents required to
effect the transactions contemplated hereby will be reasonably
satisfactory in form and substance to CHDM.
Each of CHDM or the CHDM Representative may waive any condition specified in
this Section 6(b) if it or he executes a writing so stating at or prior to the
Closing.
7. Post-Closing Covenants. The Parties agree as follows with respect to
the period following the Closing.
(a) I-trax Common Shares. Each I-trax Common Share issued in the First
Merger will be imprinted with a legend substantially in the following form:
The shares represented by this certificate have not been registered
under the Securities Act of 1933, as amended. Said shares cannot be
sold, transferred, disposed of, pledged or hypothecated in any manner
whatsoever in the absence of an effective registration statement for
the shares under said Act, or in the opinion reasonably satisfactory to
the Company in form and of counsel, an exemption from the registration
requirements is in fact applicable to said shares.
(b) Insurance and Indemnification.
(i) I-trax will provide each individual who served as a director
or officer of CHDM at any time prior to the Effective Time with
liability insurance for a period of 48 months after the Effective Time
no less favorable in coverage and amount than any applicable insurance
in effect immediately prior to the Effective Time.
(ii) I-trax will observe any indemnification provisions now
existing in the certificate of incorporation or bylaws of CHDM for the
benefit of any individual who served as a director or officer of CHDM
at any time prior to the Effective Time.
(iii) I-trax will provide each CHDM Stockholder who joins the
I-trax board of directors or becomes an officer of I-trax or its
Subsidiaries with reasonable coverage under I-trax's directors and
officers liability insurance policy beginning with the time period when
such CHDM Stockholder is an officer or director of I-trax and for the
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applicable statute of limitations period after such CHDM Stockholder
ceases to be an officer and director of I-trax.
(iv) I-trax will observe the indemnification provisions set forth
in Section 7(b) of the Employment Agreement dated as of March 3, 1997
and in Section 2 of the letter agreement dated September 20, 1999, in
each case between Michael J. Hardies and Corporate Health Dimensions,
Inc., a Subsidiary of CHDM, for a period of four years after the
Effective Time.
(c) Registration Statement on Form S-3. Subject to compliance with SEC
regulations under the Securities Act, including the requirement that current
financial information is available as a condition to effectiveness of certain
registration statements filed under the Securities Act, I-trax shall file with
the SEC a registration statement on Form S-3 in the form of Exhibit G attached
hereto as amended in such respects as I-trax determines in necessary to comply
with its obligations under the securities laws covering I-trax Common Shares
issuable in the First Merger and the I-trax Common Shares issueable upon
conversion of I-trax Preferred Shares in the First Merger. I-trax shall use its
commercially reasonable efforts to cause such Form S-3 to become effective
promptly. I-trax shall promptly convey to CHDM and its counsel all
correspondence with the SEC related to the Form S-3. I-trax shall keep such
registration statement effective for a period of two years from its initial
effective date. I-trax will cause its executive officers to enter into lock-up
agreements prohibiting the sale of their I-trax stock until such time as the
Form S-3 has been effective for 90 days. CHDM Representative will cause its
executive officers to enter into lock-up agreements prohibiting the sale of
their I-trax stock until such time as the Form S-3 has been effective for 90
days. All fees, disbursements and out-of-pocket expenses and costs incurred by
I-trax in connection with the preparation and filing of the Form S-3 and in
complying with applicable Federal and state securities laws (including, without
limitation, all attorneys' fees of I-trax) shall be borne by I-trax. The former
CHDM Stockholders shall bear the cost of underwriting and/or brokerage
discounts, fees and commissions, if any, applicable to the shares being
registered and the fees and expenses of their counsel. I-trax shall use its
reasonable best efforts to qualify any of the registered I-trax Common Stock for
sale in such states as any former CHDM Stockholder reasonably designates.
However, I-trax shall not be required to qualify in any state which will require
an escrow or other restriction relating to I-trax and/or the sellers, or which
will require I-trax to qualify to do business in such state or require I-trax to
file therein any general consent to service of process. I-trax at its expense
will supply the former CHDM Stockholders with copies of the Form S-3 and any
prospectus included therein and other related documents in such quantities as
may be reasonably requested by the former CHDM Stockholders. I-trax will
indemnify and hold harmless the former CHDM Stockholders and their affiliates
against any liability or expense under the Securities Act of 1933 or otherwise,
insofar as such liability or expense is caused by any untrue statement or
alleged untrue statement of any material fact contained in the Form S-3, any
prospectus contained therein or any amendment or supplement thereto, or arise
out of or are based upon the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances in which they were made, not misleading;
provided, however, that I-trax will not be liable to the extent that any such
liability or expense arises out of an untrue statement or alleged untrue
statement or omission or alleged omission made in conformity with information
furnished by such former CHDM Stockholder in writing specifically for use in the
preparation of the Form S-3.
(d) General Cooperation. In case at any time after the Closing any
further action is necessary or desirable to carry out the purposes of this
Agreement, each of the Parties will take such further action (including the
execution and delivery of such further instruments and documents) as any other
Party reasonably may request, all at the sole cost and expense of the requesting
Party (unless the requesting Party is entitled to indemnification therefor under
Section 8 below).
(e) Tax-Free Reorganization Treatment. Each of I-trax, Acquisition,
Acquisition LLC shall use its or their best efforts to cause the Merger to
constitute a "reorganization" within the meaning of Section 368(a) of the Code
for federal income tax purposes (a "Tax-Free Reorganization"). None of the
aforementioned Parties has taken or will take, either before or after
consummation of the Merger, any action that, to the Knowledge of such Party,
would cause the Merger to fail to constitute a Tax-Free Reorganization. Unless
otherwise required by law, each Party shall (i) report the Merger on all Tax
returns and filings as a Tax-Free Reorganization, and (ii) not take any position
or action that is inconsistent with the characteristics of the Merger as a
Tax-Free Reorganization in any audit, administrative proceeding, litigation or
otherwise.
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8. Remedies for Breaches of this Agreement.
(a) Survival of Representations and Warranties. All of the
representations and warranties contained in this Agreement will survive the
Closing hereunder (even if the beneficiary of such representation and warranties
knew or had reason to know of any misrepresentation or breach of representation
or warranty at the time of Closing) and continue in full force and effect until
August 14, 2004, at which time they shall expire and be of no further force or
effect except for covenants which by their specific terms extend for a longer
period of time in which case such specific longer period of time shall be
applicable and control. Any claim based on any of representation or warranty
will be time barred unless submitted in writing prior to August 14, 2004 to the
Party charged with such claim, regardless of the applicable legal theory
underlying such claim and regardless of any different statute of limitation that
might otherwise apply under applicable law.
(b) Indemnification Provisions for Benefit of I-trax.
(i) In the event CHDM breaches (or in the event any third party
alleges facts that, if true, would mean CHDM has breached) any of its
representations, warranties, or covenants contained herein or in any
other document or instrument delivered in connection with the
transactions contemplated hereby, and, if there is an applicable
survival period pursuant to Section 8(a) above, provided that I-trax
makes a written claim for indemnification against the Escrow Shares in
accordance with the terms of the Escrow Agreement within such survival
period, then I-trax shall recover a portion of the Escrow Shares, equal
to the lesser of (a) 3,200,000 I-trax Common Shares, (b) I-trax Common
Shares with a value, measured at the time of final resolution of such
claim, of $8,000,000, or (c) Shares with a value, measured at the time
of final resolution of such claim, equal to the entirety of any Adverse
Consequences I-trax suffers through and after the date of the claim for
indemnification (including any Adverse Consequences I-trax suffers
after the end of any applicable survival period from the events that
are the subject of an indemnification claim made prior to the end of
the survival period) resulting from, arising out of, relating to or
caused by the breach (or the alleged breach).
(ii) For purposes of determining the number of Escrow Shares that
shall be released to I-trax in satisfaction of any Adverse Consequences
claimed under this Section 8(b), each Escrow Share shall be valued at
the average of the closing price of I-trax Common Shares for ten (10)
consecutive trading days ending the day prior to the final resolution
of the claim in question. All Adverse Consequences paid pursuant to
this Section 8(b) out of the Escrow Shares shall be treated as an
adjustment to the Merger Consideration and such Adverse Consequences
shall be charged on a pro rata basis to the CHDM Stockholders whose
I-trax Shares are held in escrow. In the event the Escrow Shares are
not sufficient to cover the full amount of the Adverse Consequences
claimed pursuant to this Section 8(b), I-trax shall have no claim or
right against CHDM Stockholders regardless of whether all or any of the
Escrow Shares are actually earned by the CHDM Stockholders pursuant to
terms set forth in this Agreement. Notwithstanding any other provision
in this Agreement, recourse to such of the Escrow Shares is the sole
post-Closing remedy of I-trax for breach of any representations and
warranties of CHDM. After the Escrow Shares have been distributed,
I-trax shall have no claim or right against CHDM Stockholders.
(c) Matters Involving Third Parties.
(i) If any third party shall notify I-trax with respect to any
matter (a "Third Party Claim") which may give rise to a claim for
indemnification against the Escrow Shares under this Section 8, then
I-trax shall promptly notify the CHDM Representative in writing and
promptly make available to the CHDM Representative all relevant
information which is material to the claim and which is in the
possession of I-trax; provided, however, that no delay on the part of
I-trax in notifying the CHDM Representative shall limited the ability
of I-trax to claim for indemnification against the Escrow Shares unless
(and then solely to the extent) such delay is actually prejudicial to
the defense of such Third Party Claim.
(ii) The CHDM Representative will have the right to defend I-trax
against the Third Party Claim with counsel of his choice reasonably
satisfactory to I-trax (with legal expenses to be paid out of escrow by
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the Escrow Agent) as long as (A) the CHDM Representative notifies
I-trax in writing within 15 days after I-trax has given notice of the
Third Party Claim that the CHDM Representative will indemnify I-trax
from and against the entirety of any Adverse Consequences I-trax may
suffer resulting from, arising out of, relating to, in the nature of,
or caused by the Third Party Claim, (B) the Third Party Claim involves
only money damages and does not seek an injunction or other equitable
relief, and (D) the CHDM Representative conducts the defense of the
Third Party Claim in a commercially reasonable, active and diligent
manner.
(iii) As long as the CHDM Representative is conducting the
defense of the Third Party Claim in accordance with Section 8(c)(ii)
above, (A) I-trax may retain separate co-counsel at its sole cost and
expense and participate in the defense of the Third Party Claim, (B)
CHMD Representative will not consent to the entry of any judgment or
enter into any settlement with respect to the Third Party Claim without
the prior written consent of I-trax (not to be withheld unreasonably),
and (C) the CHDM Representative will not consent to the entry of any
judgment or enter into any settlement with respect to the Third Party
Claim without the prior written consent of the Indemnified Parties (not
to be withheld unreasonably).
(iv) In the event any of the conditions in Section 8(c)(ii) above
is breached materially and such breach is not cured within ten (10)
days of notice thereof, or becomes unsatisfied, however, (A) I-trax may
defend against, and consent to the entry of any judgment or enter into
any settlement with respect to, the Third Party Claim in any manner
they reasonably may deem appropriate (and I-trax need not consult with,
or obtain any consent from, the CHDM Representative in connection
therewith), and (B) I-trax will collect the costs of defending against
the Third Party Claim (including reasonable attorneys' fees and
expenses) out of the Escrow Shares.
(d) Limitations on Liability. In no event will the aggregate Liability
for breach of any CHDM representations and warranties contained in this
Agreement exceed the Escrow Shares. In no event will any CHDM Stockholder be
personally liable on account of a breach of any representation or warranty of
CHDM hereunder.
(e) Determination of Adverse Consequences. All indemnification payments
under this Section 8 shall be deemed adjustments to Merger Consideration.
(f) Basket.
(i) Notwithstanding anything in Section 8(b) above to the
contrary, no Escrow Shares will be applied to indemnify I-trax from and
against any Adverse Consequences resulting from, arising out of,
relating to, in the nature of, or caused by any breach (or any alleged
breach) of any representation or warranty until I-trax has suffered
Adverse Consequences by reason of all such breaches (or alleged
breaches) in excess of $500,000 and then only to the extent that I-trax
has suffered Adverse Consequences by reason of all such breaches (or
alleged breaches) in excess of $500,000.
(ii) For purposes of Sections 8(b) and this Section 8(f), any and
all references to a "Material Adverse Effect" or "material" limitations
in the representations and warranties of CHDM which determine whether a
breach has occurred shall not be considered deductibles or a separate
basket, i.e., Adverse Consequences shall be calculated from the first
dollar of loss.
9. Termination.
(a) Termination of Agreement. Any of the Parties may terminate this
Agreement with the prior authorization of its board of directors (whether before
or after stockholder approval) as provided below:
(i) the Parties may terminate this Agreement by mutual written
consent at any time prior to the Effective Time;
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(ii) I-trax may terminate this Agreement by giving notice to CHDM
prior to the Effective Time (A) in the event CHDM has breached any
representation, warranty, or covenant contained in this Agreement in
any respect, I-trax or Acquisition has notified CHDM of the breach, and
the breach has continued without cure for a period of 30 days after the
notice of breach or (B) if the Closing shall not have occurred on or
before April 30, 2004 by reason of the failure of any condition
precedent under Section 6(a) hereof (unless the failure results
primarily from I-trax's or Acquisition's breaching any representation,
warranty, or covenant contained in this Agreement); provided, however,
if the sole condition precedent which has failed is the condition under
Section 6(a)(xvii) above, I-trax may, by notice to CHDM, elect to
extend the termination date set forth in Sections 9(a)(ii) and
9(a)(iii) to July 31, 2004 if I-trax promptly files a registration
statement on Form S-4 to register the I-trax Shares issuable in the
Merger.
(iii) CHDM may terminate this Agreement by giving notice to
I-trax and Acquisition at any time prior to the Effective Time (A) in
the event I-trax or Acquisition has breached any representation,
warranty, or covenant contained in this Agreement in any respect, CHDM
has notified I-trax and Acquisition of the breach, and the breach has
continued without cure for a period of 30 days after the notice of
breach or (B) if the Closing shall not have occurred on or before April
30, 2004 by reason of the failure of any condition precedent under
Section 6(b) hereof (unless the failure results primarily from CHDM's
breaching any representation, warranty, or covenant contained in this
Agreement);
(iv) I-trax and Acquisition may terminate this Agreement by
giving notice to the other Parties at any time prior to the Effective
Time in the event the fairness opinion referred to in Section 5(d) is
withdrawn;
(v) CHDM may terminate this Agreement by giving notice to I-trax
at any time prior to the Effective Time in the event the closing price
of I-trax Common Shares of the American Stock Exchange for ten (10)
consecutive trading days is less than $2.25.
(vi) any Party may terminate this Agreement by giving written
notice to the other Parties at any time after the Special CHDM Meeting
or the Special I-trax Meeting in the event this Agreement and the
Merger fail to receive the Requisite Stockholder Approval.
(b) Effect of Termination. If any Party terminates this Agreement
pursuant to Section 9(a) above, all rights and obligations of the Parties
hereunder shall terminate without any liability of any Party to any other Party
(except for any liability of any Party then in breach); provided, however, that
the confidentiality provisions contained in Section 5(g) above shall survive any
such termination.
10. Miscellaneous.
(a) Press Releases and Public Announcements. None of the Parties shall
issue any press release or make any public announcement relating to the subject
matter of this Agreement prior to the Closing without the prior written approval
of the other Party; provided, however, that any Party may make any public
disclosure it believes in good faith is required by applicable law or any
listing or trading agreement concerning its publicly-traded securities (in which
case the disclosing Party will use its reasonable efforts to advise the other
Parties prior to making the disclosure).
(b) No Third-Party Beneficiaries. This Agreement does not confer any
rights or remedies upon any Person other than the Parties and their respective
successors and permitted assigns; provided, however, that (i) the provisions of
this Agreement concerning delivery of the Merger Consideration, the obligation
of I-trax to keep the Form S-3 effective for two years, the continuing
obligation of I-trax to report the Merger on all Tax returns and filings as a
Tax-Free Reorganization, and the representations and warranties of I-trax and
Acquisition set forth in Section 3 above are for the benefit of the CHDM
Stockholders (in each case to be enforced on their behalf by the CHDM
Representative), and (ii) the provisions in Section 5(i) above concerning
insurance and indemnification are intended for the benefit of the individuals
specified therein and their respective legal representatives.
A-43
(c) Entire Agreement. This Agreement and the Confidentiality Agreement
dated as of June 16, 2003 between I-trax and CHDM constitute the entire
agreement among the Parties and supersedes any prior understandings, agreements,
or representations by or among the Parties, written or oral, to the extent they
related in any way to the subject matter hereof.
(d) Succession and Assignment. This Agreement shall be binding upon and
inure to the benefit of the Parties named herein and their respective successors
and permitted assigns. No Party may assign either this Agreement or any of his
or its rights, interests, or obligations hereunder without the prior written
approval of the other Parties.
(e) Counterparts. This Agreement may be executed in one or more
counterparts and/or by facsimile, each of which shall be deemed an original but
all of which together will constitute one and the same instrument.
(f) Headings. The section headings contained in this Agreement are
inserted for convenience only and shall not affect in any way the meaning or
interpretation of this Agreement.
(g) Notices. All notices, requests, demands, claims, and other
communications hereunder will be in writing. Any notice, request, demand, claim,
or other communication hereunder shall be deemed duly given if (and then two
business days after) it is sent by registered or certified mail, return receipt
requested, postage prepaid, and addressed to the intended recipient as set forth
below:
If to CHDM: CHD Meridian Healthcare
40 Burton Hills Blvd.
Suite 200
Nashville, Tennessee 37215
Attention: Haywood D. Cochrane, Jr., CEO
Copies to: R. Riley Sweat
Managing Director
Raymond James & Associates
2525 West End Avenue, Suite 925
Nashville, TN 37203
Fax: (615) 321-4588
and to:
Stephen P. Rothman, Esq.
1533 Addison Road
Palos Verdes Estates, CA 90274
Fax: (310) 373-0211
If to I-trax or Acquisition I-trax, Inc.
One Logan Square, Suite 2615
130 N. 18th Street
Philadelphia, PA 19103
Fax No. (215) 557-7820
Attention: Frank A. Martin, CEO
and Yuri Rozenfeld, Esq.
Copy to: Ballard Spahr Andrews & Ingersoll, LLP
1735 Market Street, 51st Floor
Philadelphia, PA 19103
Fax No. (215) 864-8999
Attention: Justin P. Klein, Esq.
A-44
If to the Process Agent: Corporate Trust Center
1209 Orange Street
Wilmington, DE 19801
Any Party may send any notice, request, demand, claim, or other
communication hereunder to the intended recipient at the address set forth above
using any other means (including personal delivery, expedited courier, messenger
service, telecopy, telex, ordinary mail, or electronic mail), but no such
notice, request, demand, claim, or other communication shall be deemed to have
been duly given unless and until it actually is received by the intended
recipient. Any Party may change the address to which notices, requests, demands,
claims, and other communications hereunder are to be delivered by giving the
other Parties notice in the manner herein set forth.
(h) Governing Law. This Agreement shall be governed by and construed in
accordance with the domestic laws of the State of Delaware without giving effect
to any choice or conflict of law provision or rule (whether of the State of
Delaware, State of Tennessee or Commonwealth of Pennsylvania or any other
jurisdiction) that would cause the application of the laws of any jurisdiction
other than the State of Delaware, as may be required by this Section 10(h).
(i) Amendments and Waivers. The Parties may mutually amend any
provision of this Agreement at any time prior to the Effective Time with the
prior authorization of their respective boards of directors; provided, however,
that any amendment effected subsequent to stockholder approval will be subject
to the restrictions contained in the Delaware General Corporation Law. No
amendment of any provision of this Agreement shall be valid unless the same
shall be in writing and signed by CHDM and I-trax. No waiver by any Party of any
default, misrepresentation, or breach of warranty or covenant hereunder, whether
intentional or not, shall be deemed to extend to any prior or subsequent
default, misrepresentation, or breach of warranty or covenant hereunder or
affect in any way any rights arising by virtue of any prior or subsequent such
occurrence.
(j) Severability. Any term or provision of this Agreement that is
invalid or unenforceable in any situation in any jurisdiction shall not affect
the validity or enforceability of the remaining terms and provisions hereof or
the validity or enforceability of the offending term or provision in any other
situation or in any other jurisdiction.
(k) Expenses. Each of the Parties will bear its own costs and expenses
(including legal fees and expenses) incurred in connection with this Agreement
and the transactions contemplated hereby. Further, CHDM will cause its
attorneys, accountants and investment professionals, including without
limitation, Raymond James and Associates to invoice CHDM at or prior to Closing
for all of their fees and expenses incurred in connection with this Agreement
and the transactions contemplated hereby, to the extent not yet paid (such
amounts, in the aggregate, "Accrued CHDM Professional Expenditures").
(l) Construction. The Parties have participated jointly in the
negotiation and drafting of this Agreement. In the event an ambiguity or
question of intent or interpretation arises, this Agreement shall be construed
as if drafted jointly by the Parties and no presumption or burden of proof shall
arise favoring or disfavoring any Party by virtue of the authorship of any of
the provisions of this Agreement. Any reference to any Federal, state, local, or
foreign statute or law shall be deemed also to refer to all rules and
regulations promulgated thereunder, unless the context requires otherwise. The
word "including" shall mean including without limitation. The Parties intend
that each representation, warranty, and covenant contained herein shall have
independent significance. If any Party has breached any representation,
warranty, or covenant contained herein in any respect, the fact that there
exists another representation, warranty, or covenant relating to the same
subject matter (regardless of the relative levels of specificity) which the
Party has not breached shall not detract from or mitigate the fact that the
Party is in breach of the first representation, warranty, or covenant.
(m) Incorporation of Exhibits, Annexes, and Schedules. The Exhibits,
Annexes, and Schedules identified in this Agreement are incorporated herein by
reference and made a part hereof.
A-45
(n) Specific Performance. Each of the Parties acknowledges and agrees
that the other Parties would be damaged irreparably in the event any of the
provisions of this Agreement are not performed in accordance with their specific
terms or otherwise are breached. Accordingly, each of the Parties agrees that
the other Parties shall be entitled to an injunction or injunctions to prevent
breaches of the provisions of this Agreement and to enforce specifically this
Agreement and the terms and provisions hereof in any action instituted in any
court of the United States or any state thereof having jurisdiction over the
Parties and the matter (subject to the provisions set forth in Section 10(o)
below), in addition to any other remedy to which they may be entitled, at law or
in equity.
(o) Submission to Jurisdiction. Each of the Parties submits to the
jurisdiction of any state or Federal court sitting in the State of Pennsylvania,
in any action or proceeding arising out of or relating to this Agreement and
agrees that all claims in respect of the action or proceeding may be heard and
determined in any such court. Each Party also agrees not to bring any action or
proceeding arising out of or relating to this Agreement in any other court. Each
of the Parties waives any defense of inconvenient forum to the maintenance of
any action or proceeding so brought and waives any bond, surety, or other
security that might be required of any other Party with respect thereto. Each
Party appoints CT Corporation (the "Process Agent") as his, her or its agent to
receive on his, her or its behalf service of copies of the summons and complaint
and any other process that might be served in the action or proceeding. Any
Party may make service on any other Party by sending or delivering a copy of the
process (i) to the Party to be served at the address and in the manner provided
for the giving of notices in Section 10(g) above or (ii) to the Party to be
served in care of the Process Agent at the address and in the manner provided
for the giving of notices in Section 10(g) above. Nothing in this Section 10(o),
however, shall affect the right of any Party to bring any action or proceeding
arising out of or relating to this Agreement in any other court or to serve
legal process in any other manner permitted by law or at equity. Each Party
agrees that a final judgment in any action or proceeding so brought shall be
conclusive and may be enforced by suit on the judgment or in any other manner
provided by law or at equity.
A-46
IN WITNESS WHEREOF, the Parties hereto have executed this Agreement as
of the date first above written.
I-TRAX, INC.
By: /s/ Frank A. Martin
---------------------------------
Frank A. Martin
Chief Executive Officer
DCG ACQUISITION, INC.
By: /s/ Frank A. Martin
--------------------------------
Frank A. Martin
Chief Executive Officer
MERIDIAN OCCUPATIONAL HEALTHCARE ASSOCIATES, INC.
By: /s/ Haywood D. Cochrane, Jr.
-----------------------------------------
Haywood D. Cochrane, Jr.
Chief Executive Officer
CHD MERIDIAN HEALTHCARE, LLC
By: I-trax, Inc., its sole member
By: /s/ Frank A. Martin
-----------------------------------------
Frank A. Martin
Chief Executive Officer
A-47
AMENDMENT TO MERGER AGREEMENT
This Amendment to Merger Agreement is dated as of February 4, 2004 (the
"Amendment"), is by and among 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 ("Acquisition LLC"), and Meridian Occupational
Healthcare Associates, Inc. (d/b/a CHD Meridian Healthcare), a Delaware
corporation ("CHDM"), and amends the Merger Agreement dated December 26, 2003
(the "Merger Agreement") among such Parties. All capitalized terms used in this
Amendment without definition have the respective meanings set forth in the
Merger Agreement.
WHEREAS, the Parties desire to amend the Merger Agreement and the
Escrow Agreement to change the number of I-trax Common Shares to be delivered at
the Effective Time by I-trax to the Escrow Agent and distributed to the CHDM
Stockholders in April 2005 if the historic business of CHDM meets certain
financial performance goals described in the Merger Agreement;
WHEREAS, the Parties desire to amend Section 5(f) of the Merger
Agreement to correct a typographical numbering error; and
WHEREAS, the Parties desire to amend Exhibit F to the Merger Agreement
to exclude certain expenses or accruals from the calculation of the 2004 EBITDA;
NOW THEREFORE, the Parties, intending to be legally bound, agree as
follows:
1. Escrow Shares.
--------------
(a) Section 2(h) of the Merger Agreement be and it hereby is amended and
restated to be and read in full as follows:
(h) Closing Escrow. At Closing, the Parties will
establish an escrow with the Escrow Agent for 3,859,200 I-trax
Common Shares (the "Escrow Shares") that will be delivered at
the Effective Time by I-trax to the Escrow Agent. The Escrow
Shares are in addition to the I-trax Common Shares deliverable
to the CHDM Stockholders at Closing under Section 2(b). The
Escrow Agent shall hold and distribute the Escrow Shares in
accordance with the terms of this Section 2(h), Section 2(i)
and the escrow agreement (the "Escrow Agreement")
substantially in the form of Exhibit E attached hereto to be
entered into at the Closing by I-trax, the CHDM Representative
and the Escrow Agent.
(b) Section 2(i) of the Merger Agreement be and it hereby is amended and
restated to be and read in full as follows:
(i) Earn Out. On the earlier of (X) two business days
following the date on which I-trax files its annual report on
Form 10-K or Form 10-KSB for the year ended December 31, 2004,
or (Y) April 30,
A-48
2005, I-trax and the CHDM Representative
shall cause the Deliverable Escrow Shares (as defined below)
to be delivered to the CHDM Stockholders at the Effective Time
in accordance with the Escrow Agreement if CHDM (prior to the
Effective Time) and First Merger Surviving Corporation or
Acquisition LLC, as applicable (after the Effective Time),
record calendar year 2004 earnings before interest, taxes,
depreciation, and amortization ("2004 EBITDA") of not less
than $8,100,000. I-trax and the CHDM Representative shall
calculate 2004 EBITDA in accordance with the rules set forth
in Exhibit F to this Agreement. "Deliverable Escrow Shares"
means that number of the Escrow Shares equal to the product of
(i) a fraction, the numerator of which is the lesser of 2004
EBITDA or $9,000,000 and the denominator of which is
$9,000,000 multiplied by (ii) 3,859,200 shares, less (A) any
Escrow Shares released to I-trax pursuant to Section 8 and (B)
any Escrow Shares which are subject to a pending claim that
has been made against the Escrow Shares in accordance with
Section 8 on or before August 31, 2004; provided, however,
that any Escrow Shares subtracted from the Deliverable Escrow
Shares pursuant to clause (B) shall be deliverable to CHDM
Stockholders at a later date if such claim is ultimately
resolved against I-trax. Any Escrow Shares not delivered to
CHDM Stockholders in accordance with this Section 2(i), will
be returned to I-trax and canceled.
2. Escrow Agreement. The form of Escrow Agreement attached as Exhibit E to the
Merger Agreement be and it hereby is replaced with the amended and restated form
of Escrow Agreement attached as Exhibit E to this Amendment.
3. Exhibit F. 2004 EBITDA Calculation Rules attached as Exhibit F to the Merger
Agreement be and they hereby are replaced with the amended and restated 2004
EBITDA Calculation Rules attached as Exhibit E to this Amendment.
4. Section 5(f). Section 5(f), "Operation of the Businesses," of the Merger
Agreement is amended to renumber each subsection thereof sequentially from (i)
through (x).
5. Miscellaneous
(a) Governing Law. This Amendment shall be governed by and construed
in accordance with the domestic laws of the State of Delaware without giving
effect to any choice or conflict of law provision or rule (whether of the State
of Delaware, State of Tennessee or Commonwealth of Pennsylvania or any other
jurisdiction) that would cause the application of the laws of any jurisdiction
other than the State of Delaware, as may be required by this Section 5(a).
(b) Successors and Assigns. This Amendment shall be binding upon and
inure to the benefit of the Parties named herein and their respective successors
and permitted assigns. No Party may assign either this Amendment or any of his
or its rights, interests, or obligations hereunder without the prior written
approval of the other Parties.
A-49
(c) Further Assurances. Each Party agrees to execute, acknowledge and deliver
such further instruments and to do all such other acts as may be reasonably
necessary or appropriate in order to carry out the purposes and intent of this
Amendment.
(d) Ratification. Except as expressly modified by this Amendment, the terms and
provisions of the Merger Agreement shall remain in full force and effect and
effect and references in the Merger Agreement to "this Agreement", "the
Agreement", "hereunder", "herein", "hereof" and words of like effect shall mean
the Merger Agreement as amended by this Amendment. If there is any conflict
between the provisions of the Merger Agreement and the provisions of this
Amendment, the provisions of this Amendment shall control.
(e) Amendments. This Amendment may be changed, modified or amended only by an
agreement in writing signed by the Parties hereto.
(f) Counterparts. This Amendment may be executed in one or more counterparts
and/or by facsimile, each of which shall be deemed an original but all of which
together will constitute one and the same instrument.
[Signatures on the following page.]
A-50
IN WITNESS WHEREOF, the Parties' duly authorized representatives have
executed and delivered this Amendment to the Merger Agreement as of the date and
year first above written.
I-TRAX, INC.
By: /s/ Frank A. Martin
-------------------------------
Frank A. Martin
Chief Executive Officer
DCG ACQUISITION, INC.
By: /s/ Frank A. Martin
--------------------------------
Frank A. Martin
Chief Executive Officer
MERIDIAN OCCUPATIONAL HEALTHCARE
ASSOCIATES, INC.
By: /s/ Haywood D. Cochrane, Jr.
-------------------------------
Haywood D. Cochrane, Jr.
Chief Executive Officer
CHD MERIDIAN HEALTHCARE, LLC
By: I-trax, Inc., its sole member
By: /s/ Frank A. Martin
--------------------------------
Frank A. Martin
Chief Executive Officer
A-51
ANNEX B
-------
[LETTERHEAD OF BRYANT PARK CAPITAL, INC.]
December 28, 2003
Board of Directors
I-trax, Inc.
One Logan Square
130 N. 18th Street
Philadelphia, PA 19103
Members of the Board:
You have asked us, in our capacity as investment bankers, to advise you with
respect to the fairness to I-trax, Inc. ("I-trax"), from a financial point of
view, of the Consideration (as defined below) to be paid by I-trax pursuant to
the terms of the Merger Agreement (the "Merger Agreement") to be entered into by
and among I-trax, DCG Acquisition, Inc. ("Acquisition"), Meridian Occupational
Healthcare Associates, Inc. (d/b/a CHD Meridian Healthcare) ("CHDM") and CHDM
Healthcare, LLC ("Acquisition LLC"). The Merger Agreement provides for a
two-step merger whereby (i) Acquisition would merge with and into CHDM (the
"First Merger") and CHDM would be the entity surviving the First Merger and (ii)
as soon as practicable following the First Merger, CHDM would merge with and
into Acquisition LLC (the "Second Merger" and together with the First Merger,
the "Transaction") and Acquisition LLC would be the entity surviving the Second
Merger. The aggregate consideration to be paid by I-trax at the effective time
of the First Merger (the "Merger Consideration") will equal: (i) 10,000,000
shares of common stock, par value $.001 par value per share, of I-trax (the
"Common Shares Consideration"), (ii) 400,000 shares of Series A Preferred Stock,
par value $.001 per share, of I-trax (the "Preferred Shares Consideration") and
(iii) $35,000,000 in cash minus the expense CHDM incurs to redeem or repurchase,
as the case may be, any outstanding share of common stock, par value $0.001 per
share, of CHDM (each a "CHDM Share") or any option to acquire a CHDM Share
("CHDM Option") during the period beginning on the date of the Merger Agreement
and ending on the closing date of the Transaction (the "Cash Consideration"). At
the effective time of the First Merger (the "Effective Time"); each CHDM Option
will be converted into an option to purchase the Merger Consideration divided by
the CHDM Shares Deemed Outstanding (as defined in the Merger Agreement) for an
exercise price per CHDM Share equal to the exercise price in effect immediately
prior to the Effective Time; provided, however, that in the case of any CHDM
Option to which Code Section 421 applies by reason of its qualification under
any of Internal Revenue Code of 1986, as amended (the "Code") Sections 422-424,
the exercise price and number of I-trax Common Shares subject to such option
shall be determined in a manner that meets the requirements for "issuing or
assuming a stock option in a transaction to which Code Section 424(a) applies,"
within the meaning of Code Section 424(a).
B - 1
December 28, 2003
Board of Directors
I-Trax, Inc.
Page 2 of 3
In addition, on April 30, 2005, I-trax may be required to deliver up to
4,000,000 additional I-trax Common Shares if Acquisition LLC meets certain
financial milestones (the "Earn-Out" and together with the Merger Consideration,
the "Consideration").
In arriving at our opinion, we have been advised by I-trax and have assumed,
among other things, the following: (i) that all 4,000,000 I-trax Common Shares
will be paid to the CHDM Stockholders pursuant to the Earn-Out and (ii) that, as
of the Effective Time, CHDM will have a net cash balance of not less than
$13,258,338, provided that if it has a lower cash balance: the Cash
Consideration shall be reduced dollar-for-dollar by the amount that such cash
balance is less than $13,258,338.
In addition, in arriving at our opinion, we have reviewed the December 24, 2003
draft of the Merger Agreement as well as certain publicly available business and
financial information relating to I-trax and CHDM. We also have reviewed certain
other information relating to I-trax and CHDM, including financial forecasts,
provided to or discussed with us by I-trax and CHDM, and have met with the
management of I-trax and CHDM to discuss the businesses and prospects of I-trax
and CHDM. We have also considered certain financial and stock market data, as
applicable, of I-trax and CHDM, and we have compared those data with similar
data for other publicly and privately held companies in businesses similar to
I-trax and CHDM, and we have considered, to the extent publicly available, the
financial terms of certain other business combinations and other transactions
which have recently been effected or announced. We also considered such other
information, financial studies, analyses and investigations and financial,
economic and market criteria which we deemed relevant.
In connection with our review, we have not assumed any responsibility for
independent verification of any of the foregoing information and have relied on
such information being complete and accurate in all material respects and upon
the assurances of the management of I-trax and CHDM that no relevant information
has been omitted or remains undisclosed to us. We have been advised, and have
assumed, that the financial forecasts for I-trax and CHDM have been reasonably
prepared on bases reflecting the best currently available estimates and
judgments of the respective managements of I-trax and CHDM as to the future
financial performance of I-trax and CHDM. With respect to forecasts regarding
certain cost savings, operating efficiencies and other financial synergies, we
have been advised, and have assumed, that such synergies will be realized in the
amounts and in the time periods currently estimated. In addition, we have not
made an independent evaluation or appraisal of the assets or liabilities
(contingent or otherwise) of I-trax or CHDM, nor have we been furnished with any
such evaluations or appraisals. Our opinion does not address the relative merits
of the Transaction as compared to other business strategies that might be
available to I-trax, nor does it address the underlying business decision of
I-trax to proceed with the Transaction. We are not expressing any opinion as to
what the value of the I-trax Common Shares and I-trax Preferred Shares will be,
at any future time, including when issued to the holders of CHDM Shares pursuant
to the Transaction or the prices at which such I-trax Common Shares and I-trax
Preferred Shares will trade subsequent to the announcement of the Transaction.
We express no view as to the federal, state or local tax consequences of the
Transaction.
We have assumed, with your consent, that in the course of obtaining the
necessary regulatory and third party approvals, consents and releases for the
Transaction, no modification, delay, limitation, restriction or condition will
be imposed that will have a material adverse effect on the Transaction and that
the Transaction will be consummated in accordance with applicable laws and
B - 2
December 28, 2003
Board of Directors
I-Trax, Inc.
Page 3 of 3
regulations and the terms of the Merger Agreement as set forth in the December
24, 2003 draft thereof, without waiver, amendment or modification of any
material term, condition or agreement. We have assumed that the Transaction will
be consummated in accordance with the terms of the Merger Agreement as set forth
in the December 24, 2003 draft thereof, without any further amendments thereto,
without waiver by any party of any of the conditions to its obligations
thereunder and without any material alteration of the Consideration as a result
of the indemnification provisions thereof. We have also assumed that the
representations and warranties of the parties contained in the Merger Agreement
will be true and correct.
Our opinion is necessarily based on information available to us, and financial,
economic, market and other conditions and circumstances as they exist and can be
evaluated by us, as of the date hereof. It should be understood that, although
subsequent developments may affect this opinion, we do not have any obligation
to update, revise or reaffirm the opinion.
We have acted as financial advisor to I-trax in connection with the Transaction
and will receive a fee for such services, a significant portion of which is
contingent upon the consummation of the Transaction. We also will receive a fee
based upon a request of I-trax to prepare and deliver this opinion. We and our
affiliates have in the past provided financial and investment banking services
to I-trax and its affiliates, including with regard to possible financing
sources in connection with the Transaction, and may in the future provide
financial or investment banking services to I-trax and its affiliates unrelated
to the Transaction for which we have received, and expect to receive,
compensation.
It is understood that this letter is for the information of the Board of
Directors of I-trax in connection with its evaluation of the Transaction and
does not constitute a recommendation to any stockholder as to how such
stockholder should vote or act with respect to any matter relating to the
Transaction. This letter is not to be quoted or referred to, in whole or in
part, in any registration statement, prospectus, information statement or proxy
statement or in any other document used in connection with the offering or sale
of securities, nor shall this letter be used for any other purposes, without our
prior written consent.
Based upon and subject to the foregoing, it is our opinion that, as of the date
hereof, the Consideration to be paid by I-trax in the Transaction is fair to
I-trax from a financial point of view.
Very truly yours.
BRYANT PARK CAPITAL, INC.
B - 3
ANNEX C
-------
ESCROW AGREEMENT
ESCROW AGREEMENT dated this ___ day of _______ 2004 (the
"Agreement") by and among I-trax, Inc., a Delaware corporation ("I-trax"),
Haywood D. Cochrane, Jr., solely in his capacity as limited agent of the
shareholders of CHDM (as defined below) under the Merger Agreement (as defined
below) (the "CHDM Representative"), and ____________________ (the "Escrow
Agent"). I-trax, the CHDM Representative and the Escrow Agent are sometimes
referred to herein individually as a "Party" and collectively as the "Parties."
BACKGROUND
A. I-trax, Meridian Occupational Healthcare Associates, Inc.,
a Delaware corporation (d/b/a/ CHD MERIDIAN HEALTHCARE) ("CHDM"), DCG
Acquisition, Inc., a Delaware corporation ("Acquisition") and a subsidiary of
I-trax, and CHD Meridian Healthcare LLC are parties to a Merger Agreement dated
December 26, 2003 and an Amendment to Merger Agreement dated as of February 4,
2004 (together, the "Merger Agreement"). Except as provided in this Agreement,
terms with initial capital letters used but not defined in this Agreement have
the meanings given to such terms in the Merger Agreement.
B. The Merger Agreement contemplates a merger of Acquisition
with and into CHDM, in which merger CHDM will continue as the surviving
corporation. As provided in the Merger Agreement, I-trax is depositing with the
Escrow Agent 3,859,200 I-trax Common Shares (the "Escrow Shares").
C. The Parties wish to provide for the appointment of an
escrow agent to hold the Escrow Shares, and to set forth the terms and
conditions under which the Escrow Shares will be distributed.
AGREEMENT
NOW, THEREFORE, intending to be legally bound hereby, the
Parties hereto agree as follows:
1. Appointment of Escrow Agent. I-trax and CHDM Representative
appoint the Escrow Agent, as the escrow agent under this Agreement and the
Escrow Agent accepts such appointment and agrees to hold the Escrow Shares,
together with all dividends thereon, deposited into escrow with the Escrow Agent
pursuant to Section 2(g) of the Merger Agreement, in accordance with the terms
of this Agreement, and to perform the Escrow Agent's other duties under this
Agreement.
2. Establishment of Escrow. Concurrently with the execution of
this Agreement I-trax is delivering to the Escrow Agent a single stock
certificate in the name of the Escrow Agent representing the Escrow Shares. The
Escrow Agent will upon receipt of the Escrow Shares provide written confirmation
to I-trax and the CHDM Representative that
C - 1
the Escrow Shares have been deposited with it. The portion of the Escrow Shares
attributable to each CHDM Stockholder is set forth on Annex A to this Agreement.
The Federal tax identification number of each CHDM Stockholder is likewise set
forth on Annex A to this Agreement.
3. Security Interest. The CHD Representative hereby grants (to
the extent the CHD Representative has the power to do so) I-trax a security
interest and lien in the Escrow Shares for purposes of satisfying any indemnity
rights of I-trax under the Merger Agreement, which security interest will
terminate on the earlier of distribution of from the Escrow Shares or the
Termination Date (as defined below).
4. Escrow Shares - Dividends and Voting. For Federal income
tax purposes or otherwise, each CHDM Stockholder identified on Annex A to this
Agreement will be deemed to be the owner of his, her or its pro rata portion of
the Escrow Shares while the Escrow Shares are held by the Escrow Agent. Any
regular or liquidating dividends paid on the Escrow Shares will be deposited
into escrow with the Escrow Agent and each CHDM Stockholder identified on Annex
A to this Agreement will be entitled to receive, upon distribution of the Escrow
Shares to the CHDM Stockholders in accordance with the terms of this Agreement,
any such dividends attributable to his, her or its pro rata portion of the
Escrow Shares. While the Escrow Shares are held by the Escrow Agent, the Escrow
Agent will vote the Escrow Shares held by it in proportion in which other
outstanding shares of Common Stock are voted with respect to any and all matters
which may be presented to the I-trax stockholders for action.
5. Escrow Shares - No Liquidation. The Escrow Agent shall not
without the consent of both I-trax and the CHDM Representative liquidate any
Escrow Shares.
6. Fees and Expenses of Escrow Agent. I-trax shall bear and
pay promptly upon receipt of an invoice the Escrow Agent's fees and expenses
according to the schedule of fees and expenses previously delivered by Escrow
Agent to I-trax.
7. Distribution of Escrow Shares.
(a) The Escrow Agent shall distribute the Escrow
Shares only:
(i) In accordance with mutual written and
executed directions of I-trax and CHDM
Representative; or
(ii) In accordance with the terms and
provisions of Section 9 below; or
(iii) If no Claims (as defined below) are
pending, on the earlier of (X) two business days following the date on which
I-trax files its annual report on Form 10-K or Form 10-KSB with the SEC for the
year ended December 31, 2004, or (Y) April 30, 2005 all remaining Escrow Shares
to the CHDM Stockholders without any further instructions from any Party; or
C - 2
(b) Any delivery of Escrow Shares pursuant to this
Agreement will be made to the CHDM Stockholders pro rata in accordance with the
percentage interests in the Escrow Shares of each CHDM Stockholder as set forth
on Annex A attached hereto; provided, however, that if a CHDM Stockholder has
defaulted in its obligations to fund its pro rata share of any CHDM
Representative expenses under Section 2(j)(iv) of the Merger Agreement, the CHDM
Representative may direct that Escrow Shares otherwise distributable to such
CHDM Stockholder, with a value equal to the unpaid obligation, plus interest at
10% per year, shall instead be distributed to the CHDM Representative or to
another CHDM Stockholder who has funded more than its share of such expenses.
8. Claims Procedures. If, while the Escrow Shares are held in
escrow by the Escrow Agent, I-trax, acting in good faith, reasonably determines:
(i) that I-trax has incurred a loss as a result of an Adverse Consequence for
which I-trax is entitled to be indemnified out of the Escrow Shares pursuant to
the Merger Agreement or (ii) the earn-out condition set forth in Section 2(i) of
the Merger Agreement has not been satisfied or has not been satisfied in full (a
"Claim"), then:
(a) I-trax is entitled to deliver to the Escrow
Agent and the CHDM Representative written notice of the Claim (a "Claim
Notice"). In the Claim Notice, I-trax shall specify in reasonable detail the
reasons for the conclusion that: (i) a loss caused by an Adverse Consequence for
which I-trax or Acquisition is entitled to be indemnified has been incurred, the
approximate date on which such Claim was first incurred, the dollar amount of
the loss if it can be reasonably estimated, and the number of Escrow Shares, as
calculated in accordance with Section 8 (including without limitation Section
8(b)(i) and Section 8(f)) of the Merger Agreement) that are properly recoverable
by I-trax on account of such Claim or (ii) the earn-out condition set forth in
Section 2(i) of the Merger Agreement has not been satisfied or has not been
satisfied in full, and the number of Escrow Shares that are properly recoverable
by I-trax on account of such Claim. The Escrow Shares subject to a Claim are
referred to as the "Claim Shares".
(b) On the 15th business day following the date on
which the CHDM Representative and the Escrow Agent receive the Claim Notice, the
Escrow Agent shall release and deliver to I-trax the Claim Shares, together with
any dividends accrued thereon, unless prior to the release date I-trax and the
Escrow Agent receive a written notice from the CHDM Representative stating that
the CHDM Representative objects to the Claim Notice (an "Objection Notice"). In
the Objection Notice, the CHDM Representative shall specify in reasonable detail
the conclusion that I-trax is not entitled to the Claim Shares or, if the CHDM
Representative is disputing only the amount of Claim Shares to which I-trax is
entitled, the reason for the conclusion that I-trax is entitled to fewer Claim
Shares and further providing the alternate calculation of the number of Claim
Shares to which I-trax is entitled. Reasonably promptly after I-trax and Escrow
Agent receive the Objection Notice, the Escrow Agent shall: (i) release from the
Escrow Shares the portion of the Claim Shares not subject to a dispute, together
with any dividends earned thereon; (ii) not release from the Escrowed Shares the
remainder of the Claim Shares; and (iii) notify I-trax and the CHDM
Representative of the Claim Shares so released and retained pursuant to this
Section 8(b).
C - 3
(c) If the CHDM Representative and I-trax cannot,
within an additional 10 days of the Claim Notice, resolve the dispute regarding
whether I-trax or CHDM Representative is entitled to the Claim Shares, the CHDM
Representative and I-trax will resolve the dispute through an arbitration
proceeding conducted in Philadelphia, Pennsylvania, under the Commercial
Arbitration Rules, Expedited Procedures, of the American Arbitration
Association. Upon delivery to the Parties of the arbitrator's determination, the
Escrow Agent shall promptly comply therewith. I-trax and the CHDM Representative
shall pay the fees and expenses of arbitration as follows: (i) if the arbitrator
resolves all of the disputes in favor of I-trax, the CHDM Representative shall
pay all of the fees and expenses of the arbitration; (ii) if the arbitrator
resolves all of the disputes in favor of the CHDM Representative, I-trax shall
pay all of the fees and expenses of the arbitration; and (iii) if the arbitrator
resolves some of the disputes in favor of the CHDM Representative and the rest
of the disputes in favor of I-trax, the CHDM Representative shall pay a
proportionate amount of the fees and expenses of the arbitration based on the
dollar amount of the disputes resolved against the CHDM Representative compared
to the total dollar amount of all disputes submitted to the arbitrator and
I-trax shall pay a proportionate amount of the fees and expenses of the
arbitration based on the dollar amount of the disputes resolved against I-trax
compared to the total dollar amount of all disputes submitted to the arbitrator.
Each of the CHDM Representative's and I-trax's own costs and expenses will be
paid in the same manner as is set forth above.
9. Transfer Agent. Upon distribution of the Escrow Shares in
accordance with Section 8 of this Agreement, the Escrow Agent shall return the
certificate(s) representing the Escrow Shares to I-trax's transfer agent
directing that the shares be issued to the applicable CHDM Stockholders and/or
I-trax.
10. Termination. This Agreement will terminate on May 1, 2005
(such date, the "Termination Date"), unless:
(a) The Escrow Agent distributes the Escrow Shares
in accordance with the terms of this Agreement prior to the Termination Date, in
which case this Agreement will terminate on the date on which all Escrow Shares
are so distributed; or
(b) A Claim is pending on the Termination Date, in
which case the Escrow Agent will distribute the Escrow Shares that are not
subject to a Claim in accordance with the terms of this Agreement and retain the
balance of the Escrow Shares until the CHDM Representative and I-trax resolve
the dispute in accordance with terms of this Agreement.
11. Resignation or Removal of Escrow Agent. The Escrow Agent
is entitled to resign at any time upon 30 days' prior notice to the other
Parties, and the other Parties are entitled to remove the Escrow Agent by mutual
consent upon 30 days' prior notice to the Escrow Agent. Prior to the effective
date of the resignation or removal of the Escrow Agent or any successor escrow
agent, the Parties other than the Escrow Agent shall appoint a successor escrow
agent to hold the Escrow Shares, and any such successor escrow agent shall
execute and deliver to the predecessor escrow agent an instrument accepting such
appointment; thereupon such successor escrow agent will, without further act,
become vested with all of the rights, powers and duties of the predecessor
escrow agent as if originally named herein.
C - 4
12. Liability of Escrow Agent.
(a) The duties of Escrow Agent hereunder are
entirely administrative and not discretionary. Further, the Escrow Agent is a
Party to this Agreement solely for the purposes of carrying out its
administrative duties hereunder and for no other purpose. The Escrow Agent shall
act only in accordance with written instructions received by it as provided in
this Agreement, is authorized to comply with any orders, judgments or decrees of
any court or arbitration panel and shall not incur any liability as a result of
its compliance with such instructions, orders, judgments or decrees. The Escrow
Agent is not required to complete any duties hereunder outside of the Escrow
Agent's ordinary course of business.
(b) The Escrow Agent is entitled to rely on any
instrument, not only as to its due execution, validity and effectiveness, but
also as to the truth and accuracy of any information contained therein, which
the Escrow Agent shall in good faith believe to be genuine, to have been signed
or presented by the persons or parties purporting to sign the same and to
conform to the provisions of this Agreement.
(c) Each of CHDM Representative and I-trax waives
any suit, claim, demand or cause of action of any kind which any of them may
have against the Escrow Agent arising out of or relating to the execution or
performance by the Escrow Agent of this Agreement, unless such suit, claim,
demand or cause of action is based upon the willful misappropriation of funds by
the Escrow Agent or the gross negligence or willful misconduct of the Escrow
Agent.
13. Dispute Resolution; Action in Interpleader.
Notwithstanding any other provision of this Agreement, if any dispute or
difference arises between the Escrow Agent and any other Party, or if any
conflicting demand is made upon the Escrow Agent, the Escrow Agent shall not
determine the same or take any action thereon. Rather, the Escrow Agent shall
await settlement of the controversy by appropriate legal proceedings; or the
Escrow Agent is entitled to, by written notice to the other Parties hereto,
require the Parties to enter binding arbitration or litigation to determine to
whom the Escrow Agent shall distribute the Escrow Shares or any portion thereof
held under this Agreement; or the Escrow Agent is entitled to file suit in
interpleader with the proper court in Philadelphia, Pennsylvania for the purpose
of having the respective rights of the Parties adjudicated. The Escrow Agent,
upon initiation of such suit, is entitled to deposit the Escrow Shares with the
court and, upon giving notice thereof to the Parties, the Escrow Agent is
entitled to be fully released and discharged from all further obligations
hereunder with respect to the Escrow Shares.
15. Notices. Any notices required or permitted hereunder must
be in writing and will be deemed to be properly given when personally delivered
to the party entitled to receive such notice or when sent by certified or
registered mail, postage prepaid, properly addressed to the party entitled to
receive such notice at its respective address set forth opposite its name below,
or at such other address as the party specifies by written notice similarly
delivered.
C - 5
If to I-trax: I-trax, Inc.
One Logan Square
130 N. 18th Street, Suite 2615
Philadelphia, PA 19103
Attention: Chief Executive Officer
Fax No. (215) 557-7828
Tax Identification No: 23-3057511
with a copy to: I-trax, Inc.
One Logan Square
130 N. 18th Street, Suite 2615
Philadelphia, PA 19103
Attention: General Counsel
Fax No. (215) 557-7820
If to CHDM Representative: Haywood D. Cochrane, Jr.
CHD Meridian Healthcare
40 Burton Hills Blvd.
Suite 200
Nashville, Tennessee 37215
with a copy to: Stephen P. Rothman, Esq.
1533 Addison Road
Palos Verdes Estates, CA 90274
If to Escrow Agent:
16. Miscellaneous. This Agreement, the Merger Agreement, and
all exhibits and schedules to the Merger Agreement set forth the entire
understanding of the Parties with respect to the subject matter hereof. All of
the terms and provisions of this Agreement will be binding upon and inure to the
benefit of the respective successors, including any successor to the CHDM
Representative appointed in accordance with the Merger Agreement, and assigns of
the Parties hereto. If there is any conflict between this Agreement and the
Merger Agreement that pertains to the rights and obligations of I-trax and the
CHDM Representative as against each other, the Merger Agreement shall control.
If there is any conflict between this Agreement and the Merger Agreement that
pertains to the rights and obligations of the Escrow Agent, this Agreement shall
control.
17. Governing Law. This Agreement must be construed and
interpreted in accordance with the laws of the State of Delaware, without regard
to any choice or conflict of laws provision or rule that will cause the
applicability of the laws of any jurisdiction other than the State of Delaware.
C - 6
18. Counterparts. This Agreement may be executed in one or
more counterparts and/or by facsimile, each of which shall be deemed an original
but all of which together will constitute one and the same instrument.
C - 7
IN WITNESS WHEREOF, this Agreement has been executed as of the
date and year first-above written.
I-TRAX, INC.
By:_______________________________
Name:
Title:
CHDM REPRESENTATIVE
_____________________________________
Haywood D. Cochrane, Jr.
ESCROW AGENT
By:__________________________________
Name:
Title:
C - 8
ANNEX A
--------
[Persons that receive Merger Consideration pursuant to Merger Agreement will be
listed on this Annex A in proportion to the amount of Merger Consideration that
such Persons receive in the Merger.]
C - 9
ANNEX D
-------
Note: I-trax will use its best efforts to incorporate the changes indicated
below in bold and surrounded by brackets prior to Closing.
CERTIFICATE OF DESIGNATIONS, PREFERENCES AND RIGHTS
OF
THE SERIES A CONVERTIBLE PREFERRED STOCK
OF
I-TRAX, INC.
_________________________
(Pursuant to Section 151 of the Delaware General Corporation Law)
_________________________
I-trax, Inc., a corporation organized and existing under the laws of
the State of Delaware (the "Company"), hereby certifies that, pursuant to the
authority vested in the Board of Directors of the Company (the "Board") by the
Certificate of Incorporation of the Company, as amended (the "Certificate of
Incorporation"), the following resolution was adopted as of _______________,
20___ by the Board pursuant to Section 141 of the Delaware General Corporation
Law:
RESOLVED, that pursuant to the authority granted to and vested in the
Board in accordance with the provisions of the Certificate of Incorporation
there shall be created a series of Preferred Stock, $0.001 par value per share,
with the following designations, powers, preferences, rights, qualifications,
limitations and restrictions:
1. Designation and Number of Shares. There shall hereby be created and
established a series of Preferred Stock designated as "Series A Convertible
Preferred Stock." The authorized number of shares of Series A Preferred Stock is
1,500,000.
2. Conversion.
(a) Conversion Formula. Each share of Series A Preferred Stock
is convertible into the number of shares of common stock, par value $.001 per
share, of the Company ("Common Stock") equal to the quotient of Twenty-Five
Dollars ($25.00) (the "Original Issue Price") divided by the then applicable
Conversion Price (as defined below).
(b) Optional or Automatic Conversion.
D-1
(1) Subject to Section 2(c), Shares of Series A
Preferred Stock are convertible in whole or in part, at any time, or from time
to time upon the election of the holder (such conversion, an "Optional
Conversion").
(2) If (i) the shares of Common Stock issuable upon
conversion of the Series A Preferred Stock (the "Underlying Shares") are
registered for resale under the Securities Act of 1933, as amended, (ii) there
is an effective registration statement and a related prospectus permitting
resale of the Underlying Shares during the entire Automatic Conversion Period
(as defined below); (iii) during the entire Automatic Conversion Period, the
Common Stock is listed or admitted for trading on The Nasdaq National Market,
The American Stock Exchange or the New York Stock Exchange; and (iv) the Company
has honored all conversions for which a Conversion Notice (as defined below) has
been received in accordance with Section 2(e)(5), the Shares of Series A
Preferred Stock will be automatically converted, to the extent not restricted by
Section 2(c), on the Trading Day (as defined below) immediately following the
twentieth (20th) Trading Day out of thirty (30) consecutive Trading Days on
which the Market Price (as defined below) of a share of Common Stock is equal to
or greater than Seven Dollars Fifty Cents ($7.50) (subject to adjustment in the
event of stock splits, reverse stock splits, stock dividends, recapitalizations
or similar events and) (such conversion, the "Automatic Conversion," such 30
Trading Day period, the "Automatic Conversion Period" and the date on which it
occurs, the "Automatic Conversion Date").
(3) Each such conversion under this Section 2(b) will
be in accordance with the terms of Section 2(a) above.
(c) 4.9% Limitation. Notwithstanding anything to the contrary
contained herein, the number of shares of Common Stock that may be acquired at
any time by a holder of Series A Preferred Stock upon conversion of Series A
Preferred Stock will not exceed a number that, when added to the total number of
shares of Common Stock deemed beneficially owned by such holder (other than by
virtue of the ownership of securities or rights to acquire securities that have
limitations on the holder's right to convert, exercise, or purchase similar to
the limitation set forth herein ("Excluded Shares")), together with all shares
of Common Stock beneficially owned at such time (other than by virtue of the
ownership of Excluded Shares) by persons whose beneficial ownership of Common
Stock would be aggregated with the beneficial ownership of such holder for
purposes of determining whether a group exists or for purposes of determining
the holder's beneficial ownership (the "Aggregation Parties"), in either case
for purposes of Section 13(d) of the Securities Exchange Act of 1934 (the
"Exchange Act"), Rule 13d-1 to 7, and Schedules 13D and 13G thereunder
(including as the same is made applicable to Section 16 of the Exchange Act and
the rules promulgated thereunder), would result in the beneficial ownership by
such holder or such group of more than 4.9% of the shares of Common Stock for
purposes of Section 13(d) or Section 16 of the Exchange Act and the rules
promulgated thereunder. The Company and the holders of Series A Preferred Stock
agree that, if and to the extent this Section 2(c) would restrict the conversion
of the shares of Series A Preferred Stock held by any holder (a "Restricted
Holder"), then notwithstanding anything to the contrary contained herein, only
that portion of the shares of Series A Preferred Stock held by the Restricted
Holder as may be converted in accordance with this Section 2(c) will be
D-2
converted and the remaining shares of Series A Preferred Stock held by the
Restricted Holder will remain outstanding until the ninetieth (90th) day
following the date of the Automatic Conversion Date, at which time the remaining
shares of Series A Preferred Stock held by the Restricted Holder will
automatically convert into shares of Common Stock in the manner provided for in
Section 2(b) above and the limitation on conversion set forth in this Section
2(c) will cease and be of no further force or effect. Any Restricted Holder will
promptly (and in any event prior to the Automatic Conversion Date) notify the
Company in writing if this Section 2(c) would restrict conversion of such
holder's Series A Preferred Stock, specifying therein the number of shares of
Series A Preferred Stock so restricted. If at any time the limits in this
Section 2(c) make the shares of Series A Preferred Stock held by any holder not
convertible in whole or in part, the Company shall not by reason thereof be
relieved of its obligation to issue shares of Common Stock at any time or from
time to time thereafter as and when shares of Common Stock may be issued without
violating such restrictions. Notwithstanding anything else in this Section 2(c)
to the contrary, all shares of Series A Preferred Stock will cease to accrue
dividends effective as of the Automatic Conversion Date and any holder of Series
A Preferred Stock may waive the terms of this Section 2(c) upon sixty-one (61)
day notice to the Company to this effect.
(d) Additional Definitions.
(1) Conversion Price. The initial "Conversion Price"
of each share of Series A Preferred Stock is Two Dollars Fifty Cents ($2.50)
(such that on the date on which shares of Series A Preferred Stock are first
issued, each such share would convert into ten (10) shares of Common Stock). The
initial and any subsequent Conversion Price is subject to adjustment as provided
in Section 3 below.
(2) Market Price. "Market Price" means, with respect
to the shares of Common Stock on a Trading Day, (i) if the shares are listed or
admitted for trading on any national securities exchange or included in The
Nasdaq National Market or Nasdaq SmallCap Market, the last reported sales price
as reported on such exchange or market on such Trading Day; (ii) if the shares
are not listed or admitted for trading on any national securities exchange or
included in The Nasdaq National Market or Nasdaq SmallCap Market, the average of
the last reported highest closing bid and lowest asked quotation for the shares
as reported on the National Association of Securities Dealers Automated
Quotation System ("NASDAQ") or a similar service if NASDAQ is not reporting such
information on such Trading Day; or (iii) if the shares are not listed or
admitted for trading on any national securities exchange or included in The
Nasdaq National Market or Nasdaq SmallCap Market or quoted by NASDAQ or a
similar service, the average of the last reported highest bid and lowest asked
quotation for the shares as quoted by a market maker in the shares (or if there
is more than one market maker, the highest bid and lowest asked quotation shall
be obtained from two market makers and the average of the highest bid and lowest
asked quotation) on such Trading Day. In the absence of any available public
quotations for the Common Stock, the Board shall determine in good faith the
fair value of the Common Stock, which determination shall be set forth in a
certificate by the Secretary of the Company, and which shall constitute the
Market Price.
D-3
(3) Trading Day. "Trading Day" means a day on which
the principal market or quotation system on which shares of Common Stock are
traded or quoted is open to transact business.
(e) Effecting a Conversion.
(1) Optional Conversion. The holder of a share of
Series A Preferred Stock shall effect an Optional Conversion by surrendering to
the Company the certificate representing such share, together with written
notice of election to convert and specifying the name and address in which a
certificate or certificates of shares of Common Stock are to be issued (a
"Conversion Notice"). Each Conversion Notice shall specify the number of shares
of Series A Preferred Stock to be converted and the effective date of such
conversion, which date may be neither prior to, nor more than ten (10) days
after, the date the holder delivers such Conversion Notice to the Company. If
the effective date of the conversion is not specified in a Conversion Notice,
the effective date of the conversion will be the date that the Conversion Notice
is received by the Company. Each Conversion Notice, once given, is irrevocable,
except that (A) a conversion not honored, and the shares issuable thereunder not
delivered, within three business days of the effective date of such conversion
will be revocable until such conversion is honored and the shares issuable
thereunder delivered and [(B) the effectiveness of a Conversion Notice may be
made conditional upon external events, such as the acceptance for purchase in a
tender offer of Underlying Shares, or the consummation of a merger or other
transaction involving Underlying Shares.] A holder of shares of Series A
Preferred Stock may only convert shares of Series A Preferred Stock in blocks
equal to at least the lesser of (i) the number of shares of Series A Preferred
Stock convertible into five thousand (5,000) shares of Common Stock and (ii) all
shares of Series A Preferred Stock then held by the holder. If the holder is
converting less than all shares of Series A Preferred Stock represented by the
certificate or certificates tendered by the holder to the Company with the
Conversion Notice, the Company will convert the number of shares of Series A
Preferred Stock so specified and shall within three business days of the
effective date of conversion deliver to such holder a certificate for such
number of shares of Series A Preferred Stock as have not been converted.
(2) Automatic Conversion. Upon Automatic Conversion,
the Company will notify each holder of Series A Preferred Stock of the effective
date of Automatic Conversion and each holder shall surrender the certificate or
certificates representing all of the shares of Series A Preferred Stock owned by
such holder. Each holder of shares of Series A Preferred Stock will be deemed a
holder of record of the Common Stock upon such Automatic Conversion.
(3) Dividends. Upon conversion of a share of Series A
Preferred Stock all accrued and unpaid dividends on such share shall, at the
election of the Company, be paid either in cash, to the extent funds are legally
available therefor, or that number of shares of Common Stock equal to the
quotient of such accrued and unpaid dividends divided by the average Market
Price of the Common Stock for the ten (10) consecutive Trading Days preceding
the effective date of conversion. Pursuant to this Section 2(e)(3), accrued but
unpaid dividends may only be paid in Shares of Common Stock if such Shares of
Common Stock are registered under the Securities Act of 1933, as amended.
D-4
(4) Fractional Shares. The value of all fractional
shares resulting from a conversion of shares of Series A Preferred Stock or
accrued but unpaid dividends thereon will be rounded down to the nearest whole
cent and paid out in cash.
(5) Miscellaneous. The Company will cancel upon
receipt all certificates representing shares of Series A Preferred Stock
surrendered for conversion for which conversions have been honored. Within three
business days of the date of conversion, the Company shall deliver to the holder
of shares so surrendered certificate(s) representing the number of shares of
Common Stock into which such shares were converted.
(f) Reservation of Shares.
(1) Reserved Shares. The Company will at all times
reserve and keep available out of its authorized and unissued Common Stock
solely for the purpose of issuance upon conversion of Series A Preferred Stock
as herein provided, free from preemptive rights or any other actual contingent
purchase rights of persons other than the holders of Series A Preferred Stock,
not less than such number of shares of Common Stock as shall be issuable upon
the conversion of all outstanding shares of Series A Preferred Stock. All shares
of Common Stock issued upon conversion of shares of Series A Preferred Stock
shall be duly and validly authorized and fully paid and non-assessable.
(2) Additional Shares. If at any time the number of
authorized but unissued shares of Common Stock shall not be sufficient to effect
the conversion of all then outstanding shares of Series A Preferred Stock, in
addition to such other remedies as shall be available to the holders of such
Series A Preferred Stock, the Company will take such corporate action as is
necessary to increase its authorized but unissued shares of Common Stock to such
number of shares as shall be sufficient for such purposes.
(g) Issue Taxes. The Company shall pay any issue taxes
incurred in respect of the issue of shares of Common Stock upon conversion of
shares of Series A Preferred Stock. If a holder of shares of Series A Preferred
Stock specifies that the shares of Common Stock to be issued are to be issued in
a name or names other than the name or names in which such Series A Preferred
Stock stand, then the Company will not be required to pay any additional
transfer or other taxes incurred by reason of the issuance of such shares of
Common Stock to the name of another, and if the appropriate transfer taxes are
not paid to the Company or the transfer agent for the Series A Preferred Stock
at the time of such conversion, the shares of Common Stock issued upon
conversion thereof may be registered in the name or names in which the Series A
Preferred Stock were registered, despite the instructions to the contrary.
3. Adjustment of Conversion Price. The number and kind of securities
issuable upon the conversion of the Series A Preferred Stock and the Conversion
Price will adjusted from time to time in accordance with the following
provisions:
(a) Subdivision or Combination of Shares. If, while any share
of Series A Preferred Stock is outstanding, the Company (i) subdivides the
D-5
outstanding shares of Common Stock into a larger number of shares or (ii)
combines the outstanding shares of Common Stock into a smaller number of shares,
then, and in each such event, the Conversion Price in effect immediately prior
to such event shall be adjusted (and any other appropriate actions pertaining to
the Series A Preferred Stock will be taken by the Company) so that the holder of
any outstanding share of Series A Preferred Stock thereafter surrendered for
conversion will receive the number of shares of Common Stock or other securities
of the Company that such holder would have owned or would have received upon or
by reason of any event described in this Section 3(a) had such share of Series A
Preferred Stock been converted immediately prior to the occurrence of such
event. An adjustment made pursuant to this Section 3(a) shall become effective
retroactively in the case of any such subdivision or combination, to the close
of business on the day upon which such corporate action becomes effective.
(b) Stock Dividends. If, while any share of Series A Preferred
Stock is outstanding, the Company declares, pays or otherwise distributes a
dividend or other distribution with respect to outstanding shares of Common
Stock (or declares such dividend), the Conversion Price shall be reduced, as of
the date a record is taken of the holders of Common Stock for the purpose of
receiving such dividend or other distribution (or if no such record is taken, as
at the earliest of the date of such declaration, payment or other distribution),
to the Conversion Price determined by multiplying the Conversion Price in effect
immediately prior to such declaration, payment or other distribution by a
fraction (i) the numerator of which is the number of shares of Common Stock
outstanding immediately prior to such declaration, payment or other
distribution, and (ii) the denominator of which is the total number of shares of
Common Stock outstanding immediately after such declaration, payment or other
distribution. If the Company declares, pays or otherwise distributes any
dividend on the Common Stock payable in any right to acquire Common Stock for no
consideration, then the Company shall be deemed to have made a dividend payable
in Common Stock in an amount of shares equal to the maximum number of shares
issuable upon exercise of such rights to acquire Common Stock.
(c) Capital Events.
(1) Condition to Capital Event. While any Share of
Series A Preferred Stock is outstanding, in advance of, and as a condition to
the occurrence of, any Capital Event (as defined below), any resulting successor
or acquiring entity (if not the Company) must assume by written instrument the
obligations of this Section 3(c).
(2) Capital Event Obligations. If, while any share of
Series A Preferred Stock is outstanding, there is a Capital Event (as defined
below), the Board, in advance of such Capital Event and subject to the right of
the holder of shares of Series A Preferred Stock to elect to declare certain
such events a Deemed Liquidation pursuant to Section 5(c) below, shall make
appropriate adjustment (as reasonably determined in good faith by the Board) in
the application of the provisions herein set forth with respect to rights and
interests thereafter of the holder of the Series A Preferred Stock, to the end
that the provisions set forth herein (including the specified changes in and
other adjustments of the number of shares underlying the Series A Preferred
Stock) shall thereafter be applicable, as near as reasonably may be, in relation
to any such shares of stock or other securities or other property thereafter
deliverable upon conversion of the Series A Preferred Stock. "Capital Event"
means a capital reorganization or reclassification (other than a change in par
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value) of the capital stock of the Company, or (ii) exchange or conversion of
the Common Stock for or into securities of another corporation or other entity,
or (iii) consolidation or merger of the Company into any other person (other
than a merger which does not result in any reclassification, conversion,
exchange or cancellation of outstanding shares of Common Stock) or (iv) sale,
lease or other conveyance of all or substantially all of the assets of the
Company.
(d) Other Provisions Applicable to Adjustment Under this
Section 3. The following provisions apply to an adjustment of the Conversion
Price as provided in this Section 3:
(1) Treasury Shares. The number of shares of Common
Stock at any time outstanding shall not include any shares thereof then directly
or indirectly owned or held by or for the account of the Company.
(2) Other Action Affecting Common Stock. If the
Company takes any action affecting the outstanding number of shares of Common
Stock other than an action described in Sections 3(a)-3(c), which would have an
inequitable effect on the holders of the Series A Preferred Stock, then the
Conversion Price shall be adjusted in such manner and at such times as the Board
may in good faith determine to be equitable in the circumstances.
(3) Minimum Adjustment. No adjustment of the
Conversion Price shall be made if such adjustment is less than one percent (1%)
of the Conversion Price then in effect, but any such amount will be carried
forward and an adjustment in respect thereof shall be made at the time of and
together with any subsequent adjustment which, together with such amount and any
other amount or amounts so carried forward, shall aggregate an increase or
decrease of one percent (1%) or more.
(4) Certain Adjustments. The Conversion Price shall
not be adjusted upward except in the event of a combination of the outstanding
shares of Common Stock into a smaller number of shares of Common Stock.
(e) No Impairment. The Company shall not, by amendment of its
Certificate of Incorporation or through any reorganization, transfer of assets,
consolidation, merger, dissolution, issue or sale of securities or any other
voluntary action, avoid or seek to avoid the observance or performance of any of
the terms to be observed or performed hereunder by the Company but will at all
times in good faith assist in the carrying out of all the provisions of Section
3 and in the taking of all such action as may be necessary or appropriate in
order to protect the conversion rights of the holders of the Series A Preferred
Stock against impairment.
(f) Notices of Adjustments. Whenever the Conversion Price is
adjusted as herein provided, the Chief Financial Officer (or another senior
executive officer in the absence of the Chief Financial Officer) of the Company
shall, in good faith, compute the adjusted Conversion Price in accordance with
the foregoing provisions and prepare a written certificate setting forth such
adjusted Conversion Price and showing in detail the facts upon which such
adjustment is based, and such written instrument shall promptly be delivered to
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each record holder of the Series A Preferred Stock.
4. Rank. In a Liquidation (as defined in Section 5(a) below), Series A
Preferred Stock will rank, as to dividends, rights upon liquidation, dissolution
or winding up, senior and prior to (i) Common Stock and (ii) each other class or
series of capital stock of the Company hereafter created which does not
expressly rank pari passu with or senior to Series A Preferred Stock. (All
equity securities of the Company to which the Series A Preferred Stock ranks
senior, whether with respect to dividends, rights upon liquidation, dissolution,
winding up or otherwise, including the Common Stock, are collectively referred
to herein as "Junior Securities," all equity securities of the Company to which
the Series A Preferred Stock ranks on a parity with, whether with respect to
dividends or upon liquidation, dissolution, winding up or otherwise, are
collectively referred to herein as "Parity Securities" and all equity securities
of the Company to which the Series A Preferred Stock ranks junior, whether with
respect to dividends or upon liquidation, dissolution, winding up or otherwise
are collectively referred to herein as "Senior Securities").
5. Liquidation Rights.
(a) Liquidation Preference. Upon a voluntary or involuntary
liquidation, or dissolution or winding up of the Company (a "Liquidation"),
before any distribution of assets are made to the holders of Junior Securities,
the holder of each then outstanding share of Series A Preferred Stock shall be
paid out of the assets of the Company legally available for distribution to its
stockholders (the "Available Assets") the Original Issue Price plus all
dividends accrued but unpaid on the Original Issue Price (whether or not
declared) up to the date of the Liquidation (such amount, the "Liquidation
Preference").
(b) Priority. If the Available Assets are insufficient to pay
the holders of outstanding shares of Series A Preferred Stock and of all Parity
Securities the full Liquidation Preference of all such securities, then the
holders of all such shares shall share the Available Assets ratably with all
other holders of shares of Series A Preferred Stock and Parity Securities in
such distribution of assets in proportion to the Liquidation Preference of the
respective shares.
(c) Deemed Liquidation. The holders of a majority of the then
outstanding shares of Series A Preferred Stock, acting as a single class, may
deem a Liquidation to be any of the following (each such event, a "Deemed
Liquidation"): (i) a merger, reorganization or consolidation of the Company with
or into another corporation or other similar transaction or series of related
transactions if the Company is not the surviving entity in such merger,
reorganization, consolidation or similar transaction or series of related
transactions or if the member of the Board immediately prior to such merger,
reorganization, consolidation or similar transaction do not continue as a
majority of members of the Board of the surviving entity immediately after such
merger, reorganization, consolidation or similar transaction; and (ii) the sale
of all or substantially all the assets of the Company. Upon a Deemed
Liquidation, holders of Series A Preferred Stock may elect to receive either (i)
the Liquidation Preference or (ii) the consideration issuable in the merger,
reorganization or consolidation or similar transaction to the holders of shares
of the Common Stock pro rata with such holders as if the outstanding shares of
D-8
Series A Preferred Stock were converted into shares of Common Stock pursuant to
Section 2 above immediately prior to the record date of such merger,
reorganization or consolidation or similar transaction. The value of
consideration issuable in any merger, reorganization or consolidation or similar
transaction shall be determined in good faith by the Board.
(d) Notice. The Company will send a written notice of a
Liquidation to the holders of record of the Series A Preferred Stock, stating a
payment date, the liquidation amount and the place where the Liquidation Amount
will be paid, not less than fifteen (15) days prior to the payment date, using
any of the following delivery methods: (i) in person; (ii) mailed by certified
or registered mail, return receipt requested; (iii) sent by national courier; or
(iv) sent by telecopier. The notice will be addressed to each holder as shown by
the records of the Company.
6. Dividends. Each share of Series A Preferred Stock will accrue
dividends at the rate of 8% per annum on the Original Issue Price beginning on
the Original Issue Date of such share of Series A Preferred Stock. Accrued and
unpaid dividends are payable in accordance with Section 2(e)(3) or 5(a).
7. Voting Rights.
(a) Stockholder Votes. Each holder of outstanding shares of
Series A Preferred Stock is entitled to the number of votes equal to the number
of whole shares of Common Stock into which the shares of Series A Preferred
Stock held of record by such holder are convertible at each meeting of
stockholders of the Company (and written actions of stockholders in lieu of
meetings) with respect to any and all matters presented to the stockholders of
the Company for their action or consideration. Except as provided by law and by
the provisions of Section 8 below, the holders of shares of Series A Preferred
Stock shall vote together with the holders of Common Stock as a single class.
(b) Notice. The Company shall notify in writing each holder of
Series A Preferred Stock of any meeting of the stockholders (and provide them
with copies of proxy materials and other information sent to stockholders). In
the event of any undertaking by the Company of a record of its stockholders for
the purpose of determining stockholders who are entitled to receive payment of
any dividend or other distribution, any right to subscribe for, purchase or
otherwise acquire (including by way of merger, consolidation, recapitalization
or similar transaction) any share of any class or any other securities or
property, or to receive any other right, or for the purpose of determining
stockholders who are entitled to vote in connection with a Liquidation the
Company shall mail a notice to each holder, at least ten (10) days prior to the
record date specified therein (or twenty (20) days prior to the consummation of
any transaction or event, whichever is earlier), of the date on which any such
record is to be taken for the purpose of such dividend, distribution, right or
other event, and a brief statement regarding the amount and character of such
dividend, distribution, right or other event to the extent known at such time.
(c) Delaware General Corporation Law. To the extent that under
the Delaware General Corporation Law ("DGCL") the vote of the holders of the
Series A Preferred Stock, voting separately as a class or series as applicable,
is required to authorize a given action of the Company, the affirmative vote or
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consent of the holders of at least a majority of the shares of Series A
Preferred Stock then outstanding represented at a duly held meeting at which a
quorum is present or by written consent of a majority of the shares of Series A
Preferred Stock (except as otherwise may be required under the DGCL) shall
constitute the approval of such action by the class.
8. Protective Provision. As long as the shares of Series A Preferred
Stock are outstanding, the Company shall not, without the consent of at least a
majority of the then outstanding shares of Series A Preferred Stock:
(a) Parity or Senior Securities. Authorize, issue, sell or
agree to any of the foregoing any new class or series of Parity Securities,
Senior Securities or securities or rights of any kind convertible into or
exercisable or exchangeable for any Parity Securities or Senior Securities;
(b) Charter Amendments. Amend the Certificate of Incorporation
or Bylaws of the Company so as to affect adversely the rights, preferences or
privileges of the Series A Preferred Stock or any Parity Securities or Senior
Securities; or
(c) Dividends. Declare, pay, or set aside for payment any
dividend on any Junior Securities (except for dividends payable in Junior
Securities) or Parity Securities (unless the Series A Preferred Stockholders
shall participate in such dividend pari passu).
9. No Reissuance of Series A Preferred Stock. Shares of Series A
Preferred Stock acquired by the Company upon redemption, purchase, conversion or
otherwise shall not be reissued, and all such shares of Series A Preferred Stock
shall be cancelled, retired and eliminated from the shares of Series A Preferred
Stock which the Company shall be authorized to issue. Any such shares of Series
A Preferred Stock acquired by the Company shall have the status of authorized
and unissued shares of Preferred Stock issuable in undesignated series and may
be redesignated and reissued in any series of preferred stock other than as
Series A Preferred Stock. No shares of Series A Preferred Stock shall be
authorized or issued after the date of this resolution other than those set
forth in Section 1.
10. Registered Holders. A holder of Series A Preferred Stock registered
on the Company's stock transfer books as the owner of shares of Series A
Preferred Stock shall be treated as the owner of such shares of all purposes.
All notices and all payments required to be mailed to a holder of shares of
Series A Preferred Stock shall be mailed to such holder's registered address on
the Company's stock transfer books, and all dividends and redemption payments to
a holder of Series A Preferred Stock made hereunder shall be deemed to be paid
in compliance hereof on the date such payments are deposited into the mail
addressed to such holder at his registered address on the Company's stock
transfer books.
11. Certain Remedies. Any registered holder of shares of Series A
Preferred Stock is entitled to an injunction or injunctions to prevent breaches
of the provisions of this Certificate of Designations and to enforce
specifically the terms and provisions of this Certificate of Designations in any
court of the United States of America or any state thereof having jurisdiction,
D-10
this being in addition to any other remedy to which such holder may be entitled
at law or in equity.
12. Headings of Subdivisions. The headings of the various subdivisions
hereof are for convenience of reference only and shall not affect the
interpretation of any of the provisions hereof.
13. Severability of Provisions. If any right, preference or limitation
of the Series A Preferred Stock set forth herein (as may be amended) from time
to time is invalid, unlawful or incapable of being enforced by reason of any
rule of law or public policy, such right, preference or limitation (including,
without limitation, the dividend rate) shall be enforced to the maximum extent
permitted by law and all other rights, preferences and limitations set forth
herein (as so amended) which can be given effect without the invalid, unlawful
or unenforceable right, preference or limitation herein set forth shall be
deemed dependent upon any other such right, preference or limitation unless so
expressed herein.
D-11
IN WITNESS WHEREOF, the undersigned, being the Chief Executive Officer
of the Company, has executed this Certificate of Designations as of
_____________, 2004.
I-TRAX, INC.
By:
---------------------------------------
Name: Frank A. Martin
Title: Chief Executive Officer
D-12
ANNEX E
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Section 262 of Delaware General Corporation Law
Appraisal Rights
(a) Any stockholder of a corporation of this State who holds shares of
stock on the date of the making of a demand pursuant to subsection (d) of this
section with respect to such shares, who continuously holds such shares through
the effective date of the merger or consolidation, who has otherwise complied
with subsection (d) of this section and who has neither voted in favor of the
merger or consolidation nor consented thereto in writing pursuant to ss. 228 of
this title shall be entitled to an appraisal by the Court of Chancery of the
fair value of the stockholder's shares of stock under the circumstances
described in subsections (b) and (c) of this section. As used in this section,
the word "stockholder" means a holder of record of stock in a stock corporation
and also a member of record of a nonstock corporation; the words "stock" and
"share" mean and include what is ordinarily meant by those words and also
membership or membership interest of a member of a nonstock corporation; and the
words "depository receipt" mean a receipt or other instrument issued by a
depository representing an interest in one or more shares, or fractions thereof,
solely of stock of a corporation, which stock is deposited with the depository.
(b) Appraisal rights shall be available for the shares of any class or
series of stock of a constituent corporation in a merger or consolidation to be
effected pursuant to ss. 251 (other than a merger effected pursuant to ss.
251(g) of this title), ss. 252, ss. 254, ss. 257, ss. 258, ss. 263 or ss. 264 of
this title:
(1) Provided, however, that no appraisal rights under this section
shall be available for the shares of any class or series of stock,
which stock, or depository receipts in respect thereof, at the record
date fixed to determine the stockholders entitled to receive notice of
and to vote at the meeting of stockholders to act upon the agreement of
merger or consolidation, were either (i) listed on a national
securities exchange or designated as a national market system security
on an interdealer quotation system by the National Association of
Securities Dealers, Inc. or (ii) held of record by more than 2,000
holders; and further provided that no appraisal rights shall be
available for any shares of stock of the constituent corporation
surviving a merger if the merger did not require for its approval the
vote of the stockholders of the surviving corporation as provided in
subsection (f) of ss. 251 of this title.
(2) Notwithstanding paragraph (1) of this subsection, appraisal
rights under this section shall be available for the shares of any
class or series of stock of a constituent corporation if the holders
thereof are required by the terms of an agreement of merger or
consolidation pursuant to ss.ss. 251, 252, 254, 257, 258, 263 and 264
of this title to accept for such stock anything except:
a. Shares of stock of the corporation surviving or
resulting from such merger or consolidation, or depository
receipts in respect thereof;
b. Shares of stock of any other corporation, or depository
receipts in respect thereof, which shares of stock (or
depository receipts in respect thereof) or depository receipts
at the effective date of the merger or consolidation will be
either listed on a national securities exchange or designated
as a national market system security on an interdealer
quotation system by the National Association of Securities
Dealers, Inc. or held of record by more than 2,000 holders;
c. Cash in lieu of fractional shares or fractional
depository receipts described in the foregoing subparagraphs
a. and b. of this paragraph; or
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d. Any combination of the shares of stock, depository
receipts and cash in lieu of fractional shares or fractional
depository receipts described in the foregoing subparagraphs
a., b. and c. of this paragraph.
(3) In the event all of the stock of a subsidiary Delaware
corporation party to a merger effected under ss. 253 of this title is
not owned by the parent corporation immediately prior to the merger,
appraisal rights shall be available for the shares of the subsidiary
Delaware corporation.
(c) Any corporation may provide in its certificate of incorporation that
appraisal rights under this section shall be available for the shares of any
class or series of its stock as a result of an amendment to its certificate of
incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale of all or substantially all of the assets of
the corporation. If the certificate of incorporation contains such a provision,
the procedures of this section, including those set forth in subsections (d) and
(e) of this section, shall apply as nearly as is practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal
rights are provided under this section is to be submitted for approval
at a meeting of stockholders, the corporation, not less than 20 days
prior to the meeting, shall notify each of its stockholders who was
such on the record date for such meeting with respect to shares for
which appraisal rights are available pursuant to subsection (b) or (c)
hereof that appraisal rights are available for any or all of the shares
of the constituent corporations, and shall include in such notice a
copy of this section. Each stockholder electing to demand the appraisal
of such stockholder's shares shall deliver to the corporation, before
the taking of the vote on the merger or consolidation, a written demand
for appraisal of such stockholder's shares. Such demand will be
sufficient if it reasonably informs the corporation of the identity of
the stockholder and that the stockholder intends thereby to demand the
appraisal of such stockholder's shares. A proxy or vote against the
merger or consolidation shall not constitute such a demand. A
stockholder electing to take such action must do so by a separate
written demand as herein provided. Within 10 days after the effective
date of such merger or consolidation, the surviving or resulting
corporation shall notify each stockholder of each constituent
corporation who has complied with this subsection and has not voted in
favor of or consented to the merger or consolidation of the date that
the merger or consolidation has become effective; or
(2) If the merger or consolidation was approved pursuant to ss.
228 or ss. 253 of this title, then, either a constituent corporation
before the effective date of the merger or consolidation, or the
surviving or resulting corporation within ten days thereafter, shall
notify each of the holders of any class or series of stock of such
constituent corporation who are entitled to appraisal rights of the
approval of the merger or consolidation and that appraisal rights are
available for any or all shares of such class or series of stock of
such constituent corporation, and shall include in such notice a copy
of this section. Such notice may, and, if given on or after the
effective date of the merger or consolidation, shall, also notify such
stockholders of the effective date of the merger or consolidation. Any
stockholder entitled to appraisal rights may, within 20 days after the
date of mailing of such notice, demand in writing from the surviving or
resulting corporation the appraisal of such holder's shares. Such
demand will be sufficient if it reasonably informs the corporation of
the identity of the stockholder and that the stockholder intends
thereby to demand the appraisal of such holder's shares. If such notice
did not notify stockholders of the effective date of the merger or
consolidation, either (i) each such constitutent corporation shall send
a second notice before the effective date of the merger or
consolidation notifying each of the holders of any class or series of
stock of such constitutent corporation that are entitled to appraisal
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rights of the effective date of the merger or consolidation or (ii) the
surviving or resulting corporation shall send such a second notice to
all such holders on or within 10 days after such effective date;
provided, however, that if such second notice is sent more than 20 days
following the sending of the first notice, such second notice need only
be sent to each stockholder who is entitled to appraisal rights and who
has demanded appraisal of such holder's shares in accordance with this
subsection. An affidavit of the secretary or assistant secretary or of
the transfer agent of the corporation that is required to give either
notice that such notice has been given shall, in the absence of fraud,
be prima facie evidence of the facts stated therein. For purposes of
determining the stockholders entitled to receive either notice, each
constitutent corporation may fix, in advance, a record date that shall
be not more than 10 days prior to the date the notice is given,
provided, that if the notice is given on or after the effective date of
the merger or consolidation, the record date shall be such effective
date. If no record date is fixed and the notice is given prior to the
effective date, the record date shall be the close of business on the
day next preceding the day on which the notice is given.
(e) Within 120 days after the effective date of the merger or
consolidation, the surviving or resulting corporation or any stockholder who has
complied with subsections (a) and (d) hereof and who is otherwise entitled to
appraisal rights, may file a petition in the Court of Chancery demanding a
determination of the value of the stock of all such stockholders.
Notwithstanding the foregoing, at any time within 60 days after the effective
date of the merger or consolidation, any stockholder shall have the right to
withdraw such stockholder's demand for appraisal and to accept the terms offered
upon the merger or consolidation. Within 120 days after the effective date of
the merger or consolidation, any stockholder who has complied with the
requirements of subsections (a) and (d) hereof, upon written request, shall be
entitled to receive from the corporation surviving the merger or resulting from
the consolidation a statement setting forth the aggregate number of shares not
voted in favor of the merger or consolidation and with respect to which demands
for appraisal have been received and the aggregate number of holders of such
shares. Such written statement shall be mailed to the stockholder within 10 days
after such stockholder's written request for such a statement is received by the
surviving or resulting corporation or within 10 days after expiration of the
period for delivery of demands for appraisal under subsection (d) hereof,
whichever is later.
(f) Upon the filing of any such petition by a stockholder, service of a
copy thereof shall be made upon the surviving or resulting corporation, which
shall within 20 days after such service file in the office of the Register in
Chancery in which the petition was filed a duly verified list containing the
names and addresses of all stockholders who have demanded payment for their
shares and with whom agreements as to the value of their shares have not been
reached by the surviving or resulting corporation. If the petition shall be
filed by the surviving or resulting corporation, the petition shall be
accompanied by such a duly verified list. The Register in Chancery, if so
ordered by the Court, shall give notice of the time and place fixed for the
hearing of such petition by registered or certified mail to the surviving or
resulting corporation and to the stockholders shown on the list at the addresses
therein stated. Such notice shall also be given by 1 or more publications at
least 1 week before the day of the hearing, in a newspaper of general
circulation published in the City of Wilmington, Delaware or such publication as
the Court deems advisable. The forms of the notices by mail and by publication
shall be approved by the Court, and the costs thereof shall be borne by the
surviving or resulting corporation.
(g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with this section and who have become entitled to
appraisal rights. The Court may require the stockholders who have demanded an
appraisal for their shares and who hold stock represented by certificates to
submit their certificates of stock to the Register in Chancery for notation
thereon of the pendency of the appraisal proceedings; and if any stockholder
fails to comply with such direction, the Court may dismiss the proceedings as to
such stockholder.
E-3
(h) After determining the stockholders entitled to an appraisal, the
Court shall appraise the shares, determining their fair value exclusive of any
element of value arising from the accomplishment or expectation of the merger or
consolidation, together with a fair rate of interest, if any, to be paid upon
the amount determined to be the fair value. In determining such fair value, the
Court shall take into account all relevant factors. In determining the fair rate
of interest, the Court may consider all relevant factors, including the rate of
interest which the surviving or resulting corporation would have had to pay to
borrow money during the pendency of the proceeding. Upon application by the
surviving or resulting corporation or by any stockholder entitled to participate
in the appraisal proceeding, the Court may, in its discretion, permit discovery
or other pretrial proceedings and may proceed to trial upon the appraisal prior
to the final determination of the stockholder entitled to an appraisal. Any
stockholder whose name appears on the list filed by the surviving or resulting
corporation pursuant to subsection (f) of this section and who has submitted
such stockholder's certificates of stock to the Register in Chancery, if such is
required, may participate fully in all proceedings until it is finally
determined that such stockholder is not entitled to appraisal rights under this
section.
(i) The Court shall direct the payment of the fair value of the shares,
together with interest, if any, by the surviving or resulting corporation to the
stockholders entitled thereto. Interest may be simple or compound, as the Court
may direct. Payment shall be so made to each such stockholder, in the case of
holders of uncertificated stock forthwith, and the case of holders of shares
represented by certificates upon the surrender to the corporation of the
certificates representing such stock. The Court's decree may be enforced as
other decrees in the Court of Chancery may be enforced, whether such surviving
or resulting corporation be a corporation of this State or of any state.
(j) The costs of the proceeding may be determined by the Court and
taxed upon the parties as the Court deems equitable in the circumstances. Upon
application of a stockholder, the Court may order all or a portion of the
expenses incurred by any stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorney's fees and the
fees and expenses of experts, to be charged pro rata against the value of all
the shares entitled to an appraisal.
(k) From and after the effective date of the merger or consolidation,
no stockholder who has demanded appraisal rights as provided in subsection (d)
of this section shall be entitled to vote such stock for any purpose or to
receive payment of dividends or other distributions on the stock (except
dividends or other distributions payable to stockholders of record at a date
which is prior to the effective date of the merger or consolidation); provided,
however, that if no petition for an appraisal shall be filed within the time
provided in subsection (e) of this section, or if such stockholder shall deliver
to the surviving or resulting corporation a written withdrawal of such
stockholder's demand for an appraisal and an acceptance of the merger or
consolidation, either within 60 days after the effective date of the merger or
consolidation as provided in subsection (e) of this section or thereafter with
the written approval of the corporation, then the right of such stockholder to
an appraisal shall cease. Notwithstanding the foregoing, no appraisal proceeding
in the Court of Chancery shall be dismissed as to any stockholder without the
approval of the Court, and such approval may be conditioned upon such terms as
the Court deems just.
(l) The shares of the surviving or resulting corporation to which the
shares of such objecting stockholders would have been converted had they
assented to the merger or consolidation shall have the status of authorized and
unissued shares of the surviving or resulting corporation.
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ANNEX F
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LETTER OF TRANSMITTAL
to accompany
Shares of Common Stock of
Meridian Occupational Healthcare Associates, Inc.(d/b/a CHD Meridian Healthcare)
("CHDM")
Surrendered in Exchange for Shares of Common Stock and Preferred Stock of
I-trax, Inc.
("I-trax")
and a Cash Payment Pursuant to the Merger Agreement
Dated December 26, 2003
To: StockTrans, Inc.
c/o I-trax, Inc.
One Logan Square, Suite 2615
130 N. 130th Street
Philadelphia, PA 19003
------------------
By Mail, Hand Delivery or Overnight Courier:
Attention: Transfer Department
The instructions accompanying this letter of transmittal should be read
carefully before completing this letter of transmittal.
Ladies and Gentlemen:
Pursuant to a Merger Agreement dated December 26, 2003 by and among
I-trax, CHDM, and certain affiliates of I-trax (the "Merger Agreement"), the
undersigned herewith surrenders the following certificate(s) of Common Stock of
CHDM in exchange for shares of Common Stock of, shares of Preferred Stock of,
and a cash payment by, I-trax, Inc.
--------------------------------------------------------------------------------
DESCRIPTION OF SHARES TENDERED
--------------------------------------------------- ----------------------------------- ----------------------------
Name(s) and Address(es) of Registered Holder(s) Total Number of Shares
(Please fill in exactly as name(s) appear(s) on Certificate Represented by
certificate(s)) Number(s) Certificate(s)
--------------------------------------------------- ----------------------------------- ----------------------------
--------------------------------------------------- ----------------------------------- ----------------------------
--------------------------------------------------- ----------------------------------- ----------------------------
--------------------------------------------------- ----------------------------------- ----------------------------
--------------------------------------------------- ----------------------------------- ----------------------------
--------------------------------------------------- ----------------------------------- ----------------------------
--------------------------------------------------- ----------------------------------- ----------------------------
Total Shares
--------------------------------------------------- ----------------------------------- ----------------------------
F - 1
Capitalized terms used in the Letter of Transmittal which are not
defined herein shall have the respective meanings given to them in the Merger
Agreement.
The undersigned hereby represents and warrants that the undersigned has
full power and authority to surrender the shares of Common Stock of CHDM
described above and that the undersigned has good and unencumbered title to such
shares, free and clear of all liens, restrictions, charges, encumbrances, and
agreements, and that such shares are not subject to any adverse claim. The
undersigned will, upon request, execute and deliver any additional documents as
may be deemed necessary or desirable by I-trax or StockTrans, Inc., Inc. to
complete the surrender of such shares in exchange for the Merger Consideration.
-------------------------------------------------------------------------------
SIGN HERE
(Please also complete Substitute Form W-9 appearing on
page 5 of this Letter of Transmittal)
-> <-
-> <-
Signature(s) of Owner(s)
Dated , 2004
Name(s)
(Please Print)
Capacity (full title)
Area Code and Telephone No.
E-mail address
(Must be signed by the registered holder(s) exactly as name(s)
appear(s) on the stock certificate(s). If signature is by a
trustee, executor, administrator, guardian, attorney-in-fact,
officer of a corporation or other person acting in a fiduciary
or representative capacity, please set forth full title and see
Instruction 2.)
-------------------------------------------------------------------------------
If you are requesting payment of the cash portion of the
merger consideration by wire transfer, check the box at the right and complete
the information below.
-------------------------------- ---------------------------------
Name of Holder's Bank ABA Routing Number for Holder's Bank
-------------------------------- ---------------------------------
Holder's Bank Account Number Name on Holder's Bank Account to which
Funds will be Wired
-------------------------------- ---------------------------------
Holder's Telephone Number Address of Holder's Bank
(including area code)
F - 2
INSTRUCTIONS FOR LETTER OF TRANSMITTAL
The instructions below must be followed when forwarding certificates
for shares of Common Stock of CHDM.
1. Transmittal Letter.
A. The Letter of Transmittal must be properly completed,
signed, dated and sent to StockTrans, Inc. at the address shown on the face of
the Letter of Transmittal, together with the certificate(s) surrendered.
B. The signature(s) on the Letter of Transmittal must
correspond with the name(s) on the face of the CHDM certificate(s), surrendered,
without alterations, enlargement or any change whatsoever. If any of the CHDM
shares surrendered are held of record by two or more persons, all such persons
must sign the Letter of Transmittal. If any of the CHDM shares surrendered are
registered in different names on different certificates, it will be necessary to
complete, sign and submit as many separate Letters of Transmittal as there are
different registrations of certificates. If there is not enough space on the
face of the Letter of Transmittal to list all of your stock certificates, please
attach a separate list.
C. The method of transmitting stock certificates is at the
option and risk of the holder. Delivery will be effected, and risk of loss and
title will pass, only upon delivery of the certificates to StockTrans, Inc.
Unless and until certificates representing the CHDM shares have been surrendered
to StockTrans, Inc. holders of such certificates will not be entitled to receive
the Merger Consideration. Upon surrender of the CHDM certificates, certificates
for shares of I-trax Common Stock and shares of I-trax Preferred Stock will be
issued and delivered in exchange therefor and payment of the cash portion of the
Merger Consideration will be made by wire transfer if so requested by the
holder, and otherwise by wire transfer or check. If the Letter of Transmittal is
sent by mail, registered mail (return receipt requested) is recommended.
2. Endorsement of Certificates; Stock Powers and Endorsements.
A. If the Letter of Transmittal is signed by the registered
holder(s) of the CHDM shares surrendered and the Merger Consideration is to be
issued and delivered to the registered holder(s), no endorsements of
certificates or separate stock powers are required.
B. If any of the I-trax shares are to be issued in a name
other than the name of the registered holder(s) of the CHDM shares, the CHDM
share certificate or a separate stock power must be signed by all registered
holders and the signature(s) must be guaranteed by a member of the Securities
Transfer Agent Medallion Program (STAMP). A notary public is NOT acceptable.
C. If the Letter of Transmittal or any certificate or stock
power is signed by a trustee, executor, administrator, guardian,
attorney-in-fact, officer of a corporation, or other person acting in a
fiduciary or representative capacity, such person must so indicate when signing,
F - 3
and proper evidence satisfactory to StockTrans, Inc. of the authority of such
person so to act must be submitted.
3. Substitute Form W-9. The surrendering holder of the CHDM shares is
required to provide StockTrans, Inc. with a correct Taxpayer Identification
Number ("TIN") on Substitute Form W-9, which is provided under "Important Tax
Information" below. Failure to provide the information on Substitute Form W-9
may subject the surrendering holder to Federal income tax backup withholding.
The box in Part 2 of Substitute Form W-9 may be checked if the surrendering
holder has not been issued a TIN and has applied for a number or intends to
apply for a number in the near future.
4. Requests for Assistance or Additional Copies. Any questions or
requests for assistance may be directed to the Secretary of I-trax at the
address shown on the first page of the Letter of Transmittal or by calling (215)
557-7488. Requests for additional copies of the Letter of Transmittal may be
directed to such person and such copies will be furnished promptly at I-trax's
expense.
IMPORTANT TAX INFORMATION
Under Federal income tax law, a holder whose surrendered CHDM shares
are accepted in exchange for the Merger Consideration is required to provide
StockTrans, Inc. with such holder's correct TIN on Substitute Form W-9 below. If
such holder is an individual, the TIN is his or her social security number. For
businesses and other entities, the TIN is the employer identification number. If
StockTrans, Inc. is not provided with the correct TIN, the holder will be
subject to backup withholding on reportable payments made by I-trax and may be
subject to a monetary penalty imposed by the Internal Revenue Service.
Backup withholding is not an additional tax. Rather, the Federal income
tax liability of persons subject to backup withholding will be reduced by the
amount of the tax withheld. If withholding results in an overpayment of taxes, a
refund may be obtained.
Purpose of Substitute Form W-9
To avoid backup withholding, the holder is required to notify I-trax of
his or her correct TIN by completing the Substitute Form W-9 attached hereto and
certifying that the TIN provided on Substitute Form W-9 is correct and that (a)
the holder has not been notified by the Internal Revenue Service that he or she
is subject to Federal income tax backup withholding as a result of failure to
report all interest or dividends or (b) the Internal Revenue Service has
notified the holder that he or she is no longer subject to Federal income tax
backup withholding.
F - 4
Payer's Name:
--------------------------- -------------------------------------------------- -------------------------------------
Part 1--PLEASE PROVIDE YOUR TIN IN THE BOX AT Social security number OR
RIGHT AND CERTIFY BY SIGNING AND DATING BELOW: Employee Identification Number
SUBSTITUTE TIN
--------------------------- -------------------------------------------------- -------------------------------------
Form W-9 Name (Please Print) Part 2
Department of the Treasury Address Awaiting TIN |_|
Internal Revenue Service
City State Zip Code
----------
--------------------------- ------------------------------------------------------------------ ---------------------
Part 3--CERTIFICATION--UNDER THE PENALTIES OF PERJURY, I CERTIFY THAT:
Payer's Request for
Taxpayer Identification
Number ("TIN") and (1) The number shown on this form is my correct
Certification taxpayer identification number (or a TIN has not
been issued to me but I have mailed or delivered
an application to receive a TIN or intend to do so
in the near future).
(2) I am not subject to backup withholding either
because (a) I am exempt from backup withholding,
or (b) I have not been notified by the Internal
Revenue Service (the "IRS") that I am subject to
backup withholding as a result of a failure to
report all interest or dividends or (c) the IRS
has notified me that I am no longer subject to
backup withholding.
(3) I am a U.S. person (including a U.S. resident
alien).
(4) All other information provided on this form is
true, correct and complete.
SIGNATURE: ____________________ DATE: ____________________
You must cross out item (2) above if you have been
notified by the IRS that you are currently subject
to backup withholding because of underreporting
interest or dividends on your tax return.
--------------------------- ----------------------------------------------------------------------------------------
NOTE: FAILURE TO COMPLETE AND RETURN THIS FORM AND, IF APPLICABLE, THE
CERTIFICATE OF AWAITING TAXPAYER IDENTIFICATION NUMBER BELOW MAY
RESULT IN BACKUP WITHHOLDING OF 28% OF THE CASH CONSIDERATION AND OF
ANY DIVIDENDS OR DISTRIBUTIONS PAYABLE ON THE I-TRAX SHARES. PLEASE
REVIEW THE ENCLOSED GUIDELINES FOR CERTIFICATION OF TAXPAYER
IDENTIFICATION NUMBER ON SUBSTITUTE FORM W-9 FOR ADDITIONAL DETAILS.
YOU MUST COMPLETE THE FOLLOWING CERTIFICATE IF YOU CHECKED THE BOX IN
PART 2 OF THE SUBSTITUTE FORM W-9.
--------------------------------------------------------------------------------------------------------------------
CERTIFICATE OF AWAITING TAXPAYER IDENTIFICATION NUMBER
I certify under penalties of perjury that a taxpayer identification number has
not been issued to me and either (1) I have mailed or delivered an application
to receive a taxpayer identification number to the appropriate Internal Revenue
Service Center or Social Security Administration Office or (2) I intend to mail
or deliver an application in the near future. I understand that if I do not
provide a taxpayer identification number within 60 calendar days, 28% of any
dividends or distributions thereafter payable on the I-Trax Shares will be
withheld until I provide a number.
SIGNATURE: ____________________ DATE: ____________________
--------------------------------------------------------------------------------------------------------------------
[Continued on following page]
F - 5
ADDITIONAL AGREEMENTS OF SURRENDERING HOLDER
OF CHDM SHARES
In consideration for receiving the Merger Consideration, the
undersigned surrendering holder of CHDM shares hereby represents, warrants,
acknowledges, and agrees as follows:
1. Access to I-trax. Prior to his, her or its execution of this Letter
of Transmittal, the undersigned has had the opportunity to ask questions of the
management of I-trax and to receive answers concerning the terms and conditions
of the merger and to obtain any additional information which I-trax possesses or
can acquire without unreasonable effort or expense that is necessary to verify
the accuracy of information furnished to the undersigned.
2. Review of Information. He, she or it has received copies of the
following documents and has had an opportunity to review them:
(a) Joint Proxy Statement dated February ___, 2004 provided to
the undersigned by I-trax and CHDM, including all of the appendices
thereto;
(b) I-trax's annual report to stockholders for the fiscal year
ended December 31, 2002;
(c) I-trax's definitive proxy statement for its annual meeting
of stockholders held on April 25, 2003;
(d) I-trax's Annual Report on Form 10-KSB for the year ended
December 31, 2002;
(e) I-trax's Quarterly Reports on Form 10-QSB for the periods
ended March 31, 2003 , June 30, 2003, and September 30, 2003;
(f) I-trax's Current Reports on Form 8-K dated October 17,
2003, November 17, 2003, and December 29, 2003.
3. Risk Factors. There are substantial risks attendant to I-trax and
its business, including the risks identified under the heading "Risk Factors" in
the Joint Proxy Statement provided to the undersigned together with this Letter
of Transmittal. The undersigned has considered and understands such risks. No
representations or warranties have been made concerning the business or the
potential profit of an investment in I-trax.
4. Private Placement. Although I-trax has agreed pursuant to the
Merger Agreement to register the I-trax shares of capital stock to be received
by the undersigned as part of the Merger Consideration, I-trax has not yet done
so, and therefore, such shares are not registered under the Securities Act of
1933, as amended (the "Securities Act"), or any state securities laws. As such,
such I-trax shares cannot be transferred without registration or available
exemption from registration under the Securities Act or such state securities
F - 6
laws. The undersigned is acquiring the I-trax shares of capital stock for his,
her or its own account as principal not with a view to or for sale in connection
with any distribution of all or any part of such shares.
5. Representation of Investment Experience and Ability to Bear Risk.
The undersigned (i) is knowledgeable and experienced with respect to the
financial, tax and business aspects of the ownership of investments such as the
shares of I-trax capital stock and of the businesses in which the merged company
will be engaged and is capable of evaluating the risks and merits of acquiring
the shares of I-trax capital stock, and (ii) can bear the economic risk of an
investment in such shares for an indefinite period of time and can afford to
suffer the complete loss thereof.
6. Accredited Investor. The undersigned has read the definition of
"accredited investor" attached to this Letter of Transmittal. The undersigned is
or is not (check one box) an accredited investor within such definition. If the
undersigned is an accredited investor, the reason(s) why is/are set forth in one
or more of the affirmative responses of the undersigned below.
INITIAL EACH BOX THAT APPLIES TO THE UNDERSIGNED
Verification of Status as "Accredited Investor" under Regulation D.
------------------------------------------------------------------
_____ The undersigned is a natural person
(individual) whose net worth, or joint net
worth with that of the undersigned's spouse,
if any, exceeds $1,000,000. Net worth for this
purpose means total assets (including
residence, personal property and other assets)
in excess of total liabilities.
_____ The undersigned is a natural person
(individual) who had an individual income in
excess of $200,000 in each of the two most
recent years or joint income with the
undersigned's spouse, if any, in excess of
$300,000 in each of those years, and who has a
reasonable expectation of reaching the same
income level in the current year.
_____ The undersigned is a director or executive officer
of I-trax.
F - 7
FOR ENTITIES OTHER THAN INDIVIDUALS
-----------------------------------
INITIAL EACH BOX THAT APPLIES TO THE UNDERSIGNED
----
Verification of Status as "Accredited Investor" under Regulation D.
------------------------------------------------------------------
_____ The undersigned is either a bank as defined in
section 3(a)(2) of the Securities Act, or a
savings and loan association or other
institution as defined in section 3(a)(5)(A) of
the Securities Act, whether acting in an
individual or fiduciary capacity; a broker or
dealer registered pursuant to section 15 of the
Securities Exchange Act of 1934, as amended; an
insurance company as defined in section 2(13) of
the Securities Act; an investment company
registered under the Investment Company Act or a
business development company as defined in
section 2(a)(48) of the Investment Company Act;
a Small Business Investment Company licensed by
the U.S. Small Business Administration under
section 301(c) or (d) of the Small Business
Investment Act of 1958; a plan established and
maintained by a state of the United States of
America, its political subdivisions or any
agency or instrumentality of a state of the
United States of America or its political
subdivisions for the benefit of its employees
that has total assets in excess of $5,000,000;
an Employee Benefit Plan within the meaning of
ERISA if the investment decision is made by a
plan fiduciary, as defined in section 3(21) of
ERISA, which is either a bank, savings and loan
association, insurance company or registered
investment advisor; an Employee Benefit Plan
that has total assets in excess of $5,000,000;
or an Employee Benefit Plan that is a
self-directed plan, with investment decisions
made solely by persons that are accredited
investors.
_____ The undersigned is a private business
development company as defined in section
202(a)(22) of the Investment Advisers Act.
_____ The undersigned is either an organization
described in section 501(c)(3) of the Code; a
corporation; a Massachusetts or similar business
trust; or a Company, in each case not formed for
the specific purpose of acquiring the securities
offered and in each case with total assets in
excess of $5,000,000.
_____ The undersigned is an entity as to which all of
the equity owners are accredited
investors.
_____ The undersigned is a trust, not formed for the
specific purpose of acquiring the securities
offered, with total assets in excess of
$5,000,000 and whose purchase is directed by a
sophisticated person as described in Rule
506(b)(2)(ii) of Regulation D promulgated under
the Securities Act.
F - 8
_____ The undersigned (i) was not formed and (ii) is
not being utilized primarily for the purpose of
making an investment in the Company (and
investment in this Company does not exceed 40%
of the aggregate capital committed to the
undersigned by the undersigned's partners,
shareholders or others).
_____ The undersigned is or is acting on behalf of (i)
an employee benefit plan within the meaning of
section 3(3) of ERISA, whether or not such plan
is subject to ERISA, or (ii) an entity which is
deemed to hold the assets of any such employee
benefit plan pursuant to 29 C.F.R.
ss.2510.3-101. For example, a plan which is
maintained by a foreign corporation,
governmental entity or church, a Keogh plan
covering no common-law employees and an
individual retirement account are employee
benefit plans within the meaning of section 3(3)
of ERISA but generally are not subject to ERISA.
_____ The undersigned is or was acting on behalf of
such an employee benefit plan or is
an entity deemed to hold the assets of any such
plan or plans (i.e., the undersigned is subject
to ERISA).
_____ The undersigned is a U.S. pension trust or
governmental plan qualified under
section 401(a) of the Code or a U.S. tax-exempt
organization qualified under section 501(c)(3)
of the Code.
_____ The undersigned (i) is an investment company
under the Investment Company Act or (ii) is
relying on the "private investment company"
exclusion provided by section 3(c)(1) or section
3(c)(7) of the Investment Company Act to avoid
registration and regulation under such Act.
F - 9
SIGNATURE PAGE FOR LETTER OF TRANSMITTAL
DATED this ___ day of _________ 2004.
------------------------------------------
Name of Organization, if applicable
------------------------------------------
Signature
------------------------------------------
Print Name
------------------------------------------
Title (if applicable)
------------------------------------------
Address
------------------------------------------
Address
------------------------------------------
Telephone Number
------------------------------------------
E-mail Address
F - 10
Accredited Investor. "Accredited investor" shall mean any person who
comes within any of the following categories, or who the issuer reasonably
believes comes within any of the following categories, at the time of the sale
of the securities to that person:
(1) Any bank as defined in Section 3(a)(2) of the Securities Act of
1993 (the "Securities Act") or any savings and loan association or other
institution as defined in Section 3(a)(5)(A) of the Act whether acting in its
individual or fiduciary capacity; any broker dealer registered pursuant to
Section 15 of the Securities Exchange Act of 1934; any insurance company as
defined in Section 2(13) of the Securities Act; any investment company
registered under the Investment Company Act of 1940 or a business development
company as defined in Section 2(a)(48) of such Act; any Small Business
Investment Company licensed by the U.S. Small Business Administration under
Section 301(c) or (d) of the Small Business Investment Act of 1958; any plan
established and maintained by a state, its political subdivisions, or any agency
or instrumentality of a state or its political subdivisions, for the benefit of
its employees, if such plan has total assets in excess of $5,000,000; any
employee benefit plan within the meaning of the Employee Retirement Income
Security Act of 1974, if the investment decision is made by a plan fiduciary, as
defined in Section 3(21) of such Act, which is either a bank, savings and loan
association, insurance company, or registered investment adviser, or if the
employee benefit plan has total assets in excess of $5,000,000, or, if a
self-directed plan, with investment decisions made solely by persons that are
accredited investors;
(2) Any private business development company as defined in Section
202(a)(22) of the Investment Advisers Act of 1940;
(3) Any organization described in Section 501(c)(3) of the Internal
Revenue Code, corporation, Massachusetts or similar business trust, or
partnership, not formed for the specific purpose of acquiring the securities
offered, with total assets in excess of $5,000,000;
(4) Any director, executive officer, or general partner of the issuer
of the securities being offered or sold, or any director, executive officer, or
general partner of a general partner of that issuer;
(5) Any natural person whose individual net worth, or joint net worth
with that person's spouse, at the time of his purchase exceeds $1,000,000;
(6) Any natural person who had an individual income in excess of
$200,000 in each of the two most recent years or joint income with that person's
spouse in excess of $300,000 in each of those years and has a reasonable
expectation of reaching the same income level in the current year;
(7) Any trust with total assets in excess of $5,000,000, not formed for
the specific purpose of acquiring the securities offered, whose purchase is
directed by a sophisticated person as described in Rule 506(b)(2)(ii); and
(8) Any entity in which all of the equity owners are accredited
investors.
F - 11
ANNEX G
-------
INDEX
Report Page of
Annex G
Annual Report on Form 10-KSB for the fiscal year ended December 31, 2002 G-2
Quarterly Report on Form 10-QSB for the fiscal quarter ended March 31, 2003 G-76
Quarterly Report on Form 10-QSB for the fiscal quarter ended June 30, 2003 G-100
Quarterly Report on Form 10-QSB for the fiscal quarter ended September 30, 2003 G-129
Current Report on Form 8-K filed on February 12, 2003 G-160
Current Report on Form 8-K filed on February 19, 2003 G-162
Current Report on Form 8-K filed on April 22, 2003 G-164
Current Report on Form 8-K filed on May 19, 2003 G-166
Current Reports on Form 8-K filed on August 15, 2003 G-168
Current Report on Form 8-K filed on October 17, 2003 G-172
Current Report on Form 8-K filed on November 17, 2003 G-174
Current Report on Form 8-K filed on December 29, 2003 G-176
Current Report on Form 8-K filed on December 30, 2003 G-181
Current Report on Form 8-K filed February 2, 2004 G-183
Proxy Statement on Schedule 14A filed on April 25, 2003 G-237
U.S. Securities and Exchange Commission
Washington, D.C. 20549
Form 10-KSB
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended: December 31, 2002
[ ] TRANSITION REPORT UNDER TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______ to _______
Commission File Number: 0-30275
I-TRAX, INC.
------------------------------------------
(Name of small business issuer in its charter)
Delaware 23-3057155
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
One Logan Square
130 N. 18th Street, Suite 2615
Philadelphia, Pennsylvania 19103
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (215) 557-7488
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act: Common Stock,
$.001 par value
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. [X] Yes [ ] No
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of the registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [X]
State issuer's revenues for its most recent fiscal year: $3,931,910.
The aggregate market value of the voting stock held by non-affiliates computed
by reference to the price at which the stock was sold on March 21, 2003 on the
American Stock Exchange was $11,652,493. As of March 21, 2003, the number of
shares outstanding of each class of common equity was 9,372,727 shares of Common
Stock, $.001 par value.
DOCUMENTS INCORPORATED BY REFERENCE: Portions of the issuer's definitive proxy
statement for its 2003 Annual Meeting of Stockholders are incorporated by
reference in Part III of this report.
Transitional Small Business Disclosure Format (Check one): [ ] Yes [X] No
--------------------------------------------------------------------------------
G-1
I-TRAX, INC.
FORM 10-KSB ANNUAL REPORT
FOR THE YEAR ENDED DECEMBER 31, 2002
TABLE OF CONTENTS
Item Page No.
PART I
1. Description of Business............................................................................ 1
2. Description of Properties..........................................................................19
3. Legal Proceedings..................................................................................20
4. Submission of Matters to a Vote of Security Holders................................................20
PART II
5. Market for Common Equity and Related Stockholder Matters...........................................21
6. Management's Discussion and Analysis of Financial Condition and Results of Operations..............25
7. Financial Statements...............................................................................32
8. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure...............66
PART III
9. Directors, Executive Officers, Promoters and Control Persons; Compliance with
Section 16(a) of the Exchange Act .................................................................66
10. Executive Compensation.............................................................................66
11. Security Ownership of Certain Beneficial Owners and Management.....................................66
12. Certain Relationships and Related Transactions.....................................................66
13. Exhibits and Reports on Form 8-K...................................................................66
14. Controls and Procedures............................................................................70
G-2
PART I
ITEM 1. DESCRIPTION OF BUSINESS
This report includes and incorporates forward-looking statements. All
statements, other than statements of historical facts, included or incorporated
in this report regarding our strategy, future operations, financial position,
future revenues, projected costs, prospects, plans and objectives of management
are forward-looking statements. The words "anticipates," "believes,"
"estimates," "expects," "intends," "may," "plans," "projects," "will," "would"
and similar expressions are intended to identify forward-looking statements,
although not all forward-looking statements contain these identifying words. We
cannot guarantee that we actually will achieve the plans, intentions or
expectations disclosed in our forward-looking statements and you should not
place undue reliance on our forward-looking statements. Actual results or events
could differ materially from the plans, intentions and expectations disclosed in
the forward-looking statements we make. We have included important factors in
the cautionary statements included or incorporated in this report, particularly
under the heading "Risk Factors" beginning on page 13 that we believe could
cause actual results or events to differ materially from the forward-looking
statements we make. Our forward-looking statements do not reflect the potential
impact of any future acquisitions, mergers, dispositions, joint ventures or
investments we may make.
Business Overview
I-trax provides focused disease management and comprehensive health
management solutions designed to improve the health of the populations we serve
while reducing the cost of medical care.
Our solutions are designed to meet the needs of insurers, employers and
consumers seeking to reduce costs and improve the quality of care by enabling
healthcare organizations to evolve from fragmented care management practices
into a cohesive and efficient system of healthcare management. Our solutions are
fully integrated, use a single-data platform that allows all caregivers to share
records and enable our clients to provide true coordination of care. By
facilitating real-time communication between all stakeholders within today's
complex healthcare system, I-trax's health management solutions reduce costs and
enable the best possible delivery of care.
Ours is a three-pronged approach that results in savings and consumer
satisfaction: Prediction + Prevention + Care Management = Performance
Prediction
First, we use historical information to predict future healthcare
costs. Experts agree that predictive modeling provides a comprehensive advantage
to health plans, employers and providers, which leads to cost effective medical
management and greater profitability. By using predictive modeling, we identify
our clients' future healthcare costs, the health conditions that will drive
those costs and the people within our clients' populations who are at risk for
those conditions. Armed with this information, we target appropriate resources
to address the costly conditions and the populations that are at risk for those
conditions, thus managing costs while improving care.
Prevention
Second, we use what we believe to be state-of-the-art demand management
and nurse triage services to effect our targeted interventions. These services
incorporate nationally recognized, evidence-based clinical guidelines to ensure
that all caregivers and consumers are following the best practices. We also link
the key stakeholders in this care delivery effort--consumers, physicians and
care managers--through secure, web-based solutions. These solutions facilitate
real-time sharing of information and support the adherence to our population and
disease management programs. Finally, we staff our state-of-the-art Care
Communications Center with skilled nurses and other healthcare professionals 24
hours per day, 7 days per week. The Center helps consumers make informed
decisions about their health and provides ongoing support for those with chronic
diseases.
G-3
The products and services we use to deliver targeted interventions
include: MyNurseLine(TM), a technology-enabled nurse triage service;
DoctorsLine(TM), an after-hours custom triage and administrative outsourcing
service; Health-e-Community(TM), a specialized enrollment, marketing and
fulfillment service; eImmune(R), a clinical immunization and related adverse
events tracking system; and Medicive(R) Medical Enterprise Data System, a
proprietary software architecture developed to collect, store, retrieve and
analyze a broad range of information used in the healthcare industry, which
serves as the foundation for our Care Coordination Platform offerings. Our Care
Coordination Platform includes: Health-e-Coordinator(TM), a web-based care
management application; MyFamilyMD(TM), a consumer health management portal; and
CarePrime(R), a clinical care application for physicians and clinicians.
Care Management
Finally, we believe that we offer the industry's most comprehensive
health management and disease management solution. We assist clients in managing
the healthcare of their populations by outsourcing clinical and administrative
services as part of a strategic partnership. Through long-term partnerships with
our clients, we align our assets and core competencies to develop targeted
solutions to meet the needs of the populations our clients serve. Our disease
management solutions currently address congestive heart failure (CHF), coronary
artery disease (CAD), asthma, diabetes, lower back pain and chronic obstructive
pulmonary disease (COPD). We also develop programs using evidenced-based
guidelines based on our clients' requests. Health-e-Life Program(TM) is our
comprehensive end-to-end solution for care management.
Performance
Everything we do is built on information, which drives decision-making
and results. Information guides the identification of consumers, the utilization
of protocols that provide high quality and cost effective care, the
communication among the key stakeholders and ultimately the return on capital
invested in providing healthcare. When all of these components are in place, we
believe that consumer satisfaction will increase and the costs of providing
quality healthcare will decrease.
Corporate History
I-trax, Inc.--Holding Company
I-trax was incorporated in the State of Delaware on September 15, 2000
at the direction of the Board of Directors of I-trax Health Management
Solutions, Inc. ("Health Management"), I-trax's then parent company. On February
5, 2001, I-trax became the holding company of Health Management at the closing
of a reorganization pursuant to Section 251(g) of Delaware General Corporation
Law. The holding company reorganization was described in greater detail in
I-trax's registration statement on Form S-4 (Registration Number 333-48862),
filed with the Securities and Exchange Commission on October 27, 2000. At the
effective time of the reorganization all of the stockholders of Health
Management became the stockholders of I-trax and Health Management became a
wholly owned subsidiary of I-trax. Further, all outstanding shares of Health
Management were converted into shares of I-trax in a non-taxable transaction.
Health Management no longer files reports with the Securities and Exchange
Commission. However, I-trax does file reports with the Securities and Exchange
Commission, and its common stock is traded on the American Stock Exchange under
the symbol "DMX."
The holding company structure has allowed us greater flexibility in our
operations and expansion and diversification plans, including in the acquisition
of WellComm Group, Inc. on February 6, 2002 and iSummit Partners, LLC, doing
business as "MyFamilyMD," on February 7, 2001.
I-trax acquired WellComm effective February 6, 2002 in a two-step
reorganization pursuant to a Merger Agreement dated January 28, 2002 by and
among I-trax, WC Acquisition, Inc., an Illinois corporation and a wholly-owned
subsidiary of I-trax, WellComm and WellComm's two principals. The initial step
of the reorganization transaction involved a merger of WC Acquisition with and
into WellComm, in which merger WellComm continued as the surviving corporation.
The second step of the reorganization transaction involved a statutory merger of
WellComm with and into I-trax, in which merger I-trax continued as the surviving
corporation.
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At the closing of the WellComm merger, we delivered to the WellComm
stockholders approximately $2,200,000 in cash and 1,488,000 shares of our common
stock, and to each of two senior officers of WellComm options to acquire 56,000
shares of our common stock at a nominal exercise price. After the merger, three
executive officers of WellComm joined us as senior executives and WellComm's two
principal stockholders were elected to our Board of Directors.
We funded the acquisition of WellComm by selling a 6% convertible
senior debenture in the aggregate principal amount of $2,000,000 to Palladin
Opportunity Fund LLC pursuant to a Purchase Agreement dated as of February 4,
2002 between Palladin and us. Pursuant to the purchase agreement, we also issued
Palladin a warrant to purchase up to 307,692 shares of our common stock at an
exercise price of $5.50 per share. The outstanding principal and any interest
under the debenture are payable in full on or before February 3, 2004. Further,
outstanding principal and any interest may be converted at any time at the
election of Palladin into our common stock. The current conversion price under
the debenture is $3.03. The current conversion price is subject to "reset" as of
August 4, 2003 but only if the closing bid price for our common stock, averaged
during a period of 20 consecutive trading days ending on August 3, 2003, is less
than the then current conversion price.
I-trax acquired iSummit effective February 7, 2001 in an exchange
transaction pursuant to a Contribution and Exchange Agreement dated September
22, 2000, as amended, by and among iSummit, I-trax, Health Management and
iSummit's three members. I-trax issued 580,682 shares of common stock to acquire
iSummit (reflecting a post closing adjustments to the aggregate number of issued
shares effective as of December 31, 2001).
I-trax Health Management Solutions, Inc.--Operating Subsidiary
Health Management is a predecessor to I-trax and is our operating
subsidiary. It was incorporated in the State of Delaware under the name of
Marmac Corporation in May 1969. In December 1979, it changed its name to Ibex
Industries International, Inc. On April 1, 1996, Health Management purchased the
assets of certain physician practices, changed its name to U.S. Medical
Alliance, Inc., and commenced operations as a physician practice management
company.
As U.S. Medical Alliance, Health Management completed one additional
physician practice acquisition. However, it did not have adequate liquidity or
capital resources to withstand the downturn in the physician practice management
industry, nor the ability to acquire profitable physician practices. In January
1997, the Board of Directors, in an effort to reorganize Health Management,
elected Frank A. Martin as its President. Mr. Martin negotiated the return of
the previously acquired physician practice assets to the physicians in exchange
for the cancellation of any Health Management capital stock or notes associated
with those acquisitions. Health Management changed its name to I-Trax.com, Inc.
in August 1999.
Health Management merged with Member-Link effective December 30, 1999
pursuant to a Merger Agreement dated as of December 14, 1999. In the merger,
Health Management issued an aggregate of 1,554,368 shares (as adjusted) of its
common stock. And on February 7, 2001, Health Management and I-trax completed
the previously described holding company reorganization. Health Management
assumed its current name, I-trax Health Management Solutions, Inc., on March 21,
2001.
Our Market and Business Strategy
We believe that the market for our population health management
solutions is large and continues to grow. Experts in disease management
outsourcing estimate that the disease management industry generated outsource
fees of approximately $73 million in 1997 and approximately $425 million in
2001. Same experts also estimate that these outsource fees could reach $20
billion in 2010.
As the costs of medical care continue to grow, there is a growing
recognition throughout the healthcare community of the need for targeted,
coordinated, and effective healthcare management solutions. Further, we believe
that increased interest in population health and disease management among health
plans, employers and governmental agencies and optimistic results from numerous
ongoing population health and disease management programs indicate that
population health and disease management are effective and will become a
permanent aspect of healthcare.
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Because our solutions are scalable and can be tailored to fit into most
healthcare organizations, we feel we have a competitive advantage. We have
identified, and are targeting, the following segments of the healthcare industry
as purchasers of our solutions:
o Self-Insured Employers. As the ultimate payor for health related
costs, self-insured employers have a significant stake in making
sure that employees and their dependents are empowered with tools
to make the best and most educated healthcare decisions. We
believe that correct and informed decisions will not only reduce
direct healthcare costs, but also reduce employee absenteeism and
improve employees' focus at work. Where employees are older or
retired and at risk for chronic diseases, early risk
identification and targeted interventions will help reduce costs
and improve quality of life.
o Military and Government. The eImmune(R) application is the first
application we designed and built. It now used to manage records
for 2.5 million individuals. With recent increased funding to
state health programs, this application is now very expandable.
o Public Health Agencies. Public health agencies are charged with
coordinating care to a significant portion of America's uninsured
population. Our care coordination tools and disease management
programs are well suited to benefit this segment of the healthcare
market. Furthermore, eImmune(R) and our other software
applications are ideally suited for aggregating and analyzing vast
of amounts of data required to, among other things, track
immunizations and detect trends that can provide important
surveillance information in the event of an outbreak of infectious
diseases associated with bio-terrorism.
o Hospitals and Health Systems. Hospitals and health systems are
under increasing financial pressure to balance the expense of high
quality medical care with public and private insurers'
reimbursements. Our solutions assist hospitals and health systems
to reduce costs while enhancing the service and care provided to
patients. Our flexible call center solution offers multi-lingual
24 per day, 7 days per week technology-enabled nurse triage and
disease management services, which permit hospitals and health
systems to reduce operational costs.
o Health Plans and Health Insurers. We believe that the era of
health maintenance organizations denying access to care as a
measure to reduce costs is over. We believe that health plans and
health insurers are under increasing pressure to revise their
methods to reduce medical errors, coordinate care and implement
technology enabled population health management solutions and
disease management programs. We believe that denial of access was
a short-term solution that is now causing escalated costs.
Population health management is a long-term solution with proven
return on investment.
o Colleges and Universities. America's colleges and universities
have an increasing need to communicate with their students,
streamline and automate the collection of medical histories during
the enrollment process, and improve communication between the
student and student health services in a secure, confidential
manner. Furthermore, colleges and universities seeking to improve
the healthcare services offered to enrolled students are beginning
to value 24 hours per day, 7 days per week nurse triage and health
information services that we offer.
We are now servicing and continuing to add clients in each of our
targeted markets. To devise acceptable pricing plans, we work with each of our
clients individually. Generally, our clients pay us for each completed
transaction or on a "per member, per month" or "per member, per year" basis.
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Our Products and Services
I-trax provides focused disease management and comprehensive health
management solutions designed to improve the health of the populations we serve
while reducing the cost of medical care. Ours is a three-pronged approach that
results in savings and consumer satisfaction:
Prediction + Prevention + Care Management = Performance
Prediction
We use historical information to predict future healthcare costs.
Experts agree that predictive modeling provides a comprehensive advantage to
health plans, employers and providers, which leads to cost effective medical
management and greater profitability. By using predictive modeling, we identify
our clients' future healthcare costs, the health conditions that will drive
those costs and the people within our clients' populations who are at risk for
those conditions. Armed with this information, we target appropriate resources
to address the costly conditions and the populations that are at risk for those
conditions, thus managing costs while improving care.
Prevention
We use what we believe to be state-of-the-art demand management and
nurse triage services to effect our targeted interventions. These services
incorporate nationally recognized, evidence-based clinical guidelines to ensure
that all caregivers and consumers are following the best practices. We also link
the key stakeholders in this care delivery effort--consumers, physicians and
care managers--through secure, web-based solutions. These solutions facilitate
real-time sharing of information and support the adherence to our population and
disease management programs. Finally, we staff our state-of-the-art Care
Communications Center with skilled nurses and other healthcare professionals 24
hours per day, 7 days per week. The Center helps consumers make informed
decisions about their health and provides ongoing support for those with chronic
diseases.
Our prevention products and services include:
MyNurseLine(TM). MyNurseLine(TM) is our technology-enabled, clinical
nurse triage service that is available 24 hours per day, 7 days per week. The
service provides clients with tailored communication center solutions to meet
their healthcare needs. By utilizing state-of-the-art information technology,
MyNurseLine(TM) affords consumers access to affordable, high quality health and
wellness information through our Care Communications Center, ultimately reducing
costs and improving general health status.
MyNurseLine(TM) service allows for rapid assessment of callers'
condition, triaging them to the appropriate level of care ranging from emergency
care referral to guided self-care at home. Recent studies cited by the Wall
Street Journal indicate that 37% to 54% of the 95 million yearly emergency room
visits are for conditions that do not require immediate treatment, such as sore
throats and ankle sprains. By using MyNurseLine(TM) nurse triage a client can
reduce medical costs by directing callers to appropriate levels of care thereby
reducing unnecessary over utilization of services. MyNurseLine(TM) service
features:
o Fully operational, 24 hours a day, 7 days per week.
o Calls answered by registered nurses, with a minimum of three-years of
recent clinical experience, including experience in critical care and
case management.
o Seamless continuity for patients or members because nurses answering
calls become part of our client's staff by using greeting and
procedures customized and to client specifications.
o Triage protocols provided by Barton D. Schmitt, MD, FAAP and the
American Institute for Preventive Medicine and organized into
manageable topics such as chest pain, fever and rashes.
o High level of quality assurance by physicians and registered and
telephone triage certified nurses serving as clinical team leaders.
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o Multi-lingual triage and support.
o Selection of 1,800 standard patient call reports, including caller
satisfaction, telephone activity by day-of-week and patient chart
reports. Reports may be faxed or emailed to clients daily.
DoctorsLine(TM). DoctorsLine(TM) service is our after-hours custom
triage and administrative outsourcing service for physicians. DoctorsLine(TM)
service provides physicians with a cost effective solution to address telephone
coverage and general administrative needs. This service is uniquely designed to
be highly flexible so that physicians can switch their telephone coverage during
times of vacations, staff meetings as well as for standard after-hours coverage.
Nurses staffing the DoctorsLine(TM) service resolve over 80% of all
after-hours triage calls by using Barton Schmitt pediatric triage protocols,
American Institute of Preventative Medicine adult triage protocols and, if
applicable, the treating physicians protocols, thus reducing significantly
unnecessary emergency room visits and costs. DoctorsLine(TM) service features
many of the features included in the NurseLine(TM) service, including:
o Ability for each physician to customize patient orders according to
the physician's practice management specifications.
o Call-in of drug prescriptions by nurses in non-emergency situations.
o Seamless coverage if office staff is unable to answer telephones for
any reason, including after-hours, holidays, vacations, office
closings and family functions.
o Patient encounter and caller detail reports sent daily to each client
to ensure coordination of information and care.
o Custom reporting options including quality assurance, costs savings,
benefits and management reports.
Health-e-Community(TM). Health-e-Community(TM) services provide
healthcare organizations with enrollment, marketing and fulfillment services.
Health-e-Community(TM) services are designed to help clients who are instituting
or have already started disease management programs for their populations by
augmenting and enhancing the resources allocated by our clients. We have had
particular success in specialized patient enrollments, including those requiring
multi-lingual capabilities.
Health-e-Community(TM) services support increased communications
between members and care providers and facilitate real-time communication
between our Care Communications Center staff and our clients' administrative,
clinical and care management teams. We gather, process and deliver data
real-time to help our clients monitor and measure outcomes. Our timely response
ensures greater success for our clients' health management programs.
Health-e-Community(TM) service includes:
o Disease management program enrollment.
o Specialized patient enrollment, education and communication. o Health risk
assessments and surveys. o Targeted health screenings.
o Health information and literature fulfillment services. o Class registration.
o Customer contact management.
o Physician referrals for consumers. o Community services referral.
o Patient test result line with personal identification number secure access. o
Emergency room pre-certification. o Membership management.
o Physician, hospital and clinic database management.
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o Quality assurance reports.
o Service measurement, demographic and outcome reporting. o Admission and
revenue justification. o Complaint and suggestion tracking.
eImmune(R). The eImmune(R) application is a comprehensive clinical
software product for processing, recording and tracking immunizations and
related adverse events. The eImmune(R) application is designed for use by state
registries, physician networks, managed care plans, school nurses and individual
physicians. The program enables caregivers to follow standards of care and
adhere to documentation requirements, including capturing ICD-9 codes, CPT codes
and lab information.
The eImmune (R) application was developed in conjunction with Walter
Reed Army Medical Center, Allergy and Immunology Department, in Washington,
D.C., to maintain all military immunizations at that site. First installed at
Walter Reed in January 1998, the eImmune(R) application now manages records for
2.5 million individuals. An upgraded, secure, web-enabled version of eImmune(R)
software released in August 2000 now operates at a number of sites, including
the Pentagon and the Office of Attending Physician, U.S. Congress. The
eImmune(R) application:
o Tracks administration of vaccines.
o Retrieves and records vital patient information, including medical and
medication history and allergies.
o Produces standard and ad-hoc encounter reports, labels for yellow-shot
records and adverse event reports in a Vaccine Adverse Event Reporting
System format.
o Provides information on dosing schedules for vaccines and skin test
materials and manufacturer specific contraindications and warnings.
o Generates vaccination schedules and reminder notices, which include
specific product information.
o Follows customary information flow required during the patient
encounter using touch screen and point and click data entry.
o Utilizes intuitive user interfaces for easy navigation facilitating
point of care data entry.
o Coordinates with I-trax's consumer Internet portal, which provides
users with access to their official immunization records.
o Supports integration with existing software.
o Maintains a confidential and secure platform.
The eImmune(R) application's system-wide benefits include:
o A secure, web-enabled clinical immunization documentation and tracking
system which can be used in routine immunizations as well as
large-scale immunization efforts, including as part of a bioterrorism
preparedness plan.
o Automated data collection, tracking and analysis of outcomes and
critical health data enabling quicker response to public health
threats such as emerging infectious diseases or bioterrorism.
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o A comprehensive framework integrating health data with immunization
information to facilitate timely and accurate reporting of information
to the Centers of Disease Control and state and local health
departments to comply with government requirements.
o Architecture that supports integration with existing immunization
registry systems to provide states with an enhanced comprehensive
solution to meet the requirements established by United States
Department of Health and Human Services.
o Improved operational efficiency and reduction of paperwork thereby
allowing health providers more time to deliver care.
Medicive(R) Medical Enterprise Data System. All I-trax software
applications and health management solutions are built on a common platform--The
Medicive(R) Medical Enterprise Data System. The Medicive(R) system is a
proprietary database developed to collect, store, retrieve and analyze a broad
range of information used in the healthcare industry. It is through the
Medicive(R) system that I-trax solutions are able to be completely integrated
and enable true coordination of care, thereby delivering the right information
to the right person at the right time. The Medicive(R) platform is the
foundation of our Care Coordination Platform.
A key feature of the Medicive(R) platform is the architecture's ability
to accept new and critical data, which is important for an industry experiencing
rapid advances in clinical care, laboratory research, facilities improvements,
diagnostic modalities, as well as changes in treatment protocols. Using
point-of-care user interfaces, Medicive(R) collects data such as demographics
and staff and physician assessments, and allows the user to view a record over
time, call it up in graphical display, to generate reports, and to make quick
comparisons in easy-to-read formats. We believe that our technology is
"user-friendly" and personalized because we developed it in concert with a team
of health care providers, technology experts and third-party users. The ability
to monitor patient care data longitudinally not only gives the provider an
unprecedented view of the progress of treatments and factors that contribute to
a particular disease, but also provides a comprehensive picture of the
management of the disease and treatment outcomes promoting successful health
care delivery. As a result, our technology promotes user interaction,
facilitates decision-making and supports health care management, thus expanding
our offering into an enterprise-wide system covering all aspects of a customer's
business process.
The flexibility of Medicive(R) Medical Enterprise Data System's
construction is due primarily to the effort that went into its architecture
design. Medicive(R) system has been structured to capture information about the
general healthcare process or activity and then to narrow the healthcare process
or activity to the most specific level. Thus, the architecture permits new data
to be added to the database because, in most instances, new data are extensions
of existing data. We believe that Medicive(R) Medical Enterprise Data System's
flexibility gives us an advantage over competitors that may need to spend far
more time to modify their systems to accommodate new healthcare processes or
activities. The Medicive(R) Medical Enterprise Data System contains and
organizes several industry standard medical data elements and is capable of
producing ICD9 diagnosis codes, CPT procedure codes, SNOMED, or Medcin coded
medical data. These codes are commonly used in the medical profession to
identify specific disease states.
Medicive(R)'s schema is completely platform independent. Deployed
systems have utilized Microsoft SQL Server 7.0. However, I-trax can create
execution files to put the Medicive(R) platform on any SQL platform available
today, including, Oracle(R) 8i, Sybase(R) Adaptive Server, or IBM(R) DB2.
Health-e-Coordinator(TM). Health-e-Coordinator(TM) software enables
true coordination of care by connecting all healthcare professionals involved in
the treatment and monitoring of patients. It is a sophisticated web-based
application designed to support disease management, patient care management,
education and referral according to current published clinical guidelines.
Health-e-Coordinator(TM) software serves as an over-arching application to view
and manage all information that resides in our Medicive(R) Medical Enterprise
Data System, regardless of which other I-trax software applications are used to
collect the information.
Health-e-Coordinator(TM) is ideally suited for disease management and
care management by clinicians in a communications center venue or an outpatient
setting. It is designed to manage large volume of members or patients while
ensuring consistency and quality among caregivers. Key features of
Health-e-Coordinator(TM) software include:
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o Schedule and Task List. This feature not only organizes patient care,
but also assists healthcare providers to manage workflow. Providers
can quickly access member activities from various activity lists. Each
clinician can view a list of the members they need to contact and
quickly view each member's health summary or complete health record to
help focus their activities.
o Member Record. This feature enables documentation of members past
medical history, medications and vaccinations. Member Record also
permits documentation and generation of surveys, assessments and care
plans.
o Messaging. This feature provides for the secure transfer of
information from patients to providers. The messaging feature
encourages the patient to participate in the management of their care.
o Reports. Reports are available to support the management and oversight
of work processes and outcomes for all healthcare providers involved
in the care process. The application provides a number of standard
management reports and enables the end-user to generate custom reports
to meet their specific requirements. All reports are immediately
available to authorized users via the Internet.
o Resource Library. This feature provides users easy accessible disease
specific information to enhance the care process should members have
specific educational needs. The information can be mailed or e-mailed
to members, therefore enhancing the interaction between the clinician
and the member.
MyFamilyMD(TM). The MyFamilyMD(TM) web-based platform is designed to
allow patients to chronicle their daily health routines, including medications,
allergies, exercise and achievement of health goals. By providing easy-to-use
graphs and reports, the MyFamilyMD(TM) platform empowers patients to monitor and
control their health by reviewing trends in their healthcare regimen.
The cornerstone of the MyFamilyMD(TM) platform is its ability to
provide the tools for consumers to collaborate with their healthcare provider
about their daily management. The MyFamilyMD(TM) platform provides capability
for prescription refill requests, appointment requests, health assessments,
interactive tools for weight and blood sugar management, lab tracking and health
history forms for pre- and post-encounter information exchange. The platform's
messaging system is built to facilitate user compliance with the Health
Insurance Portability and Accountability Act of 1996 and related regulations
("HIPAA") standards to ensure the utmost security and confidentiality of
personal and medical information.
The MyFamilyMD(TM) platform uses what we believe to be leading-edge
personalization to deliver relevant news, articles and messaging from qualified
medical sources based on the user's medical history and health concerns, thus
providing timely information without burdening users with the tedious manual
Internet searches. The MyFamilyMD(TM) platform features:
o A personal health record to store and maintain health interests,
medical concerns, medications, diet and exercise habits and
immunizations, among other information.
o Secure messaging of non-urgent, routine requests, such as
appointments, refill requests, immunizations and screening tests.
o Interactive MedWizard(R) applications that help to monitor blood
glucose, insulin dosing, blood pressure, weight, height, pulse, peak
flow, lab values and other variables. Members can custom-design
journals or daily diaries to track a series of symptoms and health
care concerns.
o Risk assessments that evaluate the risk for diabetes and asthma, and
recommend appropriate safety habits and information about when to seek
appropriate medical care.
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o Daily, personalized content from qualified medical sources about
health maintenance and conditions such as diabetes, asthma and other
medical concerns of patient health interest.
o Automated recall alerts for medications, vaccines and consumer
products.
CarePrime(R). CarePrime(R) is a web-based communication tool for
physicians and their staff that permits secure messaging between the physicians,
their staff and patients, and facilitates online appointment requests and
referrals. The CarePrime(R) and MyFamilyMD(TM) applications promote a
partnership between patients and physicians by allowing providers, with
permission, to access their patients' personal health record kept in the
MyFamilyMD(TM) application.
Replacing or supplementing patients' paper files, the CarePrime(R)
application provides healthcare providers a web based tool for reviewing a
snapshot of client's health information, immunization compliance, medical
history, demographics, allergies and applicable evidence-based clinical
guidelines. The CarePrime(R) application brings important information to the
provider's fingertips. The CarePrime(R) application features include:
o Secure messaging for non-urgent requests such as prompting diabetic
patients to schedule eye examinations and providing parents with
immunization reminders for their children.
o Group messaging, with message tracking, to all patients or a
predefined group of patients on topics such as air quality alerts, or
scheduling school physical examinations.
o Custom and automated, based on established rules, patient
notifications such as exam reminders.
o Communication with patients when they update their Personal Health
Record MyFamilyMD(TM), and forward the information to their providers
via a secure Internet portal, to be received through CarePrime(R)
application.
o Easy differentiation between customer or patient and provider or
professional entered data.
o Completion and submission of health forms and immunization records
electronically via the MyFamilyMD(TM) application to the CarePrime(R)
application, which are then physician-verified and become the core of
an electronic medical record.
o Quick provider access to reports on vaccine recalls, dosing schedules
for vaccines, and patient adverse reactions.
o Patient compliance monitoring by providers in an easy-to-use format.
Care Management
We believe that we offer the industry's most comprehensive health
management and disease management solution. We assist clients in managing the
healthcare of their populations by outsourcing clinical and administrative
services as part of a strategic partnership. Through long-term partnerships with
our clients, we align our assets and core competencies to develop targeted
solutions to meet the needs of the populations our clients serve. Our disease
management solutions currently address congestive heart failure (CHF), coronary
artery disease (CAD), asthma, diabetes, lower back pain and chronic obstructive
pulmonary disease (COPD). We also develop programs using evidenced-based
guidelines based on our clients' requests.
Health-e-Life(TM) Program. Our Health-e-Life(TM) Program provides
interactive tools for healthcare providers and their well patients which are
intended to reduce the possibility of acute or chronic conditions. The
components of the program are delivered through I-trax's
Health-e-Coordinator(TM) care coordination tool, our web portals CarePrime(R)
and MyFamilyMD(TM) and our communications center staffed by skilled nurses and
other health professionals 24 hours per day, 7 days per week. Features and
benefits of I-trax's Health-e-Life(TM) Program include:
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o Proven success demonstrated with clinical and financial outcomes.
o Protocols designed and reviewed by physicians and experts in disease
management.
o Integration of industry-leading technology, proven clinical protocols,
and clients' business practices to drive custom results.
o Utilization of care processes with focus on self-care, advocacy, and
education and change management tailored to each enrolled member.
o Utilization of clinical expertise and technology to integrate
individual member needs including co-morbidities and cultural factors
without increasing program costs.
o Stratification of populations using clinically validated statistical
analysis.
o Life assessment and coaching regarding stress, self-advocacy,
lifestyle changes and self-assessment.
o Educations about risk prevention, healthy lifestyles, diet and
exercise, and other self care activities.
o Risk assessments for leading causes of morbidity and mortality.
o MyFamilyMD(TM) interactive health platform for members with web
access, including health record management and messaging.
o Personalized daily content about health concerns and conditions.
o Status reporting to physicians about changes in members' health.
o Home monitoring and home visits as needed.
o Flexible program implementation, including complete outsourcing to
I-trax, or licensing of I-trax's technology with in-house management,
with expert consulting available.
Customer Service
We obtain new business, in part, based upon referrals from satisfied
customers, such as Walter Reed Army Medical Center and Los Angeles County. We
have received referrals from Walter Reed Medical Center in two primary forms.
First, the immunology department at Walter Reed has referred its own departments
to us for possible product purchase. Second, Walter Reed has provided some of
our prospective customers with positive information relating to our products and
our commitment to customer service. In addition, customers, such as Walter Reed
Army Medical Center, have returned to purchase some of our new products and
upgrades on our existing products. We attribute this success, in part, on our
high level of customer service. We intend to continue this high level of
customer service, as we believe it is a key factor for its success in this
market. Management has recently implemented a staffing plan in advance of growth
to assure that premier standards in customer service are met.
Competition
Numerous companies are operating in the disease management segment of
the larger healthcare industry. Many of these companies are larger than we are
and have greater resources, including access to capital. We believe, however,
that our total population health management solutions are unique. We also
believe that our software applications and our broad based expertise in
designing and deploying scalable, military grade software applications
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allow us to compete effectively against these larger competitors. We consider
the following types of companies to compete with us in providing a similar
product:
o Disease management and care enhancement companies, such as American
Healthways, Lifemasters, Matria, Allere and McKesson.
o Established providers of existing, healthcare information technology.
These firms have competencies in hospital information systems but also
offer general electronic medical records, practice management systems,
clinical data repositories, hospital information systems, accounting
systems. E.g. Cerner Corporation, Siemens, McKesson, GE Medical
Systems, Philips, IDX, Epic and Landacorp.
o Health-related, online services or web sites targeted at consumers,
such as careenhance.com, drweil.com, healthcentral.com,
healthgate.com, intelihealth.com, mayoclinic.com, thriveonline.com,
webmd.com and wellmed.
o Hospitals, HMOs, pharmaceutical companies, managed care organizations,
insurance companies, other healthcare providers and payors that offer
disease management solutions.
One or more of these companies could choose to expand their markets so
as to compete more directly with us. Most of them are better capitalized than we
are, and therefore such an entry into our niche would add to the competitive
pressures of our business. Nonetheless, we believe we enjoy two primary
competitive advantages. First, we have a standing strategic relationship with
one early adopter of our technology, Walter Reed Army Medical Center, which has
used our custom applications since 1995. Second, we have a time advantage in
software and database development over any new direct competitor.
Intellectual Property
Our proprietary software applications are protected by United States
copyright laws. We have registered the use of certain of our trade names and
service names in the United States. We also have the rights to a number of
Internet domain names, including I-trax.com and .net, MyFamilyMD.com and .net,
eImmune.com and .net, CarePrime.com and .net and healthecoordinator.com. In
addition, we continue to explore potential availability of patent protection for
our business processes and innovations.
Research and Development
We conduct research and development on three levels on a continuing
basis. First, we continually study the business process in the medical
community. A pivotal part of the success of our services is understanding the
exact needs of our customers, and applying that knowledge to the graphic user
interface, thus allowing our systems to integrate into the user's workflow
without disruption. I-trax was founded on this principle. We are constantly
studying the changing work environment and clinical landscape of our customers
and the industry as a whole. New disease modules, such as a diabetes-tracking
module, are under development and modifications and additional functionality
will continue to be added to currently available services.
Second, as a by-product of the business process study, the invention
and development of unique problem solving tools embedded in our software
applications make possible the process of entering and retrieving vast amounts
of information in short periods of time. Constant development, re-engineering
and implementation of these tools is a priority of the design and engineering
staff and will continue to be our focus, allowing us to maintain a leading role
in information systems development.
Third, further technology platform research, development and
engineering are conducted on a continual basis. New technologies, such as
Internet applications and the commercial software that support it, lack certain
capabilities and functionalities required to allow the medical and healthcare
industry to migrate to a total eHealth strategy. We believe we are in the
process of creating software components to solve these problems and are
constantly educating ourselves on available and emerging technologies that will
help support and enhance our services.
G-14
We have spent approximately $1.3 million on research and development
activities over the past two fiscal years, the majority of which was
attributable to the completion of MedWizards(R) health assessment tools, and
Health-e-Coordinator(TM) and CarePrime(R) applications. We expect to continue to
spend funds on adding functionality to the MyFamilyMD(TM) application by adding
MedWizard(R) tools, on CarePrime(R), which interacts with the MyFamilyMD(TM)
application and its MedWizards(R) tools, and on Health-e-Coordinator(TM)
software by adding additional disease capabilities.
Employees
We believe our success depends to a significant extent on its ability
to attract, motivate and retain highly skilled, vision-oriented management and
employees. To this end, we focus on incentive programs for our employees and
endeavor to create a corporate culture that is challenging, rewarding and fun.
As of March 24, 2003, we had 56 full-time and 20 part-time employees.
Risk Factors
In addition to other information in this report, you should carefully
consider the following risks and the other information in evaluating I-trax and
its business. Our business, financial condition and results of operations could
be materially and adversely affected by each of these risks. Such an adverse
effect could cause the market price of our Common Stock to decline, and you
could lose all or part of your investment.
We Have a History of Operating Losses and Anticipate Continued Operating
Losses Through the Third Quarter of 2003
We have used substantial cash to fund our operating losses, and we have
never earned a profit. Through December 31, 2002, we have used approximately
$12.8 million of cash to fund our operating activities. Moreover, we expect to
use additional cash to fund our operating losses through the third quarter of
2003. Our ability to achieve profitability will depend, in part, on:
o the commercial success of our service and software applications;
o successful deployment and retention of our services and software
applications by our customers; and
o our sales and marketing activities.
The success of our business model depends on attracting customers, such
as public health agencies, hospitals, health plans, self-insured employers, and
colleges and universities, to our population health management solutions.
Although we believe that this business model will be successful, we cannot
assure you that we will achieve or sustain profitability or that our operating
losses will not increase in the future.
We Will Require Additional Capital To Improve Our Products and Services
At present, we have projected sufficient funding to cover our operating
expenses and therefore to mitigate questions about our ability to continue as a
going concern. Additional funds, however, will be required to complete our
planned product development efforts and to expand our sales and marketing
activities. We will have to obtain such funds through equity or debt financing,
strategic alliances with corporate partners and others, or through other
sources. We do not have any committed sources of additional financing, and we
cannot provide assurance that additional funding, if necessary, will be
available on acceptable terms, if at all. If adequate funds are not available,
we may have to delay, scale-back or eliminate certain aspects of our operations
or attempt to obtain funds through arrangements with collaborative partners or
others. And this will cause us to loose what we believe is a current competitive
advantage in the technology-enabled population health management field.
Therefore, if we are unable to obtain adequate funds, our business, financial
condition and results of operations may be adversely affected.
G-15
The Segment of the Healthcare Industry in Which We Operate Is Relatively
New and Our Sales Cycle Is Long and Complex
The disease and population health management business, although growing
rapidly, is a relatively new segment of the overall healthcare industry and has
many entrants. Many companies use the generic label of "disease management" to
characterize activities ranging from the sale of medical supplies and drugs to
services aimed at managing demand for healthcare services. Because this segment
of the industry is relatively new, potential purchasers take a long time to
evaluate and purchase such services, lengthening our sales cycle. Further, the
sales and implementation process for our services and software applications is
lengthy, involves a significant technical evaluation and requires our customers
to commit a great deal of time and money. Finally, the sale and implementation
of our solutions are subject to delays due to our customers' internal budgets
and procedures for approving large capital expenditures and deploying new
services and software applications within their organizations. The sales cycle
for our solutions, therefore, is unpredictable and has generally ranged from 3
to 24 months from initial contact to contract signing. The time it takes to
implement our solutions is also difficult to predict and has lasted as long as
18 months from contract execution to the commencement of live operation. During
the sales cycle and the implementation period, we may expend substantial time,
effort and money preparing contract proposals, negotiating the contract and
implementing the solution without receiving any related revenue.
Our Limited Operating Experience May Cause Us to Misjudge the Segment of
the Healthcare Industry in Which We Are Operating
We have only recently begun to design, build and offer disease
management and comprehensive health management solutions. Our enterprise
software applications have been operational for less than four years, our
web-based solutions have been operational for less than two years and our
disease management and comprehensive health management solutions have been
operational for only one year. Accordingly, we have a limited operating history
in our business. Furthermore, we are also facing other risks and challenges,
including a lack of meaningful historical financial data upon which to plan
future budgets, increasing competition, the need to develop strategic
relationships, and other risks described below. We cannot guarantee that we will
be able successfully to implement our business model. An investor in our common
stock must consider the risks, uncertainties, expenses and difficulties
frequently encountered by companies in their early stages of development. As a
result of the absence of meaningful history and experience in our business, we
may easily misjudge the nature or size of our perceived markets, or the amount
of work or capital necessary to complete our pending products or to implement
our business plan.
We May Be Unable to Implement Our Business Strategy to Deploy Our Products
Effectively and Attract Customers
Although we believe that there is significant demand for our services
and products in the overall healthcare market, there are many reasons why we may
be unable to execute our business strategy, including our possible inability to:
o deploy our services and software applications on a large scale;
o attract a sufficiently large number of public health agencies,
hospitals, health plans, self-insured employers and colleges and
universities to subscribe for our services and software applications;
o increase awareness of our brand;
o strengthen user loyalty;
o develop and improve our services and software applications;
o continue to develop and upgrade our services and software
applications; and
o attract, retain and motivate qualified personnel.
G-16
The Healthcare Industry Is Subject to Cost Pressures
The healthcare industry is currently under pressure by governmental and
private-sector revenue sources to cut spiraling costs. These pressures will
continue and possibly intensify. Although we believe that our services and
software applications assist public health agencies, hospitals, health plans and
self-insured employers to control the high costs associated with the treatment
of chronic diseases, the pressures to reduce costs immediately may hinder our
ability (or the length of time we require) to obtain new contracts. In addition,
the focus on cost reduction may pressure our customers to restructure contracts
and reduce our fees.
Government Regulation Could Adversely Affect Our Business
Many of our existing and potential clients are subject to considerable
state and federal government regulations. Many of these regulations are vaguely
written and subject to differing interpretations that may, in certain cases,
result in unintended consequences that may affect our ability to effectively
deliver our services. Regulatory and legislative efforts currently focus on the
confidentiality of patient identifiable medical information, as evidenced by
such legislation as the Health Insurance Portability and Accountability Act of
1996 (or "HIPAA"). While we believe that our ability to obtain patient
identifiable medical information for disease management purposes from certain of
our clients is protected in recently released federal regulations governing
medical record confidentiality, state legislation or regulations will preempt
federal legislation if it is more restrictive. Accordingly, new federal or state
legislation or regulations restricting the availability of this information to
us or leaving uncertain whether disease management is an allowable use of
patient identifiable medical information would have a material negative effect
on us.
Although we are not directly subject to many of the regulations
governing healthcare delivery, our clients, such as public health agencies,
hospitals, health plans, and self-insured employers, must comply with
regulations including the licensing and reimbursement requirements of federal,
state and local agencies. Further, certain of our professional healthcare
employees, such as doctors and nurses, are subject to individual licensing
requirements. All of our healthcare professionals who are subject to licensing
requirements are licensed in the state in which they are physically present.
Multiple state licensing requirements for healthcare professionals who provide
services telephonically over state lines may require us to license some of our
healthcare professionals in more than one state. We continually monitor the
developments in telemedicine. There is no assurance, however, that new judicial
decisions or federal or state legislation or regulations would not increase the
requirement for multi-state licensing of all central operating unit call center
health professionals, which would significantly increase our administrative
costs.
We are indirectly affected by changes in the laws governing health
plan, hospital and public health agency reimbursement under governmental
programs such as Medicare and Medicaid. There are periodic legislative and
regulatory initiatives to reduce the funding of the Medicare and Medicaid
programs in an effort to curtail or reduce overall federal healthcare spending.
Federal legislation has and may continue to significantly reduce Medicare and
Medicaid reimbursements to most hospitals. These reimbursement changes are
negatively affecting hospital revenues and operations. There can be no assurance
that such legislative initiatives or government regulations would not adversely
affect our operations or reduce demand for our services.
Various federal and state laws regulate the relationship among
providers of healthcare services, other healthcare businesses and physicians.
The "fraud and abuse" provisions of the Social Security Act provide civil and
criminal penalties and potential exclusion from the Medicare and Medicaid
programs for persons or businesses who offer, pay, solicit or receive
remuneration in order to induce referrals of patients covered by federal
healthcare programs (which include Medicare, Medicaid, TriCare and other
federally funded health programs). Although we believe that our business
arrangements with our clients are in compliance with these statutes, these fraud
and abuse provisions are broadly written and the full extent of their
application is not yet known. We are therefore unable to predict the effect, if
any, of broad enforcement interpretation of these fraud and abuse provisions.
G-17
Our Dependence on the Internet and Internet-Related Technologies Subjects
Us to Frequent Change and Risks
Our web-based software applications that form the backbone of our
disease management and comprehensive health management solutions depend on the
continuous, reliable and secure operation of Internet servers and related
hardware and software. In the past, several large Internet commerce companies
have suffered highly publicized system failures, which depressed their stock
prices, caused significant negative publicity and sometimes led to litigation.
It is possible that we may also suffer service outages from time to time. To the
extent that our service is interrupted, our users will be inconvenienced and our
reputation may be diminished. If access to our system becomes unavailable at a
critical time, users could allege we are liable, which could depress our stock
price, cause significant negative publicity and possibly lead to litigation.
Although our computer and communications hardware is protected by physical and
software safeguards, it is still vulnerable to fire, storm, flood, power loss,
telecommunications failures, physical or software break-ins and similar events.
We will not have 100% redundancy for all of our computer and telecommunications
facilities. A catastrophic event could have a significant negative effect on our
business, results of operations, and financial condition.
We also depend on third parties to provide certain of our clients with
Internet and online services necessary for access to our servers. It is possible
that our clients will experience difficulties with Internet and other online
services due to system failures, including failures unrelated to our systems.
Any sustained disruption in Internet access provided by third parties could have
a material adverse effect on our business, results of operations and financial
condition.
Finally, we retain confidential healthcare information on our servers.
It is, therefore, critical that our facilities and infrastructure remain secure
and are perceived by clients to be secure. Although we operate our software
applications from a secure facility managed by a reputable third party, our
infrastructure may be vulnerable to physical break-ins, computer viruses,
programming errors or similar disruptive problems. A material security breach
could damage our reputation or result in liability to us.
We May Be Sued by Our Users if We Provide Inaccurate Health Information on
Our Web Site or Inadvertently Disclose Confidential Health Information to
Unauthorized Users
Because users of our web site will access health content and services
relating to a medical condition they may have or may distribute our content to
others, third parties may sue us for defamation, negligence, copyright or
trademark infringement, personal injury or other matters. We could also become
liable if confidential information is disclosed inappropriately. These types of
claims have been brought, sometimes successfully, against online services in the
past. Others could also sue us for the content and services that will be
accessible from our web site through links to other web sites or through content
and materials that may be posted by our users in chat rooms or bulletin boards.
Any such liability will have a material adverse effect on our reputation and our
business, results of operations or financial position.
Our Business Will Be Adversely Affected If We Lose a Key Employee or Fail
to Recruit and Retain Other Skilled Employees
Our Chairman and Chief Executive Officer, Frank A. Martin, is an integral
part of our business and our future success greatly depends upon his retention.
Our failure to retain Mr. Martin could significantly reduce our ability to
compete and succeed in the future.
Our future success also depends on our ability to attract, retain and
motivate highly skilled employees. As we secure new contracts and implement our
services and products, we will need to hire additional personnel in all
operational areas. We may be unable to attract, assimilate or retain such highly
qualified personnel. We have in the past experienced, and we expect to
experience in the future, difficulty in hiring and retaining highly skilled
employees with appropriate qualifications. If we do not succeed in attracting
new personnel or retaining and motivating our current personnel, our business
will be adversely affected.
G-18
We May Be Unable to Compete Successfully Against Companies Offering
Similar Products
Many healthcare companies are offering disease management services and
healthcare focused software solutions. Further, a vast number of Internet sites
offer healthcare content, products and services. In addition, traditional
healthcare providers compete for consumers' attention both through traditional
means as well as through new Internet initiatives. Although we believe our
technology-enabled service solutions are unique and better than our
competitors', we compete for customers with numerous other businesses.
Many of these potential competitors are likely to enjoy substantial
competitive advantages compared to us, including:
o greater name recognition and larger marketing budgets and resources;
o larger customer and user bases;
o larger production and technical staffs;
o substantially greater financial, technical and other resources; and
o a wider array of online products and services.
To be competitive, we must continue to enhance our products and services,
as well as our sales and marketing channels and our financial condition.
We May Be Exposed to Liability Claims
We maintain professional malpractice, errors and omissions and general
liability insurance for all of our locations and operations. Although we believe
that these insurance policies are adequate in amount and coverage for our
current operations, there can be no assurance that coverage is sufficient to
cover all future claims or will continue to be available in adequate amounts or
at a reasonable cost.
I-trax Health Management Solutions, Inc., our operating subsidiary, had
engaged in the physician practice management business. While we are no longer
engaged in that business, Health Management may be subject to unknown
liabilities arising from such prior business operations, which may have a
material adverse effect on our business, operations, financial condition, or
prospects.
Member-Link Systems, Inc., a company we acquired in 1999 by way of a
merger with Health Management, was engaged in the business of marketing, selling
and installing eImmune(R) and AsthmaWatch(R) applications. Since beginning its
operations in 1996 until March 15, 2000, Member-Link and Health Management did
so without obtaining product or professional liability insurance. Accordingly,
if any customer of Member-Link or Health Management should in the future claim
that the software applications Member-Link and Health Management sold prior to
obtaining insurance on March 15, 2000 were defective, we would not have the
protection of insurance in satisfying or defending against such claims. At this
time we are not aware of any such claims. Any such claims, however, could have a
material adverse effect on our business, results of operations, financial
condition and prospects.
Our clients may sue us if any of our software applications or services
is defective, fails to perform properly or injures the user. Even though we
currently have insurance, claims could require us to spend significant time and
money in litigation, to pay significant damages and to reserve for such
liability on our financial statements. At this time we are not aware of any such
claims. However, any such claims, whether or not successful, could seriously
damage our reputation and our business, results of operations or financial
position.
If Our Intellectual Property Rights Are Undermined by Third Parties, Our
Business Will Suffer
Our intellectual property is important to our business. We rely on a
combination of copyright, trademark and trade secret laws, confidentiality
procedures and contractual provisions to protect our intellectual property. Our
G-19
efforts to protect our intellectual property may not be adequate. Our
competitors may independently develop similar technology or duplicate our
products or services. Unauthorized parties may infringe upon or misappropriate
our products, services or proprietary information. In addition, the laws of some
foreign countries do not protect proprietary rights as well as the laws of the
United States do, and the global nature of the Internet makes it difficult to
control the ultimate destination of our products and services. In the future,
litigation may be necessary to enforce our intellectual property rights or to
determine the validity and scope of the proprietary rights of others. Any such
litigation would probably be time-consuming and costly. We could be subject to
intellectual property infringement claims as the number of our competitors grows
and the content and functionality of software applications and services overlap
with competitive offerings. Defending against these claims, even if not
meritorious, could be expensive and divert our attention from operating our
company. If we become liable to third parties for infringing their intellectual
property rights, we could be required to pay a substantial damage award and
forced to develop noninfringing technology, obtain a license or cease selling
the applications that contain the infringing technology. We may be unable to
develop noninfringing technology or obtain a license on commercially reasonable
terms, or at all. We also intend to rely on a variety of technologies that we
will license from third parties, including any database and Internet server
software, which will be used to operate our applications. These third-party
licenses may not be available to us on commercially reasonable terms. The loss
of or inability to obtain and maintain any of these licenses could delay the
introduction of enhancements to our software applications, interactive tools and
other features until equivalent technology could be licensed or developed. Any
such delays could materially adversely affect our business, results of
operations and financial condition.
Provisions of Our Certificate of Incorporation Could Impede a Takeover of
Our Company Even Though a Takeover May Benefit Our Stockholders
Our Board of Directors has the authority, without further action by the
stockholders, to issue from time to time, up to 2,000,000 shares of preferred
stock in one or more classes or series, and to fix the rights and preferences of
such preferred stock. We are subject to provisions of Delaware corporate law
which, subject to certain exceptions, will prohibit us from engaging in any
"business combination" with a person who, together with affiliates and
associates, owns 15% or more of our common stock (referred to as an interested
stockholder) for a period of three years following the date that such person
became an interested stockholder, unless the business combination is approved in
a prescribed manner. Additionally, our bylaws establish an advance notice
procedure for stockholder proposals and for nominating candidates for election
as directors. These provisions of Delaware law and of our certificate of
incorporation and bylaws may have the effect of delaying, deterring or
preventing a change in our control, may discourage bids for our common stock at
a premium over market price and may adversely affect the market price, and the
voting and other rights of the holders of our common stock.
Our Officers and Directors Have Effective Control of the Company and Other
Stockholders May Have Little or No Voice in Corporate Management
Our Chairman, the venture capital firm with which our Chairman is
affiliated, three other members of our management team and two directors
beneficially own, in the aggregate, approximately 30% of the outstanding shares
of our common stock. As a result, these stockholders, acting together,
effectively control the election of directors and matters requiring approval by
our stockholders. Thus, they may be able to prevent corporate transactions such
as future mergers that might be favorable from our standpoint or the standpoint
of the other stockholders.
The Loss of Any of Our Very Limited Number of Customers Will Have a
Material Adverse Effect on Our Business
Historically, a very limited number of customers has accounted for a
significant percentage of our revenues. In 2001, our largest customer, Walter
Reed Army Medical Center, accounted for 84% of our revenues. In 2002, our
largest customers, UICI and Aetna Health Management, Inc. accounted for 42% and
30% of our revenues, respectively. We anticipate that our results of operations
in any given period will continue to depend to a significant extent upon a small
number of customers. Accordingly, if we were to lose the business of even a
single customer, our results of operations would be materially and adversely
affected.
G-20
Shares Eligible for Future Sale Upon the Conversion of the Debenture and
Upon the Exercise of Issued Options And Warrants may cause significant dilution
Palladin Opportunity Fund, LLC purchased from us a debenture with the
principal amount of $2,000,000. The debenture is convertible into such number of
shares of our common stock as determined by dividing the principal amount
thereof by the then current conversion price. If converted on March 21, 2003,
the debenture would convert into approximately 661,000 shares of our common
stock. But this number of shares could prove to be significantly greater when
the conversion price of the debentures is "reset" in August 4, 2003, the date
that is 18 months after the issue date. Our stockholders, therefore, could
experience substantial dilution of their investment upon conversion of the
debenture. The shares of common stock issuable upon the conversion of the
debentures are registered under the Securities Act of 1933, as amended, and may
be sold by Palladin, subject to certain limitations, at any time.
As of December 31, 2002, approximately 3,843,755 shares of our common
stock were reserved for issuance upon exercise of our outstanding warrants and
options and an additional 1,061,538 shares of our common stock were reserved for
issuance upon conversion of the debenture and exercise of the warrants issued in
connection with the debenture.
If We Cannot Repay the Debenture We Sold to Palladin, We Will Be In
Default on a Material Obligation, Which Will Cause Us to Suffer a Material
Adverse Event
We owe Palladin $2,000,000 under a 6% convertible senior debenture. If
Palladin does not convert this sum into our common stock, this sum, together
with interest, must be repaid on February 3, 2004. If we do not have sufficient
funds to repay this sum on debenture's due date, we will be in default on a
material obligation and as a result our operations may be materially and
adversely effected.
The Price of Our Common Stock Is Volatile
Our stock price has been and we believe will continue to be volatile.
The stock's volatility may be influenced by the market's perceptions of the
healthcare sector in general, or other companies believed to be similar to us or
by the market's perception of our operations and future prospects. Many of these
perceptions are beyond our control. In addition, our stock is not heavily traded
and therefore the ability to achieve relatively quick liquidity without a
negative impact on our stock price is limited.
ITEM 2. DESCRIPTION OF PROPERTIES
Our executive, administrative and sales offices are located in
Philadelphia, Pennsylvania, where we lease approximately 4,659 square feet of
office space pursuant to a lease expiring in June 2005 at a current base annual
rate of $128,123. The property is in good condition.
Our technology development offices are located in Reston, Virginia,
where we lease approximately 1,381 square feet of office space pursuant to a
lease expiring in August 2003 at a current base annual rate of $42,673. The
property is in good condition.
Our Customer Contact Center is located in Omaha, Nebraska, where we
lease approximately 6,212 square feet of office space pursuant to a lease
expiring in May 2007, at a current base annual rate of $55,908. The property is
in good condition.
We do not invest in real estate or interest in real estate, in real
estate mortgages or in securities or of or interests in persons primarily
engaged in real estate activities.
G-21
ITEM 3. LEGAL PROCEEDINGS
Threatened Litigation
In 1998, a former Chief Executive Officer, stockholder and creditor of
Health Management (the "Plaintiff") commenced an action in New Jersey state
court against, among others, the present Chief Executive Officer of Health
Management. Health Management is identified in the caption as a defendant. The
complaint alleges breach of contract, breach of fiduciary duty, breach of the
covenant of good faith and fair dealing, securities fraud, common law fraud,
negligent misrepresentation and racketeering activity. See Nazir Memon v. Frank
Martin, et al, CAM-L-04026-98. The allegations in this action reference
circumstances relating to Health Management's prior line of business of
physician practice management. In 1999, the court entered two orders dismissing
the action "without prejudice" for procedural reasons. Furthermore, in 1999 the
Plaintiff filed for bankruptcy protection. As part of the bankruptcy
proceedings, the Plaintiff, the present Chief Executive Officer and Health
Management entered into a stipulation limiting the period within which the
Plaintiff can bring a new action alleging Plaintiff's claims. Plaintiff sought
to reactivate his prior state court action in January 2001 (within the
stipulated period), rather than commence a new action. The stipulated time
period for commencing a new action has expired.
By Opinion-Letter/Order dated August 22, 2001, the New Jersey Superior
Court, Civil Division, ruled in favor of I-trax by barring Plaintiff from
reactivating the civil action by the bankruptcy stipulation. By order date March
10, 2003, the New Jersey Superior Court, Appellate Division likewise ruled in
favor of I-trax by affirmed the lower court decision. At this time, this matter
has been finally resolved in favor of I-trax because Plaintiff has exhausted all
rights to appeal.
ITEM 4. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of our stockholders during the
quarter ended December 31, 2002.
G-22
>
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market For Our Common Stock
Our common stock trades on the American Stock Exchange under the symbol
"DMX." Prior to January 15, 2003, our common stock was quoted on OTC Bulletin
Board under the symbol "IMTX" and "ITRX." The following table sets forth the
high and low closing prices for our common stock for the periods indicated. All
closing prices have been adjusted to reflect a 1-for-5 reverse stock split
effected as of close of business on January 3, 2003.
High Low
---- ---
2003
First Quarter (through March 21, 2003) $ 5.000 $ 1.370
2002
Fourth Quarter 4.300 2.500
Third Quarter 5.100 2.750
Second Quarter 6.625 4.150
First Quarter 7.650 5.100
2001
Fourth Quarter $ 8.350 $ 1.800
Third Quarter 3.850 1.800
Second Quarter 5.155 2.900
First Quarter 15.000 3.440
We obtained the information presented above from Nasdaq.com.
As of January 10, 2003, there were approximately 843 registered and
"street name" holders of our common stock. On March 21, 2003, the last reported
sales price of our common stock was $1.80.
Dividend Policy
We have never paid or declared any cash dividends on our common stock
or other securities and do not anticipate paying cash dividends in the
foreseeable future.
G-23
Equity Compensation Plan Information
The following table represents information about all equity
compensation plans under which equity securities of I-trax are authorized for
issuance as of December 31, 2002. All share and exercise price information
presented below reflects a 1-for-5 reverse stock split effected as of close of
business on January 3, 2003.
Number of shares of
common stock available
Number of shares of for issuance under
common stock issuable Weighted average equity compensation
upon the exercise of exercise price of plans (excluding shares
outstanding options, outstanding options, of common stock
Plan Category warrants and rights (a) warrants and rights (b) reflected in column (a))
-------------------------------------- ------------------------- -------------------------- --------------------------
Equity compensation plans approved 1,271,802 $ 5.04 528,198
by security holders (1)
Equity compensation plans not
approved by security holders (2) 2,571,953 $ 3.55 0
--------- --------- ---------
Totals: 3,843,755 $ 4.04 528,198
-------------------------------------- ========= ========= =========
(1) Includes I-trax's 2000 and 2001 Equity Compensation Plans. The number of
shares authorized for issuance under I-trax's 2001 Equity Compensation Plan
increases automatically on the first day of each year beginning with the year
2002 by 200,000 shares. Accordingly, as of January 1, 2003, 1,400,000 shares
were authorized for issuance under the 2001 Plan.
(2) Includes options to acquire an aggregate of 439,000 shares granted outside
of I-trax's 2000 and 2001 Equity Compensation Plans and warrants to acquire an
aggregate of 2,132,953 shares. Options granted outside of I-trax's 2000 and 2001
Equity Compensation Plans have terms similar to options granted pursuant to such
plans including, exercise prices established with reference to our common
stock's market price, vesting terms and exercise terms. Warrants are granted as
necessary to secure financings and have terms of five or seven years. Please see
Notes 19 and 20 to our financial statements appearing below for further
discussion.
Recent Sales of Unregistered Securities
In October 2001, we initiated a private placement of up to 1,200,000
shares of our common stock to accredited investors at $2.50 per share, seeking
to raise approximately $2,500,000 in cash and to convert into our common stock
approximately $500,000 accrued by us on account of services rendered to us by
certain consultants and vendors. As of December 31, 2001, we sold 780,200
shares, yielding proceeds of $1,950,500, issued 156,995 shares in exchange for
previously rendered services and issued 133,800 shares in exchange for surrender
of debt held by our Chief Executive Officer and Chief Operating Officer. During
the month of January 2002, we sold an additional 22,000 shares under this
private placement, yielding additional proceeds of $55,000. We closed the
private placement on January 31, 2002. The funds raised in this private
placement, with the exception of a portion of the proceeds used to cover
expenses related to the offering, have been used to fund our operations. In
issuing shares in this private placement, we relied on an exemption from
registration under Section 4(2) of the Securities Act and Regulation D
thereunder. We filed with the Securities and Exchange Commission a Form D in
connection with the issuance of our shares in this private placement.
Effective January 4, 2002, four institutional investors and one I-trax
officer exercised warrants using a "cashless" feature of the warrants, and upon
this exercise the institutional investors received 340,316 shares of our common
stock and the employee received 10,580 shares of our common stock. These shares
were valued at $7.48 for purposes of the warrants' "cashless" feature. In
undertaking this offering, we relied on an exemption from registration under
Section 4(2) of the Securities Act.
We acquired WellComm effective as of February 6, 2002 in a two-step
merger transaction pursuant to a Merger Agreement dated as of January 28, 2002,
as amended. To acquire WellComm, we issued a total of 1,488,000 shares of our
common stock to seven WellComm stockholders. We recorded an accounting expense
of
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$6.55 per share in connection with this issuance. In undertaking this offering,
we relied on an exemption from registration under Section 4(2) of the Securities
Act.
Effective February 4, 2002, we sold a 6% senior convertible debenture,
initially convertible into 400,000 shares of our common stock at a conversion
price of $5.00 per share. Effective February 4, 2003, the conversion price under
the debenture was reset to $3.03 and it is therefore convertible into 660,939
shares of our common stock. With the 6% senior convertible debenture, we also
sold a warrant to acquire 307,692 shares of our common stock, at an exercise
price of $5.50 per share. The purchaser was an institutional investor. In
undertaking this offering, we relied on an exemption from registration under
Section 4(2) of the Securities Act.
As of June 30, 2002, we sold 505,500 shares of our common stock at
$3.75 per share pursuant to a private placement initiated on February 7, 2002.
All participants were accredited investors. In undertaking this offering, we
relied on an exemption from registration under Section 4(2) of the Securities
Act and Regulation D thereunder. We filed a Form D with the Securities and
Exchange Commission in connection with the issuance of our common stock in this
transaction.
Effective as of March 20, 2002, we issued 15,000 shares of our common
stock to two companies as consideration for investor relations services. We
recorded an accounting expense of $5.50 per share in connection with this
issuance. The companies are accredited investor. In undertaking this issuance,
we relied on an exemption from registration under Section 4(2) of the Securities
Act and Regulation D thereunder.
Effective as of March 20, 2002, we issued 6,200 shares of our common
stock and a warrant to acquire 40,000 shares of our common stock to an
investment banker as consideration for services rendered in connection with the
WellComm financing. For purposes of this issuance, each issued share of common
stock was valued at $6.55 per share. The exercise price under the warrant is
$5.00 per share. The investment baker is an accredited investor. In undertaking
this issuance, we relied on an exemption from registration under Section 4(2) of
the Securities Act and Regulation D thereunder.
Effective as of March 20, 2002, we issued 16,000 shares of our common
stock to an employee as consideration for services rendered in connection with
the WellComm acquisition. For purposes of this issuance, we valued each issued
share of our common stock at $6.55 per share. In undertaking this issuance, we
relied on an exemption from registration under Section 4(2) of the Securities
Act.
Effective as of October 1, 2002, a former I-trax employee exercised
options to acquire 2,727 shares of our common stock by surrendering to the
exercise price of $2.75 per share. In undertaking this issuance, we relied on an
exemption from registration under Section 4(2) of the Securities Act and
Regulation D thereunder.
Effective as of October 15, 2002, one I-trax officer exercised a
warrant to acquire 2,000 shares of our common stock by paying the exercise price
of $.75 per share. In undertaking this offering, we relied on an exemption from
registration under Section 4(2) of the Securities Act.
Effective as of October 15, 2002, we issued 5,128 shares of our common
stock to a consultant in exchange for previously rendered personnel recruiting
services. For purposes of this issuance, we valued each issued share of our
common stock at $3.25 per share. The consultant is an accredited investor. In
undertaking this issuance, we relied on an exemption from registration under
Section 4(2) of the Securities Act and Regulation D thereunder.
Effective as of October 15, 2002, we issued 13,333 shares of our common
stock to a consultant in exchange for previously rendered investor relations
services. For purposes of this issuance, we valued each issued share of our
common stock at $3.25 per share. The consultant is an accredited investor. In
undertaking this issuance, we relied on an exemption from registration under
Section 4(2) of the Securities Act and Regulation D thereunder.
Effective October 31, 2002, we issued a customer a warrant to acquire
400,000 shares of our common stock at $5.50 per share in connection with a joint
marketing agreement. The customer is an accredited investor. In undertaking this
issuance, we relied on an exemption from registration under Section 4(2) of the
Securities Act and Regulation D thereunder.
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Effective as of November 4, 2002, we issued 3,579 shares of our common
stock to a consultant as consideration for investor relations services. We
recorded an accounting expense of $4.40 per share in connection with 1,704 of
such shares and $4.00 per share in connection with 1,875 of such shares. The
consultant is an accredited investor. In undertaking this issuance, we relied on
an exemption from registration under Section 4(2) of the Securities Act and
Regulation D thereunder.
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ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
You should read the following discussion and analysis together with our
financial statements and the notes to our financial statements included
elsewhere in this report.
This Management's Discussion and Analysis of Financial Condition and
Results of Operations contains forward-looking statements, which are based upon
current expectations and involve a number of risks and uncertainties. In order
for I-trax, Inc. to utilize the "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995, investors are hereby cautioned that
these statements may be affected by important factors, which are set forth below
and elsewhere in this report, and consequently, actual operations and results
may differ materially from those expressed in these forward-looking statements.
The important factors include the Company's ability to continue as a going
concern and the Company's ability to execute contracts for disease management
services and software technology.
Our Business
I-trax has historically developed enterprise and client server
applications for collecting disease specific data at the point-of-care for
several large hospitals and medical centers. In 2001, we expanded our product
lines by developing additional software applications, adding services, and
completing several strategic acquisitions.
I-trax now provides focused disease management and comprehensive health
management solutions designed to improve the health of the populations we serve
while reducing the cost of medical care. Our solutions are designed to meet the
needs of insurers, employers and consumers seeking to reduce costs and improve
the quality of care by enabling healthcare organizations to evolve from
fragmented care management practices into a cohesive and efficient system of
healthcare management. Our solutions are fully integrated, use a single-data
platform that allows all caregivers to share records and enable our clients to
provide true coordination of care.
Our Services
Our services are divided into three portfolios: Prediction, Prevention and
Care Management. The specific services in each portfolio are:
Prediction
First, we license third party software to analyze our clients'
historical information to predict future healthcare costs. By using predictive
modeling, we identify our clients' future healthcare costs, the health
conditions that will drive those costs and the people within our clients'
populations who are at risk for those conditions.
Prevention
Second, we use what we believe to be state-of-the-art demand management
and nurse triage services to effect our targeted interventions. Our services
incorporate nationally recognized, evidence-based clinical guidelines to ensure
that all caregivers and consumers are following the best practices. We also link
the key stakeholders in this care delivery effort--consumers, physicians and
care managers--through secure, web-based solutions. These solutions facilitate
real-time sharing of information and support the adherence to our population and
disease management programs. Our prevention products and services include:
o MyNurseLine(TM)--24 hours per day, 7 days per week demand management
and nurse triage service staffed by skilled nurses;
o DoctorsLine(TM)--an after-hours custom triage and administrative
outsourcing service;
o Health-e-Community(TM)--a specialized enrollment, marketing and
fulfillment service;
o eImmune(R)--a clinical immunization and related adverse events
tracking system;
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o Medicive(R) Medical Enterprise Data System--a proprietary software
architecture developed to collect, store, retrieve and analyze a broad
range of information used in the healthcare industry, which serves as
the foundation for our Care Coordination Platform offerings;
o Health-e-Coordinator(TM)--a web-based care management application;
o MyFamilyMD(TM)--a consumer health management portal; and
o CarePrime(R)--a clinical care application for physicians and
clinicians.
Care Services
Finally, we offer what we believe to be the industry's most
comprehensive health management and disease management solutions. Our disease
management solutions currently address congestive heart failure (CHF), coronary
artery disease (CAD), asthma, diabetes, lower back pain and chronic obstructive
pulmonary disease (COPD). We also develop programs using evidenced-based
guidelines based on our clients' requests. Health-e-Life Program(TM) is our
comprehensive end-to-end solution for care management.
Listing on the American Stock Exchange
Effective January 3, 2003 we completed a 1-for-5 reverse stock split.
Our Board of Directors and stockholders authorized the reverse stock split in
connection with the then pending application to list our common stock on the
American Stock Exchange. We began trading on the American Stock Exchange on
January 15, 2003 under the symbol "DMX."
Significant Transactions
On September 30, 2002, we entered into a license and maintenance
agreement with UICI, a company listed on the New York Stock Exchange. Pursuant
to the agreement, we granted to UICI an exclusive license to certain I-trax
software, including MyFamilyMD(TM) and CarePrime(R), in the student market and a
non-exclusive license to such software for use by UICI for its other businesses.
We also agreed to maintain the licensed software. The agreement is valued at
approximately $2,800,000.
The license agreement resulted from a relationship between I-trax and
UICI's wholly owned subsidiary, Student Resources, based in St. Petersburg,
Florida. Student Resources and I-trax entered the student health market in
second quarter of 2002 by piloting at five colleges and universities, covering a
total of approximately 77,000 students, a web-based service, utilizing
MyFamilyMD(TM) and CarePrime(R) applications. The service connects students to
their college or university health centers, providing them online access to
secure and confidential electronic appointment requests, lab results,
prescription refill requests and explanation of benefits. The solution enables
students to build their personal health record, utilize private and secure
messaging and receive targeted health education content, and complete required
school health forms online.
On October 31, 2002, UICI and I-trax entered into a Joint Marketing
Agreement. Under this agreement, each party will, using its reasonable
discretion, market to its clients the other party's products and services. In
connection with the agreement, I-trax issues UICI a seven year warrant to
acquire up to 400,000 shares of common stock at $5.50 per share.
Effective February 6, 2002, I-trax acquired WellComm in a two-step
reorganization pursuant to a Merger Agreement dated January 28, 2002 by and
among I-trax, WC Acquisition, Inc., an Illinois corporation and a wholly-owned
subsidiary of I-trax, WellComm and WellComm's two principals. The initial step
of the reorganization transaction involved a merger of WC Acquisition with and
into WellComm, in which merger WellComm continued as the surviving corporation.
The second step of the reorganization transaction involved a statutory merger of
WellComm with and into I-trax, in which merger I-trax continued as the surviving
corporation.
At the closing of the WellComm merger, we delivered to the WellComm
stockholders approximately $2,200,000 in cash and 1,488,000 shares of our common
stock, and to each of two senior officers of WellComm options to acquire 56,000
shares of our common stock at a nominal exercise price. After the merger, three
executive
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officers of WellComm joined us as senior executives and WellComm's two principal
stockholders were elected to our Board of Directors.
We funded the acquisition of WellComm by selling a 6% convertible
senior debenture in the aggregate principal amount of $2,000,000 to Palladin
Opportunity Fund LLC pursuant to a Purchase Agreement dated as of February 4,
2002 between Palladin and us. Pursuant to the purchase agreement, we also issued
Palladin a warrant to purchase an aggregate of up to 307,692 shares of our
common stock at an exercise price of $5.50 per share. The outstanding principal
and any interest under the debenture are payable in full on or before February
3, 2004. Further, outstanding principal and any interest may be converted at any
time at the election of Palladin into our common stock. The current conversion
price under the debenture is $3.03. The current conversion price is subject to
"reset" as of August 4, 2003 but only if the closing bid price for our common
stock, averaged during a period of 20 consecutive trading days ending on August
3, 2003, is less than the then current conversion price.
Corporate Overview
I-trax was incorporated in the State of Delaware on September 15, 2000
at the direction of the Board of Directors of I-trax Health Management
Solutions, Inc. ("Health Management"), I-trax's then parent company. On February
5, 2001, I-trax became the holding company of Health Management at the closing
of a reorganization pursuant to Section 251(g) of Delaware General Corporation
Law. The holding company reorganization was described in greater detail in
I-trax's registration statement on Form S-4 (Registration Number 333-48862)
filed with the Securities and Exchange Commission on October 27, 2000. At the
effective time of the reorganization, all of the stockholders of Health
Management became the stockholders of I-trax and Health Management became a
wholly owned subsidiary of I-trax. Further, all outstanding shares of Health
Management were converted into shares of I-trax in a non-taxable transaction.
Health Management no longer files reports with the Securities and Exchange
Commission. However, I-trax does file reports with the Securities and Exchange
Commission, and its common stock is traded on the American Stock Exchange under
the symbol "DMX."
The holding company structure has allowed us greater flexibility in our
operations and expansion and diversification plans, including in the acquisition
of WellComm Group, Inc. on February 6, 2002 and iSummit Partners, LLC, doing
business as "MyFamilyMD," on February 7, 2001.
I-trax acquired iSummit effective February 7, 2001 in an exchange
transaction pursuant to a Contribution and Exchange Agreement dated September
22, 2000, as amended, by and among iSummit, I-trax, Health Management and
iSummit's three members. I-trax issued 580,682 shares of common stock to acquire
iSummit (reflecting a post closing adjustments to the aggregate number of issued
shares effective as of December 31, 2001).
I-trax now conducts its business through two wholly owned entities,
Health Management and WellComm Group, LLC. WellComm Group, LLC was formed
following the acquisition of WellComm Group, Inc. to hold its assets.
Our Customers
As of December 31, 2002, we served approximately 65 customers. Our
customers include physician groups, hospitals, health plans, including plans
providing Medicaid and Medicare covered services, universities and colleges and
agencies and branches of the United States government.
We continue to focus our marketing efforts on the following markets:
health plans and health insurers; self-insured employers; military, government
and public health agencies; college and university student health services; and
hospital and health systems.
Results of Operations
In 2001 and 2002, we expended a predominant portion of our resources to
build and deliver eImmune(R) and C-Trax(TM) applications to Walter Reed Army
Medical Center in accordance with prior contractual obligations. Further, during
this period, we changed our focus from developing custom software applications
for few clients to
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combining all of our services and applications to deliver a single solution to
the population and disease management market place.
Year Ended December 31, 2002 Compared to Year Ended December 31, 2001.
Revenue for 2002 was $3,931,910, an increase of $3,318,840 or 541% from
$613,070 for 2001. Total revenue was comprised of two components: (1) prevention
and care services revenue of $1,706,602 derived from contracts we assumed
effective February 1, 2002 as a result of the WellComm acquisition; and (2)
technology license and services revenue of $2,225,308 derived from licensing of
eImmune(R), AsthmaWatch(R), Health-e-Coordinator(TM), CarePrime(R) and
MyFamilyMD(TM) applications, including a perpetual and exclusive license of
CarePrime(R) and MyFamilyMD(TM) that represented revenue of approximately
$1,700,000 to UICI for use in the student health market. We expect that in
future periods we will generate a significant portion of our revenue from
delivery of prevention services, such as MyNurseLine(TM), and care services that
we deliver using the Health-e-Program(TM).
Cost of revenue for 2002 was $1,229,044, an increase of 1134% from
$99,584 for 2001. The increase is attributable to the personnel costs required
to service our prevention and care services contracts, which we assumed
effective February 1, 2002. We expect that in future periods our cost of revenue
will increase or decrease in proportion to volume of business. This is because
we expect to derive a significant portion of our future revenue from prevention
and care services contracts, which require human involvement proportionate to
the size of the contract.
Research and development costs were $410,220 for 2002 as compared to
$818,176 for 2001, a decrease of 50%. The decrease was attributable in
significant part to a shift of some software development work from a
subcontractor to in-house. Despite the decrease, we expect to continue to spend
funds on adding functionality to our products including to the MyFamilyMD(TM)
application by adding MedWizard(R) tools, on CarePrime(TM) application, which
interacts with MyFamilyMD(TM) and its MedWizard(R) tools, and on
Health-e-Coordinator(TM) application by adding additional disease capabilities.
All product development costs for 2002 were expensed.
General and administrative expenses (excluding salary and related
benefits which are discussed separately below) were virtually unchanged,
$1,711,430 in 2001 and $1,721,685 in 2002, even though 2002 general and
administrative expenses include approximately of $630,000 of expenses
attributable to the operation of WellComm, which we assumed effective February
1, 2002. Our ability to maintain general and administrative expenses constant is
attributable to post-WellComm acquisition efficiencies, personnel reductions and
stringent budgetary controls implemented in the fourth quarter of 2001. We do
not anticipate increasing spending in 2003. We believe that with the addition of
WellComm's personnel, we have the resources to handle increased revenue with
minimal incremental costs up to a certain level, and then have the ability to
ramp-up expenses with additional business.
Salary and related benefits were $4,233,209 for 2002 as compared to
$6,996,108 for 2001. The 2001 expenses include approximately $3,900,000
attributable to a non-cash charge associated with stock purchase warrants we
issued to employees and officers in exchange for surrender of accrued salary
under our salary deferment program. Excluding this component, the increase in
salary and related benefits from 2001 to 2002 was approximately $1,150,000, of
which approximately $700,000 was the result of the WellComm acquisition
completed effective February 1, 2002, and the balance of which relates to hiring
additional management and sales personnel.
Acquired in process research and development was $1,642,860 in 2001 and
was directly attributable to the acquisition of iSummit on February 7, 2001. An
independent third-party valuation company derived this amount after a detailed
analysis of all the underlying facts.
Depreciation and amortization expenses were $2,045,461 in 2002, as
compared to $779,014 in 2001. The increase is primarily attributable to the
amortization of the value of intangible assets acquired in the WellComm
acquisition.
Marketing and advertising expenses were $773,963 in 2002 as compared to
$989,972 in 2001. The decrease of 22% resulted from stringent budgetary
constraints.
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Interest expense for 2002 was $1,107,632 increasing by $583,000 or 111%
from $524,632 for 2001. For 2002, interest expense includes the amortization and
accretion on items related to the $2,000,000 debenture as follows: $434,798
associated with the beneficial conversion feature of the debenture; $408,041
associates with the value of the warrants issued with the debenture; and
$147,654 associated with the option liability stemming from the option we
granted Palladin to purchase from us an additional debenture. Generally, the
beneficial conversion value represents the benefit to the investor that results
from purchasing an immediately convertible debenture with a conversion price
that is less than fair market value on the date of purchase after first
allocating a portion of the proceeds from the debenture to the associated
warrants. For 2001, the incurred interest charges were associated with certain
promissory notes converted into common stock.
Amortization of debt issuance and conversion costs was $187,337 and
$1,424,688 for 2002 and 2001, respectively. The significant decrease is due
solely to the fact that in 2001, we re-priced the exercise price of certain
warrants issued in connection with convertible promissory notes. The re-price of
the warrants from $10 to $2.50 resulted in a one-time charge of approximately
$1,400,000.
Our net loss was $9,424,973 in 2002 as compared to a net loss of
$14,359,432 in 2001, a decrease of 34%. In both periods, we had significant
transactional charges. In 2002, we incurred a charge of approximately $434,798
on account of an interest expenses associated with the beneficial conversion
value associated with the debenture we issued to Palladin, additional
depreciation and amortization of $1,753,144 in connection with intangible assets
acquired in the WellComm acquisition and a $1,648,333 impairment charge incurred
in connection with those same assets. In 2001, we incurred a one-time charge of
$1,642,860 on account of acquired in process research and development in the
iSummit acquisition, $1,424,688 for certain securities issuances and conversion
costs and $3,915,232 of stock based compensation associated with the conversion
of deferred salary in warrants.
Liquidity and Capital Resources
Working Capital Deficiency
We ended 2002 with approximately $360,000 in cash on our balance sheet. As
of December 31, 2002, we had a working capital deficiency of $2,384,004.
Further, during the past two years and as of the date of this report, cash flow
deficits from operations averaged approximately $300,000 per month. Through
December 31, 2002 and the date of this report, we have been able to finance
these deficits by sales of common stock to unrelated parties and loans from our
senior management team and their affiliates, including members of our senior
executive management team and a director. Although we expect to continue to run
cash flow deficits as of the date of this report, we also continue to make
progress towards producing positive cash flow from operations and we expect,
although no assurances exist, that we will reach operating cash flow break even
in the third quarter of 2003.
In 2002, we borrowed from certain executives and certain relatives of
such executives a total of $700,000. These loans bear interest at a rate of 8%
per annum and were used to fund working capital deficiencies. In February 2003,
pursuant to a promissory note, the former Chief Executive Officer of WellComm,
now a member of our Board of Directors advanced to us $200,000 for working
capital. The loan carries interest at 8% per year and matures in February 2004.
Additionally, during the three months ended March 31, 2003, our Chief
Executive and Operating Officers, along with certain stockholders advanced to
us, in the form of loans and equity, $540,000 for working capital. Our Chief
Executive and Operating Officers have committed to continue to fund us until we
generate positive cash flow from operations and raise additional funds in the
private placement, which we commenced subsequent to year-end, but at least
through January 1, 2004.
Sources and Uses of Cash
Despite our negative cash flows from operations, which amounted to
$2,871,201 in 2002 and $4,922,266 in 2001, we have been able to secure funds to
support our operations. In 2002, we secured funding by selling equity securities
and a debenture, which aggregated approximately $4,000,000. Of the $4,000,000,
approximately $2,200,000 we used to acquire WellComm and the remainder to fund
operations. Additionally, in the third quarter
G-31
of 2002, we received $2,500,000 from a customer as a deposit on a license and
future development work. In 2002, we also received (net of repayments) $510,000
from officers and related parties. In 2001, we used $4,922,266 to fund our
operations, of which sum $3,822,968 we raised by selling common stock, $682,809
we received by issuing promissory notes and $700,000, net of repayments, we
received from related parties.
As of December 31, 2002, our current liabilities were $3,640,334 of
which $225,000 is due on demand to a relative of a senior executive. In February
2003, $140,000 of the $225,000 was repaid. The remainder of current liabilities
of approximately $3,415,000 is made up, primarily, of trade payables of
approximately $918,791, accrued expenses of approximately $743,000, $300,000
credit line payable, which was assumed with the acquisition of WellComm and
approximately $1,379,922 of deferred revenue. We have good relationships with
all of our vendors.
As of December 31, 2002, the face value of our long-term debt amounted
to approximately $3,700,000. This sum is comprised of 6% convertible senior
debenture in the aggregate principal amount of $2,000,000 (but carrying value of
$842,839) held by Palladin, for which principal and deferred interest is not due
until February 3, 2004, $692,809 (but carrying value of $403,137) held by a
group of investors led by Psilos Group Partners, L.P., which includes Nantucket
Healthcare Ventures I, L.P., a venture fund managed by our Chief Executive
Officer, for which principal and interest is not due until March 2006, and
approximately $1,000,000 held by executive officer and members of our Board of
Directors.
Related Party Transactions
In 2002, certain of our officers and a relative of an officer advanced
to us funds for working capital. Such advances totaled $700,000, of which,
$350,000 are due on demand and $350,000 are due in February 2004. All advances
bear interest at a rate of 8% per annum.
Critical Accounting Policies
Legal Contingencies
As of December 31, 2002, we were involved in certain litigation. We
prevailed in the matter with finality in March 2003. As of December 31, 2002, we
had not accrued a loss contingency because the plaintiff's success in this
matter was not deemed probable nor could we have reasonably estimated any
adverse effect based on the then current facts.
Impairment of Goodwill and Intangible
We operate in an industry that is rapidly evolving and extremely
competitive. It is reasonably possible that our accounting estimates with
respect to the useful life and ultimate recoverability of our carrying basis of
goodwill and intangible assets could change in the near term and that the effect
of such changes on the financial statements could be material. During the
quarter ended December 31, 2002, we recorded an impairment charge of $1,648,332
in connection with the WellComm acquisition. The charge was related to the write
off of a portion of an intangible asset associated with customer relations.
Revenue Recognition
We derive our revenue pursuant to different type contracts, including
perpetual software licenses, subscription licenses and custom development
services, all of which may also include support services revenue such as
licensed software maintenance, training, consulting and web hosting
arrangements. As described below, significant management judgments and estimates
must be made and used in connection with the revenue recognized in any
accounting period. Material differences may result in the amount and timing of
our revenue for any period if our management made different judgments or
utilized different estimates.
We license our software products for a specific term or on a perpetual
basis. Most of our license contracts also require maintenance and support. We
apply the provisions of Statement of Position 97-2, "Software Revenue
Recognition," as amended by Statement of Position 98-9 "Modification of SOP
97-2, Software Revenue Recognition, With Respect to Certain Transactions" to all
transactions involving the sale of software products and
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hardware transactions where the software is not incidental. For hardware
transactions where software is not incidental, we do not unbundle the fee and we
do not apply separate accounting guidance to the hardware and software elements.
For hardware transactions where no software is involved we apply the provisions
of Staff Accounting Bulletin 101 "Revenue Recognition." In addition, we apply
the provisions of Emerging Issues Task Force Issue No. 00-03 "Application of
AICPA Statement of Position 97-2 to Arrangements that Include the Right to Use
Software Stored on Another Entity's Hardware" to our hosted software service
transactions.
We recognize revenue from the sale of software licenses when persuasive
evidence of an arrangement exists, the product has been delivered, the fee is
fixed and determinable and collection of the resulting receivable is reasonably
assured. Delivery generally occurs when product is delivered to a common
carrier.
At the time of the transaction, we assess whether the fee associated
with our revenue transactions is fixed and determinable and whether or not
collection is reasonably assured. We assess whether the fee is fixed and
determinable based on the payment terms associated with the transaction. If a
significant portion of a fee is due after our normal payment terms, which are 30
to 90 days from invoice date, we account for the fee as not being fixed and
determinable. In these cases, we recognize revenue as the fees become due.
We assess collection based on a number of factors, including past
transaction history with the customer and the credit-worthiness of the customer.
We do not request collateral from our customers. If we determine that collection
of a fee is not reasonably assured, we defer the fee and recognize revenue at
the time collection becomes reasonably assured, which is generally upon receipt
of cash.
For arrangements with multiple obligations (for example, undelivered
maintenance and support), we allocate revenue to each component of the
arrangement using the residual value method based on the fair value of the
undelivered elements. This means that we defer revenue from the arrangement fee
equivalent to the fair value of the undelivered elements.
We recognize revenue for maintenance services ratably over the contract
term. Our training and consulting services are billed based on hourly rates, and
we generally recognize revenue as these services are performed. However, at the
time of entering into a transaction, we assess whether or not any services
included within the arrangement require us to perform significant work either to
alter the underlying software or to build additional complex interfaces so that
the software performs as the customer requests. If these services are included
as part of an arrangement, we recognize the entire fee using the percentage of
completion method. We estimate the percentage of completion based on our
estimate of the total costs estimated to complete the project as a percentage of
the costs incurred to date and the estimated costs to complete.
We recognize service revenue as the services are rendered. We contracts
with our customers to provide services based on an established monthly fee, a
per-call charge or a combination of both.
Although as of the date of these financials, we have not entered into
any risk-based contracts, we expect that in the very near future it will do so.
These types of contracts are generally for terms of three to five years, provide
for an automatic renewal and typically provide that a percentage of our fees may
be refundable ("performance based") based on achieving a targeted percentage
reduction in the customer's healthcare costs.
Material Equity Transactions
In 2002, we executed equity transactions with related and unrelated
parties in connection with the raising funds for working capital along with
issuing securities in lieu of compensation for services received. We believe
that we have valued all such transaction pursuant to the various accounting
rules and that they ultimately represent the economic substance of each
transaction.
G-33
ITEM 7. FINANCIAL STATEMENTS
I-TRAX, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2002
AND
FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Item Page No.
Reports of independent accountants..........................................................................33
Balance sheet at December 31, 2002..........................................................................35
Statements of operations for the years ended December 31, 2002 and 2001.....................................36
Statement of stockholders' equity (deficiency) for the years ended December 31, 2002 and 2001...............37
Statements of cash flows for the years ended December 31, 2002 and 2001.....................................39
Notes to consolidated financial statements..................................................................41
G-34
Report of Independent Accountants
To the Board of Directors and
Stockholders of I-trax, Inc.:
We have audited the accompanying consolidated balance sheet of I-trax,
Inc. & Subsidiaries (the "Company") as of December 31, 2002, and the related
consolidated statements of operations, stockholders' equity and cash flows for
the year then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. 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 audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of the Company
at December 31, 2002, and the results of its operations and cash flows for the
year then ended in conformity with accounting principles generally accepted in
the United States of America.
As discussed in Note 6 to the consolidated financial statements,
effective January 1, 2002, the Company adopted Statement of Financial Accounting
Standards No. 142, Goodwill and Other Intangible Assets.
Goldstein Golub Kessler LLP
New York, New York
March 5, 2003
G-35
Report of Independent Accountants
To the Board of Directors and
Stockholders of I-trax, Inc.:
We have audited the accompanying consolidated balance sheet of I-trax,
Inc. & Subsidiaries (the "Company") as of December 31, 2001 (not included
herein), and the related consolidated statements of operations, stockholders'
equity (deficiency) and cash flows for the year ended December 31, 2001. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. 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 audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
the Company at December 31, 2001, and the results of its operations and cash
flows for the year ended December 31, 2001, in conformity with accounting
principles generally accepted in the United States of America.
The accompanying consolidated financial statements as of December 31,
2001 and for the year then ended were prepared assuming that the Company would
continue as a going concern. As discussed in Note 1 to the financial statements,
the Company has a working capital deficiency and incurred losses from operations
for the years ended December 31, 2001 and 2000, which raise substantial doubt
about its ability to continue as a going concern. Management's plans in regard
to these matters are also described in Note 1. Accordingly, the financial
statements as of December 31, 2001 did not include any adjustments that might
have resulted from the outcome of those uncertainties.
PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
March 29, 2002
G-36
I-TRAX, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 2002
ASSETS
Current assets
Cash $ 360,166
Deposit on potential acquisition 200,000
Accounts receivable, net 597,635
Prepaid expenses 77,569
Other current assets 20,960
-----------------
Total current assets 1,256,330
-----------------
Office equipment, furniture and leasehold improvements, net 412,779
Deferred marketing costs, net 1,284,445
Goodwill 8,424,062
Intangible assets, net 2,748,087
Debt issuance cost, net 249,273
Security deposits 31,564
-----------------
Total assets $ 14,406,540
=================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Credit line payable 300,000
Accounts payable 918,791
Accrued expenses 743,151
Due to related party 225,000
Capital lease payable 60,047
Deferred revenue 1,379,922
Other current liabilities 13,423
-----------------
Total current liabilities 3,640,334
-----------------
Capital lease obligation, net of current portion 96,765
Promissory notes and debenture payable, net of discount 1,245,876
Due to officers and directors 1,024,598
-----------------
Total liabilities 6,007,573
-----------------
Commitments and contingencies (Note 17)
Stockholders' equity
Preferred stock - $.001 par value, 2,000,000 shares authorized,
-0- issued and outstanding
Common Stock - $.001 par value, 100,000,000 shares authorized,
9,372,727 shares issued and outstanding 9,372
Additional paid in capital 39,236,119
Accumulated deficit (30,846,524)
-----------------
Total stockholders' equity 8,398,967
-----------------
Total liabilities and stockholders' equity $ 14,406,540
=================
See accompanying notes to financial statements.
G-37
I-TRAX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001
2002 2001
------------------ ---------------
Revenue:
Technology licenses $ 2,225,308 $ 613,070
Services 1,706,602 --
------------------ ---------------
Total revenue 3,931,910 613,070
------------------ ---------------
Cost of revenue:
Technology licenses 67,788 99,584
Services 1,161,256 --
------------------ ---------------
Total cost of revenue 1,229,044 99,584
------------------ ---------------
Gross profit 2,702,866 513,486
Operating expenses:
General and administrative 1,721,685 1,711,430
Salary and related benefits, including $3,915,232 for 2001
of stock based compensation 4,233,209 6,996,108
Research and development 410,220 818,176
Acquired in progress research and development -- 1,642,860
Depreciation and amortization 2,045,461 799,014
Marketing and publicity 773,963 989,972
Impairment charge related to intangible assets 1,648,332 --
------------------ ---------------
Total operating expenses 10,832,870 12,957,560
------------------ ---------------
Operating loss (8,130,004) (12,444,074)
------------------ ---------------
Other income (expenses):
Amortization of debt issuance and conversion costs (187,337) (1,424,688)
Interest income -- 33,962
Interest expense (1,107,632) (524,632)
------------------ ---------------
Total other income (expenses) (1,294,969) (1,915,358)
------------------ ---------------
Net loss $ (9,424,973) $ (14,359,432)
================== ===============
Loss per common share:
Basic and diluted $ (1.04) $ (2.71)
================== ===============
Weighted average number of shares outstanding: 9,096,958 5,291,403
================== ===============
See accompanying notes to financial statements.
G-38
I-TRAX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIENCY)
FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001
Total
Additional Notes Stockholders'
Common Stock Paid-in Accumulated Receivable Equity
-----------------------------
Shares Amount Capital Deficit Officers (Deficiency)
-------------- -------------- --------------- -------------- -------------- --------------
Balances at January 1, 2001 3,850,969 $ 3,851 $ 6,684,441 $ (7,062,119) $ (999,500) $ (1,373,327)
Common stock issued in
connection with acquisition of
iSummit Partners, LLC 673,600 674 5,253,406 -- -- 5,254,080
Fair market value of detachable
warrants issued in connection
with amended and restated
promissory notes -- -- 459,854 -- -- 459,854
Sale of common stock, June 2001
private placement 440,000 440 1,099,560 -- -- 1,100,000
Grant of non-qualified and
non-plan options to consultants as
consideration for services rendered -- 29,741 -- -- 29,741
Cancellation of note and
Pledge Agreements (100,000) (100) (999,900) -- 999,500 (500)
Issuance of common stock and
warrants in connection with
conversion of convertible
promissory notes 912,063 912 2,550,872 -- -- 2,551,784
Issuance of common stock and
warrants in connection
with conversion of
advances from officers 247,465 247 1,248,885 -- -- 1,249,132
Sale of common stock, net of
costs,
October 2001 private placement 842,395 842 2,042,116 -- -- 2,042,958
Issuance of common stock and
warrants as consideration for
services rendered 120,307 120 1,012,778 -- -- 1,012,898
Granting of warrants to employees
as consideration for deferring and
converting accrued salary amounting
to $814,595 into warrants -- -- 3,915,232 -- -- 3,915,232
Cancellation of shares in
connection with purchase price adjustment
for iSummit Partners, LLC (92,918) (93) (724,671) -- -- (724,764)
Issuance of common stock in
connection
with exercise of warrants 94,013 94 70,416 70,510
Mark-to-market of options granted
to officers in lieu of canceling
note and pledge agreement 350,000 350,000
Net loss for the year ended
December 31, 2001 -- -- (14,359,432) -- (14,359,432)
-------------- -------------- --------------- -------------- -------------- --------------
Balances at December 31, 2001 6,987,894 $ 6,987 $ 22,992,730 ($21,421,551) $ -- $ 1,578,166
-------------- -------------- --------------- -------------- -------------- --------------
See accompanying notes to financial statements.
G-39
I-TRAX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIENCY)
FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001
Common Stock Additional Total
----------------------------- Paid-in Accumulated Stockholders'
Shares Amount Capital Deficit Equity
-------------- ------------- ---------------- -------------- ---------------
Balances at December 31, 2001 6,987,894 $ 6,987 $ 22,992,730 $ (21,421,551) $ 1,578,166
Cancellation of unclaimed shares and reverse
stock split adjustment (45,332) (45) 45 -- --
Issuance of compensatory stock options -- -- 163,200 -- 163,200
Fair market value of detachable warrants
issued in connection with debenture and
beneficial conversion value -- -- 1,838,923 -- 1,838,923
Issuance of common stock and granting of
options in connection with the
acquisition of WellComm Group, Inc. 1,488,000 1,488 10,478,512 -- 10,480,000
Issuance of common stock and warrants as
consideration for finder fee 22,200 22 391,386 -- 391,408
Sale of common stock, net of $7,150 in costs 540,833 541 1,942,935 -- 1,943,476
Issuance of common stock and warrants as
consideration for services 23,708 24 1,677,243 -- 1,677,267
Issuance of common stock in connection with
exercise of options and warrants 355,424 355 1,145 -- 1,500
Mark-to-market of options granted to
officers in lieu of canceling note and
pledge agreement during 2001 -- -- (250,000) -- (250,000)
Net loss for the year ended December 31, 2002 -- -- -- (9,424,973) (9,424,973)
-------------- ------------- ---------------- -------------- ---------------
Balances at December 31, 2002 9,372,727 $ 9,372 $ 39,236,119 $ (30,846,524) $ 8,398,967
============== ============= ================ ============== ===============
See accompanying notes to financial statements.
G-40
>
I-TRAX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001
2002 2001
----------------- ----------------
Operating activities:
Net loss $ (9,424,973) $ (14,359,432)
Adjustments to reconcile net loss to net cash used in operating
activities:
Accretion of discount on notes payable charged to interest 498,751 463,551
expense
Accretion of beneficial conversion value of debenture 434,798 --
Amortization of option liability (147,655) --
Amortization of debt issuance costs 187,337 --
Depreciation and amortization 2,045,461 799,014
Impairment charge related to intangible assets 1,648,332 --
Issuance of securities for services 230,467 6,576,003
Write-off of in process research and development acquired
in iSummit Partners, LLC acquisition -- 1,642,860
Changes in operating assets and liabilities, net of acquisitions:
Decrease (increase) in:
Accounts receivable (119,888) 217,145
Prepaid expenses 54,828 (62,539)
Other current assets (19,045) 2,666
(Decrease) increase in:
Accounts payable 235,686 192,462
Accrued expenses 273,608 (167,592)
Deferred revenue 1,231,092 (226,404)
----------------- ----------------
Net cash used in operating activities (2,871,201) (4,922,266)
----------------- ----------------
Investing activities:
Proceeds from repayment of note receivable 72,437 312,500
Deposit on potential acquisition (200,000) --
Cash used to acquire property and equipment (68,040) (1,990)
Proceeds from partial release of security deposit 38,839 61,486
Net cash to acquire WellComm Group, Inc. (2,199,136) --
----------------- ----------------
Net cash used in investing activities (2,355,900) 371,996
----------------- ----------------
Financing activities:
Principal payments on capital leases (21,918) (40,095)
Proceeds from credit line payable 125,000 --
Proceeds from issuance of promissory notes -- 692,809
Repayment to related parties (190,000) (480,000)
Proceeds from related parties 700,000 1,180,990
Proceeds from issuance of convertible promissory notes -- 270,000
Proceeds from sale of Common Stock 1,944,976 3,822,968
Proceeds from sale of option 161,078
Proceeds from issuance of debenture 1,838,923 --
----------------- ----------------
Net cash provided by financing activities 4,558,059 5,446,672
----------------- ----------------
Net (decrease) increase in cash (669,042) 896,402
Cash at beginning of period 1,029,208 132,806
----------------- ----------------
Cash at end of period $ 360,166 $ 1,029,208
================= ================
Supplemental disclosure of non-cash flow information: Cash paid during the year
for:
Interest $ 15,163 $ 7,468
================= ================
G-41
(Continues on following page.)
I-TRAX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001
(Continues from previous page.)
2002 2001
---------------- -----------------
Schedule of non-cash investing activities:
Issuance of 673,600 shares of common stock in connection with
acquisition of iSummit Partners, LLC $ -- $ 5,254,080
============= ===========
Issuance of 1,488,000 shares of common stock and granting of 112,000 stock
options in connection with acquisition of WellComm Group,
Inc $ 10,480,000 $ --
============= ===========
Issuance of common stock and warrants for finder fee $ 391,408 $ --
============= ===========
Schedule of non-cash financing activities:
Issuance of common stock in connection with conversion of convertible
promissory notes and related party advances $ -- $ 2,551,784
============= ===========
Issuance of common stock in connection with conversion of advances
from officers $ -- $ 275,000
============= ===========
Issuance of common stock in connection with conversion of accounts
payable $ 16,667 $ 76,798
============= ===========
Acceptance (cancellation) of promissory notes in connection with sale
of common stock $ -- $ (999,500)
============= ===========
Acquisition of office equipment in connection with capital lease
obligation $ 107,709 $ --
============= ===========
Issuance of warrants in connection with marketing agreement $ 1,360,000 $ --
============= ===========
See accompanying notes to financial statements.
G-42
I-TRAX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001
NOTE 1--ORGANIZATION
I-trax, Inc. (the "Company") provides focused disease management and
comprehensive health management solutions designed to improve the health of the
populations it serves while reducing the cost of medical care. The Company was
incorporated in the State of Delaware on September 15, 2000. On February 5,
2001, the Company and I-trax Health Management Solutions, Inc. (formerly known
as I-Trax.com, Inc.) ("Health Management") completed a holding company
reorganization. The holding company reorganization was accomplished through a
merger under Delaware law. At the effective time of the reorganization, all of
the stockholders of Health Management became stockholders of the Company and
Health Management became a wholly owned subsidiary of the Company. The Company's
common stock is traded on the American Stock Exchange under the symbol "DMX."
As of December 31, 2002, the Company had three wholly owned subsidiaries: Health
Management, a corporation, and iSummit Partners, LLC and WellComm Group, LLC,
each a single member limited liability company. The Company acquired iSummit
Partners, LLC in February 2001. iSummit Partners, LLC does not conduct any
operations but maintains ownership of certain intellectual property. The Company
formed WellComm Group, LLC to conduct the activities of WellComm Group, Inc.,
which the Company acquired on February 6, 2002, as further described in Note 8.
The Company conducts its operations through Health Management and WellComm
Group, LLC.
Effective January 3, 2003, the Company completed a 1-for-5 reverse stock split.
Accordingly, all information presented in these financial statements has been
adjusted retroactively to reflect this reverse stock split.
The accompanying financial statements as of December 31, 2001 and for the year
then ended were prepared assuming that the Company would have continued as a
going concern. For the years ended 2001 and 2000, the Company used cash in
operations of approximately $4,900,000 and $4,700,000 respectively. As of
December 31, 2001, the Company's accumulated deficit amounted to $21,421,551 of
which $14,359,432 resulted from losses generated during the year ended December
31, 2001. Of the total loss of $14,359,432 for 2001, $1,642,860 was a non-cash
charge to operations for the acquired in progress research and development in
connection with iSummit acquisition and $6,576,003 of non-cash charges as
consideration for payments for services rendered to the Company and for the
granting and re-pricing of warrants associated with the conversion of debt into
equity and for the borrowing of funds from related parties. As of December 31,
2001, the Company's working capital deficiency amounted to $624,863.
The financial statements as of December 31, 2001, did not include adjustments
relating to the recoverability and realization of assets and classification of
liabilities that might have been necessary should the Company had been unable to
continue in operation. The Company implemented several cash conservation
programs and raised sufficient funds during 2002 from various sources in order
to continue operations through December 31, 2002.
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Income Taxes
The Company accounts for income taxes in accordance with Financial Accounting
Standards Board's ("FASB") Statement of Financial Accounting Standards ("SFAS")
No. 109, "Accounting for Income Taxes," which requires the use of the "liability
method" of accounting for income taxes. Accordingly, deferred tax liabilities
and assets are determined based on the difference between the financial
statement and tax bases of assets and liabilities, using enacted tax rates in
effect for the year in which the differences are expected to reverse. Current
income taxes are based on the respective periods' taxable income for federal and
state income tax reporting purposes.
G-43
I-TRAX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd)
Loss Per Common Share
Loss per common share is computed pursuant to SFAS No. 128, "Earnings Per
Share." Basic loss per share is computed as net income (loss) available to
common shareholders divided by the weighted average number of common shares
outstanding for the period. Diluted loss per share reflects the potential
dilution that could occur from common shares issuable through stock options,
warrants, and convertible debt. As of December 31, 2002 and 2001, 3,843,755 and
2,348,744, respectively, options and warrants were excluded from the diluted
loss per share computation, as their effect would be anti-dilutive.
Use Of Estimates
In preparing the financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and assumptions
which affect the reported amounts of assets and liabilities and the disclosure
of contingent assets and liabilities at the date of the financial statements and
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
Fair Value Disclosure At December 31, 2002
The carrying value of cash, accounts payable, accrued expenses and credit line
payable are reasonable estimates of their fair value because of short-term
maturity. The fair value of the promissory notes and debenture payable
approximates their principal amount of $2,692,800.
Office Equipment, Furniture And Leasehold Improvements
The Company records office equipment, furniture and leasehold improvements at
cost less accumulated depreciation and amortization, which is provided for on
the straight line basis over the estimated useful lives of the assets which
range between three and seven years. The Company expenses expenditures for
maintenance and repairs as incurred.
Accounts Receivable
The Company utilizes the allowance method for determining the collectibility of
its accounts receivable. The allowance method recognizes bad debt expense
following a review of the individual accounts outstanding in light of the
surrounding facts. Accounts receivables are reported at their outstanding unpaid
principal balances reduced by an allowance for doubtful accounts based on
historical bad debts, factors related to specific customers ability to pay and
economic trends. The Company writes off accounts receivables against the
allowance when a balance is determined to be uncollectible.
Research And Development Costs
Research and development costs are expensed as incurred. Such costs amounted to
$410,220 and $818,176 for the years ended December 31, 2002 and 2001,
respectively.
G-44
I-TRAX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd)
Revenue Recognition
The Company recognizes revenue from technology licenses in accordance with
Statement of Position 97-2 "Software Revenue Recognition" as further modified by
Statement of Position 98-9 "Modification of SOP 97-2, "Software Revenue
Recognition with Respect to Certain Transactions." SOP 97-2 generally requires
revenue earned on software arrangements involving multiple elements such as
software products, upgrades, enhancements, post-contract customer support,
installation and training to be allocated to each element based on the relative
fair value of the elements.
The Company recognizes revenue from software development contracts on a
percentage-of-completion method with progress to completion measured based upon
labor hours incurred or achievement of contract milestones. Revenue from re-sale
of hardware and software, obtained from vendors, is recognized at the time
hardware and software is delivered to customers. Customer deposits represent
funds received in advance in excess of revenue recognized. The Company has
adopted the provisions of the Securities and Exchange Commission Staff
Accounting Bulletin (SAB) 101, "Revenue Recognition in Financial Statements," in
the fourth quarter of 2000, retroactively to January 1, 2000, as required by the
Securities and Exchange Commission. The adoption had no impact on the Company's
financial statements.
The Company recognizes service revenue as the services are rendered. The Company
contracts with its customers to provide services based on an established monthly
fee, a per-call charge or a combination of both.
During the third quarter of 2002, the Company entered into a License and
Maintenance Agreement with UICI, a New York Stock Exchange company, valued at
approximately $2,800,000. For the year ended December 31, 2002, the Company
recognized approximately $1,700,000, representing the amount allocated to the
software license. The balance representing services to be performed has been
deferred.
Software Development Costs
In accordance with the provisions of SFAS No. 86, "Accounting for the Costs of
Computer Software to be Sold, Leased or Otherwise Marketed," the Company
capitalizes software development and production costs once technological
feasibility has been achieved. Software development costs incurred prior to
achieving technological feasibility are included in research and development
expense in the accompanying statement of operations. As of December 31, 2002,
the Company had not capitalized any software development costs. Commencing with
the first quarter of 2003, the Company expects to start capitalizing some of its
software development costs based on the expected completion of working models
for several of its software products.
Deferred Marketing Costs
Deferred marketing costs consist of the value of the warrant issued to a
customer in October 2002 in connection with a three-year joint marketing
agreement. The warrant to acquire 400,000 shares of common stock was valued at
$1,360,000 utilizing the Black-Scholes pricing model. The value of the warrant
is being amortized over the three-year life of the joint marketing agreement on
a straight-line basis. During the year ended December 31, 2002, $75,555 was
charged. The unamortized portion of the deferred marketing costs was $1,284,445
and is reflected on the accompanying consolidated balance sheet.
G-45
I-TRAX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd)
Debt Issuance Costs
The Company recorded debt issuance costs in connection with the sale of a 6%
senior debenture in February 2002. These costs consist of a cash payment of
$130,000 and common stock and warrants issued to an unrelated party as a finder
fee. The Company is amortizing the total costs of $416,610 on a straight-line
basis over the two-year life of the debenture. For the year ended December 31,
2002, amortization of debt issuance costs amounted to $167,337. The unamortized
portion of debt issuance costs was $249,273 and is reflected on the accompanying
consolidated balance sheet.
Comprehensive Income
The Company adopted SFAS No. 130, "Accounting for Comprehensive Income." This
statement establishes standards for reporting and disclosing of comprehensive
income and its components (including revenues, expenses, gains and losses) in a
full set of general-purpose financial statements. The items of other
comprehensive income that are typically required to be disclosed are foreign
currency items, minimum pension liability adjustments, and unrealized gains and
losses on certain investments in debt and equity securities. The Company had no
items of other comprehensive income for the years ended December 31, 2002 and
2001.
Stock-Based Compensation
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure-an amendment of FASB Statement No. 123."
SFAS No. 148 amends FASB Statement No. 123, "Accounting for Stock-Based
Compensation," to provide alternative methods of transition for an entity that
chooses to change to the fair-value-based method of accounting for stock-based
employee compensation. It also amends the disclosure provisions of that
statement to require prominent disclosure about the effects that accounting for
stock-based employee compensation using the fair-value-based method would have
on reported net income and earnings per share and to require prominent
disclosure about the entity's accounting policy decisions with respect to
stock-based employees compensation. Certain of the disclosure requirements are
required for all companies, regardless of whether the fair value method or
intrinsic value method is used to account for stock-based compensation
arrangements. The amendments to SFAS No. 123 are effective for financial
statements for fiscal years ended after December 15, 2002 and for interim
periods beginning after December 15, 2002.
G-46
I-TRAX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd)
Stock-Based Compensation (cont'd)
The Company accounts for its employee incentive stock option plans using the
intrinsic value method in accordance with the recognition and measurement
principles of Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees," as permitted by SFAS No. 123. The adoption of the
disclosure requirements of SFAS No. 148 did not have a material effect on the
Company's financial position or results of operations. Had the Company
determined compensation expense base on the fair value at the grant dates for
those awards consistent with the method of SFAS 123, the Company's net loss per
share would have been increased to the following pro forma amounts:
2002 2001
------------ ------------
Net loss as reported $ (9,424,973) $(14,359,432)
Add back intrinsic value of the options issued to
employee and charged to operations 163,200 --
Deduct total stock based employee compensation expense determined under fair
value based methods
for all awards (2,844,904) (1,191,937)
------------ ------------
Pro forma net loss $(12,106,677) $(15,551,369)
============ ============
Basic and diluted net loss per share as reported $ (1.04) $ (2.70)
Pro forma basic and diluted net loss per share $ (1.33) $ (2.90)
The above pro forma disclosure may not be representative of the effects on
reported net operations for future years as options vest over several years and
the Company may continue to grant options to employees.
The fair market value of each option grant is estimated at the date of grant
using the Black Scholes option-pricing model with the following weighted-average
assumptions
Dividend yield 0.00%
Expected volatility 162%
Risk-free interest rate 5%
Expected life 5 year
Segment Reporting
The Company evaluates segment performance based on income from operations.
Through December 31, 2002, the Company has not measured segment performance
because the Company has operated in only one segment.
G-47
I-TRAX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd)
New Accounting Pronouncements
In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets," which addresses the financial accounting and
reporting for the impairment or disposal of long-lived assets and supercedes
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and Long-Lived
assets to be Disposed Of." SFAS 144 is effective for fiscal years beginning
after December 15, 2001 and the interim periods within. Management periodically
evaluates carrying values of long-lived assets, including property, plant and
equipment and intangible assets, when events and circumstances indicate that
these assets may have been impaired. On January 1, 2002, the Company adopted
SFAS No. 144, which provides for the evaluation of impairment of long-lived
assets. An asset is considered impaired when undiscounted cash flows to be
realized from the use of such assets are less than its carrying value. In that
event, a loss is determined based on the amount the carrying value exceeds the
fair market value of such asset. The adoption of SFAS 144 did not have a
material impact on the financial statements of the Company.
In April 2002, the FASB issued SFAS No. 145, "Rescission on FASB Statements 4,
44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections."
Under certain provisions of SFAS No. 145, gains and losses related to the
extinguishment of debt are no longer automatically segregated on the income
statement as extraordinary items net of the effects of income taxes. Instead,
unless those gains and losses meet the usual criteria for extraordinary items
under APB No. 30, those gains and losses are included as a component of income
before income taxes. The provisions of SFAS No. 145 are effective for fiscal
years beginning after May 15, 2002 with early adoption encouraged. To date, the
Company has not recorded any gains or losses on its statements of operations as
extraordinary items.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." SFAS No. 146 addresses financial accounting
and reporting for costs associated with exit or disposal activities and
nullifies Emerging Issues Task Force Issue No. 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)." SFAS 146 requires that a
liability for costs associated with an exit or disposal activity be recognized
when the liability is incurred rather than when a company commits to such an
activity and also establishes fair value as the objective for initial
measurement of the liability. The provisions of SFAS 146 are effective for exit
or disposal activities initiated after December 31, 2002. The Company does not
expect the provisions of SFAS No. 146 to have a material effect on the Company's
financial position or results of operations.
The Company does not believe that any other recently issued and adopted, but not
yet effective, accounting standards would have a material effect on the
accompanying financial statements.
NOTE 3--DEPOSIT ON POTENTIAL ACQUISITION
On November 8, 2002, the Company entered into a merger agreement to acquire
DxCG, Inc. for a total purchase price of approximately $10,000,000, of which the
Company intended to pay $6,000,000 in cash and $4,000,000 in common stock. Under
the terms of this agreement and at the time this agreement was executed, the
Company deposited $200,000 into an escrow account. This sum was intended to be
released to DxCG if DxCG terminated the merger agreement because the Company
failed to satisfy certain conditions to closing, including third party financing
for the cash portion of the purchase price. The Company did not secure the
financing by January 31, 2003 as stipulated in the merger agreement and
accordingly the sum of $200,000 was released to DxCG in the first quarter of
2003 and charged to operations as an uncompleted acquisition cost.
G-48
I-TRAX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001
NOTE 4--NOTE RECEIVABLE
Pursuant to a promissory note and a security agreement dated December 19, 2000,
the Company loaned Diabetex Corporation, which is in the business of managing
the healthcare of diabetes patients, $350,000 with a maturity date of February
19, 2002 or within 60 days of termination of merger discussions, bearing
interest at 8% per annum. In March 2001, the parties terminated the merger
discussions. Further, on April 30, 2001, the Company demanded that, pursuant to
the terms of the promissory note, Diabetex repay the principal amount of the
promissory note and all accrued interest thereon on or before June 29, 2001. As
of December 31, 2001, Diabetex and certain of its related parties had paid the
Company a total of $312,500, which had been first applied to accrued interest
and reimbursable expenses and the balance to principal. As of December 31, 2001,
the principal and interest outstanding under the promissory note was $72,437, of
which $37,500 was paid on February 11, 2002 and the balance on July 15, 2002.
NOTE 5--OFFICE EQUIPMENT, FURNITURE AND LEASEHOLD IMPROVEMENTS
Office equipment, furniture and leasehold improvements are as follows at
December 31, 2002:
Office equipment $ 850,560
Furniture 143,404
Leasehold improvements 50,000
-------------
1,043,964
Less accumulated depreciation and amortization (631,185)
-------------
$ 412,779
=============
Certain office equipment is pledged as collateral for related capital lease
obligations. (See Note 11.)
Depreciation expense for the years ended December 31, 2002 and 2001 amounted to
$216,762 and $158,162, respectively.
NOTE 6--GOODWILL AND INTANGIBLE ASSETS
In July 2001, the FASB issued SFAS No. 141, "Business Combinations," and SFAS
No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 addresses
financial accounting and reporting for business combinations and supercedes APB
Opinion No. 16, "Business Combinations." Changes made by SFAS No. 141 include
(1) requiring the purchase method of accounting be used for all business
combinations initiated after June 30, 2001, and (2) established specific
criteria for the recognition of intangible assets separately from goodwill.
These provisions were effective for business combinations for which the date of
acquisition was subsequent to June 30, 2001. SFAS No. 142 addresses the
accounting for goodwill and intangible assets subsequent to their acquisition.
The provisions for SFAS No. 142 were effective for fiscal years beginning after
December 15, 2001. The Company has adopted SFAS No. 142 as of January 1, 2002.
SFAS No. 142 eliminates the amortization of goodwill and certain other
intangible assets and requires the Company to complete a test for impairment of
these assets annually as well as a transitional goodwill impairment test within
six months of the date of adoption. The Company has completed its impairment
assessment as required by SFAS No. 142 and concluded that no impairment of
recorded goodwill exists. The impairment testing was based on capitalization of
earnings.
G-49
I-TRAX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001
NOTE 6--GOODWILL AND INTANGIBLE ASSETS (cont'd)
The changes in the carrying amount of goodwill for the year ended December 31,
2002 are as follows:
Total
----------------
Balance as of January 1, 2002 $ 2,224,726
Goodwill acquired during the year 6,199,336
----------------
Balance as of December 31, 2002 $ 8,424,062
================
SFAS No. 142 also requires disclosure of what net loss would have been in all
periods presented had SFAS No. 142 been in effect in such periods. The following
table is provided to disclose such net loss.
Year ended Year ended
December 31, 2002 December 31, 2001
Amount Per share Amount Per share
----------------- ---------------- ----------------- ----------------
Reported net loss $ (9,424,973) $ (1.04) $ (14,359,432) $ (2.71)
Add back goodwill amortization -- -- 640,851 .12
----------------- ---------------- ----------------- ----------------
Adjusted net loss $ (9,424,973) $ (1.04) $ (13,718,581) $ (2.59)
================ ================ ================ ================
The components of identifiable intangible assets, which are included in the
consolidated balance sheet as of December 31, 2002, are as follows:
Gross Carrying Accumulated Net Carrying
Amount Amortization Amount
----------------- --------------- -----------------
Amortized intangible assets:
Non-compete covenants 1,648,000 (377,667) 1,270,333
Customer relationships 2,853,231 (1,375,477) 1,477,754
------------------ ---------------- -----------------
Total $ 4,501,231 $ (1,753,144) $ 2,748,087
================== ================ =================
During the quarter ended December 31, 2002, the Company recorded an impairment
charge of approximately $1,650,000 related to customer relationships. This
charge related to a loss of expected business from a customer following the
acquisition of WellComm Group, Inc. as further discussed in Note 8. Total
amortization expense for all the intangibles amounted to $1,753,144 for the year
ended December 31, 2002. The estimated amortization expense for the years ending
December 31, 2003, 2004, 2005 and 2006 is $1,121,320, $1,121,320, $471,114 and
$34,333, respectively.
NOTE 7--ACQUISITION OF ISUMMIT PARTNERS, LLC
Effective February 7, 2001, the Company acquired iSummit Partners, LLC, doing
business as MyFamilyMD, by issuing a net of 580,682 shares of common stock
(after certain cancellation of shares resulting from a purchase price
adjustment) to the owners of iSummit in exchange for all of the issued and
outstanding limited liability company membership interests of iSummit. The
acquisition was valued at $5,254,080, of which $3,590,341 was allocated to
goodwill, after allocating $1,642,860 to in-progress research and development
(representing undeveloped software) and $20,879 to tangible assets. The
allocation of purchase price was prepared based on a formal valuation by an
independent appraiser.
G-50
I-TRAX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001
NOTE 7--ACQUISITION OF ISUMMIT PARTNERS, LLC (cont'd)
The Company amortized the goodwill through December 31, 2001. Accordingly, from
February 7, 2001 (date of acquisition) through December 31, 2001, the Company
recorded amortization expense of $640,851.
The following summary table sets forth the pro-forma statement of operations for
the year ended December 31, 2001 as if the acquisition was consummated at
January 1, 2001.
Year ended
December 31,
2001
----------------
Total revenue $ 613,070
============
Total expenses $ 14,972,502
============
Net loss $(14,359,432)
============
Pro forma basic and diluted net loss per share $ (2.71)
============
Weighted average number of shares outstanding 5,291,403
============
NOTE 8--ACQUISITION OF WELLCOMM GROUP, INC.
On February 6, 2002, the Company acquired all of the issued and outstanding
common stock of WellComm Group, Inc., as stipulated in the Merger Agreement
dated January 28, 2002, as amended, by issuing 1,488,000 shares of common stock
valued at $9,746,400, granting 112,000 options valued at $733,600 to acquire
common stock at a nominal exercise price and paying approximately $2,200,000 in
cash. In addition, the Company issued 16,000 shares of common stock to an
employee for introducing the Company to WellComm valued at $104,800 and charged
to operations. The aggregate acquisition price amounted to approximately
$12,660,000. The value of common stock issued and stock options granted was
determined based on the average market price of common stock immediately before
and after the acquisition was agreed to and announced. For accounting purposes,
the effective date of the acquisition is January 31, 2002.
WellComm was a disease management company that offered a wide array of expertise
including a nurse contact center specializing in disease management, triage,
health information surveys and research services for the healthcare industry.
The Company acquired WellComm in order to enhance its portfolio of product
offerings by combining technology and services.
The financial statements include the operations of WellComm from February 1,
2002 forward.
The purchase price allocation is based on a formal valuation prepared by an
independent appraiser. Of the total purchase price, the Company allocated
approximately $1,648,000 to non-compete covenants, approximately $4,501,000 to
customer relationships, $311,000 to net assets acquired with the remainder of
approximately $6,200,000 assigned to goodwill. Non-compete covenants will be
amortized on a straight-line basis over a four-year life and customer
relationships will be amortized over a three-year life.
G-51
I-TRAX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001
NOTE 8--ACQUISITION OF WELLCOMM GROUP, INC. (cont'd)
The following table summarizes the estimated fair values of the assets acquired
and liabilities assumed at the acquisition date.
Current assets $ 635,000
Property and equipment 190,000
Intangible assets 6,149,000
Goodwill 6,200,000
-----------
Total assets acquired $13,174,000
===========
Current liabilities $ 485,000
Long term debt 29,000
-----------
Total liabilities assumed 514,000
-----------
Net assets acquired $12,660,000
===========
The following unaudited pro forma results of operations of the Company give
effect to the acquisition of WellComm as though the acquisition was consummated
at the beginning of the year for each of the respective periods.
Year ended
December 31,
2002 2001
----------------- ---------------
Total revenue $ 4,185,689 $ 5,900,772
================= ================
Total expenses $ 13,688,289 $ 20,063,645
================= ================
Net loss $ (9,502,600) $ (14,162,873)
================= ================
Pro forma net loss per share: $ (1.03) $ (2.09)
Basic and Diluted
================= ================
Weighted average number of shares outstanding: 9,220,958 6,779,403
Basic and Diluted ================= ================
NOTE 9--DEPOSIT ON ACQUISITION OF INTELLECTUAL PROPERTY
On March 9, 2001 the Company entered into an intellectual property letter of
intent with Disease Management Holdings, Inc., doing business as
CardioContinuum, a company in the business of providing disease management
services to patients suffering from cardiac disease. Among other things, the
letter of intent contemplated a license by CardioContinuum to the Company of
certain protocols and workflows that facilitate efficient treatment of patients
suffering from cardiac disease. The letter of intent also contemplated that an
outstanding loan by the Company to CardioContinuum in the amount of $100,000,
and all accrued but unpaid interest thereunder, as of January 8, 2001, would be
surrendered by the Company to CardioContinuum for cancellation as an up front
license payment for the subject intellectual property. Following
CardioContinuum's 2001 bankruptcy filing, the Company wrote off the deposit on
the intellectual property since it would not have been able to realize any value
from the license and repayment of the note was unlikely. The deposit was charged
to operations during the year ended December 31, 2001.
G-52
I-TRAX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001
NOTE 10--ACCRUED EXPENSES
Accrued expenses consist of the following at December 31, 2002:
Interest $ 317,712
Salaries 385,869
Other 39,570
--------------
Total $ 743,151
==============
NOTE 11--CAPITAL LEASE OBLIGATIONS
In April 2000, the Company acquired a telephone system for $34,290 by entering
into capital lease obligations with interest at approximately 10% per annum,
requiring 60 monthly payments of $731, which include principal and interest. The
related equipment secures the lease.
In October 2000, the Company acquired web hosting equipment for $107,288 by
entering into a capital lease obligation with interest at approximately 9% per
annum, requiring 36 monthly payments of $3,572, which include principal and
interest. The related equipment secures the lease.
In July 2002, the Company acquired a new telephony system for its call center
with a total cost of $107,709 by entering into a capital lease obligation with
interest at approximately 8% per annum, requiring 60 monthly payments of
approximately $2,278, which includes principal and interest. The related
equipment secures the lease.
The future minimum lease commitments under the capital leases as of December 31,
2002 are as follows:
For the year ending December 31:
-------------------------------
2003 $ 77,228
2004 41,508
2005 35,660
2006 32,736
2007 15,946
--------------
Total future payments 203,078
Less amount representing interest (46,266)
--------------
Present value of minimum lease payments 156,812
Less current portion 60,047
--------------
Net long term portion $ 96,765
==============
At December 31, 2002 equipment under capital leases is carried at a book value
of $124,061.
G-53
I-TRAX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001
NOTE 12--RELATED PARTIES TRANSACTIONS
2001 Related Party Transactions
During the year ended December 31, 2001, the Company's Chief Executive Officer,
Chief Operating Officer and a key employee have periodically loaned funds to the
Company for working capital. As of December 31, 2001, the Company had borrowed
$739,598 net of certain repayments and the conversion discussed below. As
consideration for the advances, the Company issued to such individuals,
detachable stock purchase warrants to acquire an aggregate of 218,600 shares of
common stock at exercise prices ranging from $2.50 to $5 per share. The Company
valued the detachable warrants using the Black-Scholes pricing model, thereby
recording a charge to earnings for financing costs of $630,469.
In connection with the Company's Chief Executive Officer and Chief Operating
Officer converting a total of $618,663 of advances at $2.50 per share, the
Company issued an aggregate of 247,465 shares of its common stock.
From November 2000 through May 2001, the Company issued several convertible
promissory notes with an aggregate face amount of $2,200,000. Of such total,
$500,000 was from the Company's Chief Executive Officer and Chief Operating
Officer during October 2000, which was subsequently converted into common stock
as further discussed in Note 16.
As of December 31, 2001, a venture fund managed by the Company's Chief Executive
Officer loaned the Company $75,000 and received warrants to purchase 39,480
shares of common stock at $.50 per share. (See Note 14 for additional
information.)
In connection with signing of their employment agreements, the Company's Chief
Executive and Operating Officers had each purchased from the Company 50,000
shares of common stock for a purchase price of $10 per share. The shares were
purchased pursuant to a subscription agreement and a note and pledge agreement.
Each note was for a principal amount of $499,750 (net of a $250 bonus), bearing
interest at approximately 6% per annum, and provided that the unpaid principal
amount was due in five equal annual installments beginning on December 29, 2001.
Effective during the second quarter 2001, pursuant to board resolutions, such
notes and pledge agreements were canceled. Further, on April 10, 2001, each of
such executive officers was granted 70,000 incentive stock options pursuant to
the Company's 2001 Equity Compensation Plan. Pursuant to FASB Interpretation No.
44, variable accounting at the end of each interim period must be applied to
50,000 of the 70,000 options granted on April 10, 2001 since they are deemed a
re-price of the cancelled pledge and note agreements. Accordingly, since fair
value of common stock was $6.25 per share at December 31, 2001 and such options
have an exercise of $2.75 per share, the Company recorded the intrinsic value of
$3.50 or a total of $350,000 as compensation expense on account of the
re-pricing. The Company will continue to mark-to-market these options at the end
of each respective interim period until they are exercised.
On December 31, 2001, the Company issued 94,013 shares of common stock in
connection with the Chief Executive Officer exercising 94,013 warrants by
converting $70,510 of advance into equity. Such warrants were granted in
connection with the salary deferment program.
G-54
I-TRAX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001
NOTE 12--RELATED PARTIES TRANSACTIONS (cont'd)
2002 Related Party Transactions
At December 31, 2001, the Company had loans outstanding from certain officers
amounting to $739,598. During the year ended December 31, 2002, the Company
borrowed an additional $700,000 from other officers and a relative of an
officer. During the year ended December 31, 2002, repayments of these loans
amounted to $190,000. At December 31, 2002, $225,000 of the outstanding amount
has been classified as a current liability as it is due on demand and $1,024,598
has been classified as a long term liability as it is subordinate to the
convertible debenture.
Interest expense associated with related party loans and advances amounted to
$79,735 and $38,708 for the years ended December 31, 2002 and 2001,
respectively.
NOTE 13--CREDIT LINE
The Company, by virtue of acquiring WellComm, assumed a revolving line of credit
that allows the Company to borrow up to $300,108. Amounts outstanding under the
line of credit bear interest at 0.5% over the National Prime Rate, as reported
by the Wall Street Journal and are payable monthly. As of December 31, 2002,
$300,000 was outstanding under the line of credit. WellComm's assets
collateralize the line of credit. The line, which was due on August 2002, has
been extended through April 30, 2003. The Company is in the process of extending
this line of credit.
NOTE 14--PROMISSORY NOTES PAYABLE
On March 2, 2001 the Company entered into an Amended and Restated Promissory
Note and Warrant Purchase Agreement with Psilos Group Partners, L.P., its
affiliates and a venture capital fund managed by the Company's Chief Executive
Officer (collectively, the "Psilos Investor Group") pursuant to which the Psilos
Investor Group agreed to loan the Company up to $1,000,000. As consideration,
the Company granted the Psilos Investor Group detachable warrants to acquire
common stock at $0.50 per share. The loan bears interest at 8% per annum, with a
default rate of 12% per annum, and is due five years from original date of
issuance. As of December 31, 2002, the Psilos Investor Group funded an aggregate
of $692,809 of the $1,000,000, which sum is included in promissory notes and
debenture payable on the accompanying consolidated balance sheet. The Company
also granted warrants to purchase 364,694 shares of common stock. These warrants
were exercised during the first quarter of 2002 and the Company issued an
aggregate 340,317 shares of common stock, net of shares surrendered as exercise
price.
The Company valued the issued detachable warrants at $459,854 using the
Black-Scholes pricing model, thereby allocating a portion of the proceeds from
the debt to the warrants utilizing the relevant fair value of the debt and
warrants to the actual proceeds from the debt. This amount was recorded as a
discount to the related promissory notes and netted against the related debt.
Furthermore, the discount is being accreted to interest expense over the
five-year term of the underlying promissory notes. For the years ended December
31, 2002 and 2001, the amount accreted to interest expense was $90,708 and
$79,372, respectively. At December 31, 2002, the carrying value of the notes
amounted to $403,037 and is included in the promissory notes and debenture
payable in the accompanying consolidated balance sheet.
G-55
I-TRAX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001
NOTE 15--CONVERTIBLE DEBENTURE
The Company funded the cash portion of WellComm's acquisition price by selling a
6% convertible senior debenture in the aggregate principal amount of $2,000,000
to Palladin Opportunity Fund LLC pursuant to a Purchase Agreement dated February
4, 2002. Pursuant to the Purchase Agreement, the Company also issued a warrant
to Palladin to purchase an aggregate of up to 307,692 shares of common stock.
The outstanding principal and any accrued interest under the debenture are
payable in full on or before February 3, 2004. Palladin can also convert the
outstanding principal and any accrued interest at any time into common stock.
The conversion price (as of February 3, 2003, 12 months from issuance of
debenture) is $3.026 per share. The conversion price is subject to "reset" as of
the date that is 18 months after the issue date. On the date of reset, the
conversion price may be reduced if the average of closing bid prices for the
common stock during a period of 20 consecutive trading days ending on the date
which immediately precedes the reset date is less than the then applicable
conversion price, in which case, the reset conversion price will be reset to
equal such average. The warrant entitles Palladin to purchase shares of the
Company's common stock at the price of $5.50 per share.
Pursuant to the Purchase Agreement, Palladin also received a one-year option to
purchase an additional 6% convertible senior debenture in the face amount of
$1,000,000 and an additional warrant to purchase up to 153,846 shares of common
stock. In connection with this option, the Company recorded a liability of
$161,077, which is being accreted to interest expense over the one-year life of
the option. For the year ended December 31, 2002, the Company amortized $147,654
to offset interest expense.
Finally, pursuant to a related registration rights agreement, the Company
registered all of the shares of common stock underlying the Palladin debenture
and warrant in a registration statement on Form SB-2, which was declared
effective by the Securities and Exchange Commission in July 2002.
The Company valued the warrant issued to Palladin at $890,272 using the
Black-Scholes pricing model, thereby allocating a portion of the proceeds from
the debt to the warrant and the option using the relevant fair value of the debt
and warrant to the actual proceeds from the debenture. The Company recorded
$890,272 as a discount to the debenture and this amount will be accreted to
interest expense over the life of the debenture. For the year ended December 31,
2002, $408,041 of the discount was accreted to interest expense. The Company
also recorded $434,798 of interest expense from February 4, 2002 through
December 31, 2002 for the amortization of the portion of the beneficial
conversion value of the debenture. The amount allocated to the beneficial
conversion feature was $948,651. The beneficial conversion value represents the
difference between the fair market value of the common stock on the date the
debenture was sold and the price at which the debt could be converted into
common stock. As of December 31, 2002, the carrying value of the debenture
amounted to $842,839 and is included in the promissory notes and debenture
payable in the accompanying consolidated balance sheet. Lastly, in connection
with facilitating the transaction with Palladin, the Company recorded $416,610
of debt issuance costs comprised of $130,000 of cash, 6,200 shares of common
stock valued at $40,610 and a warrant to acquire 40,000 shares of common stock
at $5.00 valued at $246,000 per share issued to a third party that brokered the
transaction. These costs are being amortized over the life of the debenture. For
the year ended December 31, 2002, amortization expense amounted to $187,337.
G-56
I-TRAX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001
NOTE 16--CONVERTIBLE PROMISSORY NOTES PAYABLE
From November 2000 through May 2001, the Company issued several convertible
promissory notes with an aggregate face amount of $2,200,000. Of such total,
$500,000 represented bridge financing provided to the Company by its Chief
Executive Officer and Chief Operating Officer in October 2000. The principal
amount of these promissory notes and accrued and unpaid interest thereon were
convertible into common stock at $10.00 per share. The promissory notes were to
mature one year from the date of issuance and bore interest at 8% per annum or
12% per annum in an event of default. Furthermore, the Company issued to the
holders of the promissory notes detachable warrants to purchase an additional
440,000 shares of common stock at an exercise price of $10.00.
The proceeds allocated to the detachable purchase warrants amounted to $845,650,
which was arrived at using the Black-Scholes pricing model. Such amount was
recorded as a discount to the promissory notes. The discount has been accreted
as interest expense over the life of the underlying promissory notes. As of May
15, 2001, the date the holders of the promissory notes and the Company entered
in to an Exchange Agreement discussed below, the Company accreted $365,143 of
the discount to interest expense.
Pursuant to an Exchange Agreement dated May 14, 2001 between the Company and the
holders of the promissory notes, the holders agreed to exchange $2,200,000,
representing the principal amounts of the promissory notes, and $80,157, the
interest accrued thereon through May 15, 2001, into common stock at the exchange
price of $2.50 per share. In addition, as consideration for the exchange, the
Company reset the exercise price of the warrants to $2.50 per share.
Accordingly, the Company issued a total of 912,063 shares of common stock in the
exchange. For accounting purposes, the Company recorded the conversion at
$2,551,784 (net of the un-amortized discount) into equity. In connection with
the Company reducing the conversion price from $10.00 to $2.50 for the purpose
of inducing note holders to convert, during the second quarter, the Company
recorded debt conversion costs amounting to $794,219 which represented the
difference between the adjusted conversion price and the fair market value of
the Company's securities on the date of conversion.
NOTE 17--COMMITMENTS AND CONTINGENCIES
Employment Agreements
The Company is a party to various employment agreements with certain of its
officers and key employees. Such employment agreements range between three to
five years with annual salaries ranging from $100,000 to $175,000. The
aggregated annual minimum commitment under these agreement is $575,000.
Nature of Business
The Company is subject to risks and uncertainties common to growing technology
companies, including rapid technological developments, reliance on continued
development and acceptance of the Internet and health care applications
utilizing the Internet, intense competition and a limited operating history.
Significant Customers
Financial instruments, which may expose the Company to concentrations of credit
risk, consist primarily of accounts receivable. As of December 31, 2002, one
customer represented 46% of the total accounts receivable. For the year ended
December 31, 2002, the Company had two unrelated customers, which accounted for
42% and 30%, respectively, of total revenues. For the year ended December 31,
2001, the Company had one unrelated customer, which accounted for 84% of total
revenues.
G-57
I-TRAX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001
NOTE 17--COMMITMENTS AND CONTINGENCIES (cont'd)
Office Leases
During October 1999, the Company entered into a lease agreement for its
technology and product development offices. The lease was to expire on October
31, 2004 with annual rent of approximately $162,000 before annual escalations.
During December 2001, the Company was successful in negotiating out of this
lease by entering into an amendment\relocation lease agreement with the same
landlord for materially less space. The Company entered into an eighteen-month
lease, which requires monthly payment of approximately $3,600.
During April 2000, the Company entered into a lease agreement for its executive
offices. The lease expires June, 2005 and requires annual rent payments of
approximately $150,000 before annual escalations.
During May 2002, the Company entered into a lease agreement for its call center
located in Omaha, Nebraska. The lease expires during May 2007 with annual rent
of approximately $56,000 before annual escalations.
The Company's approximate future minimum annual rental payments including annual
escalations under the non-cancelable operating leases in effect as of December
31, 2002 are as follows:
For the year ending December 31:
-------------------------------
2003 $ 224,000
2004 206,000
2005 119,000
2006 56,000
2007 24,000
-------------
$ 629,000
=============
Rent expense for the years ended December 31, 2002 and 2001 amounted to
approximately $275,000 and $312,000, respectively.
G-58
I-TRAX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001
NOTE 17--COMMITMENTS AND CONTINGENCIES (cont'd)
Threatened Litigation
In 1998, a former Chief Executive Officer, stockholder and creditor of Health
Management (the "Plaintiff") commenced an action in New Jersey state court
against, among others, the present Chief Executive Officer of Health Management.
Health Management is identified in the caption as a defendant. The complaint
alleges breach of contract, breach of fiduciary duty, breach of the covenant of
good faith and fair dealing, securities fraud, common law fraud, negligent
misrepresentation and racketeering activity. See Nazir Memon v. Frank Martin, et
al, CAM-L-04026-98. The allegations in this action reference circumstances
relating to Health Management's prior line of business of physician practice
management. In 1999, the court entered two orders dismissing the action "without
prejudice" for procedural reasons. Furthermore, in 1999 the Plaintiff filed for
bankruptcy protection. As part of the bankruptcy proceedings, the Plaintiff, the
present Chief Executive Officer and Health Management entered into a stipulation
limiting the period within which the Plaintiff can bring a new action alleging
Plaintiff's claims. Plaintiff sought to reactivate his prior state court action
in January 2001 (within the stipulated period), rather than commence a new
action. The stipulated time period for commencing a new action has expired.
By Opinion-Letter/Order dated August 22, 2001, the New Jersey Superior Court,
Civil Division, ruled in favor of I-trax by barring Plaintiff from reactivating
the civil action by the bankruptcy stipulation. By order date March 10, 2003,
the New Jersey Superior Court, Appellate Division likewise ruled in favor of
I-trax by affirmed the lower court decision. At this time, this matter has been
finally resolved in favor of I-trax because Plaintiff has exhausted all rights
to appeal.
Profit Sharing Plan
The Company maintains a 401(k) profit sharing plan covering qualified employees,
which includes employer participation in accordance with the provisions of the
Internal Revenue Code. The plan allows participants to make pretax contributions
and the Company to match certain percentages of employee contributions depending
on a number of factors, including the participant's length of service. The
profit sharing portion of the plan is discretionary and noncontributory. All
amounts contributed to the plan are deposited into a trust fund administered by
an independent trustee. As of December 31, 2002, the Company has made no
contributions.
Risk Based Contracts
The Company enters into risk-based contracts in certain disease management
arrangements. These contracts are generally for terms of three to five years and
provide that a percentage of the Company's fees may be refunded to a client if
the Company does not save the client a certain percentage of the expenses
incurred by individuals whose health is managed by the Company. As of December
31, 2002, the Company had not entered into these types of contracts.
NOTE 18--PROVISION FOR INCOME TAXES
Income taxes are provided for the tax effects of transactions reported in the
financial statements and consist of taxes currently due plus deferred taxes
related to differences between the financial statement and tax bases of assets
and liabilities for financial statement and income tax reporting purposes.
Deferred tax assets and liabilities represent the future tax return consequences
of these temporary differences, which will either be taxable or deductible in
the year when the assets or liabilities are recovered or settled. Accordingly,
measurement of the deferred tax assets and liabilities attributable to the
book-tax basis differentials are computed at a rate of 34% federal and 6% state.
G-59
I-TRAX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001
NOTE 18--PROVISION FOR INCOME TAXES (cont'd)
As of December 31, 2002, the Company had deferred tax assets of approximately
$8,011,000 resulting from temporary differences and net operating loss
carry-forwards of approximately $19,036,000, which are available to offset
future taxable income, if any, through 2017. As utilization of the net operating
loss carry-forwards and temporary difference is not assured, the deferred tax
asset has been fully reserved through the recording of a 100% valuation
allowance.
The tax effects of temporary differences, loss carry-forwards and the valuation
allowance that give rise to deferred income tax assets are as follows:
December 31,
2002
---------------
Temporary differences:
Fair value of warrants $ 451,000
Compensation not currently deductible 1,088,000
Net operating losses 6,472,000
Less valuation allowance (8,011,000)
---------------
Deferred tax assets $ 0
===============
The reconciliation of the effective income tax rate to the federal
statutory rate for the years ended December 31, 2002 and 2001 is as
follows:
Federal income tax rate (34.0)%
Change in valuation allowance on net operating carry-forwards 34.0
---------------
Effective income tax rate: 0.0 %
===============
NOTE 19--STOCKHOLDERS' EQUITY
Amendment of the Company's Certificate of Incorporation
The Company amended its Certificate of Incorporation to increasing the number of
authorized shares of common stock from 50,000,000 to 100,000,000 shares on June
4, 2001. The holders of the majority of the Company's then outstanding shares of
common stock approved this amendment on May 21, 2001.
Unclaimed Shares and Reverse Stock Split Adjustment
The Company has been unable to locate one stockholder entitled to receive common
stock as a result of a 1999 merger. Accordingly, the Company has cancelled
45,141 unclaimed shares of common stock. In connection with a 1-for-5 reverse
stock split, the Company paid stockholders cash for all fractional shares that
resulted from the reverse stock split. Accordingly, a total of 191 shares were
cashed out.
G-60
I-TRAX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001
NOTE 19--STOCKHOLDERS' EQUITY (cont'd)
2001 Issuances of Common Stock and Warrants
In connection with the issuance of the promissory notes payable discussed in
Note 14, the Company granted the Psilos Investor Group detachable warrants to
acquire 0.5264 shares of common stock at $.50 per share for each $1 of the face
amount of the loan. As of December 31, 2002, the Psilos Investor Group (which
includes a venture fund managed by the Company's Chief Executive Officer) funded
an aggregate of $692,809 of the $1,000,000 and received warrants to purchase
364,695 shares of common stock. The Company valued the detachable warrants
issued at $459,854 using the Black-Scholes pricing model, thereby allocating a
portion of the proceeds from the debt to the warrants utilizing the relevant
fair value of the debt and warrants to the actual proceeds from the debt. This
amount was recorded as a discount to the related promissory notes and netted
against the related debt.
Effective as of June 25, 2001, the Company completed a private placement of
440,000 shares of its common stock at $2.50, yielding to the Company a total of
$1,100,000. As consideration for completing the private placement, the Company
issued to the participating investors detachable stock purchase warrants to
acquire a total of 110,000 shares of common stock at an exercise price of $5.00
per share.
In connection with signing of their employment agreements, the Company's Chief
Executive and Operating Officers had purchased from the Company a total of
100,000 shares of common stock for a purchase price of $10 per share. The shares
were being purchased pursuant to a subscriptions agreement and a note and pledge
agreement. The note was for a principal amount of $999,500 (net of a $500
bonus), bearing interest at approximately 6% per annum, and provided that the
unpaid principal amount was due in five equal annual installments beginning on
December 29, 2001. During the second quarter 2001, pursuant to board
resolutions, such notes and pledge agreements were canceled. Thereafter, such
executive officers were granted an aggregate of 140,000 incentive stock options
pursuant to the Company's 2001 Equity Compensation Plan. Pursuant to FASB
Interpretation 44, variable accounting at the end of each interim period must be
applied to such options since they are deemed a re-pricing of the cancelled
pledge and note agreements. Accordingly, since the fair market value of common
stock was $6.25 per share at December 31, 2001 and such options have an exercise
of $2.75 per share, the Company recorded the intrinsic value of $3.50 per option
or $350,000 of compensation expense. The Company will continue to mark-to-market
these options at the end of each respective interim period until they are
exercised. In connection with the re-pricing, for the year ended December 31,
2002, the Company reversed a charge amounting to $250,000 for the mark-to-market
comparison.
Effective as of June 25, 2001 and pursuant to an Exchange Agreement dated as of
May 14, 2001 between the Company and the holders of the convertible promissory
notes as discussed in Note 16, the holders agreed to exchange $2,200,000, the
principal amount of the promissory notes, and $80,157, the interest accrued
thereon effective as of May 15, 2001, into common stock at the exchange price of
$2.50 per share. Accordingly, during the second quarter, the Company issued a
total of 912,063 shares of common stock for conversion of such debt. In
addition, as consideration for the conversion, the Company reset the exercise
price of 440,000 warrants previously issued to such holders to $2.50 per share
from $10.00. For accounting purposes, the Company recorded the conversion at
$2,551,784 (net of un-amortized discount) into equity. In connection with the
Company reducing the conversion price from $10.00 to $2.50, the Company recorded
debt conversion costs amounting to $794,219, which represents the difference
between the adjusted conversion price and the fair market value of the Company's
securities on the date of conversion.
G-61
I-TRAX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001
NOTE 19--STOCKHOLDERS' EQUITY (cont'd)
2001 Issuances of Common Stock and Warrants (cont'd)
During 2001, the Company's Chief Executive and Operating Officers, and a Vice
President of Sales (and a shareholder), lent the Company funds for working
capital purposes. At various dates during the year, the officers elected to
convert a portion of their advances to the Company into equity. As consideration
for the advances, the Company granted such individuals detachable stock purchase
warrants to acquire 218,600 shares of common stock at exercise prices ranging
from $2.50 to $5 per share. The Company valued the detachable warrants issued to
such individuals using the Black-Scholes pricing model, thereby recording a
charge to earnings for financing costs of $630,469. Lastly, the Company issued
an aggregate of 247,465 shares of common stock to its Chief Executive and
Operating Officer in exchange for the conversion of a portion of their advances
amounting to $618,663.
During November and December of 2001, pursuant to a private placement, the
Company sold an aggregate of 842,395 shares of common stock for cash and
services for $2,042,958, net of $50,640 of direct costs.
During 2001, pursuant to various agreements and board resolutions, the Company
issued an aggregate of 120,307 shares of common stock to various consultants for
consideration of services received. The common stock was valued at the fair
market value of the stock on the date of issuance or $907,598 in the aggregate.
In addition, in July 2001, the Company granted an investment banker 36,000 five
year warrants with an exercise price of $3.75 for services from July 2001 to
July 2002. The Company valued such warrants at $72,000 by utilizing the
Black-Scholes pricing model. Pursuant to EITF 96-18, the Company, at the end of
each reporting period, must apply variable accounting treatment and re-value
these warrants. As of December 31, 2001, the Company recorded a charge to
earnings of $33,300 as an investor relations expense. For the year ended
December 31, 2002, the Company recorded a net reduction of $18,900 for investor
relations as a result of re-valuating the warrants on a quarterly basis.
Effective December 31, 2001, the Company terminated the salary deferment program
and granted each participant as consideration for participating in the program,
one warrant for each dollar deferred with exercise prices ranging between $2.50
to $5.00. Accordingly, the Company granted 142,197 warrants with an exercise
price of $2.50 each and 20,541 warrants with an exercise price of $5.00 each.
Additionally, individuals were given the option to convert the actual deferred
salaries into warrants with an exercise price of $.75 or elect to be paid in
cash over time. As of December 31, 2001, the Company had accrued $1,038,876 of
deferred salary of which $814,595 was converted into equity by granting such
individuals 465,483 warrants exercisable at $.75. Accordingly, the Company
granted an aggregate of 628,220 warrants for which it utilized the Black-Scholes
pricing model resulting in an additional charge to earnings of $3,100,635
representing additional compensation cost.
On December 31, 2001, the Company's issued 94,013 shares of common stock in
connection with the Chief Executive Officer exercising 94,013 warrants by
converting $70,510 of advance into equity. Such warrants were granted in
connection with the salary deferment program as discussed above.
As of December 31, 2001, the total number of warrants outstanding amounted to
1,703,502 with exercise prices ranging from $.50 to $5.00.
G-62
I-TRAX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001
NOTE 19--STOCKHOLDERS' EQUITY (cont'd)
2002 Issuance of Common Stock and Warrants
In connection with the sale of the $2,000,000 debenture, the Company also issued
a warrant to Palladin to purchase an aggregate of up to 307,692 shares of common
stock at the price of $5.50 per share. The Company valued the warrant at
$890,272 using the Black-Scholes pricing model, thereby allocating a portion of
the proceeds from the debt to the Warrant using the relevant fair value of the
debt and warrants to the actual proceeds from the debenture. The Company
recorded $890,272 as a discount to the debenture and this amount will be
accreted to interest expense over the life of the debenture. The Company also
recorded $434,798 of interest expense for the year ended December 31, 2002 for
amortization of the beneficial conversion value over the two year life of the
debenture.
On February 6, 2002, the Company acquired all of the issued and outstanding
common stock of WellComm as stipulated in the Merger Agreement dated January 28,
2002, as amended, by issuing 1,488,000 shares of common stock, granting 112,000
options to acquire common stock at a nominal price and paying $2,175,056 in
cash.
In connection with facilitating the transaction with Palladin, the Company paid
$130,000, issued 6,200 shares of common stock valued at $40,610 and granted a
warrant to acquire 40,000 shares of common stock at $5.00 per share to a third
party that brokered the transaction. Lastly, the Company issued 16,000 shares of
common stock valued at $104,800 to an employee for introducing the Company to
WellComm. The Company has valued the shares at the market price on day of
issuance or $145,408 and has valued the warrants utilizing the Black-Scholes
option-pricing model or $246,000.
During January 2002, the Company sold in a private placement an aggregate of
22,000 shares of common stock for $47,850, net of $7,150 of direct costs. This
private placement was commenced in November 2001. Additionally, pursuant to a
private placement commenced in February 2002, the Company sold 505,500 shares of
common stock, yielding proceeds of $1,895,626. In connection with the fund
raising efforts from an existing stockholder, the Company issued 13,333 shares
as consideration to such stockholder.
During the year ended December 31, 2002, pursuant to various agreements and
board approvals, the Company issued an aggregate of 23,708 shares of common
stock and granted 60,000 warrants to various consultants for services received
and for settlement of debt. The common stock was valued at fair market value on
the date of issuance or $114,167 in the aggregate, which was charged to
operations. The warrants were valued utilizing the Black-Scholes option-model.
Accordingly, the Company recorded a charge of $222,000 for investor relations as
a result of granting such warrants.
During the year ended December 31, 2002, the Company charged operations for
$163,200 related to the issuance of options to a former employee.
G-63
I-TRAX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001
NOTE 19--STOCKHOLDERS' EQUITY (cont'd)
2002 Issuances of Common Stock and Warrants (cont'd)
Effective October 31, 2002, the Company and one of its customers entered into a
three year Joint Marketing Agreement. Under this agreement, each party will,
using its reasonable discretion, market to its clients the other party's
products and services. In connection with the agreement, the Company granted
UICI, a New York Stock Exchange Company, a seven-year warrant to acquire up to
400,000 shares of common stock at $5.50 per share. The Company and UICI are also
parties to a license and maintenance agreement entered into on September 30,
2002, pursuant to which the Company granted UICI an exclusive license to certain
software in the student market and a non-exclusive license to such software for
use by UICI for its other businesses. The Company, utilizing the Black-Scholes
option-pricing model, has valued such warrant at approximately $1,360,000. Such
amount has been capitalized and it will be amortized on a monthly basis over the
life of the agreement of three years. For the year ended December 31, 2002, the
Company has charged $75,555.
During the year ended December 31, 2002, a total of 380,960, warrants and
options were exercised and accordingly, the Company issued an aggregate of
355,424 shares of common stock, net of shares surrendered as exercise price.
The following table summarizes the Company's activity as it relates to its
warrants for the year ended December 31, 2002:
Balance outstanding at January 1,2002 1,703,493
Quarter ended March 31, 2002
Granted 347,692
Exercised (376,232)
------------------
Balance outstanding at March 31, 2002 1,674,953
Quarter ended June 30, 2002
Granted --
Exercised --
------------------
Balance outstanding at June 30, 2002 1,674,953
Quarter ended September 30, 2002
Granted --
Exercised --
------------------
Balance outstanding at September 30, 2002 1,674,953
Quarter ended December 31, 2002
Granted 460,000
Exercised (2,000)
------------------
Balance outstanding at December 31, 2002 2,132,953
==================
Outstanding warrants are exercisable at prices ranging from $.75 to $5.50.
G-64
I-TRAX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001
NOTE 20--STOCK OPTIONS
Equity Compensation Plans and Non-Plan Stock Options
The Company has two equity compensation plans, which were adopted in 2000 and
2001. The purpose of the plans is to provide the opportunity for grants of
incentive stock options, nonqualified stock options and restricted stock to
employees of the Company and its subsidiaries, certain consultants and advisors
who perform services for the Company or its subsidiaries and non-employee
members of the Company's Board of Directors. The 2001 plan has several
additional features, including, a salary investment option grant program that
permits eligible employees to reduce their salary voluntarily as payment of
two-thirds of the fair market value of the underlying stock subject to the
option, with the remaining one-third of the fair market value payable as the
exercise price for the option and, if specifically implemented, automatic grant
program for non-employee members of the Board of Directors at periodic
intervals.
There are 600,000 shares of common stock authorized for issuance under the 2000
plan and 1,200,000 shares of common stock authorized for issuance under the 2001
plan. The number of shares authorized for issuance under the 2001 plan increases
automatically on the first day of each year beginning with the year 2002 by an
amount equal to the lesser of (a) three percent of the shares of common stock
then outstanding and (b) 200,000 shares. As a result, effective January 1, 2002,
the number of shares of common stock available for issuance under the 2001 plan
increased from 1,000,000 to 1,200,000.
The maximum aggregate number of shares of common stock that can be granted to
any individual during any calendar year is 70,000 under the 2000 plan and 80,000
and under the 2001 plan.
2000 Plan Grants
As of December 31, 2002, an aggregate of 430,134 options were outstanding under
the 2000 plan. Exercise prices of these options range from $5.00 to $10.00 per
share (depending on the fair market value of the stock on the date of grant).
2001 Plan Grants
As of December 31, 2002, an aggregate of 841,668 options were outstanding under
the 2001 plan. Exercise prices of these options range from $2.75 to $6.25
(depending on fair market value of the stock on the date of grant).
Non-Plan Stock Option Grants
As of December 31, 2002, the Company had outstanding an aggregate of 439,000
options outside of any stock option plan with exercise prices ranging from $.01
to $10.00 per share (depending on fair market value of the stock on the date of
grant).
G-65
I-TRAX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001
NOTE 20--STOCK OPTIONS (cont'd)
The table below summaries the activity in the Company's stock option plans for
the years ended December 31, 2001 and 2002:
Non-Qualified Non-Plan
Incentive Options Options Non-Qualified Total
Options
------------------------- -------------------- -------------------- -------------------- --------------------
Outstanding as of
January 1, 2001 343,000 180,445 89,000 612,445
Granted 120,500 346,926 120,000 587,426
-------------------- -------------------- -------------------- --------------------
Outstanding as of
December 31, 2001 463,500 527,371 209,000 1,199,871
Granted 342,878 95,700 230,000 668,578
Exercised -- (2,727) -- (2,727)
Forfeited/Expired (70,549) (84,371) -- (154,920)
-------------------- -------------------- -------------------- --------------------
Outstanding as of
December 31, 2002 735,829 535,973 439,000 1,710,802
==================== ==================== ==================== ====================
Vesting Dates:
December 31, 2003 179,342 137,670 75,834 392,846
December 31, 2004 119,641 27,667 39,168 186,476
December 31, 2005 68,048 19,335 26,668 114,051
December 31, 2006 10,000 -- -- 10,000
December 31, 2007 -- -- -- --
Thereafter -- -- 20,000 20,000
As of December 31, 2002, there were outstanding an aggregate of 987,429 of
exercisable plan and non-plan options with exercise prices ranging from $.01 to
$10.00.
The weighted average fair value of options granted during the year ended
December 31, 2002 amounted to $2,456,385.
For the year ended December 31, 2002 and 2001, the Company recorded $163,000 and
$29,741, respectively, of compensation.
NOTE 21--SUBSEQUENT EVENTS
Agreement to Acquire DxCG, Inc.
On November 8, 2002, the Company entered into a merger agreement to acquire
DxCG, Inc. for a total purchase price of approximately $10,000,000, of which the
Company intended to pay $6,000,000 in cash and $4,000,000 in common stock. Under
the terms of this agreement and at the time this agreement was executed, the
Company deposited $200,000 into an escrow account. This sum was intended to be
released to DxCG if DxCG terminated the merger agreement because the Company
failed to satisfy certain conditions to closing, including third party financing
for the cash portion of the purchase price. The Company did not secure the
financing.
G-66
I-TRAX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001
NOTE 21--SUBSEQUENT EVENTS (cont'd)
Related Party Transactions
During February 2003, pursuant to a promissory note, the former Chief Executive
Officer of WellComm, now a member of the Company's Board of Directors, advanced
$200,000 to the Company for working capital. The loan carries interest at 8% per
year and it matures during February 2004.
During the three months ended March 31, 2003, the Company's Chief Executive and
Operating Officers, along with certain stockholders advanced the Company
$540,000 for working capital. The Company's Chief Executive and Operating
Officers have committed to continue to fund the Company until it generates
positive cash flow from operations and raises additional funds in the private
placement described below, but at least through January 1, 2004.
Private Placement Memorandum
During March 2003, the Company commenced a private placement in order to raise
additional funds. The Company is offering to sell up to 1,000,000 Units of
equity securities, each consisting of one share of common stock and one warrant
to acquire one share of common stock.
G-67
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There are no changes and disagreements with accountants on accounting
or financial disclosure.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16 (a) OF THE EXCHANGE ACT
See the information set forth in the section entitled "Proposal No. 1
Election of Directors" in I-trax's Proxy Statement for the 2003 Annual Meeting
of Stockholders to be filed with the Securities and Exchange Commission within
120 days after the end of the Company's fiscal year ended December 31, 2002 (the
"2003 Proxy Statement"), which is incorporated herein by reference.
ITEM 10. EXECUTIVE COMPENSATION
See the information set forth in the section entitled "Executive
Compensation" in the 2003 Proxy Statement, which is incorporated herein by
reference.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
See the information set forth in the section entitled "Security
Ownership of Certain Beneficial Owners and Management" in the 2003 Proxy
Statement, which is incorporated herein by reference.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
See the information set forth in the section entitled "Certain
Relationships and Related Transactions" in the 2002 Proxy Statement, which is
incorporated herein by reference.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
NUMBER EXHIBIT TITLE
------ -------------
2.1 Agreement and Plan of Merger dated December 14, 1999 between
I-Trax.com, Inc. and Member-Link Systems, Inc. (Incorporated by
reference to Exhibit 2.1 to I-Trax.com, Inc.'s Registration
Statement on Form 10-SB, Registration No. 000-30275, filed on April
10, 2000.)
2.2 Form of Agreement and Plan of Merger by and among I-Trax.com, Inc.,
I-trax, Inc. and I-Trax.com Acquisition Co. (Exhibit A to the
prospectus incorporated in I-trax, Inc.'s Registration Statement on
Form S-4, Registration No. 333-48862, filed on October 27, 2000.)
2.3 Merger Agreement dated as of January 28, 2002 by and among I-trax,
Inc., WC Acquisition, Inc., WellComm Group, Inc., John Blazek and
Carol Rehtmeyer. (Incorporated by reference to Exhibit 2.1 to
I-trax, Inc.'s Current Report on Form 8-K, filed on February 20,
2002.)
2.4 Amendment dated as of February 5, 2002 to Merger Agreement dated as
of January 28, 2002 by and among I-trax, Inc., WC Acquisition, Inc.,
WellComm Group, Inc., John Blazek and Carol Rehtmeyer. (Incorporated
by reference to Exhibit 2.2 to I-trax, Inc.'s Current Report on Form
8-K, filed on February 20, 2002.)
G-68
3.1 Certificate of Incorporation of I-trax, Inc. filed September 15,
2000 (Incorporated by reference to Exhibit 3.1 to I-trax, Inc.'s
Registration Statement on Form S-4, Registration No. 333-48862,
filed on October 27, 2000.)
3.2 Certificate of Amendment to Certificate of Incorporation of I-trax,
Inc. filed June 4, 2001. (Incorporated by reference to Exhibit 3.2
to I-trax, Inc.'s Annual Report on Form 10-KSB for the fiscal year
ended December 31, 2001, filed on April 4, 2002.)
3.3 Certificate of Amendment to Certificate of Incorporation of I-trax,
Inc. filed on January 2, 2003.
3.4 By-laws of I-trax, Inc. (Incorporated by reference to Exhibit 3.2 to
I-trax, Inc.'s Registration Statement on Form S-4, Amendment No.1,
Registration No. 333-48862, filed on December 22, 2000.)
4.1 Form of Common Stock certificate of I-trax, Inc.'s Common Stock.
(Incorporated by reference to Exhibit 4.1 to I-trax, Inc.'s Annual
Report on Form 10-KSB for the fiscal year ended December 31, 2001,
filed on April 4, 2002.)
4.2 6% Convertible Senior Debenture dated February 4, 2002 issued by
I-trax, Inc. to Palladin Opportunity Fund LLC. (Incorporated by
reference to Exhibit 4.1 to I-trax, Inc.'s Current Report on Form
8-K, filed on February 8, 2002.)
10.1 Office Lease dated October 22, 1999 by and between Reston Plaza I &
II, LLC and Member-Link Systems, Inc. (Incorporated by reference to
Exhibit 10.3 to I-Trax.com, Inc.'s Registration Statement on Form
10-SB, Registration No. 000-30275, filed on April 10, 2000.)
10.2 Amendment Office Lease (Relocation) made as of January 31, 2002 by
and between TMT Reston I & II, Inc. (as successor to Reston Plaza I
& II, LLC) and I-trax Health Management Solutions, Inc. (as
successor to Member-Link Systems, Inc.). (Incorporated by reference
to Exhibit 10.2 to I-trax, Inc.'s Annual Report on Form 10-KSB for
the fiscal year ended December 31, 2001, filed on April 4, 2002.)
10.3 Lease Agreement dated April 10, 2000 between I-Trax.com, Inc. and
OLS Office Partners, L.P. (Incorporated by reference to Exhibit 10.1
to I-Trax.com, Inc.'s Quarterly Report Form 10-QSB for the quarter
ended June 30, 2000, filed on August 15, 2000.)
10.4 Lease Agreement dated May 28, 2002, between I-trax, Inc. and F & J
Enterprises, Inc. dba Bedford Plaza. (Incorporated by reference to
Exhibit 10.23 to I-trax, Inc.'s Registration Statement on Form SB-2,
Amendment No. 1, Registration No. 333-87134, filed on December 22,
2000.)
10.5 Contribution and Exchange Agreement dated as of September 22, 2000
by and among I-Trax.com, Inc., I-trax, Inc., iSummit Partners LLC
(d/b/a MyFamilyMD), and Stuart Ditchek, A. David Fishman, and
Granton Marketing Nederland BV. (Incorporated by reference to
Exhibit 10.7 to I-trax, Inc.'s Registration Statement on Form S-4,
Registration No. 333-48862, filed on October 27, 2000.)
10.6 Side Letter Agreement dated September 22, 2000 to the Contribution
and Exchange Agreement dated as of September 22, 2000 by and among
I-Trax.com, Inc., I-trax, Inc., iSummit Partners, LLC (d/b/a
MyFamilyMD), and Stuart Ditchek, A. David Fishman, and Granton
Marketing Nederland BV. (Incorporated by reference to Exhibit 10.8
to I-trax, Inc.'s Registration Statement on Form S-4, Registration
No. 333-48862, filed on October 27, 2000.)
G-69
10.7 Amendment, effective as of February 7, 2001, to the Contribution and
Exchange Agreement by and among I-Trax.com, Inc. and I-trax, Inc.,
on the one hand, and Stuart Ditchek, A. David Fishman, Granton
Marketing Nederland BV and iSummit Partners, LLC (d/b/a MyFamilyMD),
on the other hand, dated as of September 22, 2000. (Incorporated by
reference to Exhibit 10.1 to I-trax, Inc.'s Current Report on Form
8-K, filed on February 22, 2001.)
10.8 Amendments, effective as of December 31, 2001, to the Contribution
and Exchange Agreement by and among I-Trax.com, Inc. and I-trax,
Inc., on the one hand, and Stuart Ditchek, A. David Fishman, Granton
Marketing Nederland BV and iSummit Partners, LLC (d/b/a MyFamilyMD),
on the other hand, dated as of September 22, 2000. (Incorporated by
reference to Exhibit 10.7 to I-trax, Inc.'s Annual Report on Form
10-KSB for the fiscal year ended December 31, 2001, filed on April
4, 2002.)
10.9 Employment Agreement entered into on September 28, 2000, effective
as of January 1, 2000 between I-Trax.com, Inc. and David C.
McCormack. (Incorporated by reference to Exhibit 10.15 to I-trax,
Inc.'s Registration Statement on Form S-4, Registration No.
333-48862, filed on October 27, 2000.)
10.10 Employment Agreement effective as of December 29, 2000 between
I-trax Health Management Solutions, Inc. (f/k/a I-Trax.com, Inc.)
and Frank A. Martin. (Incorporated by reference to Exhibit 10.17 to
I-trax Health Management Solutions, Inc. (f/k/a I-Trax.com, Inc.)
Annual Report on Form 10-KSB for the fiscal year ended December 31,
2000, filed on April 2, 2001.)
10.11 Employment Agreement effective as of December 29, 2000 between
I-trax Health Management Solutions, Inc. (f/k/a I-Trax.com, Inc.)
and Gary Reiss. (Incorporated by reference to Exhibit 10.19 to
I-trax Health Management Solutions, Inc. (f/k/a I-Trax.com, Inc.)
Annual Report on Form 10-KSB for the fiscal year ended December 31,
2001, filed on April 2, 2001.)
10.12 Consulting Agreement dated as of July 1, 2002, as amended, between
I-trax, Inc. and William S. Wheeler. (Incorporated by reference to
Exhibit 10.1 to I-trax, Inc.'s Quarterly Report on Form 10-QSB for
the quarter ended September 30, 2002, filed on November 14, 2002.)
10.13 I-Trax.com, Inc. 2000 Equity Compensation Plan. (Incorporated by
reference to Exhibit 10.16 to I-Trax.com's Registration Statement on
Form 10-SB, Registration No. 000-30275.)
10.14 I-trax, Inc. 2001 Equity Compensation Plan. (Incorporated by
reference to Attachment to I-trax's 2001 Preliminary Proxy Statement
on Schedule 14A, filed on April 20, 2001.)
10.15 Amended and Restated Amended and Restated Promissory Note and
Warrant Purchase Agreement dated as of March 2, 2001 among I-trax,
Inc. and the Lenders (as defined therein) including form of Stock
Purchase Warrant issued to Lenders attached thereto as Exhibit A and
form of Stock Purchase Warrant issued to Lenders attached thereto as
Exhibit B. (Incorporated by reference to Exhibit 10.21 to I-trax,
Inc.'s Annual Report on Form 10-KSB for the fiscal year ended
December 31, 2000, filed on April 2, 2001.)
10.16 Purchase Agreement dated as of February 4, 2002 between I-trax, Inc.
and Palladin Opportunity Fund LLC. (Incorporated by reference to
Exhibit 10.1 to I-trax, Inc.'s Current Report on Form 8-K, filed on
February 8, 2002.)
G-70
10.17 Registration Rights Agreement dated as of February 4, 2002 between
I-trax, Inc. and Palladin Opportunity Fund LLC. (Incorporated by
reference to Exhibit 10.2 to I-trax, Inc.'s Current Report on Form
8-K, filed on February 8, 2002.)
10.18 Warrant to Purchase Common Stock of I-trax, Inc. dated February 4,
2002 issued by I-trax, Inc. to Palladin Opportunity Fund LLC.
(Incorporated by reference to Exhibit 10.3 to I-trax, Inc.'s Current
Report on Form 8-K, filed on February 8, 2002.)
10.19 Registration Rights Agreement dated as of February 5, 2002 by and
among I-trax, Inc., and John Blazek, as an attorney-in-fact, for
each stockholder of WellComm Group, Inc. (Incorporated by reference
to Exhibit 10.1 to I-trax, Inc.'s Current Report on Form 8-K, filed
on February 20, 2002.)
10.20 Employment Agreement dated as of February 5, 2002 between I-trax
Health Management Solutions, Inc. and John Blazek. (Incorporated by
reference to Exhibit 10.2 to I-trax, Inc.'s Current Report on Form
8-K, filed on February 20, 2002.)
10.21 Employment Agreement dated as of February 5, 2002 between I-trax
Health Management Solutions, Inc. and Carol Rehtmeyer. (Incorporated
by reference to Exhibit 10.3 to I-trax, Inc.'s Current Report on
Form 8-K, filed on February 20, 2002.)
10.22 Employment Agreement dated as of February 5, 2002 between I-trax
Health Management Solutions, Inc. and Jane Ludwig. (Incorporated by
reference to Exhibit 10.4 to I-trax, Inc.'s Current Report on Form
8-K, filed on February 20, 2002.)
10.23 License and Maintenance Agreement dated as of September 30, 2002,
between I-trax, Inc. and UICI, Inc. (Incorporated by reference to
Exhibit 10.1 to I-trax, Inc.'s Current Report on Form 8-k for filed
on October 8, 2002.)
10.24 Employment Agreement dated as of October 15, 2002 between I-trax
Health Management Solutions, Inc. and John Palumbo.
21 Subsidiaries of I-trax, Inc.
99.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
We filed a current report on Form 8-K with the Securities and Exchange
Commission on October 8, 2002 to report the execution of a License and
Maintenance Agreement between UICI and us.
We filed a current report on Form 8-K with the Securities and Exchange
Commission on November 5, 2002 to report certain Regulation FD disclosures.
We filed a current report on Form 8-K with the Securities and Exchange
Commission on November 11, 2002 to report certain Regulation FD disclosures.
We filed a current report on Form 8-K with the Securities and Exchange
Commission on February 12, 2003 to report the dismissal of
PricewaterhouseCoopers, LLP as our auditors.
We filed a current report on Form 8-K with the Securities and Exchange
Commission on February 19, 2003 to report the engagement of Goldstein Golub
Kessler LLP as our auditors.
G-71
ITEM 14. CONTROLS AND PROCEDURES
Within the 90-day period prior to the filing of this report, we carried
out an evaluation under the supervision and with the participation of our Chief
Executive Officer and Chief Financial Officer of the effectiveness of our
disclosure controls and procedures. Based on this evaluation, our Chief
Executive Officer and Chief Financial Officer have concluded that our disclosure
controls and procedures are effective to ensure that information we are required
to disclose in reports filed or submitted under the Securities Exchange Act of
1934 is recorded, processed, summarized and reported within the time periods
specified in Securities and Exchange Commission rules and forms. Subsequent to
the date of this evaluation, there were no significant changes in our internal
controls or in other factors that could significantly affect the disclosure
controls, including any corrective actions with regard to significant
deficiencies and material weaknesses.
G-72
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act
of 1934, the registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized as of April 14, 2003.
I-TRAX, INC.
By: /s/ Frank A. Martin
-------------------
Frank A. Martin, Chairman and
Chief Executive Officer
By: /s/ Anthony Tomaro
------------------
Anthony Tomaro, Chief Financial Officer
(Principal Financial and Accounting
Officer)
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the registrant and in the capacities and
on the dates indicated.
Signature Title Date
--------------------- -------------------------- ----------------
/s/ Frank A. Martin Chairman, Chief Executive Officer April 14, 2003
--------------------
Frank A. Martin and Director
/s/ Carol Rehtmeyer Director April 14, 2003
---------------------
Carol Rehtmeyer
/s/ John Blazek Director April 14, 2003
---------------------
John Blazek
/s/ David R. Bock. Director April 14, 2003
---------------------
David R. Bock
--------------------- Director April ___, 2003
Philip D. Green
/s/ David Nash Director April 14, 2003
---------------------
Dr. Craig A. Jones
/s/ Michael M.E. Johns Director April 14, 2003
---------------------
Dr. Michael M.E. Johns
--------------------- Director April ___, 2003
Dr. Arthur N. Leibowitz
/s/ John R. Palumbo Director April 14, 2003
---------------------
John R. Palumbo
/s/ William S. Wheeler Director April 14, 2003
---------------------
William S. Wheeler
G-73
CERTIFICATION
I, Frank A. Martin, certify that:
1. I have reviewed this annual report on Form 10-KSB of I-trax, Inc.
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: April 14, 2003
/s/ Frank A. Martin
-------------------
Frank A. Martin
Chief Executive Officer
G-74
CERTIFICATION
I, Anthony Tomaro, certify that:
1. I have reviewed this annual report on Form 10-KSB of I-trax, Inc.
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: April 14, 2003
/s/ Anthony Tomaro, CPA
-----------------------
Anthony Tomaro, CPA
Chief Financial Officer
G-75
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended: March 31, 2003
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT
Commission File Number: 0-30275
I-TRAX, INC.
------------------------------------------
(Exact name of small business issuer in its charter)
Delaware 23-3057155
-------------------------- --------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
One Logan Square, 130 N. 18th Street, Suite 2615
Philadelphia, Pennsylvania 19103
--------------------------
(Address of principal executive offices)
(215) 557-7488
--------------------------
(Issuer's telephone number)
-----------------------------------------------
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No [ ]
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the last practicable date: As of May 2, 2003, the Registrant had
9,372,727 shares of its $0.001 par value common stock outstanding.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
G-76
INDEX
Page No.
PART I. FINANCIAL INFORMATION..............................................................................3
Item 1. Consolidated Financial Statements ................................................3
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................................16
Item 3. Controls and Procedures..........................................................21
PART II. OTHER INFORMATION................................................................................21
Item 1. Legal Proceedings................................................................21
Item 2. Changes in Securities............................................................21
Item 3. Defaults upon Senior Securities..................................................21
Item 4. Submission of Matters to a Vote of Security Holders..............................21
Item 5. Other Information................................................................21
Item 6. Exhibits and Reports on Form 8-K.................................................21
G-77
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
I-TRAX, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Page No.
Report of Independent Public Accountants 4
Consolidated Balance Sheets at March 31, 2003 (unaudited) and December 31, 2002 5
Consolidated Statements of Operations for the three months ended March 31, 2003 and 2002 (unaudited) 6
Consolidated Statement of Stockholders' Equity for the three months ended March 31, 2003 (unaudited) 7
Consolidated Statements of Cash Flows for the three months ended March 31, 2003 and 2002 (unaudited) 8
Notes to consolidated financial statements 10
G-78
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders
of I-trax, Inc.
We have reviewed the accompanying condensed consolidated balance sheet of
I-trax, Inc. (a Delaware corporation) and Subsidiaries as of March 31, 2003, and
the related condensed consolidated statements of operations, stockholders'
equity and cash flows for the three-month period then ended.. These financial
statements are the responsibility of the company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures and making
inquiries of persons responsible for financial and accounting matters. It is
substantially less in scope than an audit conducted in accordance with generally
accepted auditing standards, the objective of which is the expression of an
opinion regarding the condensed financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying condensed financial statements for them to be in
conformity with accounting principles generally accepted in the United States of
America.
We have previously audited, in accordance with auditing standards generally
accepted in the United States of America, the balance sheet as of December 31,
2002, and the related consolidated statements of operations, stockholders'
equity and cash flows for the year then ended (not presented herein); and in our
report dated March 5, 2003, we expressed an unqualified opinion on those
financial statements. In our opinion, the information set forth in the
accompanying condensed consolidated balance sheet as of December 31, 2002, is
fairly stated, in all material respects, in relation to the consolidated balance
sheet from which it has been derived.
GOLDSTEIN GOLUB KESSLER LLP
New York, New York
May 7, 2003
G-79
I-TRAX, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
March 31, December 31,
2003 2002
(unaudited)
----------------- -----------------
Current assets:
Cash $ 32,153 $ 360,166
Deposit on potential acquisition -- 200,000
Accounts receivable, net 493,359 597,635
Prepaid expenses 150,627 77,569
Other current assets 28,390 20,960
----------------- -----------------
Total current assets 704,529 1,256,330
----------------- -----------------
Office equipment, furniture, leasehold improvements and software development
costs, net 560,517 412,779
Deferred marketing costs, net 1,171,111 1,284,445
Goodwill 8,424,062 8,424,062
Intangible assets, net 2,467,758 2,748,087
Debt issuance cost, net 191,748 249,273
Security deposits 31,564 31,564
----------------- -----------------
Total assets $ 13,551,289 $ 14,406,540
================= =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Credit line payable 300,000 300,000
Accounts payable 1,000,029 918,791
Accrued expenses 960,500 743,151
Due to officers, directors and other related parties 464,500 225,000
Capital lease payable 59,519 60,047
Deferred revenue 528,107 1,379,922
Other current liabilities -- 13,423
----------------- -----------------
Total current liabilities 3,312,655 3,640,334
----------------- -----------------
Capital lease obligation, net of current portion 96,765 96,765
Promissory notes and debenture payable, net of discount 1,498,417 1,245,876
Due to officers and directors 1,224,598 1,024,598
----------------- -----------------
Total liabilities 6,132,435 6,007,573
----------------- -----------------
Total liabilities
Commitments and contingencies (Note 7)
Stockholders' equity
Preferred stock - $.001 par value, 2,000,000 shares authorized,
-0- issued and outstanding -- --
Common Stock - $.001 par value, 100,000,000 shares authorized,
9,372,727 shares issued and outstanding 9,372 9,372
Additional paid in capital 39,219,679 39,236,119
Accumulated deficit (31,810,197) (30,846,524)
----------------- -----------------
Total stockholders' equity 7,418,854 8,398,967
----------------- -----------------
Total liabilities and stockholders' equity $ 13,551,289 $ 14,406,540
================= =================
See accompanying notes to consolidated financial statements (unaudited).
G-80
I-TRAX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 30, 2003 AND 2002
(UNAUDITED)
Three months Three months
ended ended
March 31, March 31,
2003 2002
------------------ ---------------
Revenue:
Technology licenses $ 914,702 $ 44,500
Services 701,429 361,857
------------------ ---------------
Total revenue 1,616,131 406,357
------------------ ---------------
Cost of revenue:
Technology licenses 16,014 10,834
Services 300,066 251,331
------------------ ---------------
Total cost of revenue 316,080 262,165
------------------ ---------------
Gross profit 1,300,051 144,192
Operating expenses:
General and administrative 308,504 382,119
Salary and related benefits 858,863 1,182,899
Research and development -- 119,500
Depreciation and amortization 436,548 219,987
Marketing and publicity 81,757 170,456
------------------ ---------------
Total operating expenses 1,685,672 2,074,961
------------------ ---------------
Operating loss (385,621) (1,930,769)
------------------ ---------------
Other income (expenses):
Amortization of debt issuance costs (57,525) (36,384)
Costs in connection with uncompleted acquisition (200,000) --
Interest expense (320,527) (184,759)
------------------ ---------------
Total other income (expenses) (578,052) (221,143)
------------------ ---------------
Net loss $ (963,673) $ (2,151,912)
================== ================
Loss per common share:
Basic and diluted $ (.10) $ (.26)
================== ================
Weighted average number of shares outstanding: 9,372,727 8,319,179
================== ================
See accompanying notes to consolidated financial statements (unaudited).
G-81
I-TRAX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 2003
(UNAUDITED)
Common Stock Additional Total
----------------------------- Paid-in Accumulated Stockholders'
Shares Amount Capital Deficit Equity
-------------- ------------- ---------------- -------------- ---------------
Balances at December 31, 2002 9,372,727 $ 9,372 $ 39,236,119 $ (30,846,524) $ 8,398,967
Issuance of compensatory stock options 23,942 23,942
Mark to market of warrants granted for
investor relations services and stock
options granted to a former employee -- -- (40,382) -- (40,382)
Net loss for the quarter ended March 31, 2003 -- -- -- (963,673) (963,673)
-------------- ------------- ---------------- -------------- ---------------
Balances at March 31, 2003 9,372,727 $ 9,372 $ 39,219,679 $ (31,810,197) $ 7,418,854
============== ============= ================ ============== ===============
See accompanying notes to consolidated financial statements (unaudited).
G-82
I-TRAX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2003 AND 2002
(UNAUDITED)
Three months Three months
ended ended
March 31, 2003 March 31, 2002
----------------- ----------------
Operating activities:
Net loss $ (963,673) $ (2,151,912)
Adjustments to reconcile net loss to net cash used in operating
activities:
Accretion of discount on notes payable charged to interest expense 133,961 96,867
Accretion of beneficial conversion value of debenture 118,581 79,054
Amortization of option liability (13,423) (26,846)
Amortization of debt issuance costs 57,525 16,384
Depreciation and amortization 436,548 239,988
Issuance of securities for services (16,440) 308,544
Write off of deposit on cancelled acquisition 200,000 --
Changes in operating assets and liabilities, net of acquisitions:
Decrease (increase) in:
Accounts receivable 104,276 87,965
Prepaid expenses (73,058) (83,468)
Other current assets (7,430) (15,579)
(Decrease) increase in:
Accounts payable 81,238 2,708
Accrued expenses 217,349 (165,939)
Deferred revenue (851,815) 69,066
----------------- ----------------
Net cash used in operating activities (576,361) (1,543,168)
----------------- ----------------
Investing activities:
Proceeds from repayment of note receivable -- 37,500
Cash used for property, equipment and software development costs (190,624) --
Proceeds from partial release of security deposit -- 16,484
Net cash to acquire WellComm Group, Inc. -- (2,045,065)
----------------- ----------------
Net cash used in investing activities (190,624) (1,991,081)
----------------- ----------------
Financing activities:
Principal payments on capital leases (528) (12,906)
Repayment to related parties (140,000) (50,000)
Proceeds from officers, directors and other related parties 579,500 --
Proceeds from sale of common stock -- 1,472,850
Proceeds from sale of debenture option -- 161,078
Costs of issuance of debenture -- (150,000)
Proceeds from issuance of debenture -- 1,838,922
----------------- ----------------
Net cash provided by financing activities 438,972 3,259,943
----------------- ----------------
Net decrease in cash (328,013) (274,306)
Cash at beginning of period 360,166 1,029,208
----------------- ----------------
Cash at end of period $ 32,153 $ 754,902
================= ================
Supplemental disclosure of non-cash flow information: Cash paid during the year
for:
Interest $ 15,612 $ 8,213
================= ================
(Continues on following page.)
G-83
I-TRAX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2003 AND 2002
(Continues from previous page.)
Three months Three months
ended ended
March 31, 2003 March 31, 2002
---------------- -----------------
Schedule of non-cash investing activities:
Issuance of 1,488,000 shares of common stock and granting of 112,000 stock
options in connection with acquisition of WellComm Group,
Inc. $ -- $ 10,480,000
================ =================
Issuance of common stock and warrants for finder fee $ -- $ 391,408
================ =================
See accompanying notes to consolidated financial statements (unaudited).
G-84
I-TRAX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1--ORGANIZATION
I-trax, Inc. (the "Company") provides focused disease management and
comprehensive health management solutions designed to improve the health of the
populations it serves while reducing the cost of medical care. The Company was
incorporated in the State of Delaware on September 15, 2000. The Company's
common stock is traded on the American Stock Exchange under the symbol "DMX."
As of March 31, 2003, the Company had three wholly owned subsidiaries: I-trax
Health Management Solutions, Inc. (formerly known as I-Trax.com, Inc.) ("Health
Management"), a corporation, and iSummit Partners, LLC and WellComm Group, LLC,
each a single member limited liability company.
NOTE 2--INTERIM RESULTS AND BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in accordance
with accounting principles generally accepted in the United States of America
for interim financial information, the instructions to Form 10-QSB and Items 303
and 310(B) of Regulation S-B. 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
March 31, 2003 and the results of the operations and cash flows for the three
months ended March 31, 2003. The results for the three months ended March 31,
2003 are not necessarily indicative of the results to be expected for any
subsequent quarter or the entire fiscal year ending December 31, 2003. The
balance sheet at December 31, 2002 has been derived from the audited financial
statements at that date.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with accounting principles generally accepted
in the United States of America have been condensed or omitted pursuant to the
Securities and Exchange Commission's rules and regulations.
For the three months ended March 31, 2003, the Company capitalized software
development costs amounting to $187,500 since technological feasibility has been
achieved.
Loss per common share is computed pursuant to SFAS No. 128, "Earnings Per
Share." Basic loss per share is computed as net income (loss) available to
common shareholders divided by the weighted average number of common shares
outstanding for the period. Diluted loss per share reflects the potential
dilution that could occur from common shares issuable through stock options,
warrants, and convertible debt. As of March 31, 2003 and 2002, 3,863,604 and
2,386,049, respectively, of options and warrants were excluded from the diluted
loss per share computation, as their effect would be anti-dilutive.
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 as included in the Company's report on Form 10-KSB for the
fiscal year ended December 31, 2002 filed on April 15, 2003.
G-85
I-TRAX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 3--ACQUISITION OF WELLCOMM GROUP, INC.
On February 6, 2002, the Company acquired all of the issued and outstanding
common stock of WellComm Group, Inc. by issuing 1,488,000 shares of common stock
valued at $9,746,400, granting 112,000 options valued at $733,600 to acquire
common stock at a nominal exercise price and paying approximately $2,200,000 in
cash. The aggregate acquisition price amounted to approximately $12,680,000. The
financial statements include the operations of WellComm from February 1, 2002
forward.
The following unaudited pro forma results of operations of the Company give
effect to the acquisition of WellComm for the quarter ended March 31, 2002 as if
the acquisition was consummated at the beginning of that period.
Three months
ended
March 31, 2002
-----------------
Total revenue $ 660,136
=================
Total expenses $ 2,835,031
=================
Net loss $ (2,174,895)
=================
Pro forma net loss per share: $ (.24)
Basic and Diluted =================
Weighted average number of shares outstanding: 9,036,190
Basic and Diluted =================
NOTE 4--RELATED PARTY TRANSACTIONS
At December 31, 2002, the Company had loans outstanding to certain officers and
directors amounting to $1,024,598 and $225,000 to a relative of the Company's
Chief Operating Officer.
During February 2003, pursuant to a promissory note, the former Chief Executive
Officer of WellComm, now a member of the Company's Board of Directors, advanced
$200,000 to the Company for working capital. The loan carries interest at 8% per
year and it matures in February 2004.
During the three months ended March 31, 2003, the Company's Chief Executive and
Operating Officers, along with certain stockholders and the former Chief
Executive Officer of WellComm, now a member of the Company's Board of Directors,
advanced the Company a total of $379,500 for working capital. The Company's
Chief Executive and Operating Officers have committed to continue to fund the
Company until it generates positive cash flow from operations and raises
additional funds in the private placement described in Note 10, but at least
through January 1, 2004.
During February 2003, the Company repaid $140,000 representing a portion of a
loan made by a relative of the Company's Chief Operating Officer. The
outstanding balance to this individual as of March 31, 2003 is $85,000 and is
due on demand.
G-86
I-TRAX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 4--RELATED PARTY TRANSACTIONS (cont'd)
At March 31, 2003, $464,500 of the outstanding amount has been classified as a
current liability as it is due on demand and $1,224,598 has been classified as a
long-term liability as it is subordinated to the convertible debenture.
Interest expense associated with related party loans and advances amounted to
$29,386 and $14,292 for the three months ended March 31, 2003 and 2002,
respectively.
NOTE 5--PROMISSORY NOTES PAYABLE
On March 2, 2001 the Company borrowed $692,809 from an investor group that
included a venture capital fund managed by the Company's Chief Executive
Officer. Such sum is included in promissory notes and debenture payable on the
accompanying consolidated balance sheet. The loan bears interest at 8% per
annum, with a default rate of 12% per annum, and is due five years from original
date of issuance. The Company also granted to this investor group warrants to
purchase 364,694 shares of common stock exercisable at $0.50 per share, which
were exercised in the first quarter of 2002.
The value assigned to detachable warrants of $459,854 is being accreted to
interest expense over the five-year term of the underlying promissory notes. For
the three months ended March 31, 2003 and 2002, the amount accreted to interest
expense was $22,677 and $22,677, respectively. At March 31, 2003, the carrying
value of the notes amounted to $425,714 and is included in the promissory notes
and debenture payable in the accompanying consolidated balance sheet.
NOTE 6--CONVERTIBLE DEBENTURE
The Company funded the acquisition of WellComm by selling a 6% convertible
senior debenture in the aggregate principal amount of $2,000,000 to Palladin
Opportunity Fund LLC. Pursuant to the purchase agreement, the Company also
issued Palladin a warrant to purchase an aggregate of up to 307,692 shares of
common stock at an exercise price of $5.50 per share. The outstanding principal
and any interest under the debenture are payable in full on or before February
3, 2004. Further, outstanding principal and any interest may be converted at any
time at the election of Palladin into common stock. The current conversion price
under the debenture is $3.03. The current conversion price is subject to "reset"
as of August 4, 2003 but only if the closing bid price for the Company's common
stock averaged during a period of 20 consecutive trading days ending on August
3, 2003, is less than the then current conversion price.
The value assigned to the warrant of $890,272 was recorded as a discount to the
debenture and is being accreted to interest expense over the life of the
debenture. For the three months ended March 31, 2003 and 2002, $111,284 and
$74,189, respectively, of the discount, is accreted to interest expense. The
Company also recorded $118,581 and $79,054 of interest expense for the three
months ended March 31, 2003 and 2002, respectively, for the amortization of the
portion of the beneficial conversion value of the debenture. The beneficial
conversion value, which amounted to $948,651, represents the difference between
the fair market value of the common stock on the date the debenture was sold and
the price at which the debt could be converted into common stock. As of March
31, 2003, the carrying value of the debenture amounted to $1,072,703 and is
included in the promissory notes and debenture payable in the accompanying
consolidated balance sheet.
G-87
I-TRAX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 7--COMMITMENTS AND CONTINGENCIES
Nature of Business
The Company is subject to risks and uncertainties common to growing technology
companies, including rapid technological developments, reliance on continued
development and acceptance of the Internet and health care applications
utilizing the Internet, intense competition and a limited operating history.
Significant Customers
Financial instruments, which may expose the Company to concentrations of credit
risk, consist primarily of accounts receivable. As of March 31, 2003, two
customers represented 20% and 20%, respectively of the total accounts
receivable. For the three months ended March 31, 2003, the Company had one
unrelated customer, which accounted for 43% of total revenues.
Risk Based Contracts
The Company enters into risk-based contracts in certain disease management
arrangements. These contracts are generally for terms of three to five years and
provide that a percentage of the Company's fees may be refunded to a client if
the Company does not save the client a certain percentage of the expenses
incurred by individuals whose health is managed by the Company. As of March 31,
2003, the Company was a party to one risk-based contract, which the Company
expects to implement during the second quarter.
NOTE 8--STOCKHOLDERS' EQUITY
Warrants
The following table summarizes the Company's activity as it relates to its
warrants for the three months ended March 31, 2003:
Balance outstanding at January 1, 2003 2,132,953
Quarter ended March 31, 2003:
Granted --
Exercised --
-------------
Balance outstanding at March 31, 2003 2,132,953
=============
G-88
I-TRAX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 8--STOCKHOLDERS' EQUITY (cont'd)
Options
The table below summaries the activity in the Company's stock option plans for
the three months ended March 31, 2003:
Non-Qualified Non-Plan
Incentive Options Options Non-Qualified Total
Options
------------------------- -------------------- -------------------- -------------------- --------------------
Outstanding as of
January 1, 2003 735,829 535,973 439,000 1,710,802
Granted 20,000 40,000 -- 60,000
Exercised -- -- -- --
Forfeited/Expired (127,971) (40,000) -- (167,971)
-------------------- -------------------- -------------------- --------------------
Outstanding as of March
31, 2003 627,858 535,973 439,000 1,602,831
==================== ==================== ==================== ====================
Vesting Dates:
December 31, 2003 133,261 157,670 75,834 366,765
December 31, 2004 109,350 47,667 39,168 196,185
December 31, 2005 58,265 19,335 26,668 104,268
December 31, 2006 13,334 -- -- 13,334
December 31, 2007 -- -- -- --
Thereafter -- -- 20,000 20,000
As of March 31, 2003, there were outstanding an aggregate of 902,279 of
exercisable plan and non-plan options with exercise prices ranging from $.01 to
$10.00.
For the three months ended March 31, 2003, the Company recorded $23,942 for
compensation expense in connection with grants to independent consultants.
The Company accounts for its employee incentive stock option plans using the
intrinsic value method in accordance with the recognition and measurement
principles of Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees," as permitted by SFAS No. 123. . Had the Company determined
compensation expense base on the fair value at the grant dates for those awards
consistent with the method of SFAS 123, the Company's net loss per share would
have been increased to the following pro forma amounts:
G-89
I-TRAX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 8--STOCKHOLDERS' EQUITY (cont'd)
Options (cont'd)
For the three For the three
Months ended Months ended
March 31, March 31,
2003 2002
------------------ -------------------
Net loss as reported $ (963,673) $ (2,151,912)
Add back intrinsic value of the options issued to -
employee and charged to operations 163,200
Deduct total stock based employee compensation expense determined under
fair value based methods
for all awards (710,365) (882,286)
------------------ -------------------
Pro forma net loss $ (1,674,038) $ (2,870,998)
================== ===================
Basic and diluted net loss per share as reported $ (.10) $ (.26)
Pro forma basic and diluted net loss per share $ (.18) $ (.35)
NOTE 9--AGREEMENT TO ACQUIRE DxCG, INC.
On November 8, 2002, the Company entered into a merger agreement to acquire
DxCG, Inc. for a total purchase price of approximately $10,000,000, of which the
Company intended to pay $6,000,000 in cash and $4,000,000 in common stock. Under
the terms of this agreement and at the time this agreement was executed, the
Company deposited $200,000 into an escrow account. This sum was intended to be
released to DxCG if DxCG terminated the merger agreement because the Company
failed to satisfy certain conditions to closing, including third party financing
for the cash portion of the purchase price. The Company did not secure the
financing by January 31, 2003 and accordingly such agreement was terminated
resulting in the Company charging the $200,000 to earnings.
NOTE 10--SUBSEQUENT EVENTS
Related Party Transactions
During May 2003, the Company's Chief Executive Officer advanced $150,000 to the
Company for working capital. Such advance is due on demand with an interest rate
of 8% per annum.
Private Placement Memorandum
During March 2003, the Company commenced a private placement in order to raise
additional funds. The Company is offering to sell up to 1,000,000 Units of
equity securities, each consisting of one share of common stock and one warrant
to acquire one share of common stock.
G-90
Item 2. Management's Discussion And Analysis Of Financial Condition And Results
Of Operations
The following discussions of the financial condition and related
results of operations of I-trax, Inc. and its subsidiaries should be reviewed in
conjunction with our financial statements and related notes appearing on the
preceding pages as well as our audited financial statements for the fiscal year
ended December 31, 2002, incorporated into our Form 10-KSB, filed on April 15,
2003.
This Management's Discussion and Analysis of Financial Condition and
Results of Operations contains forward-looking statements, which are based upon
current expectations and involve a number of risks and uncertainties. In order
for I-trax, Inc. to utilize the "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995, investors are hereby cautioned that
these statements may be affected by important factors, which are set forth below
and elsewhere in this report, and consequently, actual operations and results
may differ materially from those expressed in these forward-looking statements.
The important factors include our ability to continue as a going concern and our
ability to execute contracts for disease management services and software
technology.
Our Business
I-trax has historically developed enterprise and client server
applications for collecting disease specific data at the point-of-care for
several large hospitals and medical centers. In 2001, we expanded our product
lines by developing additional software applications, adding services, and
completing several strategic acquisitions.
I-trax now provides focused disease management and comprehensive health
management solutions designed to improve the health of the populations we serve
while reducing the cost of medical care. Our solutions are designed to meet the
needs of insurers, employers and consumers seeking to reduce costs and improve
the quality of care by enabling healthcare organizations to evolve from
fragmented care management practices into a cohesive and efficient system of
healthcare management. Our solutions are fully integrated, use a single-data
platform that allows all caregivers to share records and enable our clients to
provide true coordination of care.
Our Services
Our services are divided into three portfolios: Prediction, Prevention
and Care Management. The specific services in each portfolio are:
Prediction
First, we license third party software to analyze our clients'
historical information to predict future healthcare costs. By using predictive
modeling, we identify our clients' future healthcare costs, the health
conditions that will drive those costs and the people within our clients'
populations who are at risk for those conditions.
Prevention
Second, we use what we believe to be state-of-the-art demand management
and nurse triage services to effect our targeted interventions. Our services
incorporate nationally recognized, evidence-based clinical guidelines to ensure
that all caregivers and consumers are following the best practices. We also link
the key stakeholders in this care delivery effort--consumers, physicians and
care managers--through secure, web-based solutions. These solutions facilitate
real-time sharing of information and support the adherence to our population and
disease management programs. Our prevention products and services include:
o MyNurseLine(TM)--24 hours per day, 7 days per week demand management and
nurse triage service staffed by skilled nurses;
o DoctorsLine(TM)--an after-hours custom triage and administrative
outsourcing service;
o Health-e-Community(TM)--a specialized enrollment, marketing and
fulfillment service;
G-91
o eImmune(R)--a clinical immunization and related adverse events tracking
system;
o Medicive(R) Medical Enterprise Data System--a proprietary software
architecture developed to collect, store, retrieve and analyze a broad
range of information used in the healthcare industry, which serves as the
foundation for our Care Coordination Platform offerings;
o Health-e-Coordinator(TM)--a web-based care management application; o
MyFamilyMD(TM)--a consumer health management portal; and
o CarePrime(R)--a clinical care application for physicians and clinicians.
Care Services
Finally, we offer what we believe to be the industry's most
comprehensive health management and disease management solutions. Our disease
management solutions currently address congestive heart failure (CHF), coronary
artery disease (CAD), asthma, diabetes, lower back pain and chronic obstructive
pulmonary disease (COPD). We also develop programs using evidenced-based
guidelines based on our clients' requests. Health-e-Life Program(TM) is our
comprehensive end-to-end solution for care management.
Listing on the American Stock Exchange
Effective January 3, 2003 we completed a 1-for-5 reverse stock split.
Our board of directors and stockholders authorized the reverse stock split in
connection with the then pending application to list our common stock on the
American Stock Exchange. We began trading on the American Stock Exchange on
January 15, 2003 under the symbol "DMX."
Corporate Overview
I-trax was incorporated in the State of Delaware on September 15, 2000.
We currently have three wholly owned subsidiaries: I-trax Health Management
Solutions, Inc. (formerly known as I-Trax.com, Inc.) ("Health Management"), a
corporation, and iSummit Partners, LLC and WellComm Group, LLC, each a single
member limited liability company. We conduct our operations through Health
Management and WellComm Group, LLC.
Our Customers
As of March 31, 2003, we served approximately 62 customers. Our
customers include physician groups, hospitals, health plans, including plans
providing Medicaid and Medicare covered services, universities and colleges and
agencies and branches of the United States government.
We continue to focus our marketing efforts on the following markets:
health plans and health insurers; self-insured employers; military, government
and public health agencies; college and university student health services; and
hospital and health systems.
Results of Operations
Three Months Ended March 31, 2003 Compared to Three Months Ended March 31, 2002.
Revenue for the three months ended March 31, 2003 was $1,616,131, an
increase of $1,209,774 or 298% from $406,357 for the three months ended March
31, 2002. Total revenue was comprised of two components: (1) prevention and care
services revenue of $701,429; and (2) technology license and services revenue of
$914,702, of which $702,000 represents revenue from the exclusive license of
CarePrime(R) and MyFamilyMD(TM) we granted to UICI and certain related software
development work. We contracted this revenue in the third quarter of 2002 and we
are recognizing it based on delivering required deliverables. We expect that in
future periods we will generate a significant portion of our revenue from
delivery of prevention services, such as MyNurseLine(TM), and care services that
we deliver using the Health-e-Program(TM).
Cost of revenue for the three months ended March 31, 2003 was $316,080,
an increase of 21% from $262,165 for the three months ended March 31, 2002. The
increase is attributable to the personnel costs required to service our
prevention and care services contracts. We expect that in future periods our
cost of revenue will increase
G-92
or decrease in proportion to volume of business. This is because we expect to
derive a significant portion of our future revenue from prevention and care
services contracts, which require human involvement proportionate to the size of
the contract.
Outsourced research and development costs were $-0- for the three
months ended March 31, 2003 as compared to $119,500 for the three months ended
March 31, 2002, a decrease of 100%. The decrease was attributable in significant
part to a shift of some software development work from a subcontractor to
in-house. Despite the decrease, we expect to continue to spend funds on adding
functionality to our products including to the MyFamilyMD(TM) application by
adding MedWizard(R) tools, on CarePrime(TM) application, which interacts with
MyFamilyMD(TM) and its MedWizard(R) tools, and on Health-e-Coordinator(TM)
application by adding additional disease capabilities. Commencing in the first
quarter of 2003, we began to capitalize certain costs, which are primarily
developer labor costs based on which project the developers were working on and
the stage of development of the applicable project. For the three months ended
March 31, 2003, we capitalized $187,500, which includes outsourced services and
certain internal costs.
General and administrative expenses (excluding salary and related
benefits which are discussed separately below) decreased from $382,119 for the
three months ended March 31, 2002 to $308,504 for the three months ended March
31, 2003, a decrease of 19%. Our ability to reduce general and administrative
expenses is attributable to increased efficiencies and the implementation of
stringent budgetary controls. We believe that currently, we have the resources
to handle increased revenue with minimal incremental fixed costs.
Salary and related benefits were $858,863 for the three months ended
March 31, 2003 as compared to $1,182,899 for the three months ended March 31,
2002. The decrease in salary and related benefits from the three months ended
March 31, 2002 to the three months ended March 31, 2003 was $324,036 or 27%.
Again, the reduction in salary and related benefits costs is a direct result of
continued efforts by us to consolidate certain functions and improve
efficiencies.
Depreciation and amortization expenses were $436,548 for the three
months ended March 31, 2003, as compared to $219,987 for the three months ended
March 31, 2002. The increase is primarily attributable to the amortization of
the value of intangible assets acquired in the WellComm acquisition.
Marketing and advertising expenses were $81,757 for the three months
ended March 31, 2003 as compared to $170,456 for the three months ended March
31, 2002. The decrease of 52% resulted from stringent budgetary constraints.
Interest expense for the three months ended March 31, 2003 was
$320,527, increasing by $135,768 or 74% from $184,759 for the three months ended
March 31, 2002. For the three months ended March 31, 2003, interest expense
includes the amortization and accretion on items related to the $2,000,000
debenture as follows: $118,581 associated with the beneficial conversion feature
of the debenture; and $133,961 associated with the value of the warrants issued
with the debenture. The balance of $67,985 is associated with interest on other
debt and related party loans. Generally, the beneficial conversion value
represents the benefit to the investor that results from purchasing an
immediately convertible debenture with a conversion price that is less than fair
market value on the date of purchase after first allocating a portion of the
proceeds from the debenture to the associated warrants.
Amortization of debt issuance and conversion costs was $57,525 and
$36,384 for the three months ended March 31, 2003 and 2002, respectively. These
were costs incurred in selling the $2,000,000 debenture to Palladin and are
being amortized over the two year life of the debenture.
During the quarter ended March 31, 2003, in connection with the
termination of our agreement to acquire DxCG, Inc., a Boston-based predictive
modeling company, we charged $200,000 to earnings. This sum was released to DxCG
following DxCG's termination of the merger agreement because certain conditions
to closing were not satisfied, including third party financing for the cash
portion of the purchase price.
Our net loss was $963,673 for the three months ended March 31, 2003 as
compared to a net loss of $2,151,912 the three months ended March 31, 2002, a
decrease of 55%.
G-93
Liquidity and Capital Resources
Working Capital Deficiency
As of March 31, 2003, we had a working capital deficiency of
$2,608,126. Through March 31, 2003 and the date of this report, we have been
able to finance these deficits with loans from our senior management team, their
affiliates and a director. Although we continue to run cash flow deficits as of
the date of this report, we also continue to make progress towards producing
positive cash flow from operations and we expect, although no assurances exist,
that we will reach operating cash flow break even in the third quarter of 2003.
Additionally, during the three months ended March 31, 2003 and through
the date of this report, our Chief Executive and Operating Officers, along with
certain stockholders advanced to us in the form of loans $729,500 for working
capital. Our Chief Executive and Operating Officers have committed to continue
to fund us until we generate positive cash flow from operations and raise
additional funds in the private placement, which we commenced subsequent to
year-end, but at least through January 1, 2004.
Sources and Uses of Cash
Despite our negative cash flows from operations, which amounted to
$576,361 for the three months ended March 31, 2003 and $1,543,168 for the three
months ended March 31, 2002, we have been able to secure funds to support our
operations. During the quarter ended March 31, 2002, we secured funding by
selling equity securities and a debenture, which aggregated approximately
$3,200,000. Of the $3,200,000, we used approximately $2,200,000 to acquire
WellComm and the remainder to fund operations. During the quarter ended March
31, 2003, we also received (net of repayments) $439,500 from officers and
related parties.
As of March 31, 2003, our current liabilities were $3,312,655 of which
$464,500 is due to related parties. The remainder of current liabilities of
approximately $2,800,000 is made up, primarily, of trade payables of
approximately $1,000,000 accrued expenses of approximately $960,000, $300,000
credit line payable, which was assumed with the acquisition of WellComm and
approximately $530,000 of deferred revenue. We have good relationships with all
of our vendors.
As of March 31, 2003, the face value of our long-term debt amounted to
approximately $3,700,000. This sum is comprised of 6% convertible senior
debenture in the aggregate principal amount of $2,000,000 (but carrying value of
$1,072,703) held by Palladin, for which principal and deferred interest is not
due until February 3, 2004, $692,809 (but carrying value of $425,714) held by a
group of investors led by Psilos Group Partners, L.P., which includes Nantucket
Healthcare Ventures I, L.P., a venture fund managed by our Chief Executive
Officer, for which principal and interest is not due until March 2006, and
approximately $1,200,000 held by executive officer and members of our Board of
Directors.
Critical Accounting Policies
Impairment of Goodwill and Intangible
We operate in an industry that is rapidly evolving and extremely
competitive. It is reasonably possible that our accounting estimates with
respect to the useful life and ultimate recoverability of our carrying basis of
goodwill and intangible assets could change in the near term and that the effect
of such changes on the financial statements could be material.
Revenue Recognition
We derive our revenue pursuant to different type contracts, including
perpetual software licenses, subscription licenses and custom development
services, all of which may also include support services revenue such as
licensed software maintenance, training, consulting and web hosting
arrangements. As described below, significant management judgments and estimates
must be made and used in connection with the revenue recognized in any
accounting period. Material differences may result in the amount and timing of
our revenue for any period if our management made different judgments or
utilized different estimates.
G-94
We license our software products for a specific term or on a perpetual
basis. Most of our license contracts also require maintenance and support. We
apply the provisions of Statement of Position 97-2, "Software Revenue
Recognition," as amended by Statement of Position 98-9 "Modification of SOP
97-2, Software Revenue Recognition, With Respect to Certain Transactions" to all
transactions involving the sale of software products and hardware transactions
where the software is not incidental. For hardware transactions where software
is not incidental, we do not unbundle the fee and we do not apply separate
accounting guidance to the hardware and software elements. For hardware
transactions where no software is involved we apply the provisions of Staff
Accounting Bulletin 101 "Revenue Recognition." In addition, we apply the
provisions of Emerging Issues Task Force Issue No. 00-03 "Application of AICPA
Statement of Position 97-2 to Arrangements that Include the Right to Use
Software Stored on Another Entity's Hardware" to our hosted software service
transactions.
We recognize revenue from the sale of software licenses when persuasive
evidence of an arrangement exists, the product has been delivered, the fee is
fixed and determinable and collection of the resulting receivable is reasonably
assured. Delivery generally occurs when product is delivered to a common
carrier.
At the time of the transaction, we assess whether the fee associated
with our revenue transactions is fixed and determinable and whether or not
collection is reasonably assured. We assess whether the fee is fixed and
determinable based on the payment terms associated with the transaction. If a
significant portion of a fee is due after our normal payment terms, which are 30
to 90 days from invoice date, we account for the fee as not being fixed and
determinable. In these cases, we recognize revenue as the fees become due.
We assess collection based on a number of factors, including past
transaction history with the customer and the credit-worthiness of the customer.
We do not request collateral from our customers. If we determine that collection
of a fee is not reasonably assured, we defer the fee and recognize revenue at
the time collection becomes reasonably assured, which is generally upon receipt
of cash.
For arrangements with multiple obligations (for example, undelivered
maintenance and support), we allocate revenue to each component of the
arrangement using the residual value method based on the fair value of the
undelivered elements. This means that we defer revenue from the arrangement fee
equivalent to the fair value of the undelivered elements.
We recognize revenue for maintenance services ratably over the contract
term. Our training and consulting services are billed based on hourly rates, and
we generally recognize revenue as these services are performed. However, at the
time of entering into a transaction, we assess whether or not any services
included within the arrangement require us to perform significant work either to
alter the underlying software or to build additional complex interfaces so that
the software performs as the customer requests. If these services are included
as part of an arrangement, we recognize the entire fee using the percentage of
completion method. We estimate the percentage of completion based on our
estimate of the total costs estimated to complete the project as a percentage of
the costs incurred to date and the estimated costs to complete.
We recognize service revenue as the services are rendered. We contracts
with our customers to provide services based on an established monthly fee, a
per-call charge or a combination of both.
Although as of the date of these financials, we have not entered into
any risk-based contracts, we expect that in the very near future it will do so.
These types of contracts are generally for terms of three to five years, provide
for an automatic renewal and typically provide that a percentage of our fees may
be refundable ("performance based") based on achieving a targeted percentage
reduction in the customer's healthcare costs.
G-95
Item 3. Controls and Procedures
Within the 90-day period prior to the filing of this report, we carried
out an evaluation under the supervision and with the participation of our Chief
Executive Officer and Chief Financial Officer of the effectiveness of our
disclosure controls and procedures. Based on this evaluation, our Chief
Executive Officer and Chief Financial Officer have concluded that our disclosure
controls and procedures are effective to ensure that information we are required
to disclose in reports filed or submitted under the Securities Exchange Act of
1934 is recorded, processed, summarized and reported within the time periods
specified in Securities and Exchange Commission rules and forms. Subsequent to
the date of this evaluation, there were no significant changes in our internal
controls or in other factors that could significantly affect the disclosure
controls, including any corrective actions with regard to significant
deficiencies and material weaknesses.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities
None.
Item 3. Defaults upon Senior Securities
We did not default upon any senior securities during the quarter ended
March 31, 2003.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
99.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
We filed a current report on Form 8-K with the Securities and Exchange
Commission on February 12, 2003 to report the dismissal of
PricewaterhouseCoopers, LLP as our auditors.
We filed a current report on Form 8-K with the Securities and Exchange
Commission on February 19, 2003 to report the engagement of Goldstein Golub
Kessler LLP as our auditors.
G-96
SIGNATURE
In accordance with Section 12 of the Securities Exchange Act of 1934,
the registrant caused this registration statement to be signed on its behalf by
the undersigned, thereunto duly authorized.
I-TRAX, INC.
Date: May 14, 2003 By: /s/ Frank A. Martin
---------------------
Name: Frank A. Martin
Title: Chief Executive Officer
G-97
CERTIFICATION
I, Frank A. Martin, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of I-trax, Inc.
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 14, 2003
/s/ Frank A. Martin
-------------------
Frank A. Martin
Chief Executive Officer
G-98
CERTIFICATION
I, Anthony Tomaro, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of I-trax, Inc.
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 14, 2003
/s/ Anthony Tomaro
-------------------
Anthony Tomaro, CPA
Chief Financial Officer
G-99
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended: June 30, 2003
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT
Commission File Number: 0-30275
I-TRAX, INC.
------------------------------------------
(Exact name of small business issuer in its charter)
Delaware 23-3057155
-------------------------- --------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
One Logan Square, 130 N. 18th Street, Suite 2615
Philadelphia, Pennsylvania 19103
--------------------------
(Address of principal executive offices)
(215) 557-7488
--------------------------
(Issuer's telephone number)
-----------------------------------------------
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No [ ]
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the last practicable date: As of August 13, 2003, the Registrant
had 10,930,409 shares of its $0.001 par value common stock outstanding.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
G-100
INDEX
Page No.
PART I. FINANCIAL INFORMATION..............................................................................3
Item 1. Consolidated Financial Statements ................................................3
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................................19
Item 3. Controls and Procedures..........................................................26
PART II. OTHER INFORMATION................................................................................26
Item 1. Legal Proceedings................................................................26
Item 2. Changes in Securities............................................................26
Item 3. Defaults upon Senior Securities..................................................27
Item 4. Submission of Matters to a Vote of Security Holders..............................27
Item 5. Other Information................................................................27
Item 6. Exhibits and Reports on Form 8-K.................................................28
G-101
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
I-TRAX, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Page No.
Report of Independent Public Accountants 4
Consolidated Balance Sheets at June 30, 2003 (unaudited) and December 31, 2002 5
Consolidated Statements of Operations for the three months ended June 30, 2003 and 2002 (unaudited) 6
Consolidated Statements of Operations for the six months ended June 30, 2003 and 2002 (unaudited) 7
Consolidated Statement of Stockholders' Equity for the six months ended June 30, 2003 (unaudited) 8
Consolidated Statements of Cash Flows for the six months ended June 30, 2003 and 2002 (unaudited) 9
Notes to consolidated financial statements 11
G-102
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders
of I-trax, Inc.
We have reviewed the accompanying condensed consolidated balance sheet of
I-trax, Inc. (a Delaware corporation) and Subsidiaries as of June 30, 2003, and
the related condensed consolidated statements of operations for the three month
and six month periods ended June 30, 2003 and the consolidated statements of
stockholders' equity and cash flows for the six month period ended June 30,
2003. These financial statements are the responsibility of the company's
management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures and
making inquiries of persons responsible for financial and accounting matters. It
is substantially less in scope than an audit conducted in accordance with
generally accepted auditing standards, the objective of which is the expression
of an opinion regarding the condensed financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that should
be made to the condensed financial statements referred to above for them to be
in conformity with accounting principles generally accepted in the United States
of America.
We have previously audited, in accordance with auditing standards generally
accepted in the United States of America, the balance sheet as of December 31,
2002, and the related consolidated statements of operations, stockholders'
equity and cash flows for the year then ended (not presented herein); and in our
report dated March 5, 2003, we expressed an unqualified opinion on those
financial statements. In our opinion, the information set forth in the
accompanying condensed consolidated balance sheet as of December 31, 2002, is
fairly stated, in all material respects, in relation to the consolidated balance
sheet from which it has been derived.
GOLDSTEIN GOLUB KESSLER LLP
New York, New York
July 23, 2003
G-103
I-TRAX, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
June 30,
2003 December 31,
(unaudited) 2002
------------ ------------
Current assets:
Cash $ 361,138 $ 360,166
Deposit on potential acquisition -- 200,000
Accounts receivable, net 462,197 597,635
Prepaid expenses 131,825 77,569
Other current assets 22,815 20,960
------------ ------------
Total current assets 977,975 1,256,330
------------ ------------
Office equipment, furniture, leasehold improvements and software development
costs, net 703,173 412,779
Deferred marketing costs, net 1,057,777 1,284,445
Goodwill 8,424,062 8,424,062
Intangible assets, net 2,187,429 2,748,087
Debt issuance cost, net 134,223 249,273
Security deposits 31,564 31,564
------------ ------------
Total assets $ 13,516,203 $ 14,406,540
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Credit line payable 300,000 300,000
Accounts payable 688,551 918,791
Accrued expenses 536,887 743,151
Due to officers, directors and other related parties 107,330 225,000
Notes payable - other, net of discount 275,546 --
Capital lease payable 60,649 60,047
Deferred revenue 124,737 1,379,922
Debenture payable, net of discount 705,359 --
Other current liabilities -- 13,423
------------ ------------
Total current liabilities 2,799,059 3,640,334
------------ ------------
Capital lease obligation, net of current portion 61,473 96,765
Promissory notes and debenture payable, net of discount 373,390 1,245,876
Due to officers and directors 780,230 1,024,598
------------ ------------
Total liabilities 4,014,152 6,007,573
------------ ------------
Total liabilities
Commitments and contingencies (Note 8)
Stockholders' equity
Preferred stock - $.001 par value, 2,000,000 shares authorized,
-0- issued and outstanding -- --
Common Stock - $.001 par value, 100,000,000 shares authorized,
10,930,409 and 9,372,727 shares issued and outstanding, respectively 10,929 9,372
Additional paid in capital 44,043,641 39,236,119
Accumulated deficit (34,552,519) (30,846,524)
------------ ------------
Total stockholders' equity 9,502,051 8,398,967
------------ ------------
Total liabilities and stockholders' equity $ 13,516,203 $ 14,406,540
============ ============
See accompanying notes to consolidated financial statements (unaudited).
G-104
I-TRAX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30, 2003 AND 2002
(UNAUDITED)
Three months Three months
ended ended
June 30, June 30,
2003 2002
------------------ -----------------
Revenue:
Technology licenses $ 395,354 $ 135,000
Services 655,842 463,660
----------- -----------
Total revenue 1,051,196 598,660
----------- -----------
Cost of revenue:
Technology licenses 24,690 10,834
Services 317,462 354,319
----------- -----------
Total cost of revenue 342,152 365,153
----------- -----------
Gross profit 709,044 233,507
Operating expenses:
General and administrative 188,197 440,995
Salary and related benefits 465,594 935,295
Research and development -- 103,320
Depreciation and amortization 440,616 627,535
Marketing and publicity 1,522,852 156,636
----------- -----------
Total operating expenses 2,617,259 2,263,781
----------- -----------
Operating loss (1,908,215) (2,030,274)
----------- -----------
Other expenses:
Amortization of debt issuance costs (179,753) (54,576)
Interest expense and financing costs (654,354) (306,211)
----------- -----------
Total other expenses (834,107) (360,787)
----------- -----------
Net loss $(2,742,322) $(2,391,061)
=========== ===========
Loss per common share:
Basic and diluted $ (.28) $ (.26)
=========== ===========
Weighted average number of shares outstanding: 9,873,184 9,307,164
=========== ===========
See accompanying notes to consolidated financial statements (unaudited).
G-105
I-TRAX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2003 AND 2002
(UNAUDITED)
Six months ended Six months ended
June 30, June 30,
2003 2002
------------------ -----------------
Revenue:
Technology licenses $ 1,310,056 $ 179,500
Services 1,357,271 825,517
------------------ -----------------
Total revenue 2,667,327 1,005,017
------------------ -----------------
Cost of revenue:
Technology licenses 40,704 21,668
Services 617,528 605,650
------------------ -----------------
Total cost of revenue 658,232 627,318
------------------ -----------------
Gross profit 2,009,095 377,699
Operating expenses:
General and administrative 496,701 986,311
Salary and related benefits 1,324,457 1,954,997
Research and development -- 222,820
Depreciation and amortization 877,164 847,522
Marketing and publicity 1,604,609 327,092
------------------ -----------------
Total operating expenses 4,302,931 4,338,742
------------------ -----------------
Operating loss (2,293,836) (3,961,043)
------------------ -----------------
Other expenses:
Amortization of debt issuance costs (237,278) (90,960)
Costs in connection with uncompleted acquisition (200,000) --
Interest expense and financing costs (974,881) (490,970)
------------------ -----------------
Total other expenses (1,412,159) (581,930)
------------------ -----------------
Net loss $ (3,705,995) $ (4,542,973)
================== =================
Loss per common share:
Basic and diluted $ (.39) $ (.52)
================== =================
Weighted average number of shares outstanding: 9,620,206 8,782,304
================== =================
See accompanying notes to consolidated financial statements (unaudited).
G-106
I-TRAX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 2003
(UNAUDITED)
Common Stock Additional Total
----------------------------- Paid-in Accumulated Stockholders'
Shares Amount Capital Deficit Equity
-------------- ------------- ---------------- -------------- ---------------
Balances at December 31, 2002 9,372,727 $ 9,372 $ 39,236,119 $(30,846,524) $ 8,398,967
Issuance of compensatory stock options 27,942 27,942
Mark to market of warrants granted for
investor relations services and stock
options granted to a former employee -- -- (4,097) -- (4,097)
Fair market value of detachable warrants and
additional beneficial conversion
value in connection with re-pricing of
convertible debenture -- -- 1,007,833 -- 1,007,833
Issuance of common stock for services 205,833 206 330,842 -- 331,048
Contribution in the form of common stock
given by shareholders for services
rendered to the Company 437,900 437,900
Sale of common stock, net of costs 613,986 614 1,003,572 -- 1,004,186
Issuance of warrants for services -- -- 645,000 -- 645,000
Fair value of detachable warrants issued in
connection with convertible note 68,000 68,000
Issuance of common stock for conversion of
related party debt and assigned debt 668,152 668 1,168,602 -- 1,169,270
Issuance of common stock for conversion of
deferred salaries 69,711 69 121,928 -- 121,997
Net loss for the six months ended June 30, 2003 -- -- -- (3,705,995) (3,705,995)
------------ ------------ ------------ ------------ ------------
Balances at June 30, 2003
10,930,409 $ 10,929 $ 44,043,641 $(34,552,519) $ 9,502,051
============ ============ ============ ============ ============
See accompanying notes to consolidated financial statements (unaudited).
G-107
I-TRAX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2003 AND 2002
(UNAUDITED)
Six months
ended Six months ended
June 30, 2003 June 30, 2002
------------------ -----------------
Operating activities:
Net loss $(3,705,995) $(4,542,973)
Adjustments to reconcile net loss to net cash used in operating activities:
Accretion of discount on notes payable charged to interest 254,539 230,830
expense
Accretion of beneficial conversion value of debenture 525,556 197,636
Amortization of option liability (13,423) (67,115)
Amortization of debt issuance costs 237,278 90,960
Amortization of deferred marketing costs 226,668 --
Depreciation and amortization 650,496 847,522
Expenses for compensatory stock options and warrants 23,845 163,200
Issuance of securities for services 1,413,946 (83,400)
Write off of deposit on cancelled acquisition 200,000 --
Changes in operating assets and liabilities, net of acquisitions:
Decrease (increase) in:
Accounts receivable 135,438 (19,275)
Prepaid expenses (54,256) 82,923
Other current assets (1,855) (20,525)
(Decrease) increase in:
Accounts payable (230,240) 59,668
Accrued expenses 79,896 56,609
Deferred revenue (1,255,185) 216,563
----------- -----------
Net cash used in operating activities (1,513,292) (2,787,377)
----------- -----------
Investing activities:
Proceeds from repayment of note receivable -- 52,500
Cash used for property, equipment and software development costs (380,232) (12,866)
Proceeds from partial release of security deposit -- 31,825
Net cash to acquire WellComm Group, Inc. -- (2,045,065)
----------- -----------
Net cash used in investing activities (380,232) (1,973,606)
----------- -----------
Financing activities:
Principal payments on capital leases (34,690) (38,312)
Proceeds from credit line payable -- 125,000
Repayment to related parties (140,000) (65,000)
Proceeds from officers, directors and other related parties 740,000 --
Proceeds from sale of common stock 1,004,186 1,943,476
Proceeds from notes payable 325,000 --
Proceeds from sale of debenture option -- 161,078
Costs of issuance of debenture -- (150,000)
Proceeds from issuance of debenture -- 1,838,922
----------- -----------
Net cash provided by financing activities 1,894,496 3,815,164
----------- -----------
Net increase (decrease) in cash 972 (945,819)
Cash at beginning of period 360,166 1,029,208
----------- -----------
Cash at end of period $ 361,138 $ 83,389
=========== ===========
Supplemental disclosure of non-cash flow information: Cash paid during the
period for:
Interest $ -- $ 6,099
=========== ===========
(Continues on following page.)
G-108
I-TRAX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2003 AND 2002
(Continues from previous page.)
Six months
Six months ended ended
June 30, 2003 June 30, 2002
----------------- ----------------
Schedule of non-cash investing and financing activities:
Issuance of 1,488,000 shares of common stock and granting of 112,000 stock
options in connection with acquisition of WellComm Group,
Inc $ -- $ 10,480,000
=========== ===========
Issuance of common stock and warrants for finder fee $ -- $ --
=========== ===========
Issuance of common stock for conversion of related party debt and $1,169,270 $ --
=========== ===========
assigned debt
Issuance of common stock for conversion of deferred salaries $ 121,997 $ --
=========== ===========
See accompanying notes to consolidated financial statements (unaudited).
G-109
I-TRAX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1--ORGANIZATION
I-trax, Inc. (the "Company") provides focused disease management and
comprehensive health management solutions designed to improve the health of the
populations it serves while reducing the cost of medical care. The Company was
incorporated in the State of Delaware on September 15, 2000. The Company's
common stock is traded on the American Stock Exchange under the symbol "DMX."
As of June 30, 2003, the Company had three wholly owned subsidiaries: I-trax
Health Management Solutions, Inc. ("Health Management"), a corporation, iSummit
Partners, LLC and WellComm Group, LLC, each a single member limited liability
company.
NOTE 2--INTERIM RESULTS AND BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in accordance
with accounting principles generally accepted in the United States of America
for interim financial information, the instructions to Form 10-QSB and Items 303
and 310(B) of Regulation S-B. 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
June 30, 2003 and the results of the operations and cash flows for the three and
six months ended June 30, 2003. The results for the three and six months ended
June 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. The
balance sheet at December 31, 2002 has been derived from the audited financial
statements at that date.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with accounting principles generally accepted
in the United States of America have been condensed or omitted pursuant to the
Securities and Exchange Commission's rules and regulations.
For the six months ended June 30, 2003, the Company capitalized software
development costs amounting to $375,545 since technological feasibility has been
achieved.
Loss per common share is computed pursuant to SFAS No. 128, "Earnings Per
Share." Basic loss per share is computed as net income (loss) available to
common shareholders divided by the weighted average number of common shares
outstanding for the period. Diluted loss per share reflects the potential
dilution that could occur from common shares issuable through stock options,
warrants and convertible debt. As of June 30, 2003 and 2002, 5,444,093 and
2,038,051, respectively, of options and warrants were excluded from the diluted
loss per share computation, as their effect would be anti-dilutive.
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 the Company's report on Form 10-KSB for the year
ended December 31, 2002 filed on April 15, 2003.
For comparability, certain 2002 amounts have been reclassified, where
appropriate, to conform to the financial statement presentation used in 2003.
Effective January 3, 2003, the Company completed a 1-for-5 reverse stock split.
Accordingly, all information for 2002 presented herein has been adjusted
retroactively to reflect this reverse stock split.
G-110
I-TRAX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 3--ACQUISITION OF WELLCOMM GROUP, INC.
On February 6, 2002, the Company acquired all of the issued and outstanding
common stock of WellComm Group, Inc. by issuing 1,488,000 shares of common stock
valued at $9,746,400, granting 112,000 options valued at $733,600 to acquire
common stock at a nominal exercise price and paying approximately $2,200,000 in
cash. The aggregate acquisition price amounted to approximately $12,680,000. The
financial statements include the operations of WellComm from February 1, 2002
forward.
The following unaudited pro forma results of operations of the Company give
effect to the acquisition of WellComm for the six months ended June 30, 2002 as
if the acquisition was consummated at the beginning of that period.
Six months
ended
June 30, 2002
-----------------
Total revenue $ 1,258,796
=================
Total expenses $ 5,786,062
=================
Net loss $ (4,527,243)
=================
Pro forma net loss per share: $ (.48)
=================
Basic and Diluted
Weighted average number of shares outstanding: 9,391,296
Basic and Diluted =================
NOTE 4--RELATED PARTY TRANSACTIONS
At December 31, 2002, the Company had loans outstanding to certain officers and
directors amounting to $1,024,598 and $225,000 to a relative of the Company's
Chief Operating Officer.
During February 2003, pursuant to two promissory notes, two members of the
Company's Board of Directors, advanced $200,000 to the Company for working
capital. The notes accrue interest at 8% per year and mature in February 2004.
In addition, during the six months ended June 30, 2003, the Company's Chief
Executive and Operating Officers, along with a member of the Company's Board of
Directors, advanced the Company a total of $540,000 for working capital at an
interest rate of 8% per year. The Company's Chief Executive and Operating
Officers have committed to continue to support the Company until it generates
positive cash flow from operations, but at least through July 1, 2004.
During June 2003, certain officers, members of the Company's Board of Directors
and a venture capital fund managed by the Company's Chief Executive Officer
converted at a $1.75 per share a total of $909,421, comprised of loans and
advances of $790,697 and accrued interest of $118,724, into 519,667 shares of
common stock. In addition, certain of the same parties assigned additional loans
in the principal amount of $246,342 and accrued interest of $13,507 thereon, to
an investor relations firm, which thereafter converted the assigned loans into
common stock also at $1.75 per share. The price of the conversions was
determined with reference to a private placement of common stock to third
parties completed by the Company contemporaneously with the conversions as
disclosed in Note 9 below.
G-111
I-TRAX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 4--RELATED PARTY TRANSACTIONS (cont'd)
During February 2003, the Company repaid $140,000 of the $225,000 loan
outstanding to a relative of the Company's Chief Operating Officer.
At June 30, 2003, based on repayment terms agreed upon with certain related
parties, the Company classified $780,230 of outstanding loans and advances as a
non-current liability because they are not due within the next twelve months.
The Company recorded $27,349 and $13,792, and $56,735 and $28,084 of interest
expense for the three months and six months ended June 30, 2003 and 2002,
respectively, associated with these related party loans and advances.
NOTE 5--NOTES PAYABLE--OTHER
In April 2003, the Company borrowed $100,000 from a shareholder pursuant to a
convertible promissory note. The note, with an eleven-month term, accrues
interest at 6% per annum and a default interest rate of 12% per annum. The
principal and related accrued and unpaid interest is convertible by the
shareholder into common stock at anytime at $1.50 per share. As consideration
for this loan, the Company also granted the shareholder a warrant to acquire
100,000 shares of common stock at an exercise price of $1.50 per share. The
value assigned to the warrant of $68,000 is recorded as a discount to the
promissory note using the relevant fair value of the debt and the warrant to the
actual proceeds from the convertible promissory note. The discount is being
accreted to interest expense over the life of the convertible promissory note.
For the three months ended June 30, 2003, the discount accreted to interest
expense associated with the convertible promissory note amounted to $18,546. At
June 30, 2003 the carrying value of the note amounted to $50,546 and is included
in "Notes payable - other" on the accompanying balance sheet.
Pursuant to a promissory note dated April 10, 2003, the Company borrowed
$150,000 from a shareholder with an interest rate of 12% per annum, requiring
monthly payments of $25,000 plus accrued interest with a final payment due on
December 31, 2003. As of June 30, 2003, the outstanding principal balance is
$125,000. For the three months ended June 30, 2003, interest expense amounted to
approximately $3,750.
On May 29, 2003, the Company borrowed $100,000 from a shareholder. The loan is
due on September 29, 2003 and is accruing 12% during the four-month period it is
expected to be outstanding. For the three months ended June 30, 2003, interest
expense associated with such loan amounted to approximately $12,000.
NOTE 6--PROMISSORY NOTES PAYABLE
On March 2, 2001 the Company borrowed $692,809 from an investor group that
included $75,000 from a venture capital fund managed by the Company's Chief
Executive Officer. The loan bears interest at 8% per annum, with a default rate
of 12% per annum, and is due on March 2, 2006. The Company also granted this
investor group warrants to purchase 364,694 shares of common stock at $0.50 per
share, which were exercised in the first quarter of 2002.
The value assigned to detachable warrants of $459,854 is being accreted to
interest expense over the five-year term of the underlying promissory notes. For
the three and six months ended June 30, 2003 and 2002, the amount accreted to
interest expense was $22,677 and $22,677, and $45,354 and $45,354, respectively.
At June 30, 2003, the carrying value of the notes amounted to $373,390 and is
included in the "Promissory notes" in the accompanying consolidated balance
sheet.
G-112
I-TRAX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 6--PROMISSORY NOTES PAYABLE (cont'd)
In June 2003, as part of certain related parties converting and assigning debt
as discussed in Note 4 above, the venture capital fund managed by the Company's
Chief Executive Officer, with the consent of the Company, assigned the fund's
loan in the principal amount of $75,000 and a portion of the accrued interest
amounting to $6,669 thereon, to an investment relations firm, which thereafter
converted the assigned loan into common stock at $1.75 per share. The balance of
the accrued interest not assigned amounting to $6,098 was converted into 3,484
shares of common stock also at $1.75 per share. The price of the conversion was
determined with reference to a private placement of common stock to third
parties completed by the Company contemporaneously with the conversion as
disclosed in Note 9 below.
NOTE 7--CONVERTIBLE DEBENTURE
The Company funded the acquisition of WellComm by selling a 6% convertible
senior debenture in the aggregate principal amount of $2,000,000 to Palladin
Opportunity Fund LLC. Pursuant to the purchase agreement, the Company also
issued Palladin a warrant to purchase an aggregate of up to 307,692 shares of
common stock at an exercise price of $5.50 per share. The outstanding principal
and any interest under the debenture are payable in full on or before February
3, 2004. Further, outstanding principal and any accrued interest may be
converted at any time at the election of Palladin into common stock. The
original conversion price of the debenture was $5.00 per share. In accordance
with the terms of the debenture, the price was reset to $3.03 in February 2003
and to $1.75 in June 2003. In accordance with the terms of the warrant, the
exercise price of the warrant was reset from $5.50 to $1.75 in June 2003.
The initial value assigned to the warrant of $890,272 was recorded as a discount
to the debenture and is being accreted to interest expense over the life of the
debenture. As a result of the reset of the exercise price of the warrant in June
2003, the Company recorded $203,077 of interest expense for the additional
market value of the warrant on the date of the reset. For the three and six
months ended June 30, 2003, and 2002, the Company recorded $314,362 and
$111,285, and $222,570 and $222,570, respectively, of interest expense
associated with the accretion of the original discount and the reset of the
warrant. The Company also recorded $203,897 and $118,581, and $322,478 and
$237,162 of interest expense for the three months and six months ended June 30,
2003 and 2002, respectively, for the amortization of the portion of the
beneficial conversion value of the debenture. Upon the initial sale of the
debenture, the Company recorded a beneficial conversion value of $948,651. The
beneficial conversion value was increased by $682,528 as a result of the reset
in June 2003. The beneficial conversion value represents the difference between
the fair market value of the common stock on the date the debenture was sold (or
the date the conversion price is changed) and the price at which the debt could
be converted into common stock. As of June 30, 2003, the carrying value of the
debenture amounted to $705,359 and it's classified as a current liability in the
accompanying consolidated balance sheet.
Lastly, in connection with facilitating the transaction with Palladin, the
Company initially recorded $416,610 of debt issuance costs comprised of $130,000
of cash, 6,200 shares of common stock valued at $40,610 and a warrant to acquire
40,000 shares of common stock at $5.00 per share valued at $246,000 delivered to
a third party that brokered the transaction. In connection with the reset in
June 2003 of the conversion price of Palladin's debenture and the exercise price
of Palladin's warrant, the Company also, in accordance with a contractual
commitment: (1) reset the exercise price of the warrant originally granted to
the third party from $5.00 to $1.75 per share, resulting in a charge to
operations of $26,400 for additional debt issuance costs; and (2) increased the
shares issuable under the warrant by 74,285 shares of common stock, resulting in
a further charge to operations of $95,828. For the three and six months ended
June 30, 2003 and 2002 such amortization, inclusive of these one-time charges
amounted to $179,753, $57,525 and $115,050 and $115,050, respectively.
G-113
I-TRAX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 8--COMMITMENTS AND CONTINGENCIES
Nature of Business
The Company is subject to risks and uncertainties common to growing technology
companies, including rapid technological developments, reliance on continued
development and acceptance of the Internet and health care applications
utilizing the Internet, intense competition and a limited operating history.
Significant Customers
Financial instruments, which may expose the Company to concentrations of credit
risk, consist primarily of accounts receivable. As of June 30, 2003, two
customers represented 32% and 10%, respectively of the total accounts
receivable. For the three and six months ended June 30, 2003, the Company had
one customer, which accounted for 36% and 40% of total revenue, respectively.
Risk Based Contracts
The Company enters into risk-based contracts in certain disease management
arrangements. These contracts are generally for terms of three to five years and
provide that a percentage of the Company's fees may be refunded to a client if
the Company does not save the client a certain percentage of the expenses
incurred by individuals whose health is managed by the Company. As of June 30,
2003, the Company is not a party to any risk-based contracts.
NOTE 9--STOCKHOLDERS' EQUITY
Issuance of Common Stock
During May and June 2003 the Company issued an aggregate of 205,833 shares of
common stock to four investor relations firms. The common stock, valued at
$331,048, based on the market price of the Company's common stock on the date of
issuance, has been charged to operations for the three months ended June 30,
2003.
During May 2003, certain shareholders of the Company contributed loans (which
were thereafter converted into common stock) and common stock such that an
investor relations firm retained by the Company received an aggregate of 290,000
shares of common stock as compensation for services. The benefit that the
Company has received from these contributions amounted to $437,900, based on the
market price of the Company's common stock on the date of the contribution, and
was charged to operations.
During June 2003 the Company sold an aggregate of 613,986 shares of common stock
at $1.75 per share yielding net proceeds (after direct costs including 40,167
shares of common stock) of $1,004,186.
During June 2003, the Company issued 519,667 shares of common stock in
connection with the conversion of related party debt and accrued interest
thereon amounting to $909,421 based on the market price of the Company's common
stock on the date of issuance.
G-114
I-TRAX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
During June 2003, the Company issued 148,485 shares of common stock in
connection with the conversion of assigned debt to an investor relations firm
amounting to $259,849 based on the market price of the Company's common stock on
the date of issuance.
NOTE 9--STOCKHOLDERS' EQUITY (cont'd)
Issuance of Common Stock (cont'd)
During June 2003, the Company issued 69,711 shares of common stock in connection
with the conversion of deferred salaries amounting to $121,997 based on the
market price of the Company's common stock on the date of issuance.
Issuance of Warrants
During May and June 2003, the Company granted fully vested, non-forfeitable
warrants to purchase 375,000 shares of common stock with exercise prices ranging
from $1.50 to $1.76 (based on market value at the date of issuance) to two
individuals and an institution for investor relations services pursuant to three
separate consulting agreements expiring in May and June 2004. The value of such
warrants, utilizing the Black-Scholes model amounted to $645,000. Such amount
has been charged to operations for the three months ended June 30, 2003.
During May 2003 pursuant to the approval of the Board of Directors, the Company
granted an aggregate of 450,000 warrants with an exercise price of $1.80 per
share (based on market value at the date of issuance) to its Chief Executive and
Operating Officers for their continued financial support and for their
guarantees to continue to support the Company through January 2004. The granting
of such warrants did not result in any charges to operations since they are
granted to employees.
In April 2003, the Company borrowed $100,000 from a shareholder pursuant to a
convertible promissory note. The note, with an eleven-month term, accrues
interest at 6% per annum and a default interest rate of 12% per annum. The
principal and related accrued and unpaid interest is convertible at anytime by
the shareholder at $1.50 per share. As consideration for this loan, the Company
also granted the shareholder a warrant to acquire 100,000 shares of common stock
at an exercise price of $1.50 per share. The value assigned to the warrant of
$68,000 is recorded as a discount to the convertible promissory note using the
relevant fair value of the debt and the warrants to the actual proceeds from the
convertible promissory note and is being accreted to interest expense over the
life of the note.
In connection with the reset in June 2003 of the conversion price of Palladin's
debenture and the exercise price of Palladin's warrant, the Company also, in
accordance with a contractual commitment, reset the exercise price of the
warrant originally granted to the third party from $5.00 to $1.75 per share and
amended the warrant to increase the number of shares issuable thereunder by
74,285 shares of common stock. This reset of the exercise and the amendment to
the warrant resulted in a charge to operations of $95,828.
G-115
I-TRAX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 9--STOCKHOLDERS' EQUITY (cont'd)
Issuance of Warrants (cont'd)
The following table summarizes the Company's activity as it relates to its
warrants for the six months ended June 30, 2003:
Balance outstanding at January 1, 2003 2,132,953
Quarter ended March 31, 2003:
Granted --
Exercised --
-----------------
Balance outstanding at March 31, 2003 2,132,953
-----------------
Quarter ended June 30, 2003:
Granted 999,285
Exercised --
-----------------
Balance outstanding at June 30, 2003 3,132,238
=================
Stock Options
The table below summaries the activity in the Company's stock option plans for
the six months ended June 30, 2003:
Non-Qualified Non-Plan
Incentive Options Options Non-Qualified Total
Options
------------------------- -------------------- -------------------- -------------------- --------------------
Outstanding as of
January 1, 2003 735,829 535,973 439,000 1,710,802
Granted 20,000 40,000 -- 60,000
Exercised -- -- -- --
Forfeited/Expired (127,971) (40,000) -- (167,971)
-------------------- -------------------- -------------------- --------------------
Outstanding as of March
31, 2003 627,858 535,973 439,000 1,602,831
-------------------- -------------------- -------------------- --------------------
Granted 130,000 300,000 300,000 730,000
Exercised -- -- -- --
Forfeited/Expired (13,976) (10,000) (23,976)
-------------------- -------------------- -------------------- --------------------
Outstanding as of June 743,882 825,973 739,000 2,308,855
30, 2003
===================================================================================
-------------------- -------------------- -------------------- --------------------
Vesting Dates:
December 31, 2003 125,144 139,004 189,164 453,312
December 31, 2004 170,456 201,665 101,665 473,786
December 31, 2005 88,796 83,165 75,006 246,967
December 31, 2006 45,836 50,504 -- 96,340
December 31, 2007 -- 333 -- 333
Thereafter -- -- 20,000 20,000
As of June 30, 2003, there were outstanding an aggregate of 1,018,117 of
exercisable plan and non-plan options with exercise prices ranging from $.01 to
$10.00.
G-116
I-TRAX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 9--STOCKHOLDERS' EQUITY (cont'd)
Stock Options (cont'd)
The Company accounts for its employee incentive stock option plans and warrants
issued to employees using the intrinsic value method in accordance with the
recognition and measurement principles of Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees," as permitted by SFAS No.
123. Had the Company determined compensation expense base on the fair value at
the grant dates for those awards consistent with the method of SFAS 123, the
Company's net loss per share would have been increased to the following pro
forma amounts:
For the three For the three For the six For the six
months ended months ended months ended months ended
June 30, 2003 June 30, 2002 June 30, 2003 June 30, 2002
----------------- ----------------- ---------------- ----------------
Net loss as reported $(2,742,322) $(2,391,061) $(3,705,995) $(4,542,973)
Add back intrinsic value of the -- -- -- 0
options issued to employee and
charged to operations -- -- -- 163,20
Deduct total stock based employee 5 3 4 8
compensation expense determined
under fair value based methods for
all awards (1,400,36) (634,38) (2,113,13) (1,516,66)
----------- ----------- ----------- -----------
Pro forma net loss $(4,142,687) $(3,025,444) $(5,819,129) $(5,896,441)
=========== =========== =========== ===========
Basic and diluted net loss per
share as reported $ (.28) $ (.26) $ (.39) $ (.55)
----------- ----------- ----------- -----------
Pro forma basic and diluted net
loss per share $ (.42) $ (.33) $ (.60) $ (.67)
=========== =========== =========== ===========
NOTE 10--AGREEMENT TO ACQUIRE DxCG, INC.
On November 8, 2002, the Company entered into a merger agreement to acquire
DxCG, Inc. for a total purchase price of approximately $10,000,000, of which the
Company intended to pay $6,000,000 in cash and $4,000,000 in common stock. Under
the terms of this agreement and at the time this agreement was executed, the
Company deposited $200,000 into an escrow account. This sum was intended to be
released to DxCG if DxCG terminated the merger agreement because the Company
failed to satisfy certain conditions to closing, including third party financing
for the cash portion of the purchase price. The Company did not secure the
financing by January 31, 2003 and accordingly such agreement was terminated
resulting in the Company charging the $200,000 to earnings in the first quarter
2003.
NOTE 11--SUBSEQUENT EVENT
Private Placement Memorandum
During August 2003, the Company expects to commence a private placement in order
to raise additional funds.
G-117
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussions of the financial condition and related results
of operations of I-trax, Inc. and its subsidiaries should be reviewed in
conjunction with our financial statements and related notes appearing on the
preceding pages as well as our audited financial statements for the fiscal year
ended December 31, 2002, incorporated into our Form 10-KSB, filed on April 15,
2003.
This Management's Discussion and Analysis of Financial Condition and
Results of Operations contains forward-looking statements, which are based upon
current expectations and involve a number of risks and uncertainties. In order
for I-trax, Inc. to utilize the "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995, investors are hereby cautioned that
these statements may be affected by important factors, which are set forth below
and elsewhere in this report, and consequently, actual operations and results
may differ materially from those expressed in these forward-looking statements.
The important factors include our ability to continue as a going concern and our
ability to execute contracts for disease management services and software
technology.
Our Business
I-trax enables better healthcare through personalized health management
programs.
We believe that our personalized disease and life-style management
solutions enable organizations to evolve from fragmented care management
practices into a cohesive and efficient system of healthcare. Our solutions are
fully integrated, use a single-data platform that allows all caregivers to share
records, and enable our clients to provide true coordination of care. We believe
that by facilitating real-time communication between all stakeholders within
today's complex healthcare system, our solutions reduce costs and enable the
best possible delivery of care.
Health-e-LifeSM Program
We deliver our solutions through our proprietary Health-e-LifeSM Program.
The Program is designed to deliver lifestyle, disease and risk reduction
interventions to an entire population by utilizing predictive science,
technology, clinical expertise and care coordination.
Predictive Science
Our Health-e-LifeSM Program incorporates predictive science to analyze our
clients' medical claims and pharmacy and clinical data to predict future
healthcare costs. We believe this is an essential step to effective disease and
life-style management. Experts agree that predictive science provides a
comprehensive advantage to health plans, employers and providers, and leads to
cost effective medical management and greater profitability. Using predictive
science, we analyze our clients' entire populations to accurately predict our
clients' future healthcare costs, including avoidable costs, the health
conditions that will drive those costs and the people within our clients'
populations who are at risk for those conditions. Armed with this information,
I-trax is able to target the most appropriate resources to achieve the best
savings and return on investment.
Technology Solutions
All technology components of our Health-e-LifeSM Program utilize a single
data platform--Medicive(R) Medical Enterprise Data System--a proprietary
software architecture developed to collect, store, retrieve and analyze a broad
range of information used in the healthcare industry.
Further, our web accessible solutions include portals for key stakeholders
in the care delivery process--consumers, physicians and care managers--thus
permitting real-time sharing of information and support the adherence to our
health and disease intervention programs. The key technology we use for
effective care coordination include:
G-118
o Health-e-Coordinator(TM), a web-based care management application;
o MyFamilyMD(TM), a consumer health management portal;
o CarePrime(R), a clinical care application for physicians and
clinicians; and
o I-talk(TM), interactive smart voice technology.
Interventions and Clinical Expertise
Our personalized health and disease interventions include intensive
programs for individuals who suffer from, or are at high risk for, active or
chronic disease and tailored programs for individuals who are at low risk.
Depending on the individual's level of risk, our custom tailored interventions
include self-help programs available through the web or person-assisted programs
administered through our Care Communication Center, which is staffed by skilled
nurses and other health professionals 24 hours per day, 7 days per week. All
interventions include life-style and risk reduction programs that follow
evidence-based clinical guidelines to optimize health, fitness, productivity and
quality of life.
We have designed and are implementing interventions for a number of
specific chronic conditions, including congestive heart failure (CHF), coronary
artery disease (CAD), asthma, diabetes, cancer management, cystic fibrosis lower
back pain and chronic obstructive pulmonary disease (COPD).
Care Communication Center
Our Care Communications Center is staffed with registered nurses and other
healthcare professionals 24 hours per day, 7 days per week. Through the Center,
we effect targeted interventions to improve the health management of the
populations we serve. The Center helps consumers make informed decisions about
their health and provides ongoing support for those with chronic diseases. Our
demand management and nurse triage services incorporate nationally recognized,
evidence-based clinical guidelines to ensure that all caregivers and consumers
are following the best practices.
Listing on the American Stock Exchange
Effective January 3, 2003 we completed a 1-for-5 reverse stock split. Our
board of directors and stockholders authorized the reverse stock split in
connection with the then pending application to list our common stock on the
American Stock Exchange. We began trading on the American Stock Exchange on
January 15, 2003 under the symbol "DMX."
Corporate Overview
I-trax was incorporated in the State of Delaware on September 15, 2000. We
currently have three wholly owned subsidiaries: I-trax Health Management
Solutions, Inc. (formerly known as I-Trax.com, Inc.) ("Health Management"), a
corporation, and iSummit Partners, LLC and WellComm Group, LLC, each a single
member limited liability company. We conduct our operations through Health
Management and WellComm Group, LLC.
Our Customers
As of the date of this filing, we serve approximately 64 customers. Our
customers include physician groups, hospitals, health plans, including plans
providing Medicaid and Medicare covered services, universities and colleges and
agencies and branches of the United States government.
We continue to focus our marketing efforts on the following markets:
health plans and health insurers; self-insured employers; military, government
and public health agencies; college and university student health services; and
hospital and health systems.
G-119
Results of Operations
Three Months Ended June 30, 2003 Compared to Three Months Ended June 30,
2002
Revenue for the three months ended June 30, 2003 was $1,051,196, an
increase of $452,536 or 76% from $598,660 for the three months ended June 30,
2002. Total revenue was comprised of two components: (1) prevention and care
services revenue of $655,842; and (2) technology license and services revenue of
$395,354, of which approximately $375,000 represents revenue from the exclusive
license of CarePrime(R) and MyFamilyMD(TM) we granted to UICI and certain
related software development work. We contracted this revenue in the third
quarter of 2002 and we are recognizing it based on delivering required
deliverables. We expect that in future periods we will generate a significant
portion of our revenue from delivery of care services through our Health-e-Life
ProgramSM.
Cost of revenue for the three months ended June 30, 2003 was $342,152, a
decrease of 6% from $365,153 for the three months ended June 30, 2002. The small
decrease is attributable to streamlining our personnel costs required to service
our prevention and care services contracts. We expect that in future periods our
cost of revenue will increase or decrease in proportion to volume of business
because we expect to derive a significant portion of our future revenue from
prevention and care services contracts, which require human involvement
proportionate to the size of the contract.
Outsourced and certain internal research and development costs of $188,045
were capitalized for the three months ended June 30, 2003 as compared to
$103,320, which we expensed for the three months ended June 30, 2002. We
expensed such costs during the quarter ended June 30, 2002 since the products
had not reached technological feasibility and therefore could not be
capitalized. We expect to continue to spend funds on improving our services and
adding functionality to our technology products including to the MyFamilyMD(TM)
application by adding MedWizard(R) tools, on CarePrime(TM) application, which
interacts with MyFamilyMD(TM) and its MedWizard(R) tools, and on
Health-e-Coordinator(TM) application by adding additional disease capabilities.
Commencing in the first quarter of 2003, we have begun to capitalize development
costs, which are primarily developer's salaries and outsourced expenses. As of
June 30, 2003, we have capitalized an aggregate of $375,545.
General and administrative expenses (excluding salary and related benefits
which are discussed separately below) decreased from $440,995 for the three
months ended June 30, 2002 to $188,197 for the three months ended June 30, 2003,
a decrease of 57%. Our ability to reduce general and administrative expenses is
attributable to increased efficiencies and the implementation of stringent
budgetary controls. Additionally, during the quarter we successfully negotiated
the settlement of certain payables. We believe that we currently have the
resources to handle increased revenue with minimal incremental fixed costs.
Salary and related benefits were $465,594 for the three months ended June
30, 2003 as compared to $935,295 for the three months ended June 30, 2002. The
decrease in salary and related benefits from the three months ended June 30,
2002 to the three months ended June 30, 2003 was $469,701 or 50%. Again, the
reduction in salary and related benefits expenses is a direct result of our
continued efforts to consolidate positions and improve efficiencies.
Depreciation and amortization expenses were $440,616 for the three months
ended June 30, 2003, as compared to $627,535 for the three months ended June 30,
2002. The decrease is primarily attributable to the write down of certain
intangible assets during December 2002 thereby reducing future amortization
charges.
Marketing and publicity expenses were $1,522,852 for the three months
ended June 30, 2003 as compared to $156,636 for the three months ended June 30,
2002. The increase of 872% or $1,366,216 is a direct result of our ongoing
marketing and investor relations campaigns to promote I-trax and our products
and to penetrate the disease management market. Of the total expense of
$1,522,852 for the quarter ended June 30, 2003, $1,467,395 was non-cash. The
non-cash charges resulted from I-trax issuing common stock, granting warrants
and having certain of its shareholders contribute shares to an investor
relations firm as consideration for services rendered to us.
Interest expense and financing costs for the three months ended June 30,
2003 was $654,354, increasing by $348,143 or 114% from $306,211 for the three
months ended June 30, 2002. For the three months ended June 30,
G-120
2003, interest expense includes charges for the amortization of the value
assigned to the original beneficial conversion value of debenture and the
associated warrants, with additional charges and amortization for additional
beneficial conversion value resulting from the June 2003 reset of the conversion
price of the debenture and the exercise price of the associated warrants. The
charges for the quarter for all of these items amounted to $517,449. Generally,
the beneficial conversion value represents the benefit to the investor that
results from purchasing an immediately convertible debenture with a conversion
price that is less than fair market value on the date of purchase after first
allocating a portion of the proceeds from the debenture to the associated
warrants. The remaining balance of interest expense of approximately $137,000 is
associated with interest on other debt and the amortization of warrants granted
to certain shareholders for loans made to us.
Amortization of debt issuance and conversion costs was $179,753 and
$54,576 for the three months ended June 30, 2003 and 2002, respectively. These
costs were incurred in selling the $2,000,000 debenture to Palladin and are
being amortized over the two-year life of the debenture. During the three months
ended June 30, 2003, we took a charge of $122,228 in connection with the reset
of the exercise price of the warrant granted to the party that brokered the
transaction along with increasing the number of shares covered by the warrant as
per the broker agreement.
Our net loss was $2,742,322 for the three months ended June 30, 2003 as
compared to a net loss of $2,391,061 for the three months ended June 30, 2002,
an increase of 15%.
Six Months Ended June 30, 2003 Compared to Six Months Ended June 30, 2002
Revenue for the six months ended June 30, 2003 was $2,667,327, an increase
of $1,662,310 or 165% from $1,005,017 for the six months ended June 30, 2002.
Total revenue was comprised of two components: (1) prevention and care services
revenue of $1,357,271; and (2) technology license and services revenue of
$1,310,056, of which approximately $1,076,000 represents revenue from the
exclusive license of CarePrime(R) and MyFamilyMD(TM) we granted to UICI and
certain related software development work. We contracted this revenue in the
third quarter of 2002 and we are recognizing it based on delivering required
deliverables. We expect that in future periods we will generate a significant
portion of our revenue from delivery of care services through our Health-e-Life
ProgramSM.
Cost of revenue for the six months ended June 30, 2003 was $658,232, an
increase of 5% from $627,318 for the six months ended June 30, 2002. The
increase is attributable to the personnel costs required to service our
prevention and care services contracts. We expect that in future periods our
cost of revenue will increase or decrease in proportion to volume of business
because we expect to derive a significant portion of our future revenue from
prevention and care services contracts, which require human involvement
proportionate to the size of the contract.
Outsourced and certain internal research and development costs amounting
to $375,545 were capitalized for the six months ended June 30, 2003 as compared
to $222,820, which we expensed for the six months ended June 30, 2002. We
expensed such costs during the six months ended June 30, 2002 since the products
had not reached technological feasibility and therefore could not be
capitalized. We expect to continue to spend funds on improving our services and
adding functionality to our technology products including to the MyFamilyMD(TM)
application by adding MedWizard(R) tools, on CarePrime(TM) application, which
interacts with MyFamilyMD(TM) and its MedWizard(R) tools, and on
Health-e-Coordinator(TM) application by adding additional disease capabilities.
Commencing in the first quarter of 2003, we began to capitalize certain costs,
which are primarily developer salaries and out-sourced costs.
General and administrative expenses (excluding salary and related benefits
which are discussed separately below) decreased from $986,311 for the six months
ended June 30, 2002 to $496,701 for the six months ended June 30, 2003, a
decrease of 50%. Our ability to reduce general and administrative expenses is
attributable to increased efficiencies and the implementation of stringent
budgetary controls. Additionally, during the six months ended June 30, 2003, we
successfully negotiated the settlement of certain payables. We believe that we
currently have the resources to handle increased revenue with minimal
incremental fixed costs.
Salary and related benefits were $1,324,457 for the six months ended June
30, 2003 as compared to $1,954,997 for the six months ended June 30, 2002. The
decrease in salary and related benefits from the six months
G-121
ended June 30, 2002 to the six months ended June 30, 2003 was $630,540 or 32%.
Again, the reduction in salary and related benefits expenses is a direct result
of our continued efforts to consolidate positions and improve efficiencies.
Depreciation and amortization expenses were $877,164 for the six months
ended June 30, 2003, as compared to $847,522 for the six months ended June 30,
2002.
Marketing and publicity expenses were $1,604,609 for the six months ended
June 30, 2003 as compared to $327,092 for the six months ended June 30, 2002.
The increase of 390% or $1,277,517 is a direct result of our ongoing marketing
and investor relations campaigns to promote I-trax and our products and to
penetrate the disease management market. Of the total expense of $1,604,609 for
the six months ended June 30, 2003, $1,467,395 was non-cash. The non-cash
charges resulted from I-trax issuing common stock, granting warrants and having
certain of its shareholders contribute shares to an investor relations firm for
services rendered to us.
Interest expense and financing costs for the six months ended June 30,
2003 was $974,881, increasing by $483,911 or 99% from $490,970 for the six
months ended June 30, 2002. For the six months ended June 30, 2003, interest
expense includes charges for the amortization of the value assigned to the
original beneficial conversion value of debenture and the associated warrants,
with additional charges and amortization for additional beneficial conversion
value resulting from the June 2003 reset of the conversion price of the
debenture and the exercise price of the associated warrants. The charges for the
six months for all of these items amounted to $748,125. Generally, the
beneficial conversion value represents the benefit to the investor that results
from purchasing an immediately convertible debenture with a conversion price
that is less than fair market value on the date of purchase after first
allocating a portion of the proceeds from the debenture to the associated
warrants. The remaining balance of interest expense of approximately $227,000 is
associated with interest on other debt and the amortization of warrants granted
to certain shareholders for loans.
Amortization of debt issuance and conversion costs was $237,278 and
$90,960 for the six months ended June 30, 2003 and 2002, respectively. These
costs were incurred in selling the $2,000,000 debenture to Palladin and are
being amortized over the two-year life of the debenture. During the three months
ended June 30, 2003, the Company took a one-time charge of $122,228 in
connection with the re-pricing of the warrants granted to the party, which
brokered the transaction along with increasing the number of shares covered by
the warrant as per the broker agreement.
During the quarter ended March 31, 2003, in connection with the
termination of our agreement to acquire DxCG, Inc., a Boston-based predictive
modeling company, we charged $200,000 to earnings. This sum was released to DxCG
following DxCG's termination of the merger agreement because certain conditions
to closing were not satisfied, including third party financing for the cash
portion of the purchase price.
Our net loss was $3,705,995 for the six months ended June 30, 2003 as
compared to a net loss of $4,542,973 for the six months ended June 30, 2002, a
decrease of 18%.
Liquidity and Capital Resources
Working Capital Deficiency
As of June 30, 2003, we had a working capital deficiency of $1,821,084.
Through June 30, 2003 and the date of this report, we have been able to finance
these deficits with loans from our senior management team, their affiliates, a
director and through the continued sale of equity. Although we continue to run
cash flow deficits as of the date of this report, we also continue to make
progress towards producing positive cash flow from operations and we expect,
although no assurances exist, that we will reach operating cash flow break even
in the third quarter of 2003.
Additionally, during the six months ended June 30, 2003 and through the
date of this report, our Chief Executive and Operating Officers, along with
certain stockholders advanced to us in the form of loans $740,000 for working
capital. Our Chief Executive and Operating Officers have committed to continue
to fund us until we generate positive cash flow from operations, but at least
through July 1, 2004.
G-122
Sources and Uses of Cash
Despite our negative cash flows from operations, which amounted to
$1,513,292 for the six months ended June 30, 2003 and $2,787,377 for the six
months ended June 30, 2002, we have been able to secure funds to support our
operations. During the six months ended June 30, 2002, we secured funding by
selling equity securities and a debenture, which aggregated approximately
$3,800,000. Of the $3,800,000, we used approximately $2,200,000 to acquire
WellComm and the remainder to fund operations. During the six months ended June
30, 2003, we borrowed, (net of repayments) $925,000 from officers, related
parties and certain shareholders. Additionally, during June of 2003, we raised
approximately $1,000,000 in a private placement. The funds were used primarily
to fund operating activities and to continue the investment in our technology.
As of June 30, 2003, our current liabilities were $2,799,059, of which
$107,330 is due to related parties. The remainder of current liabilities of
approximately $2,700,000 is made up, primarily, of trade payables of
approximately $690,000, accrued expenses of approximately $540,000, $300,000
credit line payable, which was assumed with the acquisition of WellComm,
approximately $125,000 of deferred revenue, carrying value $700,000 of
convertible debenture (with a face value of $2,000,000 maturing in February
2004) and $275,000 of loans from shareholders. We have good relationships with
all of our vendors.
As of June 30, 2003, the face value of our long-term debt amounted to
$617,809 (but carrying value of $373,390) held by a group of investors led by
Psilos Group Partners, L.P., for which principal and interest is not due until
March 2006. Additionally, $780,230 is owed to officers and directors for
advances made to the Company. This amount has been classified as non-current
since neither us nor the officers and directors expect these advances to be
repaid within the next twelve months unless circumstances change.
Under a private placement initiated in June 2003, we raised approximately
$1,000,000 in cash, converted approximately $1,169,270 in related party loans,
of which $1,037,038 represented principal and $132,232 represented interest, and
converted $121,997 of deferred salaries by selling or issuing, applicable,
common stock. In this offering, we issued a total of 1,311,682 shares.
During the quarter ended June 30, 2003, we also issued stock for services.
Specifically, we issued 205,833 shares of common stock for investor relations
services valued at $331,048.
During May 2003, certain of our shareholders contributed loans (which were
thereafter converted into common stock) and common stock such that an investor
relations firm retained by us received an aggregate of 290,000 shares of common
stock as compensation for services. The benefit that we have received from these
contributions amounted to $437,900, based on the market price of our common
stock on the date of the contribution, and was charged to operations.
During May and June 2003, we granted 375,000 warrants with exercise prices
ranging from $1.50 to $1.76 to two individuals and an institution for investor
relations services pursuant to three separate consulting agreements expiring in
May and June 2004. The value of such warrants, utilizing the Black-Scholes
model, amounted to $645,000. Such amount has been charged to operations for the
three months ended June 30, 2003.
During May 2003 pursuant to the approval of our Board of Directors, we
granted an aggregate of 450,000 warrants with an exercise price of $1.80 per
share to our Chief Executive and Operating Officers for their continued
financial support and for their guarantees to continue to support us through
July 2004. The granting of such warrants did not result in any charges to
operations since they are deemed to be granted to our employees and accordingly
are treated similar to incentive stock options.
In April 2003, we borrowed $100,000 from a shareholder pursuant to a
convertible promissory note. The note, with an eleven-month term, accrues
interest at 6% per annum and a default interest rate of 12% per annum. The
principal and related accrued and unpaid interest is convertible by the
shareholder into common stock at $1.50 per share at any time. As consideration
for this loan, we also granted the shareholder a warrant to acquire 100,000
shares of common stock at an exercise price of $1.50 per share. The value
assigned to the warrant of $68,000 is
G-123
recorded as a discount to the convertible promissory note using the relevant
fair value of the debt and the warrants to the actual proceeds from the
convertible promissory note.
Critical Accounting Policies
Impairment of Goodwill and Intangible
We operate in an industry that is rapidly evolving and extremely
competitive. It is reasonably possible that our accounting estimates with
respect to the useful life and ultimate recoverability of our carrying basis of
goodwill and intangible assets could change in the near term and that the effect
of such changes on the financial statements could be material.
Revenue Recognition
We derive our revenue pursuant to different type contracts, including
perpetual software licenses, subscription licenses and custom development
services, all of which may also include support services revenue such as
licensed software maintenance, training, consulting and web hosting
arrangements. As described below, significant management judgments and estimates
must be made and used in connection with the revenue recognized in any
accounting period. Material differences may result in the amount and timing of
our revenue for any period if our management made different judgments or
utilized different estimates.
We license our software products for a specific term or on a perpetual
basis. Most of our license contracts also require maintenance and support. We
apply the provisions of Statement of Position 97-2, "Software Revenue
Recognition," as amended by Statement of Position 98-9 "Modification of SOP
97-2, Software Revenue Recognition, With Respect to Certain Transactions" to all
transactions involving the sale of software products and hardware transactions
where the software is not incidental. For hardware transactions where software
is not incidental, we do not unbundle the fee and we do not apply separate
accounting guidance to the hardware and software elements. For hardware
transactions where no software is involved we apply the provisions of Staff
Accounting Bulletin 101 "Revenue Recognition." In addition, we apply the
provisions of Emerging Issues Task Force Issue No. 00-03 "Application of AICPA
Statement of Position 97-2 to Arrangements that Include the Right to Use
Software Stored on Another Entity's Hardware" to our hosted software service
transactions.
We recognize revenue from the sale of software licenses when persuasive
evidence of an arrangement exists, the product has been delivered, the fee is
fixed and determinable and collection of the resulting receivable is reasonably
assured. Delivery generally occurs when product is delivered to a common
carrier.
At the time of the transaction, we assess whether the fee associated with
our revenue transactions is fixed and determinable and whether or not collection
is reasonably assured. We assess whether the fee is fixed and determinable based
on the payment terms associated with the transaction. If a significant portion
of a fee is due after our normal payment terms, which are 30 to 90 days from
invoice date, we account for the fee as not being fixed and determinable. In
these cases, we recognize revenue as the fees become due.
We assess collection based on a number of factors, including past
transaction history with the customer and the credit-worthiness of the customer.
We do not request collateral from our customers. If we determine that collection
of a fee is not reasonably assured, we defer the fee and recognize revenue at
the time collection becomes reasonably assured, which is generally upon receipt
of cash.
For arrangements with multiple obligations (for example, undelivered
maintenance and support), we allocate revenue to each component of the
arrangement using the residual value method based on the fair value of the
undelivered elements. This means that we defer revenue from the arrangement fee
equivalent to the fair value of the undelivered elements.
We recognize revenue for maintenance services ratably over the contract
term. Our training and consulting services are billed based on hourly rates, and
we generally recognize revenue as these services are performed. However, at the
time of entering into a transaction, we assess whether or not any services
included within the arrangement require us to perform significant work either to
alter the underlying software or to build additional
G-124
complex interfaces so that the software performs as the customer requests. If
these services are included as part of an arrangement, we recognize the entire
fee using the percentage of completion method. We estimate the percentage of
completion based on our estimate of the total costs estimated to complete the
project as a percentage of the costs incurred to date and the estimated costs to
complete.
We recognize service revenue as the services are rendered. We contracts
with our customers to provide services based on an established monthly fee, a
per-call charge or a combination of both.
Although as of the date of these financials, we have not entered into any
risk-based contracts, we expect that we will do so in the very near future.
These types of contracts are generally for terms of three to five years, provide
for an automatic renewal and typically provide that a percentage of our fees may
be refundable ("performance based") based on achieving a targeted percentage
reduction in the customer's healthcare costs.
Material Equity Transactions
Through June 30, 2003 we have executed equity transactions with related
and unrelated parties in connection with the raising funds for working capital
along with issuing securities in lieu of compensation for services received. We
believe that we have valued all such transaction pursuant to the various
accounting rules and that they ultimately represent the economic substance of
each transaction.
Item 3. Controls and Procedures
Within the 90-day period prior to the filing of this report, we carried
out an evaluation under the supervision and with the participation of our Chief
Executive Officer and Chief Financial Officer of the effectiveness of our
disclosure controls and procedures. Based on this evaluation, our Chief
Executive Officer and Chief Financial Officer have concluded that our disclosure
controls and procedures are effective to ensure that information we are required
to disclose in reports filed or submitted under the Securities Exchange Act of
1934 is recorded, processed, summarized and reported within the time periods
specified in Securities and Exchange Commission rules and forms. Subsequent to
the date of this evaluation, there were no significant changes in our internal
controls or in other factors that could significantly affect the disclosure
controls, including any corrective actions with regard to significant
deficiencies and material weaknesses.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities
Effective as of April 1, 2003, we issued a convertible promissory note in
the principal amount of $100,000 and convertible into common stock at $1.50 per
share and a warrant to acquire 100,000 shares of our common stock at $1.50 per
share to a an existing stockholder. The shareholder is an accredited investor.
In undertaking this issuance, we relied on an exemption from registration under
Section 4(2) of the Securities Act and Regulation D thereunder.
Effective as of June 2, 2003, we issued warrants to acquire 250,000 shares
of our common stock at $1.50 per share to two consultants as consideration for
investor relations services. We recorded an accounting expense of $430,000 in
connection with this issuance. Each of the consultants is an accredited
investor. In undertaking this issuance, we relied on an exemption from
registration under Section 4(2) of the Securities Act and Regulation D
thereunder.
Effective as of May 23, 2003, we issued a warrant to acquire 125,000
shares of our common stock at $1.76 per share to seven principals of an
investment bank as consideration for investment banking services. We recorded an
accounting expense of $215,000 in connection with this issuance. Each of the
principals is an accredited
G-125
investor. In undertaking this issuance, we relied on an exemption from
registration under Section 4(2) of the Securities Act and Regulation D
thereunder.
Effective as of May 15,2003 we issued 200,000 shares of our common stock
to a consultant as consideration for investor relations and other services. We
recorded an investor relations expense of $241,348 in connection with this
issuance. The consultant is an accredited investor. In undertaking this
issuance, we relied on an exemption from registration under Section 4(2) of the
Securities Act and Regulation D thereunder.
As of June 30, 2003, we issued a total of 1,311,682 shares of common stock
at $1.75 per share pursuant to a private placement initiated on June 2, 2003 in
exchange for cash, loans and interest accrued on such loans, and accrued
salaries. In undertaking this offering, we relied on an exemption from
registration under Section 4(2) of the Securities Act and Regulation D
thereunder. We filed a Form D with the Securities and Exchange Commission in
connection with the issuance of our common stock in this transaction.
In June 2003, in accordance with a contractual commitment, we reset the
exercise price of the warrant originally granted to a third party from $5.00 to
$1.75 per share and amended the warrant to increase the number of shares
issuable thereunder by 74,285 shares of common stock. In undertaking this
offering, we relied on an exemption from registration under Section 4(2) of the
Securities Act and Regulation D thereunder.
Item 3. Defaults upon Senior Securities
We did not default upon any senior securities during the quarter ended
June 30, 2003.
Item 4. Submission of Matters to a Vote of Security Holders
We held our annual meeting of stockholders in Philadelphia, Pennsylvania
on May 21, 2003. Of the 9,372,727 shares outstanding as of the record date,
6,578,387 shares were present or represented by proxy at the meeting. At this
meeting the following actions were voted upon:
(1) To elect the following directors to serve for a term ending upon the
2004 Annual Meeting of Stockholders or until their successors are elected and
qualified:
For Against
------------------- ------------------
John Blazek 6,529,988 2,000
David R. Bock 6,573,487 2,000
Philip D. Green 6,529,988 2,000
Dr. Michael M.E. Johns 6,529,988 2,000
Dr. Arthur N. Leibowitz 6,573,487 2,000
Frank A. Martin 6,529,988 2,000
Dr. David Nash 6,573,487 2,000
John R. Palumbo 6,529,988 2,000
Dr. Carol Rehtmeyer 6,529,588 2,000
R. Dixon Thayer 6,573,487 2,000
William S. Wheeler 6,573,487 2,000
(2) Ratify the appointment of Goldstein Golub Kessler LLP as the
Company's independent auditors for the fiscal year ending December 31, 2003.
For Against Abstain
--------------------- ----------------------- -------------------
6,489,776 86,811 1,800
Item 5. Other Information
None.
G-126
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
31.1 Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
31.2 Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
32.1 Certification Pursuant to 18 U.S.C section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
32.2 Certification Pursuant to 18 U.S.C section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
(b) Reports on Form 8-K
We filed a current report on Form 8-K with the Securities and Exchange
Commission on April 22, 2003 to report a Regulation FD disclosure.
We filed a current report on Form 8-K with the Securities and Exchange
Commission on May 19, 2003 to report a Regulation FD disclosure.
G-127
SIGNATURE
In accordance with Section 12 of the Securities Exchange Act of 1934, the
registrant caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized.
I-TRAX, INC.
Date: August 14, 2003 By: /s/ Frank A. Martin
--------------------------------
Name: Frank A. Martin
Title: Chief Executive Officer
G-128
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended: September 30, 2003
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT
Commission File Number: 0-30275
I-TRAX, INC.
------------------------------------------
(Exact name of small business issuer in its charter)
Delaware 23-3057155
-------------------------- --------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
One Logan Square, 130 N. 18th Street, Suite 2615
Philadelphia, Pennsylvania 19103
--------------------------
(Address of principal executive offices)
(215) 557-7488
--------------------------
(Issuer's telephone number)
-----------------------------------------------
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No [ ]
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: As of November 11, 2003, the
Registrant had 13,004,965 shares of its $0.001 par value common stock
outstanding.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
G-129
INDEX
Page No.
PART I. FINANCIAL INFORMATION................................................3
Item 1. Condensed Consolidated Financial Statements .....................3
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.......................................21
Item 3. Controls and Procedures.........................................29
PART II. OTHER INFORMATION..................................................29
Item 1. Legal Proceedings...............................................29
Item 2. Changes in Securities...........................................29
Item 3. Defaults upon Senior Securities.................................29
Item 4. Submission of Matters to a Vote of Security Holders.............29
Item 5. Other Information...............................................29
Item 6. Exhibits and Reports on Form 8-K................................30
G-130
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
I-TRAX, INC.
INDEX TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Page No.
Report of Independent Public Accountants 4
Consolidated Balance Sheets at September 30, 2003 (unaudited) and
December 31, 2002 5
Consolidated Statements of Operations for the three months ended
September 30, 2003 and 2002 (unaudited) 6
Consolidated Statements of Operations for the nine months ended
September 30, 2003 and 2002 (unaudited) 7
Consolidated Statement of Stockholders' Equity for the nine months
ended September 30, 2003 (unaudited) 8
Consolidated Statements of Cash Flows for the nine months ended
September 30, 2003 and 2002 (unaudited) 9
Notes to consolidated financial statements 11
G-131
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders
of I-trax, Inc.
We have reviewed the accompanying condensed consolidated balance sheet of
I-trax, Inc. (a Delaware corporation) and Subsidiaries as of September 30, 2003,
and the related condensed consolidated statements of operations for the three
month and nine month periods ended September 30, 2003 and the consolidated
statements of stockholders' equity and cash flows for the nine month period
ended September 30, 2003. These financial statements are the responsibility of
the company's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures and
making inquiries of persons responsible for financial and accounting matters. It
is substantially less in scope than an audit conducted in accordance with
generally accepted auditing standards, the objective of which is the expression
of an opinion regarding the condensed financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that should
be made to the condensed financial statements referred to above for them to be
in conformity with accounting principles generally accepted in the United States
of America.
We have previously audited, in accordance with auditing standards generally
accepted in the United States of America, the balance sheet as of December 31,
2002, and the related consolidated statements of operations, stockholders'
equity and cash flows for the year then ended (not presented herein); and in our
report dated March 5, 2003, we expressed an unqualified opinion on those
financial statements. In our opinion, the information set forth in the
accompanying condensed consolidated balance sheet as of December 31, 2002, is
fairly stated, in all material respects, in relation to the consolidated balance
sheet from which it has been derived.
GOLDSTEIN GOLUB KESSLER LLP
New York, New York
October 15, 2003
G-132
I-TRAX, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
September 30,
2003 December 31,
(unaudited) 2002
---------------- -----------------
Current assets:
Cash $ 245,257 $ 360,166
Due from life insurance company 500,000 --
Deposit on potential acquisition -- 200,000
Accounts receivable, net 564,167 597,635
Prepaid expenses 243,346 77,569
Other current assets 25,344 20,960
---------------- -----------------
Total current assets 1,578,114 1,256,330
---------------- -----------------
Office equipment, furniture, leasehold improvements and software development
costs, net 924,830 412,779
Deferred marketing costs, net 944,443 1,284,445
Goodwill 8,424,062 8,424,062
Intangible assets, net 1,907,100 2,748,087
Debt issuance cost, net 76,698 249,273
Security deposits 31,564 31,564
---------------- -----------------
Total assets $ 13,886,811 $ 14,406,540
================ =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Credit line payable 300,000 300,000
Accounts payable 711,400 918,791
Accrued expenses 442,559 743,151
Due to officers, directors and other related parties 547,560 225,000
Notes payable - other, net of discount 119,092 --
Capital lease payable 60,680 60,047
Deferred revenue -- 1,379,922
Debenture payable, net of discount 1,101,192 --
Other current liabilities -- 13,423
---------------- -----------------
Total current liabilities 3,282,483 3,640,334
---------------- -----------------
Capital lease obligation, net of current portion 33,813 96,765
Promissory notes and debenture payable, net of discount 397,500 1,245,876
Due to officers and directors 315,000 1,024,598
---------------- -----------------
Total liabilities 4,028,796 6,007,573
---------------- -----------------
Commitments and contingencies (Note 9)
Stockholders' equity
Preferred stock - $.001 par value, 2,000,000 shares authorized,
-0- issued and outstanding -- --
Common stock - $.001 par value, 100,000,000 shares authorized,
11,893,038 and 9,372,727 shares issued and outstanding, respectively 11,892 9,372
Additional paid in capital 46,008,482 39,236,119
Accumulated deficit (36,162,359) (30,846,524)
---------------- -----------------
Total stockholders' equity 9,858,015 8,398,967
---------------- -----------------
Total liabilities and stockholders' equity $ 13,886,811 $ 14,406,540
================ =================
See accompanying notes to consolidated financial statements (unaudited).
G-133
I-TRAX, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
(UNAUDITED)
Three months Three months
ended ended
September 30, September 30,
2003 2002
------------------ -----------------
Revenue:
Technology licenses $ 243,288 $ 366,340
Services 757,225 405,160
------------------ -----------------
Total revenue 1,000,513 771,500
------------------ -----------------
Cost of revenue:
Technology licenses 34,154 10,834
Services 284,749 314,089
------------------ -----------------
Total cost of revenue 318,903 324,923
------------------ -----------------
Gross profit 681,610 446,577
Operating expenses:
General and administrative 499,674 467,173
Salary and related benefits 750,223 845,967
Research and development -- 97,400
Depreciation and amortization 440,348 349,714
Marketing and publicity 96,762 39,413
------------------ -----------------
Total operating expenses 1,787,007 2,124,590
------------------ -----------------
Operating loss (1,105,397) (1,353,090)
------------------ -----------------
Other income (expenses):
Proceeds from life insurance policy 500,000 --
Amortization of debt issuance costs (57,525) (54,576)
Interest expense and financing costs (946,918) (287,965)
------------------ -----------------
Total other expenses (504,443) (342,541)
------------------ -----------------
Net loss $ (1,609,840) $ (1,695,631)
================== =================
Loss per common share:
Basic and diluted $ (.14) $ (.18)
================== =================
Weighted average number of shares outstanding: 11,121,724 9,391,370
================== =================
See accompanying notes to consolidated financial statements (unaudited).
G-134
I-TRAX, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
(UNAUDITED)
Nine months Nine months
ended ended
September 30, September 30,
2003 2002
------------------ -----------------
Revenue:
Technology licenses $ 1,553,344 $ 545,840
Services 2,114,496 1,230,677
------------------ -----------------
Total revenue 3,667,840 1,776,517
------------------ -----------------
Cost of revenue:
Technology licenses 74,858 32,501
Services 902,277 919,740
------------------ -----------------
Total cost of revenue 977,135 952,241
------------------ -----------------
Gross profit 2,690,705 824,276
Operating expenses:
General and administrative 1,020,317 1,290,284
Salary and related benefits 2,074,680 2,964,164
Research and development -- 320,220
Depreciation and amortization 1,317,512 1,197,236
Marketing and publicity 1,677,429 366,505
------------------ -----------------
Total operating expenses 6,089,938 7,090,650
------------------ -----------------
Operating loss (3,399,233) (5,314,133)
------------------ -----------------
Other income (expenses):
Proceeds from life insurance policy 500,000
Amortization of debt issuance costs (294,803) (145,536)
Costs in connection with uncompleted acquisition (200,000) --
Interest expense and financing costs (1,921,799) (778,935)
------------------ -----------------
Total other expenses (1,916,602) (924,471)
------------------ -----------------
Net loss $ (5,315,835) $ (6,238,604)
================== =================
Loss per common share:
Basic and diluted $ (.53) $ (.76)
================== =================
Weighted average number of shares outstanding: 10,111,766 8,207,741
================== =================
See accompanying notes to consolidated financial statements (unaudited).
G-135
I-TRAX, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003
(UNAUDITED)
Common Stock Additional Total
------------ Paid-in Accumulated Stockholders'
Shares Amount Capital Deficit Equity
--------- --------- ------------ ------------- ------------
Balances at December 31, 2002 9,372,727 $ 9,372 $ 39,236,119 $ (30,846,524) $ 8,398,967
Issuance of compensatory stock options 27,942 27,942
Mark to market of warrants granted for
investor relations services and stock
options granted to a former employee -- -- (4,097) -- (4,097)
Fair market value of detachable warrants
and additional beneficial conversion
value in connection with re-pricing of
convertible debenture -- -- 1,007,833 -- 1,007,833
Issuance of common stock for services 205,833 206 330,842 -- 331,048
Contribution in the form of common stock
given by shareholders for services
rendered to the Company 437,900 437,900
Sale of common stock, net of costs 1,253,986 1,254 2,404,135 -- 2,405,389
Issuance of warrants for services -- -- 645,000 -- 645,000
Fair value of detachable warrants issued in
connection with convertible note 68,000 68,000
Issuance of common stock for conversion of
related party debt and assigned debt 668,152 668 1,168,602 -- 1,169,270
Issuance of common stock for conversion of
deferred salaries 69,711 69 121,928 -- 121,997
Issuance of common stock upon conversion of
debenture 322,629 323 564,278 564,601
Net loss for the nine months ended September
30, 2003 -- -- -- (5,315,835) (5,315,835)
-------------- ------------- ---------------- -------------- ---------------
Balances at September 30, 2003 11,893,038 $ 11,892 $ 46,008,482 $ (36,162,359) $ 9,858,015
============== ============= ================ ============== ===============
See accompanying notes to consolidated financial statements (unaudited).
G-136
I-TRAX, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
(UNAUDITED)
Nine months Nine months
ended ended
September 30, September 30,
2003 2002
----------------- ----------------
Operating activities:
Net loss $ (5,315,835) $ (6,238,604)
Adjustments to reconcile net loss to net cash used in operating
activities:
Accretion of discount on notes payable charged to interest expense 556,322 364,791
Accretion of beneficial conversion value of debenture 1,053,064 316,217
Amortization of option liability (13,423) (107,385)
Amortization of debt issuance costs 294,803 145,536
Amortization of deferred marketing costs 340,002 --
Depreciation and amortization 977,509 1,239,958
Expenses for compensatory stock options and warrants 23,845 163,200
Issuance of securities for services 1,413,946 (152,200)
Write off of deposit on cancelled acquisition 200,000 --
Changes in operating assets and liabilities, net of acquisitions:
Decrease (increase) in:
Accounts receivable 33,468 174,858
Prepaid expenses (165,777) (18,649)
Other current assets (4,384) (26,081)
Due from life insurance company (500,000) --
(Decrease) increase in:
Accounts payable (207,391) 253,618
Accrued expenses 134,368 112,954
Deferred revenue (1,379,922) 2,668,063
--------------------- --------------------
Net cash used in operating activities (2,559,405) (1,103,724)
--------------------- --------------------
Investing activities:
Proceeds from repayment of note receivable -- 67,500
Cash used for property, equipment and software development costs (648,574) (25,732)
Proceeds from partial release of security deposit -- 45,120
Net cash to acquire WellComm Group, Inc. -- (2,045,065)
--------------------- --------------------
Net cash used in investing activities (648,574) (1,958,127)
--------------------- --------------------
Financing activities:
Principal payments on capital leases (62,319) (64,677)
Proceeds from credit line payable -- 125,000
Repayment to related parties (165,000) (65,000)
Notes payable repayments (175,000) --
Proceeds from officers, directors and other related parties 740,000 700,000
Proceeds from sale of common stock 2,405,389 1,943,476
Proceeds from notes payable 350,000 --
Costs of issuance of debenture -- (150,000)
Proceeds from issuance of debenture -- 2,000,000
--------------------- --------------------
Net cash provided by financing activities 3,093,070 4,488,799
--------------------- --------------------
Net increase (decrease) in cash (114,909) 1,426,948
Cash at beginning of period 360,166 1,029,208
--------------------- --------------------
Cash at end of period $ 245,257 $ 2,456,156
===================== ====================
Supplemental disclosure of non-cash flow information:
Cash paid during the period for:
Interest $ 27,839 $ 10,978
===================== ====================
(Continues on following page.)
G-137
I-TRAX, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
(Continues from previous page.)
Nine months Nine months
ended ended
September 30, September 30,
2003 2002
--------------------- --------------------
Schedule of non-cash investing and financing activities:
Issuance of 1,488,000 shares of common stock and granting of 112,000 stock
options in connection with acquisition of WellComm
Group, Inc. $ -- $ 10,480,000
===================== ====================
Issuance of common stock and warrants for finder fee $ -- $ 391,408
===================== ====================
Issuance of common stock upon conversion of related party debt and
assigned debt $ 1,169,270 $ --
===================== ====================
Issuance of common stock for conversion of deferred salaries $ 121,997 $ --
--------------------- --------------------
--------------------- --------------------
Issuance of common stock upon conversion of debenture $ 564,601 $ --
===================== ====================
See accompanying notes to consolidated financial statements (unaudited).
G-138
I-TRAX, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1--ORGANIZATION
I-trax, Inc. (the "Company") provides focused disease management and
comprehensive health management solutions designed to improve the health of the
populations it serves while reducing the cost of medical care. The Company was
incorporated in the State of Delaware on September 15, 2000. The Company's
common stock is traded on the American Stock Exchange under the symbol "DMX."
As of September 30, 2003, the Company had two wholly owned subsidiaries: I-trax
Health Management Solutions, Inc. ("Health Management"), a corporation, and
WellComm Group, LLC, a single member limited liability company.
NOTE 2--INTERIM RESULTS AND BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in accordance
with accounting principles generally accepted in the United States of America
for interim financial information, the instructions to Form 10-QSB and Items 303
and 310(B) of Regulation S-B. 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
three and nine months ended September 30, 2003. The results for the three and
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. The balance sheet at December 31, 2002 has been
derived from the audited financial statements at that date.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with accounting principles generally accepted
in the United States of America have been condensed or omitted pursuant to the
Securities and Exchange Commission's rules and regulations.
For the nine months ended September 30, 2003, the Company capitalized software
development costs amounting to $617,045 since technological feasibility has been
achieved.
Loss per common share is computed pursuant to SFAS No. 128, "Earnings Per
Share." Basic loss per share is computed as net income (loss) available to
common shareholders divided by the weighted average number of common shares
outstanding for the period. Diluted loss per share reflects the potential
dilution that could occur from common shares issuable through stock options,
warrants and convertible debt. As of September 30, 2003 and 2002, 5,809,093 and
1,836,556, respectively, of shares issuable upon exercise of options and
warrants were excluded from the diluted loss per share computation, as their
effect would be anti-dilutive.
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 the Company's report on Form 10-KSB for the year
ended December 31, 2002 filed on April 15, 2003.
For comparability, certain 2002 amounts have been reclassified, where
appropriate, to conform to the financial statement presentation used in 2003.
Effective January 3, 2003, the Company completed a 1-for-5 reverse stock split.
Accordingly, all information for 2002 presented herein has been adjusted
retroactively to reflect this reverse stock split.
G-139
I-TRAX, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 3--DUE FROM LIFE INSURANCE COMPANY
A senior executive officer and director of the Company died in September 2003.
In October 2003, the Company received proceeds of $500,000 from a key-person
life insurance policy maintained by the Company on the life of the deceased
senior executive officer. Accordingly, this amount was accrued as of September
30, 2003. Because the Company pledged the proceeds from this insurance policy as
security for loans made to the Company in 2002 and 2003 by the deceased senior
executive officer, a former director and a key employee, the Company dispersed
the proceeds from the insurance policy in October 2003 in partial satisfaction
of such loans.
NOTE 4--ACQUISITION OF WELLCOMM GROUP, INC.
On February 6, 2002, the Company acquired all of the issued and outstanding
common stock of WellComm Group, Inc. by issuing 1,488,000 shares of common stock
valued at $9,746,400, granting options valued at $733,600 to acquire 112,000
shares common stock at a nominal exercise price, and paying approximately
$2,200,000 in cash. The aggregate acquisition price amounted to approximately
$12,680,000. The financial statements include the operations of WellComm from
February 1, 2002 forward.
The following unaudited pro forma results of operations of the Company give
effect to the acquisition of WellComm for the nine months ended September 30,
2002 as if the acquisition was consummated at the beginning of that period.
Nine months
ended
September 30,
2002
-----------------
Total revenue $ 2,030,296
==================
Total expenses $ 8,253,170
==================
Net loss $ (6,222,874)
==================
Pro forma net loss per share:
Basic and Diluted $ (.66)
==================
Weighted average number of shares outstanding:
Basic and Diluted 9,391,296
==================
NOTE 5--RELATED PARTY TRANSACTIONS
At December 31, 2002, the Company owed to certain officers and directors
$1,024,598 and owed a relative of the Company's Chief Operating Officer an
additional $225,000. During February 2003, the Company repaid $140,000 of the
$225,000 loan outstanding to a relative of the Company's Chief Operating
Officer.
During February 2003, pursuant to two promissory notes, two former directors of
the Company advanced $200,000 to the Company for working capital. The notes
accrue interest at 8% per year and mature in February 2004. In addition, through
June 30, 2003, the Company's Chief Executive and Operating Officers, along with
a director of the Company, advanced the Company a total of $540,000 for working
capital at an interest rate of 8% per year. During the three months ended
September 30, 2003, the Company repaid $25,000 to its Chief Executive Officer.
The Company's Chief Executive and Operating Officers have committed to continue
to support the Company through July 1, 2004.
G-140
I-TRAX, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 5--RELATED PARTY TRANSACTIONS (cont'd)
In June 2003, certain of the Company's officers, directors and a venture capital
fund managed by the Company's Chief Executive Officer converted $909,421,
comprised of loans and advances of $790,697 and accrued interest of $118,724,
into 519,667 shares of common stock at $1.75 per share. In addition, certain of
the same parties assigned additional loans in the principal amount of $246,342,
and accrued interest of $13,507 thereon, to an investor relations firm, which
thereafter converted the assigned loans into common stock also at $1.75 per
share. The price of the conversions was determined with reference to a private
placement of common stock to third parties completed by the Company
contemporaneously with the conversions as disclosed in Note 10 below.
At September 30, 2003, based on repayment terms agreed upon with certain
officers, the Company classified $315,000 of outstanding loans and advances as a
non-current liability because they are not due within the next twelve months.
Interest expense associated with related party loans amounted to $13,951 and
$13,792 for the three months ended September 30, 2003 and 2002, respectively.
For the nine months ended September 30, 2003 and 2002, interest expense
associated with related party loans amounted to $70,686 and $41,876,
respectively.
NOTE 6--NOTES PAYABLE--OTHER
In April 2003, the Company borrowed $100,000 from a shareholder pursuant to a
convertible promissory note. The note, with an eleven-month term, accrues
interest at 6% per annum and a default interest rate of 12% per annum. The
principal and related accrued and unpaid interest is convertible by the
shareholder into common stock at anytime at $1.50 per share. As consideration
for this loan, the Company also granted the shareholder a warrant to acquire
100,000 shares of common stock at an exercise price of $1.50 per share. The
value assigned to the warrant of $68,000 is recorded as a discount to the
promissory note using the relevant fair value of the debt and the warrant to the
actual proceeds from the convertible promissory note. The discount is being
accreted to interest expense over the life of the convertible promissory note.
For the three months ended September 30, 2003, the discount accreted to interest
expense associated with the convertible promissory note amounted to $18,546. At
September 30, 2003 the carrying value of the note amounted to $69,092 and is
included in "Notes payable - other" on the accompanying condensed consolidated
balance sheets.
Pursuant to a promissory note dated April 10, 2003, the Company borrowed
$150,000 from a shareholder with an interest rate of 12% per annum, requiring
monthly payments of $25,000 plus accrued interest with a final payment due on
December 31, 2003. As of September 30, 2003, the outstanding principal balance
on this loan is $50,000. For the three months ended September 30, 2003, interest
expense amounted to approximately $3,750.
On May 29, 2003, the Company borrowed $100,000 from a shareholder. The loan was
due on September 29, 2003 and it accrued interest at 12% during the four-month
period it was outstanding. For the three months ended September 30, 2003,
interest expense associated with this loan amounted to approximately $9,000. The
loan and related interest amounting to $112,000 was repaid in full on September
29, 2003.
G-141
I-TRAX, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 7--PROMISSORY NOTES PAYABLE
On March 2, 2001 the Company borrowed $692,809 from an investor group that
included $75,000 from a venture capital fund managed by the Company's Chief
Executive Officer. The loan bears interest at 8% per annum, with a default rate
of 12% per annum, and is due on March 2, 2006. The Company also granted this
investor group warrants to purchase 364,694 shares of common stock at $0.50 per
share, which were exercised in the first quarter of 2002.
The value assigned to detachable warrants of $459,854 is being accreted to
interest expense over the five-year term of the underlying promissory notes. The
amount accreted to interest expense amounted to $22,677 and $22,677 for the
three months ended September 30, 2003 and 2002, respectively. For the nine
months ended September 30, 2003 and 2002 the amount accreted to interest expense
amounted to $68,031 and $68,031, respectively. At September 30, 2003, the
carrying value of the notes amounted to $397,500 and is included in the
"Promissory notes, net of discount" on the accompanying consolidated balance
sheets.
In June 2003, as part of certain related parties converting and assigning debt
as discussed in Note 5 above, the venture capital fund managed by the Company's
Chief Executive Officer, with the consent of the Company, assigned the fund's
loan in the principal amount of $75,000 and a portion of the accrued interest
thereon amounting to $6,669 to an investment relations firm, which thereafter
converted the assigned loan into common stock at $1.75 per share. The balance of
the accrued interest not assigned in the amount of $6,098 was converted into
3,484 shares of common stock also at $1.75 per share. The price of the
conversion was determined with reference to a private placement of common stock
to third parties completed by the Company contemporaneously with the conversion
as disclosed in Note 10 below.
NOTE 8--CONVERTIBLE DEBENTURE
The Company funded the acquisition of WellComm by selling a 6% convertible
senior debenture in the aggregate principal amount of $2,000,000 to Palladin
Opportunity Fund LLC. Pursuant to the purchase agreement, the Company also
issued Palladin a warrant to purchase an aggregate of up to 307,692 shares of
common stock at an exercise price of $5.50 per share. The outstanding principal
and any interest under the debenture are payable in full on or before February
3, 2004. Further, outstanding principal and any accrued interest may be
converted at any time at the election of Palladin into common stock. The
original conversion price of the debenture was $5.00 per share. In accordance
with the terms of the debenture, the price was reset to $3.03 in February 2003
and to $1.75 in June 2003. In accordance with the terms of the warrant, the
exercise price of the warrant was reset from $5.50 to $1.75 in June 2003. For
the three months ended September 30, 2003, Palladin converted an aggregate of
$564,601 of the amount due on the debenture for which the Company issued 322,629
shares of common stock.
The initial value assigned to the warrant of $890,272 was recorded as a discount
to the debenture and is being accreted to interest expense over the life of the
debenture. As a result of resetting of the exercise price of the warrant in June
2003, the Company recorded $203,077 of interest expense for the additional
market value of the warrant on the date of resetting. The amount accreted to
interest expense associated with the value assigned to the warrant amounted to
$260,650 and $111,285 for the three months ended September 30, 2003 and 2002,
respectively. For the nine months ended September 30, 2003 and 2002 the amount
accreted to interest expense amounted to $575,012 and $333,855, respectively.
Upon the initial sale of the debenture, the Company recorded a beneficial
conversion value of $948,651. The beneficial conversion value represents the
difference between the fair market value of the common stock on the date the
debenture was sold (or the date the conversion price is changed) and the price
at which the debt could be converted into common stock.
G-142
I-TRAX, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 8--CONVERTIBLE DEBENTURE (cont'd)
The beneficial conversion value was increased by $682,528 as a result of the
reset in June 2003. As of September 30, 2003, the carrying value of the
debenture amounted to $1,101,192 and is classified as a current liability in the
accompanying condensed consolidated balance sheet. The carrying value of the
debenture is net of Palladin's partial conversion of the debenture as describe
above.
As a result of Palladin's partial conversion of the debenture, the Company
recorded $254,310 of additional interest expense for the quarter ended September
30, 2003. This amount represents the portion of the beneficial conversion value
associated with the principal being converted and was therefore charged to
interest expense immediately instead of being amortized over time.
Accordingly, the Company recorded $527,508 and $118,581 of interest expense for
the three months ended September 30, 2003 and 2002, respectively for the
amortization of the beneficial conversion value of the debenture. For the nine
months ended September 30, 2003 and 2002, the Company recorded $849,986 and
$355,743, respectively.
Lastly, in connection with facilitating the transaction with Palladin, the
Company initially recorded $416,610 of debt issuance costs comprised of $130,000
of cash, 6,200 shares of common stock valued at $40,610 and a warrant to acquire
40,000 shares of common stock at $5.00 per share valued at $246,000 delivered to
a third party that brokered the transaction. In connection with the reset in
June 2003 of the conversion price of Palladin's debenture and the exercise price
of Palladin's warrant, the Company also, in accordance with a contractual
commitment: (1) reset the exercise price of the warrant originally granted to
the third party from $5.00 to $1.75 per share, resulting in a charge to
operations of $26,400 for additional debt issuance costs; and (2) increased the
shares of common stock issuable under the warrant by 74,285 shares, resulting in
a further charge to operations of $95,828. For the three months ended September
30, 2003 and 2002 the amortization of these debt issuance costs amounted to
$57,525 and $54,576, respectively, whereas for the nine months ended September
30, 2003 and 2002, such amortization amounted to $294,803 and $145,536,
respectively.
NOTE 9--COMMITMENTS AND CONTINGENCIES
Nature of Business
The Company is subject to risks and uncertainties common to growing technology
companies, including rapid technological developments, reliance on continued
development and acceptance of the Internet and health care applications
utilizing the Internet, intense competition and a limited operating history.
Significant Customers
Financial instruments, which may expose the Company to concentrations of credit
risk, consist primarily of accounts receivable. As of September 30, 2003, two
customers represented 24% and 11% of the total accounts receivable. For the
three months ended September 30, 2003, the Company had two customers, each of
which accounted for 13% of total revenue. For the nine months ended September
30, 2003, the Company also had two customers that accounted for 38% and 11% of
total revenue.
G-143
I-TRAX, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 9--COMMITMENTS AND CONTINGENCIES (cont'd)
Risk Sharing Contracts
The Company enters into risk sharing contracts with some customers in certain
disease management arrangements. These contracts are generally for terms of
three to five years and provide that a percentage of the Company's fees may be
refunded to a customer if the Company does not save such customer a
pre-determined percentage of the expenses incurred by individuals whose health
is managed by the Company. As of September 30, 2003, the Company is not a party
to any risk sharing contracts.
NOTE 10--STOCKHOLDERS' EQUITY
Issuance of Common Stock
During May and June 2003 the Company issued an aggregate of 205,833 shares of
common stock to four investor relations firms. The common stock valued at
$331,048, based on the market price of the Company's common stock on the date of
issuance, has been charged to operations for the three months ended June 30,
2003.
During May 2003, certain shareholders of the Company contributed loans (which
were thereafter converted into common stock) and common stock such that an
investor relations firm retained by the Company received an aggregate of 290,000
shares of common stock as compensation for services. The benefit that the
Company has received from these contributions aggregates $437,900 based on the
market price of the Company's common stock on the date of the contribution, and
was charged to operations.
During June 2003 the Company sold 613,986 shares of common stock at $1.75 per
share yielding net proceeds (after direct costs including 40,167 shares of
common stock) of $1,004,186.
During June 2003, the Company issued 519,667 shares of common stock in
connection with the conversion of related party debt and accrued interest
thereon amounting to $909,421 based on the market price of the Company's common
stock on the date of issuance.
During June 2003, the Company issued 148,485 shares of common stock in
connection with the conversion of assigned debt to an investor relations firm
amounting to $259,849 based on the market price of the Company's common stock on
the date of issuance.
During June 2003, the Company issued 69,711 shares of common stock in connection
with the conversion of deferred salaries amounting to $121,997 based on the
market price of the Company's common stock on the date of issuance.
During the three months ended September 30, 2003, Palladin converted $564,601 of
principal outstanding under the convertible debenture into 322,629 shares of the
Company's common stock.
During August 2003 the Company commenced a private placement whereby it offered
as a unit, two shares of common stock and a warrant to purchase an additional
share of common stock exercisable at $3.00 (the market price on the Company's
common stock on the date the Company commenced the private placement) for a unit
purchase price of $5. The maximum amount offered was $3,500,000. Through
September 30, 2003, the Company has issued 640,000 shares of common stock and
granted warrants to purchase 320,000 additional shares under this private
placement. The Company has realized net proceeds of $1,401,203 after expenses as
of September 30, 2003.
G-144
I-TRAX, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 10--STOCKHOLDERS' EQUITY (cont'd)
Issuance of Warrants
During May and June 2003, the Company granted fully vested, non-forfeitable
warrants to purchase 375,000 shares of common stock with exercise prices of
$1.50 and $1.76 (based on market value at the date of issuance) to two
individuals and an institution for investor relations services pursuant to three
separate consulting agreements expiring in May and June 2004. The value of such
warrants, utilizing the Black-Scholes model amounted to $645,000. Such amount
has been charged to operations for the three months ended June 30, 2003.
During May 2003 pursuant to the approval of the Board of Directors, the Company
granted warrants to purchase an aggregate of 450,000 shares for an exercise
price of $1.80 per share (representing a premium over market price on the date
of grant) to its Chief Executive and Operating Officers for their continued
financial support and for their guarantees to continue to support the Company
through January 2004. The granting of such warrants did not result in any
charges to operations because they were granted to employees.
In April 2003, the Company borrowed $100,000 from a shareholder pursuant to a
convertible promissory note. The note, with an eleven-month term, accrues
interest at 6% per annum and a default interest rate of 12% per annum. The
principal and related accrued and unpaid interest is convertible at any time by
the shareholder into common stock at $1.50 per share. As consideration for this
loan, the Company also granted the shareholder a warrant to acquire 100,000
shares of common stock at an exercise price of $1.50 per share. The value
assigned to the warrant is $68,000 and is recorded as a discount to the
convertible promissory note using the relative fair value of the debt and the
warrants to the actual proceeds from the convertible promissory note and is
being accreted to interest expense over the life of the note.
In connection with the reset in June 2003 of the conversion price of Palladin's
debenture and the exercise price of Palladin's warrant, the Company, in
accordance with a contractual commitment, reset the exercise price of the
warrant originally granted to a third party that brokered the Palladin
investment from $5.00 to $1.75 per share and amended the warrant to increase the
number of shares issuable thereunder by 74,285 shares of common stock. This
reset of the exercise and the amendment to the warrant resulted in a charge to
operations in the amount of $95,828.
The following table summarizes the Company's activity as it relates to its
warrants for the nine months ended September 30, 2003:
Shares
-----------------
Balance outstanding at January 1, 2003 2,132,953
Quarter ended March 31, 2003:
Granted --
Exercised --
------------------
Balance outstanding at March 31, 2003 2,132,953
------------------
Quarter ended June 30, 2003:
Granted 999,285
Exercised --
------------------
Balance outstanding at June 30, 2003 3,132,238
------------------
Quarter ended September 30, 2003:
Granted 320,000
Exercised
------------------
Balance outstanding at September 30, 2003 3,452,238
==================
G-145
I-TRAX, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 10--STOCKHOLDERS' EQUITY (cont'd)
Stock Options
The table below summaries the activity in the Company's stock option plans for
the nine months ended September 30, 2003:
Non-Plan
Non-Qualified Non-Qualified
Incentive Options Options Options Total
-------------------------------------------------------------------------------------------------------------
Outstanding as of
January 1, 2003 735,829 535,973 439,000 1,710,802
Granted 20,000 40,000 -- 60,000
Exercised -- -- -- --
Forfeited/Expired (127,971) (40,000) -- (167,971)
-----------------------------------------------------------------------------------
Outstanding as of
March 31, 2003 627,858 535,973 439,000 1,602,831
-----------------------------------------------------------------------------------
Granted 130,000 300,000 300,000 730,000
Exercised -- -- -- --
Forfeited/Expired (13,976) (10,000) (23,976)
-----------------------------------------------------------------------------------
Outstanding as of
June 30, 2003 743,882 825,973 739,000 2,308,855
Granted 48,000 - - 48,000
Exercised - - - -
Forfeited/Expired - - - -
-----------------------------------------------------------------------------------
Outstanding as of
September 30, 2003 791,882 825,973 739,000 2,356,855
===================================================================================
Vesting Dates:
December 31, 2003 125,144 141,004 189,164 453,312
December 31, 2004 190,706 200,998 101,665 473,786
December 31, 2005 104,795 82,665 75,006 246,967
December 31, 2006 57,587 50,504 -- 96,340
December 31, 2007 -- 333 -- 333
Thereafter -- -- 20,000 20,000
As of September 30, 2003, there were outstanding an aggregate of 1,017,617 of
exercisable plan and non-plan options with exercise prices ranging from $.01 to
$10.00.
G-146
I-TRAX, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 10--STOCKHOLDERS' EQUITY (cont'd)
Stock Options (cont'd)
The Company accounts for its employee incentive stock option plans and warrants
issued to employees using the intrinsic value method in accordance with the
recognition and measurement principles of Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees," as permitted by SFAS No.
123. Had the Company determined compensation expense base on the fair value at
the grant dates for those awards consistent with the method of SFAS 123, the
Company's net loss per share would have been increased to the following pro
forma amounts:
For the three For the three For the nine For the nine
months ended months ended months ended months ended
September 30, September 30, September 30, September 30,
2003 2002 2003 2002
----------------- ------------------ ----------------- -------------------
Net loss as reported $ (1,609,840) $ (1,695,631) $ (5,315,835) $ (6,238,604)
Add back intrinsic value of the
options issued to employee and
charged to operations -- -- 23,845 163,200
Deduct total stock based
employee compensation expense
determined under fair value
based methods for all awards (817,118) (639,310) (2,952,906) (2,155,403)
------------------ ------------------- ------------------ --------------------
Pro forma net loss (2,426,958) (2,334,941) (8,244,896) (8,230,807)
================== =================== ================== ====================
Basic and diluted net loss per
share as reported $ (.14) $ (.18) $ (.53) $ (.76)
------------------ ------------------- ------------------ --------------------
Pro forma basic and diluted net
loss per share $ (.22) $ (.25) $ (.82) $ (1.00)
================== =================== ================== ====================
NOTE 11--AGREEMENT TO ACQUIRE DxCG, INC.
On November 8, 2002, the Company entered into a merger agreement to acquire
DxCG, Inc. for a total purchase price of approximately $10,000,000. Under the
terms of this agreement and at the time this agreement was executed, the Company
deposited $200,000 into an escrow account. This sum was intended to be released
to DxCG if DxCG terminated the merger agreement because the Company failed to
satisfy certain conditions to closing, including third party financing for the
cash portion of the purchase price. The Company did not secure the financing and
accordingly such agreement was terminated which, in turn, resulted in the
Company's charging the $200,000 to earnings in the first quarter of 2003.
G-147
I-TRAX, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 12--SUBESEQUENT EVENTS
During October 2003, the Company issued 760,000 shares of common stock and
granted warrants to purchase an additional 380,000 shares of common stock
pursuant to the private placement commenced during August 2003. The Company has
realized $1,676,242 after expenses for these October sales. See Note 10 above
for further discussion.
During October 2003, the Company received $175,000 from Palladin in connection
with the partial exercise of its warrants to purchase 100,000 shares of common
stock at $1.75 each.
During October 2003, Palladin converted $175,000 of principal outstanding under
the convertible debenture into 100,000 shares of the Company's common stock.
During October 2003, the Company repaid $300,000 owed on its line of credit,
representing payment in full.
During October 2003, the Company repaid to the estate of a deceased senior
executive officer, a former director and a key employee $500,000 of loans using
proceeds of a life insurance policy. See Note 3 above for further discussion.
During October 2003, the Company repaid a shareholder $50,000 (along with
accrued interest), which represented the total balance outstanding as of
September 30, 2003. The original loan in the amount of $150,000 was made to the
Company pursuant to a promissory note dated April 10, 2003.
G-148
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following discussions of the financial condition and related
results of operations of I-trax, Inc. and its subsidiaries should be reviewed in
conjunction with our financial statements and related notes appearing on the
preceding pages as well as our audited financial statements for the fiscal year
ended December 31, 2002, incorporated into our Form 10-KSB, filed on April 15,
2003.
This Management's Discussion and Analysis of Financial Condition and
Results of Operations contains forward-looking statements, which are based upon
current expectations and involve a number of risks and uncertainties. In order
for I-trax, Inc. to utilize the "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995, investors are hereby cautioned that
these statements may be affected by important factors, which are set forth below
and elsewhere in this report, and consequently, actual operations and results
may differ materially from those expressed in these forward-looking statements.
The important factors include our ability to continue as a going concern and our
ability to execute contracts for disease management services and software
technology.
Our Business
I-trax enables better healthcare through personalized health management
programs.
We believe that our personalized disease and life-style management
solutions enable organizations to evolve from fragmented care management
practices into a cohesive and efficient system of healthcare. Our solutions are
fully integrated, use a single-data platform that allows all caregivers to share
records, and enable our clients to provide true coordination of care. We believe
that by facilitating real-time communication between all stakeholders within
today's complex healthcare system, our solutions reduce costs and enable the
best possible delivery of care.
Health-e-Life(SM) Program
We deliver our solutions through our proprietary Health-e-Life((SM))
Program. The Program is designed to deliver lifestyle, disease and risk
reduction interventions to an entire population by utilizing predictive science,
technology, clinical expertise and care coordination.
Predictive Science
Our Health-e-Life(SM) Program incorporates predictive science to
analyze our clients' medical claims and pharmacy and clinical data to predict
future healthcare costs. We believe this is an essential step to effective
disease and life-style management. Experts agree that predictive science
provides a comprehensive advantage to health plans, employers and providers, and
leads to cost effective medical management and greater profitability. Using
predictive science, we analyze our clients' entire populations to accurately
predict our clients' future healthcare costs, including avoidable costs, the
health conditions that will drive those costs and the people within our clients'
populations who are at risk for those conditions. Armed with this information,
I-trax is able to target the most appropriate resources to achieve the best
savings and return on investment for our clients.
Technology Solutions
All technology components of our Health-e-Life(SM) Program utilize a
single data platform--Medicive(R) Medical Enterprise Data System--a proprietary
software architecture developed to collect, store, retrieve and analyze a broad
range of information used in the healthcare industry.
Further, our web accessible solutions include portals for key
stakeholders in the care delivery process--consumers, physicians and care
managers--thus permitting real-time sharing of information and adherence to our
health and disease intervention programs. The key technology we use for
effective care coordination include:
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o Health-e-Coordinator(TM), a web-based care management
application;
o MyFamilyMD(TM), a consumer health management portal;
o CarePrime(R), a clinical care application for
physicians and clinicians; and
o I-talk(TM), interactive smart voice technology.
Interventions and Clinical Expertise
Our personalized health and disease interventions include intensive
programs for individuals who suffer from, or are at high risk for, active or
chronic disease and tailored programs for individuals who are at low risk.
Depending on the individual's level of risk, our custom tailored interventions
include self-help programs available through the web or person-assisted programs
administered through our Care Communication Center, which is staffed by trained
nurses and other health professionals 24 hours per day, 7 days per week. All
interventions include life-style and risk reduction programs that follow
evidence-based clinical guidelines to optimize health, fitness, productivity and
quality of life.
We have designed and are implementing interventions for a number of
specific chronic conditions, including congestive heart failure (CHF), coronary
artery disease (CAD), asthma, diabetes, cancer management, cystic fibrosis,
lower back pain and chronic obstructive pulmonary disease (COPD).
Care Communication Center
Our Care Communications Center is staffed with registered nurses and
other healthcare professionals 24 hours per day, 7 days per week. Through the
Center, we affect targeted interventions to improve the health management of the
populations we serve. The Center helps consumers make informed decisions about
their health and provides ongoing support for those with chronic diseases. Our
demand management and nurse triage services incorporate nationally recognized,
evidence-based clinical guidelines to ensure that all caregivers and consumers
are following the best practices.
Listing on the American Stock Exchange
Effective January 3, 2003 we completed a 1-for-5 reverse stock split.
Our Board of Directors and stockholders authorized the reverse stock split in
connection with the then pending application to list our common stock on the
American Stock Exchange. We began trading on the American Stock Exchange on
January 15, 2003 under the symbol "DMX."
Corporate Overview
I-trax was incorporated in the State of Delaware on September 15, 2000.
We currently have two wholly owned subsidiaries: I-trax Health Management
Solutions, Inc. (formerly known as I-Trax.com, Inc.) ("Health Management"), a
corporation, and WellComm Group, LLC, a single member limited liability company.
We conduct our operations through Health Management and WellComm Group, LLC.
Our Customers
As of the date of this filing, we serve approximately 70 customers. Our
customers include physician groups, hospitals, health plans, including plans
providing Medicaid and Medicare covered services, universities, colleges and
agencies and branches of the United States government.
Marketing Strategy
We continue to focus the majority of our marketing efforts on the
following markets:
o Self-Insured Employers. Self-insured employers have a
significant stake in making sure that employees and
their dependents are empowered with tools to make the
best and most educated healthcare decisions. We
believe that correct and informed decisions will not
only reduce direct healthcare costs, but also reduce
employee absenteeism and improve employees' focus at
G-150
work. Where employees are older or retired and at
risk for chronic diseases, early risk identification
and targeted interventions will help reduce costs and
improve quality of life. Third party administrators,
the organizations that process claims for most
self-insured employers, are an important channel in
pursuing this market segment.
o Health Plans and Health Insurers. We believe that the
era of health maintenance organizations denying
access to care as a measure to reduce costs is over.
We believe that health plans and health insurers are
under increasing pressure to revise their methods to
reduce medical errors, coordinate care and implement
technology enabled population health management
solutions and disease management programs. We believe
that denial of access was a short-term solution that
is now causing escalated costs. Population health
management is a long-term solution with proven return
on investment.
o Health Systems and Hospitals. Hospitals and health
systems are under increasing financial pressure to
balance the expense of high quality medical care with
public and private insurers' reimbursements. Our
solutions assist hospitals and health systems to
reduce costs while enhancing the service and care
provided to patients.
Results of Operations
Three Months Ended September 30, 2003 Compared to Three Months Ended
September 30, 2002
Revenue for the three months ended September 30, 2003 was $1,000,513,
an increase of $229,013 or 30% from $771,500 for the three months ended
September 30, 2002. Total revenue was comprised of two components: (1)
prevention and care services revenue of $757,225; and (2) technology license and
services revenue of $243,288. Of the total technology license and services
revenue, $125,000 represents revenue from the exclusive license of CarePrime(R)
and MyFamilyMD(TM) to UICI, Inc. We contracted this license and software
development in the third quarter of 2002 and we are recognizing it based on
deliverables. We expect that a significant portion of revenue in future periods
will be generated from the delivery of care services through our
Health-e-Life(SM) Program.
Cost of revenue for the three months ended September 30, 2003 was
$318,903, a decrease of 2% from $324,923 for the three months ended September
30, 2002. The small decrease is attributable to streamlining of personnel costs
required to service our prevention and care services contracts. We expect future
revenue to be made up largely of prevention and care services. Because the costs
associated with these services are variable in nature, we expect our expenses
will increase in line with our revenues.
Commencing in the first quarter of 2003, we have begun to capitalize
certain development costs, which are comprised primarily of developer's salaries
and outsourced expenses. As of September 30, 2003, we have capitalized an
aggregate of $617,045 in costs.
For the three months ended September 30, 2003 we capitalized $241,500.
Such costs were expensed during the quarter ended September 30, 2002 because the
products under development had not reached technological feasibility and
therefore the related expense could not be capitalized. We expect to continue to
spend funds to improve our services and to add functionality to our technology
products. Such products include the MyFamilyMD(TM) application and its
MedWizard(R) tools, the CarePrime(TM) application, which interacts with
MyFamilyMD(TM) and its MedWizard(R) tools, and the Health-e-Coordinator(TM)
application, which is a disease management platform.
General and administrative expenses (excluding salary and related
benefits which are discussed separately below) increased slightly from $467,173
for the three months ended September 30, 2002 to $499,674 for the three months
ended September 30, 2003. We believe that we currently have the resources to
handle increased revenue without major increases in general and administrative
expenses.
Salary and related benefits were $750,223 for the three months ended
September 30, 2003 as compared to $845,967 for the three months ended September
30, 2002. The decrease in salary and related benefits from the three months
G-151
ended September 30, 2002 to the three months ended September 30, 2003 was
$95,744 or 11% resulting from consolidating positions and improving
efficiencies.
Depreciation and amortization expenses were $440,348 for the three
months ended September 30, 2003, as compared to $349,714 for the three months
ended September 30, 2002. The increase is primarily attributable to certain
intangible assets acquired in October 2002.
Marketing and publicity expenses were $96,762 for the three months
ended September 30, 2003 as compared to $39,413 for the three months ended
September 30, 2002. The increase of 146% or $57,349 is a direct result of
augmented marketing and investor relation campaigns to promote I-trax and
penetrate the disease management market.
Interest expense and financing costs for the three months ended
September 30, 2003 were $946,918, an increase of $658,953 or 229% from $287,965
for the three months ended September 30, 2002. Interest expense for the three
months ended September 30, 2003 includes charges of approximately $838,825
related to the Palladin debenture and related warrants. Of this amount, $29,571
represents 6% interest on the debenture for the three months ended September 30,
2003; $554,844 represents amortization of the value assigned to the original
beneficial conversion value of the Palladin debenture and the associated
warrants and additional charges and amortization for the further beneficial
conversion value caused by the June 2003 resetting of the conversion price of
such debenture and the exercise price of the associated warrants; and $254,310
represents an accelerated charge to interest expense for the portion of the
debenture converted during the three months ended September 30, 2003. During
this period, Palladin converted approximately $561,000 of principal outstanding
under the debenture into common stock. Generally, the beneficial conversion
value represents the benefit to the investor that results from purchasing an
immediately convertible debenture with a conversion price that is less than fair
market value on the date of purchase after first allocating a portion of the
proceeds from the debenture to the associated warrants. The remaining balance of
interest expense of approximately $108,093 is associated with interest on other
debt and the amortization of warrants granted to certain shareholders for loans
made to I-trax.
Amortization of debt issuance and conversion costs was $57,525 and
$54,576 for the three months ended September 30, 2003 and 2002, respectively.
These amounts represent costs incurred in selling the $2,000,000 debenture to
Palladin and will be amortized over the two-year life of the debenture.
Carol Rehtmeyer, a senior executive officer and director of I-trax,
died in September 2003. In October 2003, we received proceeds of $500,000 from a
key-person life insurance policy we maintained on the life of the deceased
senior executive officer. Accordingly, this amount was accrued as of September
30, 2003. Because we were obligated to use the proceeds of this policy to pay
certain loans, we dispersed the proceeds from insurance policy in October 2003
in partial satisfaction of such loans.
For the three months ended September 30, 2003 our net loss was
$1,609,840 as compared to a net loss $1,695,631 for the three months ended
September 30, 2002, a decrease of 5%.
Nine Months Ended September 30, 2003 Compared to Nine Months Ended
September 30, 2002
Revenue for the nine months ended September 30, 2003 was $3,667,840, an
increase of $1,891,323 or 106% from $1,776,517 for the nine months ended
September 30, 2002. The increase in revenue is primarily attributable to I-trax
recognizing approximately $1,400,000 of deferred revenue pursuant to a contract
executed during the third quarter of 2002. The balance of the increase is
associated with new care services contracts executed during the nine months
ended September 30, 2003. Total revenue was comprised of two components: (1)
prevention and care services revenue of $2,114,496; and (2) technology license
and services revenue of $1,553,344. Of the total technology license and services
revenue, $1,400,000 represents revenue from the exclusive license of
CarePrime(R) and MyFamilyMD(TM) to UICI, Inc. We contracted this license and
software development in the third quarter of 2002 and we are recognizing it
based on deliverables. We expect that a significant portion of revenue in future
periods will be generated from the delivery of care services through our
Health-e-Life(SM) Program.
Cost of revenue for the nine months ended September 30, 2003 was
$977,135, an increase of 3% from $952,241 for the nine months ended September
30, 2002. The increase is attributable to the personnel costs required to
G-152
service our prevention and care services contracts. We expect future revenue to
be made up largely of prevention care services. Because the costs associated
with these services are variable in nature, we expect our expenses will increase
in line with our revenues.
Outsourced and certain internal research and development costs
amounting to $617,045 were capitalized for the nine months ended September 30,
2003 as compared to $320,220 which was expensed for the nine months ended
September 30, 2002. We expensed such costs during the nine months ended
September 30, 2002 because the products under development had not reached
technological feasibility and therefore the related expense could not be
capitalized. We expect to continue to spend funds to improve our services and to
add functionality to our technology products. Such products include the
MyFamilyMD(TM) application and its MedWizard(R) tools, the CarePrime(TM)
application, which interacts with MyFamilyMD(TM) and its MedWizard(R) tools, and
the Health-e-Coordinator(TM) application, which is a disease management
platform. Commencing in the first quarter of 2003, we began to capitalize
certain costs, which are comprised primarily of developer salaries and
out-sourced costs.
General and administrative expenses (excluding salary and related
benefits which are discussed separately below) decreased from $1,290,284 for the
nine months ended September 30, 2002 to $1,020,317 for the nine months ended
September 30, 2003, a decrease of 21%. Our ability to reduce general and
administrative expenses is attributable to increased efficiencies and
implementation of stringent budgetary controls. Additionally, during the nine
months ended September 30, 2003, we successfully settled certain payables on
favorable terms that resulted in a $180,757 expense reversal. We believe that we
currently have the resources to handle increased revenue without major increases
in general and administrative expenses.
Salary and related benefits were $2,074,680 for the nine months ended
September 30, 2003 as compared to $2,964,164 for the nine months ended September
30, 2002. The decrease in salary and related benefits from the nine months ended
September 30, 2002 to the nine months ended September 30, 2003 was $889,484 or
30%, resulting from consolidating positions and improving efficiencies.
Depreciation and amortization expenses were $1,317,512 for the nine
months ended September 30, 2003, as compared to $1,197,236 for the nine months
ended September 30, 2002. The increase is primarily attributable to certain
intangible assets acquired during October 2002.
Marketing and publicity expenses were $1,677,429 for the nine months
ended September 30, 2003 as compared to $366,505 for the nine months ended
September 30, 2002. The increase of 358% or $1,310,924 is a direct result of
augmented marketing and investor relation campaigns to promote I-trax in the
capital markets and its products in the disease management market. A non-cash
charge of approximately $1,467,000 for the nine months ended September 30, 2003,
resulted from the issuance of common stock, granting of warrants and
contribution of common stock by certain stockholders of I-trax to an investor
relations firm.
Interest expense and financing costs for the nine months ended
September 30, 2003 were $1,921,799, increasing by $1,142,864 or 147% from
$778,935 for the nine months ended September 30, 2002. For the nine months ended
September 30, 2003, interest expense includes charges of approximately
$1,646,354 related to the Palladin debenture and related warrants. Of this
amount $89,671 represents interest of 6% on the debenture for the nine months
ended September 30, 2003; $1,302,373 represents amortization of the value
assigned to the original beneficial conversion value of the Palladin debenture
and the associated warrants and additional charges and amortization for the
further beneficial conversion value caused by the June 2003 resetting of the
conversion price of such debenture and the exercise price of the associated
warrants; and $254,310 represents an accelerated charge to interest expense for
the portion of the debenture converted during the nine months ended September
30, 2003. During the period, Palladin converted approximately $561,000 of
principal outstanding under the debenture into common stock. Generally, the
beneficial conversion value represents the benefit to the investor that results
from purchasing an immediately convertible debenture with a conversion price
that is less than fair market value on the date of purchase after first
allocating a portion of the proceeds from the debenture to the associated
warrants. The remaining balance of interest expense of approximately $275,445 is
associated with interest on other debt and the amortization of the value of
warrants granted to certain shareholders for loans made to I-trax.
Amortization of debt issuance and conversion costs was $294,803 and
$145,536 for the nine months ended September 30, 2003 and 2002, respectively.
These amounts represented costs incurred in selling the $2,000,000 debenture to
G-153
Palladin and will be amortized over the two-year life of the debenture. During
the nine months ended September 30, 2003, we booked a one-time charge of
$122,228 in connection with the re-pricing of the exercise price of the warrants
granted to a third party that brokered the Palladin transaction and increasing
the number of shares covered by the warrant as per the broker agreement.
During the quarter ended March 31, 2003, in connection with the
termination of our agreement to acquire DxCG, Inc., a Boston-based predictive
modeling company, we charged $200,000 to earnings. This sum was released to DxCG
following DxCG's termination of the merger agreement because certain conditions
to closing, including third party financing for the cash portion of the purchase
price, were not satisfied.
For the nine months ended September 30, 2003, our net loss was
$5,315,835 as compared to a net loss of $6,238,604 for the nine months ended
September 30, 2002, a decrease of 15%.
Liquidity and Capital Resources
Working Capital Deficiency
As of September 30, 2003, we had a working capital deficiency of
$1,704,369. As of the date of this report, we have secured funds sufficient to
finance these deficits from the sales of equity instruments.
During the nine months ended September 30, 2003, our Chief Executive
and Operating Officers, along with certain stockholders advanced to us $740,000
in the form of loans for working capital. Our Chief Executive and Operating
Officers have committed to continue to support us through July 1, 2004. Cash
flow deficits from operations during the three months ended September 30, 2003
have averaged approximately $ 348,000 per month.
Sources and Uses of Cash
Despite negative cash flows from operations, which amounted to
$2,559,405 for the nine months ended September 30, 2003 and $1,103,724 for the
nine months ended September 30, 2002, we have been able to secure funds to
support our operations. During the nine months ended September 30, 2002, we
secured funding by selling equity securities, issuing a debenture and receiving
advances from officers, directors and other related parties, which aggregated
approximately $4,490,000. Of the $4,490,000, approximately $2,200,000 was used
to acquire WellComm Group, Inc., and the remainder was used to fund operations.
During the nine months ended September 30, 2003, we borrowed (net of repayments)
$750,000 from officers, related parties and certain shareholders. Additionally,
during the nine months ended September 30, 2003, we raised approximately
$2,400,000 pursuant to private placements of our securities. The funds were used
primarily to fund operations, continue the investment in our technology and
satisfy certain liabilities.
As of September 30, 2003, our current liabilities were $3,282,483, of
which $547,560 is due to related parties. The remainder of current liabilities
of $2,734,923 is comprised primarily of trade payables of approximately
$711,000, accrued expenses of approximately $442,000, $300,000 credit line
payable, which was assumed with the acquisition of WellComm, carrying value of
$1,101,000 for convertible debenture we sold to Palladin (with a face value of
$1,586,000 maturing in February 2004) and $119,000 of loans from shareholders.
If we do not have sufficient funds to repay the convertible debenture we sold to
Palladin when due, we will be in default on a material obligation and as a
result our operations may be materially and adversely effected. We have good
relationships with all of our vendors.
As of September 30, 2003, the face value of our long-term debt amounted
to $617,809 (with a carrying value of $397,500) held by a group of investors led
by Psilos Group Partners, L.P., for which principal and interest is not due
until March 2006. Additionally, we owe $315,000 to our Chief Executive and
Operating Officers for advances made to us. This amount is classified as
non-current since we do not expect these advances to be repaid within the next
twelve months unless circumstances change.
Under a private placement initiated in June 2003, we raised
approximately $1,000,000 in cash, converted approximately $1,169,270 in related
party loans, of which $1,037,038 represented principal and $132,232 represented
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interest, and converted $121,997 of deferred salaries by selling or issuing, as
applicable, common stock. In this offering, we issued a total of 1,311,682
shares.
During August 2003 we commenced a private placement whereby we offered
as a unit two shares of common stock and a warrant to purchase an additional
share of common stock exercisable at $3.00 (the market price of our common stock
on the date we commenced the private placement) for a unit purchase price of $5.
The maximum amount offered is $3,500,000. Through September 30, 2003, we issued
640,000 shares of common stock and granted warrants to purchase 320,000
additional shares under this private placement. We realized net proceeds of
$1,401,203 after expenses as of September 30, 2003.
During the quarter ended June 30, 2003, we also issued stock for
services. Specifically, we issued 205,833 shares of common stock for investor
relations services valued at $331,048.
During May 2003, certain of our shareholders contributed loans (which
were thereafter converted into common stock) and common stock such that an
investor relations firm retained by us received an aggregate of 290,000 shares
of common stock as compensation for services. The benefit that we have received
from these contributions amounted to $437,900, based on the market price of our
common stock on the date of the contribution, and was charged to operations.
During May and June 2003, we granted 375,000 warrants with exercise
prices ranging from $1.50 to $1.76 to two individuals and an institution for
investor relations services pursuant to three separate consulting agreements
expiring in May and June 2004. The value of such warrants, utilizing the
Black-Scholes model, amounted to $645,000. This amount has been charged to
operations for the three months ended June 30, 2003.
During May 2003, pursuant to the approval of our Board of Directors, we
granted an aggregate of 450,000 warrants with an exercise price of $1.80 per
share to our Chief Executive and Operating Officers for their continued
financial support and for their guarantees to continue to support us through
July 1, 2004. The granting of such warrants did not result in any charges to
operations since they are deemed to be granted to our employees and accordingly
are treated similar to incentive stock options.
In April 2003, we borrowed $100,000 from a shareholder pursuant to a
convertible promissory note. The note, with an eleven-month term, accrues
interest at 6% per annum and a default interest rate of 12% per annum. The
principal and related accrued and unpaid interest is convertible by the
shareholder into common stock at $1.50 per share at any time. As consideration
for this loan, we also granted the shareholder a warrant to acquire 100,000
shares of common stock at an exercise price of $1.50 per share. The value
assigned to the warrant of $68,000 is recorded as a discount to the convertible
promissory note using the relevant fair value of the debt and the warrants to
the actual proceeds from the convertible promissory note.
Critical Accounting Policies
Impairment of Goodwill and Intangible
We operate in an industry that is rapidly evolving and extremely
competitive. It is reasonably possible that our accounting estimates with
respect to the useful life and ultimate recoverability of our carrying basis of
goodwill and intangible assets could change in the near term and that the effect
of such changes on the financial statements could be material.
Revenue Recognition
We derive our revenue pursuant to different contract types, including
perpetual software licenses, subscription licenses and custom development
services, all of which may include support services revenue such as licensed
software maintenance, training, consulting and web hosting arrangements. As
described below, significant management judgments and estimates must be made and
used in connection with the revenue recognized in any accounting period.
Material differences may result in the amount and timing of our revenue for any
period if our management made different judgments or utilized different
estimates.
G-155
We license our software products for a specific term or on a perpetual
basis. Most of our license contracts also require maintenance and support. We
apply the provisions of Statement of Position 97-2, "Software Revenue
Recognition," as amended by Statement of Position 98-9 "Modification of SOP
97-2, Software Revenue Recognition, With Respect to Certain Transactions" to all
transactions involving the sale of software products and hardware transactions
where the software is not incidental. For hardware transactions where software
is not incidental, we do not unbundle our fee and, accordingly, do not apply
separate accounting guidance to the hardware and software elements. For hardware
transactions where no software is involved we apply the provisions of Staff
Accounting Bulletin 101 "Revenue Recognition." In addition, we apply the
provisions of Emerging Issues Task Force Issue No. 00-03 "Application of AICPA
Statement of Position 97-2 to Arrangements that Include the Right to Use
Software Stored on Another Entity's Hardware" to our hosted software service
transactions.
We recognize revenue from the sale of software licenses when persuasive
evidence of an arrangement exists, the product has been delivered, the fee is
fixed and determinable and collection of the resulting receivable is reasonably
assured. Delivery generally occurs when product is delivered to a common
carrier.
Upon execution of a contract for services, we assess whether the fee
associated with our revenue transactions is fixed and determinable and whether
or not collection is reasonably assured. We assess whether the fee is fixed and
determinable based on the payment terms associated with such contract. If a
significant portion of a fee is due after our normal payment terms, which are
generally 30 to 90 days from invoice date, we account for such fee as services
are provided.
We assess collection based on a number of factors, including past
transaction history with the customer and the credit worthiness of the customer.
We do not request collateral from our customers. If we determine that collection
of a fee is not reasonably assured, we defer the fee and recognize revenue at
the time collection becomes reasonably assured, which is generally upon receipt
of cash.
For arrangements with multiple obligations (for example, undelivered
maintenance and support), we allocate revenue to each component of the
arrangement using the residual value method based on the fair value of the
undelivered elements. Accordingly, we defer revenue for the amount equivalent to
the fair value of the undelivered elements.
We recognize revenue for maintenance services ratably over the contract
term. Our training and consulting services are billed based on hourly rates, and
we generally recognize revenue as these services are performed. However, upon
execution of a contract, we determine whether or not any services included
within the arrangement require us to perform significant work either to alter
the underlying software or to build additional complex interfaces so that the
software performs as the customer requests. If these services are included as
part of an arrangement, we recognize the fee using the percentage of completion
method. We determine the percentage of completion based on our estimate of costs
incurred to date compared with the total costs budgeted to complete the project.
We recognize service revenue as services are rendered. We contract with
our customers to provide services based on an agreed upon monthly fee, a
per-call charge or a combination of both.
As of the date of this filing, we have not entered into any
risk-sharing contracts, however we expect that we may do so in future periods.
This type of contract is generally for a term of three to five years, provides
for automatic renewal, and may provide that a percentage of our fee is
refundable ("performance based") based on achieving a targeted percentage
reduction in a customer's healthcare costs.
Material Equity Transactions
As of September 30, 2003 we have executed equity transactions with
related and unrelated parties in connection with raising funds for working
capital and with issuing securities in lieu of compensation for services
received. We believe that we have valued all such transactions pursuant to
various applicable accounting rules and that they ultimately represent the
economic substance of each transaction.
G-156
Item 3. Controls and Procedures
As of September 30, 2003, we carried out an evaluation under the
supervision and with the participation of our Chief Executive Officer and Chief
Financial Officer of the effectiveness of our disclosure controls and
procedures. Based on this evaluation, our Chief Executive Officer and Chief
Financial Officer have concluded that our disclosure controls and procedures are
effective to ensure that information we are required to disclose in reports
filed or submitted under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported within the time periods specified in
Securities and Exchange Commission rules and forms. Subsequent to the date of
this evaluation, there were no significant changes in our internal controls or
in other factors that could significantly affect the disclosure controls,
including any corrective actions with regard to significant deficiencies and
material weaknesses.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities
On August 14, 2003 we commenced a private placement whereby we offered
as a unit two shares of common stock and a warrant to purchase an additional
share of common stock exercisable at $3.00 (the market price of our common stock
on the date we commenced the private placement) for a unit purchase price of $5.
Westminster Securities Corporation, Member New York Stock Exchange, acted as
placement agent for this private placement. The maximum amount offered is
$3,500,000. As of September 30, 2003, we issued 640,000 shares of common stock
and granted warrants to purchase 320,000 additional shares under this private
placement. As of September 30, 2003, we realized proceeds of $1,401,203, net of
$198,797 in placement agent commissions and expenses. Each of the participants
in this private placement is an accredited investor. In undertaking this
issuance, we relied on an exemption from registration under Section 4(2) of the
Securities Act and Regulation D thereunder.
Item 3. Defaults upon Senior Securities
We did not default upon any senior securities during the quarter ended
September 30, 2003.
Item 4. Submission of Matters to a Vote of Security Holders
We did not submit any matters to a vote of our security holders during
the quarter ended September 30, 2003.
Item 5. Other Information
None.
G-157
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
31.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
We filed two Current Reports on Form 8-K with the Securities and
Exchange Commission on August 15, 2003 to report the issuance of our earnings
press release and Regulation FD disclosure.
We filed a Current Report on Form 8-K with the Securities and Exchange
Commission on October 17, 2003 to report a private placement of our securities.
G-158
SIGNATURE
In accordance with Section 12 of the Securities Exchange Act of 1934,
the registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
I-TRAX, INC.
Date: November 13, 2003 By: /s/ Frank A. Martin
--------------------------------
Name: Frank A. Martin
Title: Chief Executive Officer
G-159
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 6, 2003
-----------------
I-TRAX, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 0-30275 23-3057155
------------------------ ------------------------ ---------------------
(State or other jurisdiction (Commission (IRS Employer
of 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
-----------------------------------------------------
(Former name or former address, if changed since last report)
G-160
Item 4. Changes in Registrant's Certifying Accountant
Effective February 6, 2003, I-trax, Inc, a Delaware
corporation, dismissed PricewaterhouseCoopers LLP as its independent auditor.
The decision to dismiss PricewaterhouseCoopers LLP was recommended and approved
by the Audit Committee of I-trax's Board of Directors and approved by I-trax's
Board of Directors.
Except as described in the following sentence, the reports of
PricewaterhouseCoopers LLP on I-trax's financial statements for the calendar
years ended December 31, 2001 and 2000 did not contain an adverse opinion or
disclaimer of opinion and were not modified as to uncertainty, audit scope or
accounting principles. The reports of PricewaterhouseCoopers LLP for the
calendar years ended December 31, 2001 and 2000 were modified to express
substantial doubt regarding the Company's ability to continue as a going
concern.
During I-trax's two most recent calendar years and through the
date of this Form 8-K, there were no disagreements with PricewaterhouseCoopers
LLP on any matters of accounting principles or practices, financial statement
disclosure, or audit scope or procedures, which disagreements, if not resolved
to the satisfaction of PricewaterhouseCoopers LLP, would have caused it to make
reference to such disagreements in its reports.
I-trax has requested PricewaterhouseCoopers LLP to furnish to
I-trax a letter addressed to the Securities and Exchange Commission regarding
whether or not PricewaterhouseCoopers LLP agrees with the above statements.
I-trax is filing this letter, dated February 12, 2003, as Exhibit 16 to this
Form 8-K.
Item 7. Financial Statements and Exhibits.
16 Letter of PricewaterhouseCoopers LLP to the Securities and
Exchange Commission dated February 12, 2003.
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: February 12, 2003 By:/s/ Anthony Tomaro
-------------------------------
Name: Anthony Tomaro
Title: Chief Financial Officer
G-161
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 18, 2003
-----------------
I-TRAX, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 0-30275 23-3057155
------------------------ ------------------- -------------------
(State or other jurisdiction (Commission (IRS Employer
of 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
-----------------------------------------------------
(Former name or former address, if changed since last report)
G-162
Item 4. Changes in Registrant's Certifying Accountant
Effective February 18, 2003, I-trax, Inc, a Delaware corporation, engaged
Goldstein Golub Kessler LLP as the principal accountant to audit I-trax's 2002
financial statements. The decision to engage Goldstein Golub Kessler LLP was
recommended and approved by the Audit Committee of I-trax's Board of Directors.
Neither I-trax nor anyone on its behalf consulted Goldstein Golub Kessler
LLP regarding the application of accounting principals to a specific completed
or contemplated transaction or regarding the type of audit opinion that
Goldstein Golub Kessler LLP would render on I-trax's financial statements prior
to this engagement.
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: February 19, 2003 By: /s/ Anthony Tomaro
-------------------------------
Name: Anthony Tomaro
Title: Chief Financial Officer
G-163
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): April 22, 2003
-----------------
I-TRAX, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 0-30275 23-3057155
------------------------ ------------------------ ------------------------
(State or other jurisdiction of (Commission File Number) (IRS Employer Identification No.)
incorporation)
One Logan Square
130 N. 18th St., Suite 2615
Philadelphia, Pennsylvania 19103
------------------------------------------------ -----------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (215) 557-7488
N/A
-----------------------------------------------------
(Former name or former address, if changed since last report)
G-164
Item 9. Regulation FD Disclosure
I-trax, Inc. is holding an investor conference call on Tuesday, April
22, 2003 beginning at 2:00 p.m. EST. The conference is accessible by the
investing public by dialing 800-328-1382, which was publicized through a press
release issued on April 16, 2003. The purpose of the call is for Frank A.
Martin, I-trax's Chief Executive Officer to review I-trax's 2002 performance and
I-trax's prospects for 2003. The text of Mr. Martin's presentation is attached
to this current report as Exhibit 99.1.
A tape of the investor conference call will be available through
Tuesday, May 6, 2003 at 800-642-1687. The conference ID number is 9828651.
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: April 22, 2003 By: /s/ Frank A. Martin
------------------------------
Name: Frank A. Martin
Title: Chief Executive Officer
G-165
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): May 14, 2003
-----------------
I-TRAX, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 0-30275 23-3057155
-------------------- ------------------------ -------------------
(State or other (Commission File Number) (IRS Employer
jurisdiction of Identification No.)
incorporation)
One Logan Square
130 N. 18th St., Suite 2615
Philadelphia, Pennsylvania 19103
----------------------------------------- --------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (215) 557-7488
N/A
-----------------------------------------------------
(Former name or former address, if changed since last report)
G-166
Item 9. Regulation FD Disclosure
On May 14, 2003, I-trax, Inc. issued a press release, attached to this
current report as Exhibit 99.1, announcing its result of operations for the
quarter ended March 31, 2003. In the same press release, I-trax also announced
an investor conference call, which was held on Thursday, May 15, 2003 beginning
at 3:00 p.m. EST. The conference call was accessible by the investing public by
dialing 800-328-1382. The purpose of the call was for Frank A. Martin, I-trax's
Chief Executive Officer, to review I-trax's performance for the quarter ended
March 31, 2003.
The text of Mr. Martin's presentation is available by accessing the
investor relations' section of I-trax's web site at www.i-trax.com.
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: May 19, 2003 By: /s/ Frank A. Martin
Name: Frank A. Martin
Title: Chief Executive Officer
E
G-167
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): August 15, 2003
-----------------
I-TRAX, INC.
-----------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 0-30275 23-3057155
------------------------ ------------------------ ------------------------
(State or other jurisdiction of (Commission File Number) (IRS Employer Identification No.)
incorporation)
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
-----------------------------------------------------
(Former name or former address, if changed since last report)
G-168
Item 9. Regulation FD Disclosure.
A press release issued by I-trax, Inc. on August 14, 2003 is attached hereto as
Exhibit 99.1.
Item 7. Exhibits.
99.1 Press Release, issued August 14, 2003.
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: August 14, 2003 By: /s/Frank A. Martin
-------------------------------
Name: Frank A. Martin
Title: Chief Executive Officer
G-169
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): August 15, 2003
-----------------
I-TRAX, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 0-30275 23-3057155
------------------------ ------------------------ ------------------------
(State or other jurisdiction of (Commission File Number) (IRS Employer Identification No.)
incorporation)
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
-----------------------------------------------------
(Former name or former address, if changed since last report)
G-170
Item 9. Regulation FD Disclosure
Frank A. Martin, Chairman and CEO of I-trax, Inc., intends to disclose
at a meeting with broker-dealers and investment bankers on August 15, 2003 that
I-trax management is currently projecting calendar 2003 revenue of approximately
$7 to $8 million and a net loss of approximately $4.4 to $4.9 million. In
addition, Mr. Martin intends to disclose that I-trax management is projecting
calendar 2004 revenue of approximately $12 to 14 million with earnings before
interest, taxes, depreciation and amortization (EBITDA) of approximately $2.4 to
2.8 million and net income of approximately $300,000 to $500,000. Further,
management expects calendar 2005 revenue of approximately $16 to $20 million
with EBITDA of $4 to $5 million and net income of $2.5 to 3.2 million. In the
same meeting, Mr. Martin also intends to disclose that management expects the
projected year-over-year growth in revenue to be generated from its current
pipeline without including any potential major transactions or possible
acquisitions.
Safe Harbor Statement: This Current Report on Form 8-K contains
forward-looking statements that are based upon current expectations and involve
a number of risks and uncertainties. In order for I-trax to utilize the "safe
harbor" provisions of the Private Securities Litigation Reform Act of 1995,
investors are cautioned that these statements may be affected by the important
factors, among others, set forth below, and consequently, actual operations and
results may differ materially from those expressed in these forward-looking
statements. The important factors include: I-trax's ability to execute new
contracts for disease management services, population health management services
and technology solutions; the risks associated with a significant concentration
of I-trax's revenues with a limited number of customers; I-trax's ability to
effectively improve its technology and service solutions; I-trax's ability to
renew and maintain contracts with its current customers under existing terms;
I-trax's ability to execute on its business plan; I-trax's ability to obtain
adequate financing to provide the capital that may be needed to support the
growth of its business; acceptance of I-trax's solutions by the marketplace; and
general economic conditions. I-trax undertakes no obligation to update or revise
any such forward-looking statements. These and other risks pertaining to I-trax
are described in greater detail in I-trax's periodic filings with the Securities
and Exchange Commission.
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: August 15, 2003 By: /s/ Frank A. Martin
-------------------------------
Name: Frank A. Martin
Title: Chief Executive Officer
G-171
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): October 15, 2003
-----------------
I-TRAX, INC.
------------------------------------------------------
(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
-----------------------------------------------------
(Former name or former address, if changed since last report)
G-172
Item 5. Other Events.
A press release issued by I-trax, Inc. on October 15, 2003 is attached
hereto as Exhibit 99.1.
Item 7. Exhibits.
99.1 Press Release, issued October 15, 2003.
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: October 17, 2003 By: /s/Frank A. Martin
-------------------------------
Name: Frank A. Martin
Title: Chief Executive Officer
G-173
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): November 13, 2003
-----------------
I-TRAX, INC.
------------------------------------------------------
(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
-----------------------------------------------------
(Former name or former address, if changed since last report)
G-174
Item 7. Exhibits.
99.1 Press Release, issued November 13, 2003.
Item 12. Results of Operations and Financial Condition.
A press release issued by I-trax, Inc. on November 13, 2003 is attached hereto
as Exhibit 99.1.
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: November 17, 2003 By: /s/Frank A. Martin
-------------------------------
Name: Frank A. Martin
Title: Chief Executive Officer
G-175
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): December 26, 2003
-----------------
I-TRAX, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 0-30275 23-3057155
------------------------ ------------------------ -------------------
(State or other jurisdiction (Commission File Number) (IRS Employer
of incorporation) 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
-----------------------------------------------------
(Former name or former address, if changed since last report)
G-176
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 ("Acquisition"), CHDM Healthcare, LLC, a Delaware limited
liability company of which I-trax is the sole member ("Acquisition LLC"), 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"). We refer to the transactions described in
the Merger Agreement as the "Merger."
CHD Meridian, a privately-held company, is a leading provider
of outsourced, employer-sponsored healthcare services to Fortune 1000 companies
and the Federal government. CHD Meridian's programs are designed to allow
employers to contract directly for a wide range of employee related healthcare
services delivered at or near the worksite. CHD Meridian offers programs in four
areas: (1) primary care services; (2) pharmacy services and benefits; (3)
staffing and management of on-site occupational health facilities; and (4)
corporate health staffing and management services. CHD Meridian currently
maintains contracts with 90 leading U.S. employers serving approximately 650,000
lives. Headquartered in Nashville, TN, CHD Meridian employs approximately 1,600
people and operates in over 150 sites in more than 30 states.
The Merger Agreement provides for delivery of: 10,000,000
shares of I-trax common stock, 400,000 shares of I-trax Series A 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
("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 $13.3 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.
The amount of cash, I-trax common stock, Series A Preferred
Stock, and the contingent consideration to be issued by I-trax in the Merger was
determined by arms length negotiations between I-trax and CHD Meridian. As a
basis for such negotiations, I-trax management reviewed CHD Meridian's
contracts, pipeline, projections, cash flow and other factors, such as
anticipated synergy between the companies' services and products and anticipated
consumer demand for the combined companies' products.
I-trax expects to fund the cash portion of the Merger
consideration by selling additional shares of Series A Preferred Stock and
obtaining a senior credit facility with a national lender, which allows a
closing date draw of least $16 million.
I-trax has received subscriptions from institutional investors
for an aggregate of $20 million of Series A Preferred Stock, which I-trax will
issue at the closing of the Merger. The Series A 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 Series A Preferred Stock is
converted into I-trax common stock. The Series A Preferred Stock is convertible
into I-trax common stock at a conversion price of $2.50 per share. Holders of
Series A Preferred Stock may convert such shares into I-trax common stock at any
time. In addition, shares of Series A 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, Series A 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
G-177
holder will have 90 days to reduce such holder's potential ownership to below
4.9%. The Series A 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 an loan commitment in the form of a term sheet 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.
There are no material relationships between I-trax, its
officers, directors and affiliates and their associates, on the one hand, and
CHD Meridian, its officers, directors and affiliates and their associates, on
the other hand. The parties intend that after the Merger, Haywood D. Cochrane,
Jr., the Chief Executive Officer of CHD Meridian, will be elected to the Board
of Directors of I-trax.
Promptly following the Merger, I-trax expects to file a
registration statement covering (1) I-trax common stock that it will issue in
the Merger and (2) I-trax common stock issuable upon conversion of the Series A
Preferred Stock that I-trax will issue in the Merger and to subscribing
institutional investors.
The Merger Agreement and the form of Subscription Agreement
concerning the sale of Series A Preferred Stock are attached hereto as exhibits
and are incorporated herein by reference. The foregoing summary is qualified in
its entirety by reference to such documents.
In addition to normal and customary deliveries at closing,
there are also material conditions to closing of the Merger including:
o I-trax and CHD Meridian stockholders must approve the
transaction.
o I-trax must close on the Series A Preferred Stock
subscriptions and the senior credit facility in an
aggregate amount sufficient to fund the cash portion of
the Merger consideration.
o There must not be a material change in the business and
operation of I-trax and CHD Meridian.
o The applicable waiting period under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976,
as amended must have expired.
In addition to normal and customary conditions to closing,
there are also material conditions to closing on the Series A Preferred Stock
subscriptions including:
o No event shall have occurred which has led I-trax to
believe (or which should have led I-trax to believe in
the exercise of reasonable business judgment) that any
material assumption underlying the financial forecast
delivered by I-trax to the investors is untrue or is
more likely than not to become untrue.
o The expected pro forma net income of I-trax and CHD
Meridian and their respective subsidiaries for calendar
year 2003, measured in accordance with generally
accepted accounting principles before any expenses for
interest, taxes, depreciation and amortization (and
excluding certain adjustments), equals at least
$5,500,000.
In addition to normal and customary conditions to closing,
there are also material conditions to closing on the senior credit facility
including:
o Existing I-trax debt must have had its respective
maturity dates extended beyond the expiration date of
the new senior credit facility and all such debt shall
have been subordinated to the senior debt facility.
G-178
o I-trax must have a "capital base" in form and substance
satisfactory to the lender.
o Field examination of accounts receivable and accounts
receivable systems with results satisfactory to the
lender.
o Systems review to ensure compliance with the Health
Insurance Portability and Accountability Act of 1995.
Although I-trax believes that I-trax and CHD Meridian will
satisfy these as well as other conditions to closing, there is no assurance that
such conditions to closing will in fact be satisfied.
The Merger Agreement provides for a two-step reorganization
transaction. The initial step of the reorganization transaction will involve a
merger of Acquisition with and into CHD Meridian, in which merger CHD Meridian
will continue as the surviving corporation. The second step of the
reorganization transaction will involve a statutory merger of the surviving
corporation of the initial step of the reorganization transaction with and into
Acquisition LLC, in which merger Acquisition LLC will continue as the surviving
entity. I-trax and CHD Meridian intend to complete the initial step and the
second step of the reorganization as part of an integrated plan, such that the
two steps will constitute a single transaction treated as a tax-free
reorganization pursuant to Section 368 of the Internal Revenue Code of 1986, as
amended.
The parties anticipate that the Merger will close by April 30,
2004.
The press release relating to the completion of the Merger is
attached hereto as an exhibit and is incorporated herein by reference.
Safe Harbor Statement: Statements regarding aspects of I-trax's
business and its expectations as to the transaction with CHD Meridian set forth
herein or otherwise made in writing or orally by I-trax may constitute forward
looking statements within the meaning of the Private Securities Litigation
Reform Act of 1995. Although I-trax believes that its expectations are based on
reasonable assumptions within the bounds of its knowledge of its business and
operations, there can be no assurance that actual results will not differ
materially from its expectations. Factors that might cause or contribute to such
differences include, but are not limited to, whether I-trax and CHD Meridian
will in fact satisfy the conditions to closing and complete the transaction
described in this press release, the ability of the two companies to integrate
their businesses successfully, demand for the combined companies' products and
services, uncertainty of future profitability and changing economic conditions.
These and other risks pertaining to I-trax are described in greater detail in
I-trax's filings with the Securities and Exchange Commission including those on
forms 10-KSB and 10-QSB.
Item 7. Exhibits.
2.1 Merger Agreement dated December 26, 2003 by and among I-trax, Inc.,
DCG Acquisition, Inc., CHD Meridian Healthcare LLC and Meridian
Occupational Healthcare Associates, Inc. (d/b/a CHD Meridian
Healthcare).
4.1 From of Certificate of Designations, Preferences, and Rights of the
Series A Convertible Preferred Stock.
10.1 Form of Subscription Agreement concerning issuance of Series A
Convertible Preferred Stock dated as of December 26, 2003.
99.1 Press Release issued December 29, 2003.
G-179
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 29, 2003 By: /s/ Frank A. Martin
--------------------------------
Name: Frank A. Martin
Title: Chief Executive Officer
G-180
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): December 29, 2003
-----------------
I-TRAX, INC.
------------------------------------------------------
(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, Pennsylvania 19103
----------------------------------------------- --------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (215) 557-7488
N/A
-----------------------------------------------------
(Former name or former address, if changed since last report)
G-181
Item 9. Regulation FD Disclosure
I-trax, Inc. held an investor conference call on Monday, December 29, 2003.
The conference call was accessible by the investing public through an "800"
number and publicized through a press release. The purpose of the call was for
Frank A. Martin, Chief Executive Officer of I-trax, and Haywood D. Cochrane,
Jr., the Chief Executive Officer of Meridian Occupational Healthcare Associates,
Inc. (d/b/a CHD Meridian Healthcare), to discuss the recently announced merger
agreement between CHD Meridian and I-trax, pursuant to which CHD Meridian would
merge with and into a wholly owned subsidiary of I-trax. On the conference call,
Mr. Martin and Mr. Cochrane discussed the following aspects of their respective
businesses:
o At this time, CHD Meridian is providing its service to approximately 25% of
its clients' employee and dependent population. CHD Meridian and I-trax's
management believe that the combined companies could expand their
relationships with CHD Meridian's existing clients by offering I-trax's
services to the remaining 75% of those clients' employee and dependent
population.
o The combined companies expect to experience "top line" and "bottom line"
growth of approximately 20% year over year over the following three years.
o CHD Meridian's 2003 revenues are expected to be approximately $182 million,
of which approximately $85 million will come from its pharmacy business,
approximately $45 to $50 million will come from its primary care business,
approximately $30 to $35 million will come from its occupational health
business and $10 to $15 million will come from its corporate health
business. CHD Meridian anticipates 2003 earnings before interest, taxes,
depreciation and amortization of approximately $6.7 million. CHD Meridian
is a calendar year company.
o CHD Meridian's current service contracts are structured as "cost plus."
This model generates profitability margins of approximately 15% to 20%. CHD
Meridian management believes that with regard to certain of its existing
clients and certain potential clients there is an opportunity to improve
these margins by structuring contracts such that CHD Meridian receives a
percentage of long term savings generated by CHD Meridian's programs. The
latter structure is similar to that employed by I-trax.
o Upon consummation of the transaction, the combined companies will show
goodwill of approximately $34 million.
o A tape of today's conference call will be available through February 15th
by calling 800-642-1687 and referencing the conference ID number of
4723072.
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 29, 2003 By: /s/ Frank A. Martin
-------------------------------
Name: Frank A. Martin
Title: Chief Executive Officer
G-182
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.
------------------------------------------------------
(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
-----------------------------------------------------
(Former name or former address, if changed since last report)
G-183
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
contemplated 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.
G-184
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.
G-185
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)
G-186
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
G-187
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).
G-188
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).
G-189
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).
G-190
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).
G-191
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.
G-192
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.
G-193
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
=========================================
G-194
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.
G-195
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
G-196
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
G-197
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
G-198
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.
G-199
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.
G-200
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.
G-201
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.
G-202
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.
G-203
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.
G-204
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.
G-205
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.
G-206
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.
G-207
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.
G-208
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.
G-209
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
G-210
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
========================================================
G-211
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) $ - $ - $ -
=======================================================
G-212
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.
G-213
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.
G-214
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
=========================================
G-215
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.
G-216
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.
G-217
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.
G-218
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.
G-219
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.)
G-220
(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.)
G-221
(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.
G-222
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.)
G-223
(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.
G-224
(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.)
G-225
(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.
G-226
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.
G-227
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.
G-228
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.
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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.
G-230
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.
G-231
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
G-232
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,
G-233
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.
G-234
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: February 2, 2004 By: /s/ Frank A. Martin
-------------------------------------
Name: Frank A. Martin
Title: Chief Executive Officer
G-235
Exhibit 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the use of our report dated March 13, 2003, with respect to the
consolidated financial statements of Meridian Healthcare Associates, Inc. and
subsidiaries (d/b/a CHD Meridian Healthcare) included in the Current Report on
Form 8-K of I-trax, Inc. dated February 2, 2004.
/s/ Ernst & Young LLP
January 29, 2004
Nashville, Tennessee
G-236
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the
Securities Exchange Act of 1934 (Amendment No.____)
Filed by the Registrant /X/. Filed by a Party other than the Registrant / /
Check the appropriate box:
/ / Preliminary Proxy Statement
/ / Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
/X/ Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Under Rule 14a-12
I-TRAX, INC.
-------------------------------------------------------------------
(Name of Registrant as Specified in Its Charter)
-------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
/X/ No fee required
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
1) Title of each class of securities to which transaction applies:
--------------------------------------------------------------------------------
2) Aggregate number of securities to which transaction applies:
--------------------------------------------------------------------------------
3) Per unit price or other underlying value of transaction
computed pursuant to Exchange Act Rule 0-11 (set forth the
amount on which the filing fee is calculated and state how it
was determined):
--------------------------------------------------------------------------------
4) Proposed maximum aggregate value of transaction:
--------------------------------------------------------------------------------
5) Total fee paid:
--------------------------------------------------------------------------------
/ / Fee paid previously with preliminary materials.
/ / Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting
fee was paid previously. Identify the previous filing by registration
statement number, or the form or schedule and the date of its filing.
1) Amount Previously Paid:
--------------------------------------------------------------------------------
2) Form, Schedule or Registration Statement No.:
--------------------------------------------------------------------------------
3) Filing Party:
--------------------------------------------------------------------------------
4) Date Filed:
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G-237
[GRAPHIC OMITTED]
Health Management Solutions
I-trax, Inc.
One Logan Square, Suite 2615
130 N. 18th Street
Philadelphia, PA 19103
April 25, 2003
Dear Stockholder:
We cordially invite you to attend I-trax's annual stockholders' meeting. The
meeting will be held on Wednesday, May 21, 2003, at 10:00 A.M. at 1735 Market
Street, 51st Floor, Philadelphia, Pennsylvania.
At the meeting stockholders will vote on several important matters. Please take
the time to carefully read each of the proposals described in the attached proxy
statement.
Your vote is important. Whether or not you plan to attend the meeting, you are
urged to complete, date, sign and return your proxy. If you attend the meeting
and would prefer to vote in person, you may still do so.
Thank you for your support of I-trax.
Very truly yours,
/s/ FRANK A. MARTIN
----------------------------
FRANK A. MARTIN
Chairman and Chief Executive Officer
G-238
[GRAPHIC OMITTED]
Health Management Solutions
I-trax, Inc.
One Logan Square, Suite 2615
130 N. 18th Street
Philadelphia, PA 19103
Notice of Annual Meeting of Stockholders
Dear Stockholder:
I-trax's annual stockholders' meeting will be held on Wednesday, May 21, 2003,
at 10:00 A.M., at 1735 Market Street, 51st Floor in Philadelphia, Pennsylvania.
At the meeting, stockholders will be asked to
o elect directors,
o ratify the selection of I-trax's independent auditors for 2003,
and
o consider any other business properly brought before the meeting.
The close of business on April 14, 2003, is the record date for determining
stockholders entitled to vote at the annual meeting. A list of these
stockholders will be available at I-trax's headquarters, One Logan Square, Suite
2615, 130 N. 18th Street, Philadelphia, Pennsylvania, before the annual meeting.
Please sign, date and promptly return the enclosed proxy card in the enclosed
envelope so that your shares will be represented whether or not you plan to
attend the annual meeting.
By Order of the Board of Directors,
/s/ Yuri Rozenfeld
Yuri Rozenfeld
General Counsel and Secretary
April 25, 2003
G-239
1
I-TRAX, INC.
One Logan Square, Suite 2615
130 N. 18th Street
Philadelphia, PA 19103
-------------------------------------
PROXY STATEMENT
FOR 2003 ANNUAL MEETING OF STOCKHOLDERS
-------------------------------------
I-trax, Inc., a Delaware corporation, is delivering these proxy
materials in connection with the solicitation of proxies by the board of
directors of I-trax for its 2003 annual meeting of stockholders and any
adjournments or postponements of the meeting. The 2003 annual meeting will be
held at 10:00 A.M. on May 21, 2003, at 1735 Market Street, 51st Floor,
Philadelphia, Pennsylvania 19103. These proxy materials were first mailed to
stockholders on or about April 28, 2003. The address of I-trax's principal
executive office is One Logan Square, Suite 2615, 130 N. 18th Street,
Philadelphia, Pennsylvania. Sending a signed proxy will not affect the
stockholder's right to attend the annual meeting and vote in person. Every
stockholder has the power to revoke his or her proxy at any time before it is
voted. The proxy, before it is exercised at the meeting, may be revoked by
filing with I-trax's Secretary a notice in writing revoking it, by delivering a
duly executed proxy bearing a later date, or by attending the meeting and voting
in person.
Explanatory Note About I-trax Common Stock
Effective January 3, 2003, I-trax completed a 1-for-5 reverse stock
split. The board of directors and stockholders of I-trax authorized the reverse
stock split in connection with the then pending application to list I-trax
common stock on the American Stock Exchange. I-trax common stock began trading
on the American Stock Exchange on January 15, 2003 under the symbol "DMX." The
information presented in this proxy statement about the number of outstanding
shares of I-trax common stock, historic information about the number of shares
of common stock issued in connection with completed transactions and related
prices, and option and warrant information has been adjusted to reflect the
completed reverse stock split.
Stockholders Entitled to Vote
The close of business of April 14, 2003 was the record date for
stockholders entitled to notice of and to vote at the 2003 annual meeting. As of
the record date, there were 9,372,727 outstanding shares of I-trax common stock.
Quorum Required
The presence, in person or by proxy, of stockholders entitled to cast
at least a majority of the votes that all stockholders are entitled to cast on a
particular issue constitutes a quorum for the transaction of business at the
2003 annual meeting. Abstentions and broker non-votes will be counted as present
for the purpose of determining the presence of a quorum.
Votes Required
Proposal 1. Directors are elected by a plurality of the affirmative
votes cast by those shares present in person, or represented by proxy, and
entitled to vote at the 2003 annual meeting. The eleven nominees for director
receiving the highest number of affirmative votes will be elected. Abstentions
and broker non-votes will not be counted toward a nominee's total. Stockholders
may not cumulate votes in the election of directors.
Proposals 2. Ratification of Goldstein Golub Kessler LLP as I-trax's
independent auditors for the fiscal year ending December 31, 2003 requires the
affirmative vote of a majority of those shares present in person, or
G-240
represented by proxy, and cast either affirmatively or negatively at the 2003
annual meeting. Abstentions and broker non-votes will not be counted as having
been voted on the proposal.
Proxies
A form of proxy is enclosed. All properly executed proxies received by
I-trax's board of directors, and not revoked, will be voted as indicated in
accordance with the instructions written on the proxies. In the absence of
contrary instructions, shares represented by returned proxies will be voted for
the election of the directors as described in this proxy statement, in favor of
the ratification of Goldstein Golub Kessler LLP as I-trax's independent auditors
and, in the discretion of the proxy holders, on any other matter properly
brought before the meeting.
Solicitation of Proxies
I-trax will bear all of the costs of soliciting proxies. I-trax will
arrange with brokerage houses and other custodians, nominees and fiduciaries to
send proxies and proxy materials to the beneficial owners of I-trax common
stock, and may reimburse these persons or institutions for expenses incurred in
connection with this distribution. Directors, officers or employees of I-trax,
none of whom will receive additional compensation, may solicit proxies in person
or by telephone, facsimile, e-mail or other means.
PROPOSAL NO. 1
ELECTION OF DIRECTORS
I-trax's board of directors currently consists of eleven directors. All
eleven directors are to be elected at the 2003 annual meeting to serve until the
2004 annual meeting. The board's nominees for election as directors are John
Blazek, David R. Bock, Philip D. Green, Michael M.E. Johns, M.D., Arthur N.
Leibowitz, M.D., Frank A. Martin, David Nash, M.D., John R. Palumbo, Carol M.
Rehtmeyer, Ph.D., R. Dixon Thayer and William S. Wheeler, each of whom is
currently serving on the board.
The proxy holders intend to vote all proxies received by them in the
accompanying form for these nominees unless otherwise directed. In the event any
nominee is unable or declines to serve as a director at the time of the 2003
annual meeting, the proxies will be voted for any nominee who may be designated
by the present board of directors to fill the vacancy, or, in the alternative,
the board may reduce the number of directors. As of the date of this proxy
statement, I-trax is not aware of any nominee who is unable or unwilling to
serve as a director.
The following table lists the name and age, as of April 2, 2003, of
each nominee to the board of directors.
Name Age Position
--------------------------------------- ------------------ ---------------------------------------------------
Frank A. Martin 52 Chairman, Chief Executive Officer, Treasurer and
Director
John Blazek 48 Director
David R. Bock 59 Director
Philip D. Green 52 Director
Michael M.E. Johns, M.D. 61 Director
Arthur N. Leibowitz, M.D. 56 Director
David Nash, M.D. 47 Director
John R. Palumbo 52 Vice Chairman, President and Director
Carol M. Rehtmeyer, Ph.D. 53 Executive Vice President and Director
R. Dixon Thayer 51 Director
William S. Wheeler 46 Director
Frank A. Martin has been a director, Chairman and Chief Executive
Officer of I-trax since September 2000. Mr. Martin has been a director of I-trax
Health Management Solutions, Inc. ("Health Management"), a predecessor of I-trax
and currently its operating subsidiary, since 1996. Mr. Martin founded, and has
been a managing director of, The Nantucket Group, LLC ("Nantucket"), a
healthcare venture capital firm specializing in
G-241
investing in early stage healthcare service and technology companies since
December 1998. He currently serves on the board of directors of Saddletude,
Inc., an Internet-based equestrian sports network. Mr. Martin served as the
Chief Executive Officer and director of EduNeering, Inc., an electronic
knowledge management company, from April 1999 to April 2000. In November 1992,
Mr. Martin founded Physician Dispensing Systems, Inc. ("PDS"), a healthcare
information technology company that developed pharmaceutical software for
physicians' offices. Mr. Martin assisted in the sale of PDS to Allscripts
Healthcare Solutions, Inc. ("Allscripts"), a provider of point-of-care solutions
to physicians, in December 1996 and then joined its board of directors on which
he served until 1998.
John Blazek, M.B.A., R.Ph., has been a director of I-trax since
February 2002. Mr. Blazek joined I-trax's board of directors when I-trax
acquired WellComm Group, Inc. ("WellComm") in February 2002. From May 2000 to
February 2002, Mr. Blazek served as the Chief Executive Officer of WellComm.
From 1998 to 1999, Mr. Blazek served as an Assistant to Mayor Hal Daub, City of
Omaha, in which capacity he oversaw economic development for the City of Omaha.
From 1996 to 1999, Mr. Blazek served as President of Blazek & Associates, Inc.,
a consulting firm. Mr. Blazek was co-owner of a company that was twice named
among Omaha's "25 fastest growing companies" before it was sold to Coram
Healthcare in 1992.
David R. Bock has been a director of I-trax since February 2001. Mr.
Bock was a director of Health Management from February 2000 to February 2001.
Mr. Bock has been a managing partner of Federal City Capital Advisors, LLC, an
investment banking firm located in Washington, D.C., since August 1997 and is
also a managing director of Nantucket. Mr. Bock served as Executive Vice
President and Chief Financial Officer of Pedestal, Inc., an Internet-based
company providing information on the secondary mortgage marketplace, from
January 2000 to April 2002. From 1992 to 1995, Mr. Bock was a managing director
in the London corporate finance group of Lehman Brothers where he was
responsible for developing Lehman Brothers' investment banking business in
emerging markets, including India, Russia, Turkey and Central Europe. Mr. Bock
also served in a variety of positions at the World Bank, including as Chief of
Staff for the Bank's worldwide lending operations.
Philip D. Green has been a director of I-trax since February 2001. Mr.
Green was a director of Health Management from March 2000 to February 2001.
Since July 2000, Mr. Green has been a partner of Akin, Gump, Strauss, Hauer &
Feld, L.L.P., a leading international law firm. From its formation in 1989 until
it merged with Akin Gump in July 2000, Mr. Green was the founding principal of
the Washington, D.C. based law firm of Green, Stewart, Farber & Anderson, P.C.
Mr. Green practices healthcare law and assists entities in corporate planning
and transactions. Mr. Green represents a significant number of major teaching
hospitals and integrated healthcare delivery systems. Mr. Green also represents
a number of public and private for-profit healthcare companies. Mr. Green is
currently a member of the boards of directors of Allscripts and Imagyn Medical
Technologies, Inc., a medical device manufacturer.
Michael M.E. Johns, M.D., has been a director of I-trax since February
2001. Dr. Johns was a director of Health Management from October 2000 to
February 2001. Since 1996, Dr. Johns has served as an Executive Vice President
for Health Affairs of Emory University, overseeing Emory University's widespread
academic and clinical programs in health sciences. In this position, Dr. Johns
leads strategic planning initiatives for both patient care and research. In
addition, since 1996, Dr. Johns has served as the Chairman of the Board of Emory
Healthcare, a comprehensive healthcare system in metropolitan Atlanta. Dr. Johns
also is Chairman of the Board of EHCA, LLC, a company overseen jointly by Emory
Healthcare and HCA Corporation. Through EHCA, Emory is responsible for clinical
performance improvement and quality assurance in six local hospitals and five
surgery centers owned by HCA Corporation. From 1990 to 1996, Dr. Johns served as
the Dean of the Johns Hopkins School of Medicine and Vice President of the
Medical Faculty at Johns Hopkins University.
Arthur (Abbie) N. Leibowitz, M.D., FAAP, has been a director of I-trax
since March 2002. Since 2001, Dr. Leibowitz has been the Executive Vice
President for Business Development and Chief Medical Officer of Health Advocate,
Inc., a health services company, which he helped form. Health Advocate helps
consumers navigate the healthcare system. In 2000, Dr. Leibowitz served as
Executive Vice President for Digital Health Strategy and Business Development
and director of Medscape, Inc., a clinical information company. Dr. Leibowitz's
experience includes his tenure at Aetna U.S. Healthcare from 1987 to 2000 where
he served in several positions, including as Aetna's Chief Medical Officer for
over four years. Dr. Leibowitz is a nationally recognized leader in the
healthcare industry and an authority on managed care, clinical management and
medical information systems.
G-242
David Nash, M.D., M.B.A., FACP, has been a director of I-trax since
February 2003. Since 2000, Dr. Nash has been The Dr. Raymond C. and Doris N.
Grandon Professor of Health Policy and Medicine at Thomas Jefferson University
Hospital. In 1995 he was named Associate Dean for Health Policy and Professor of
Medicine, Division of Internal Medicine at Jefferson Medical College. In 1990,
Dr. Nash was named Director of Health Policy and Clinical Outcomes at Thomas
Jefferson University Hospital. Dr. Nash has also served as a member of the
Disease Management Association of America, The Washington Business Group on
Health, and the National Committee for Quality Assurance (NCQA) Disease
Management Advisory Council. As of 2000, Dr. Nash has served as Editor-In-Chief
of Disease Management and is on the editorial board of eight other peer-reviewed
journals.
John R. Palumbo has been a director of I-trax since February 2001, Vice
Chairman since October 2002 and President since February 2003. Mr. Palumbo was a
director of Health Management from March 2000 to February 2001. From July 2001
to October 2002, Mr. Palumbo was a Vice President of Siemens Medical Solutions
Health Services, a provider of solutions and services for integrated healthcare.
From 1996 until it was acquired by Siemens, Mr. Palumbo served as Area Vice
President of Shared Medical Systems Corporation, a worldwide leader of health
information solutions. At Shared Medical Systems, Mr. Palumbo oversaw the
start-up of the national health services division, which marketed to and
serviced the for-profit and not-for profit national health systems. From 1995 to
1996, Mr. Palumbo served as an Executive Vice President and Chief Operating
Officer of Allscripts.
Carol M. Rehtmeyer, Ph.D., MSN, RN, has been a director since February
2002 and Executive Vice President since February 2003. Dr. Rehtmeyer joined
I-trax as director and a member of I-trax's Office of the President when I-trax
acquired WellComm in February 2002. Dr. Rehtmeyer formed WellComm in 1997 after
determining there was a need in healthcare for clinically based, customer
oriented telehealth information services. Dr. Rehtmeyer served as the President
of WellComm from its formation until February 2002. Dr. Rehtmeyer has more than
twenty-five years of healthcare experience in areas of practice teaching,
administration and leadership in clinical and managed care settings.
R. Dixon Thayer has been a director of I-trax since April 2003. Mr.
Thayer is the founder and senior partner of ab3 Resources, Inc., a strategic
consulting and private equity investment company. From 1999 to 2002, Mr. Thayer
served as Officer of Global New Business Operations for Ford Motor Company. In
this capacity, Mr. Thayer led corporate initiatives to develop, acquire and grow
"next generation" aftermarket service businesses to help transform Ford into a
global relationship-based consumer products and services company. From 1998 to
1999, Mr. Thayer served as President and Chief Executive Officer of Provant
Consulting Companies, where he helped lead the merger and integration of several
independent consultancies and training companies into the largest publicly
traded company of its type. From 1996 to 1998, Mr. Thayer served as President of
Sunbeam International Division and was an original member of the turnaround team
that successfully rescued the company from impending bankruptcy. From 1995 to
1996, Mr. Thayer was the Senior Vice President of Research, Development,
Engineering & Global Growth for Kimberly Clark Corporation and was a key
architect of the merger between Scott Paper and Kimberly Clark. From 1992 to
1995, he was Vice President AFH Europe, Scott Paper Company where he also served
as Chief Operating Officer of the European division.
William S. Wheeler has been a director of I-trax since February 2001.
Mr. Wheeler was a director of Health Management from September 1999 to February
2001. Mr. Wheeler is the Chief Executive Officer of the Tracer Group, Inc. a
company providing logistics support to the manufacturing industry. From March
2001 to March 2002, Mr. Wheeler was the Chief Operating Officer and Chief
Financial Officer of Net2Voice, a telecommunications company. Mr. Wheeler was a
Vice President at Cable & Wireless USA from June 1989 until February 1999.
During this period, Mr. Wheeler held the positions of Vice President and
Controller, Senior Vice President, Finance and acting President of the Dial
Internet Services division.
There are no family relationships among directors, executive officers
and persons nominated to become directors.
G-243
Board of Directors Meetings
The board of directors of I-trax held a total of six meetings during
2002. Each director who served in 2002, other than and Dr. Craig Jones, who
resigned from the board effective December 22, 2002, and Dr. Johns, attended
more than 75% of the meetings of the board and its committees of which he or she
is a member.
Board of Directors' Committees
The board of directors has a compensation committee and an audit
committee.
Compensation Committee
The compensation committee is primarily responsible for determining the
compensation payable to the officers and key employees of I-trax and
recommending to the board additions, deletions and alterations with respect to
the various employee benefit plans and other fringe benefits provided by I-trax.
No member of the committee, however, may participate in decisions pertaining to
his or her compensation or benefits in his or her capacity as a director of
I-trax. The committee also is primarily responsible for administering I-trax's
stock option plans, awarding stock options to I-trax's key employees and
non-employee directors and determining the terms and conditions on which the
options are granted. The committee currently has one member, Mr. Bock. Dr. Jones
served on the committee through the date of his resignation from the Board on
December 22, 2002. The committee did not hold separate meetings during 2002.
Rather, members of the committee participated in all board meetings concerning
compensation issues and had recommended a course of action with respect to
compensation matters to the board at those meetings. The board of directors
expects to elect a new member to the compensation committee at the 2003 annual
meeting of directors, which will follow I-trax's 2003 annual meeting of
stockholders.
Audit Committee
The audit committee is primarily responsible for approving the services
performed by I-trax's independent auditors and reviewing and evaluating I-trax's
accounting principles and reporting practices. The audit committee is also
responsible for monitoring I-trax's system of internal accounting controls and
has the responsibility and authority described in its charter, which is attached
as Exhibit A to this proxy statement. The audit committee and the board of
directors expect to review and, if necessary, amend the committee's charter as
may be required by the Sarbanes-Oxley Act of 2002 and related rules and
regulations at the 2003 annual meeting of directors, which will follow the 2003
annual meeting of stockholders. Currently, the audit committee consists of Mr.
Wheeler, as Chairman, and Mr. Bock. Mr. Palumbo served on the committee until
his resignation effective as of October 15, 2002 when he joined I-trax as an
employee. Mr. Wheeler currently serves as a consultant to I-trax, and the board
of directors expects to assess his continued service on the committee at the
2003 annual meeting of directors in light of the Sarbanes-Oxley Act of 2002 and
related rules and regulations. The committee held two separate meeting in 2002
and one separate meeting in 2003 to review I-trax's 2002 financial statements.
All of the members of the audit committee are independent, as defined in Section
121(A), as in effect on April 25, 2003, of the American Stock Exchange listing
standards.
Compensation of Directors
During 2002, directors did not receive any cash payments. When Dr.
Leibowitz joined the board in March 2002, he received an option grant that would
allow him to purchase up to 20,000 shares of I-trax common stock at $5.83 per
share. This option grant vests over a period of two years. Directors are
reimbursed for out-of-pocket expenses incurred in connection with attending
board meetings.
RECOMMENDATION OF THE BOARD OF DIRECTORS
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE NOMINEES LISTED IN
THIS PROXY STATEMENT.
G-244
PROPOSAL NO. 2
RATIFICATION OF INDEPENDENT AUDITORS
I-trax is asking the stockholders to ratify the appointment of
Goldstein Golub Kessler LLP as I-trax's independent auditors for the fiscal year
ending December 31, 2003. The affirmative vote of the holders of a majority of
shares present or represented by proxy and voting at the 2003 annual meeting
will be required to ratify the appointment of Goldstein Golub Kessler LLP.
In the event the stockholders fail to ratify the appointment, the audit
committee of the board of directors will reconsider its selection. Even if the
appointment is ratified, the audit committee of the board, in its discretion,
may direct the appointment of a different independent accounting firm at any
time during the year if the board feels that such a change would be in I-trax's
and its stockholders' best interests.
Representatives of Goldstein Golub Kessler LLP are expected to be
present at the 2003 annual meeting, will have the opportunity to make a
statement if they desire to do so, and will be available to respond to
appropriate questions.
I-trax engaged Goldstein Golub Kessler LLP on February 19, 2003,
pursuant to the authorization of the audit committee of the board to audit
I-trax's financial statements for the years ending December 31, 2002 and 2003.
PricewaterhouseCoopers LLP had audited I-trax's financial statements for the
years ending December 31, 2000 and 2001.
I-trax filed with the Securities and Exchange Commission on February
12, 2003 a Current Report on Form 8-K to report the dismissal of
PricewaterhouseCoopers LLP effective February 6, 2003 and on February 19, 2003 a
Current Report on Form 8-K to report the engagement of Goldstein Golub Kessler
LLP effective February 18, 2003. The board of directors and the audit committee
dismissed PricewaterhouseCoopers LLP and engaged Goldstein Golub Kessler LLP
after reviewing PricewaterhouseCoopers LLP's proposed fees to audit I-trax's
2002 financial statements and comparing those fees with those quoted by
comparable audit firms.
During the two years ending December 31, 2002 and through February
12, 2003 there were no disagreements between I-trax and PricewaterhouseCoopers
LLP on any matters of accounting principles or practices, financial statement
disclosure, or audit scope or procedures, which disagreements, if not resolved
to the satisfaction of PricewaterhouseCoopers LLP, would have caused it to make
reference to such disagreements in its reports. PricewaterhouseCoopers LLP
furnished to I-trax a letter addressed to the Securities and Exchange Commission
agreeing with this statement. This letter, dated February 12, 2003, was filed as
an exhibit to Form 8-K announcing the dismissal of PricewaterhouseCoopers LLP.
In addition, neither I-trax nor anyone on its behalf consulted
Goldstein Golub Kessler LLP regarding the application of accounting principals
to a specific completed or contemplated transaction or regarding the type of
audit opinion that Goldstein Golub Kessler LLP would render on I-trax's
financial statements prior to Goldstein Golub Kessler LLP's engagement.
During 2002, I-trax's former independent auditors,
PricewaterhouseCoopers LLP, provided services in the following categories and
amounts:
1. Audit Fees $48,125
2. Financial Information Systems Design and Implementation --
3. All Other Fees 11,800
The audit committee has considered the above non-audit services and has
determined that these services did not compromise the independence of
PricewaterhouseCoopers LLP.
G-245
In addition, subsequent to 2002, Goldstein Golub Kessler LLP provided
services in the following categories and amounts:
1. Audit Fees $50,000
2. Financial Information Systems Design and Implementation --
3. All Other Fees 5,000
Goldstein Golub Kessler LLP has a continuing relationship with American
Express Tax and Business Services Inc. from which it leases auditing staff who
are full time, permanent employees of American Express Tax and Business Services
and through which its partners provide non-audit services. As a result of this
arrangement, Goldstein Golub Kessler LLP has no full time employees and
therefore, none of the audit services performed were provided by permanent
full-time employees of Goldstein Golub Kessler LLP. Goldstein Golub Kessler LLP
manages and supervises the audit and audit staff, and is exclusively responsible
for the opinion rendered in connection with its examination.
RECOMMENDATION OF THE BOARD OF DIRECTORS
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE RATIFICATION OF
GOLDSTEIN GOLUB KESSLER LLP AS I-TRAX'S INDEPENDENT AUDITORS FOR THE FISCAL YEAR
ENDING DECEMBER 31, 2003.
G-246
STOCK OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The table below sets forth, as of April 20, 2003, the number of shares
and percentage of I-trax common stock beneficially owned by:
o our Chief Executive Officer, four other most highly compensated
executive officers based on compensation earned during 2002, and
one executive officer elected in 2002;
o each director;
o all directors and executive officers as a group; and
o each person who is known by I-trax to own beneficially five
percent or more of I-trax's outstanding common stock.
Beneficial ownership was determined in accordance with Rule 13d-3 under
the Exchange Act of 1934, as amended. Under this rule, certain shares may be
deemed to be beneficially owned by more than one person (if, for example,
persons share the power to vote or the power to dispose of the shares). In
addition, shares are deemed to be beneficially owned by a person if the person
has the right to acquire the shares, such as upon exercise of options or
warrants, within 60 days of April 20, 2003, the date as of which the information
is provided. In computing the percentage ownership of any person, the amount of
shares includes the amount of shares beneficially owned by such person (and only
such person) by reason of any acquisition rights. As a result, the percentage of
outstanding shares of any person as shown in the following table does not
necessarily reflect the person's actual voting power at any particular date.
To I-trax's knowledge, except as indicated in the footnotes to this
table and under applicable community property laws, the persons named in the
table have sole voting and investment power with respect to all shares shown as
beneficially owned by them.
Shares of Options and
Common Stock Warrants
Beneficially Exercisable
Named Executive Officers and Directors* Owned Within 60 Days Total Percent of Class
--------------------------------------------------------------------------------------------------------------------
Frank A. Martin (1) 1,140,308 295,894 1,436,202 14.9
John Blazek 945,296 3,333 948,629 10.1
Gary Reiss (2) 161,261 479,005 640,266 6.5
David R. Bock (1) 566,681 -- 566,681 6.1
Carol M. Rehtmeyer, Ph.D. 321,803 68,500 390,303 4.1
David C. McCormack 156,536 94,378 250,914 2.7
Yuri Rozenfeld (3) 18,580 108,151 126,731 1.3
Anthony Tomaro 6,136 114,732 120,868 1.3
John R. Palumbo 30,500 76,000 106,500 1.1
Philip D. Green (4) 1,200 69,280 70,480 **
Michael M.E. Johns, M.D. -- 40,000 40,000 **
William S. Wheeler 10,000 20,000 30,000 **
Arthur N. Leibowitz, M.D. -- 10,000 10,000 **
David Nash, M.D. -- -- -- --
R. Dixon Thayer -- -- -- --
All executive officers and directors as a
group (15 persons) 2,891,620 1,379,273 4,270,893 39.7
G-247
Warrants and
Shares of Convertible
Common Stock Securities
Beneficially Exercisable
5% Stockholders Owned Within 60 Days Total Percent of Class
--------------------------------------------------------------------------------------------------------------------
Palladin Opportunity Fund, LLC (5) -- 968,631 968,631 10.0
Woodglen Group, L.P. (6) 631,108 225,000 856,108 8.9
Hans Kastensmith 544,234 46,322 590,556 6.3
Raymond Markman 516,758 -- 516,758 5.5
----------------------------------------------
* Named executive officers and directors can be reached at I-trax, Inc., One
Logan Square, Suite 2615, 130 N. 18th Street, Philadelphia, Pennsylvania 19103.
** Less than 1% of the outstanding shares of common stock.
(1) Messrs. Martin and Bock are members and managing directors of The Nantucket
Group, LLC ("Nantucket"). Nantucket is the general partner of Nantucket
Healthcare Ventures I, L.P. ("Nantucket Ventures"), an owner of 466,681 shares.
Nantucket has sole voting and sole dispositive power with respect to these
shares. Therefore, Messrs. Martin and Bock may be deemed to have beneficial
ownership of the shares held by Nantucket Ventures. Messrs. Martin and Bock
disclaim beneficial ownership of the shares held by Nantucket Ventures, except
to the extent of their respective pecuniary interest in Nantucket Ventures. Mr.
Bock own directly 100,000 shares. Mr. Martin own directly and with his wife
651,127 shares and exercises investment control over 22,500 shares owned by his
mother. The address for Nantucket Ventures is c/o The Nantucket Group, LLC, One
Logan Square, Suite 2615, 130 N. 18th Street, Philadelphia, Pennsylvania 19103.
(2) Includes 3,800 shares held in the name of Mr. Reiss' wife.
(3) Mr. Rozenfeld is a partner of The Spartan Group Limited Partnership
("Spartan"), an owner of 6,000 shares. Mr. Rozenfeld has shared voting and
shared dispositive power with respect to the shares held by Spartan. Mr.
Rozenfeld may be deemed to have beneficial ownership of the shares held by
Spartan. Mr. Rozenfeld disclaims beneficial ownership of the shares held by
Spartan, except to the extent of his pecuniary interest in Spartan. Mr.
Rozenfeld owns 12,580 shares directly.
(4) Mr. Green is an affiliate of Health Industry Investments, LLC and Akin Gump
Health Strategies, LLC, holders of options to purchase 20,000 and 6,400 shares,
respectively, exercisable as of June 20, 2003.
(5) Palladin Asset Management, L.L.C. ("PAM") is the managing member of
Palladin. Palladin Capital Management, LLC ("PCM"), is the sole general partner
of The Palladin Group, L.P. ("Palladin Group"). Palladin Group is the investment
advisor of Palladin. PAM and PCM have shared voting and shared dispositive power
with respect to the shares held by Palladin. Because its beneficial ownership
arises solely from its status as the investment advisor of Palladin, Palladin
Group expressly disclaims equitable ownership of and pecuniary interest in any
shares. Palladin may not convert its debentures or exercise its warrants for
shares of common stock in excess of that number of shares of common stock that,
upon giving effect to such conversion or exercise, would cause the aggregate
number of shares of common stock beneficially owned by Palladin and its
affiliates to exceed 9.99% of the outstanding shares of the common stock
following such conversion or exercise; therefore, POF disclaims beneficial
ownership of any shares of common stock in excess of such amount. The business
address of Palladin is c/o The Palladin Group, 195 Maplewood Avenue, Maplewood,
New Jersey 07040.
(6) Woodglen Associates, LLC is the general partner of Woodglen Group, L.P.,
and, as such, has sole voting and sole dispositive power with respect to the
shares it holds. Its address is 101 East Street Road, Kennett Square,
Pennsylvania 19348.
G-248
EXECUTIVE COMPENSATION AND RELATED INFORMATION
I-trax's executive officers and their ages as of April 2, 2003 are as
follows:
Name Age Position
-------------------------------------- ----------------- ------------------------------------------------------
Frank A. Martin 52 Chairman, Chief Executive Officer, Treasurer and
Director
John R. Palumbo 52 Vice-Chairman and President
Gary Reiss 53 Executive Vice President and Chief Operating Officer
Carol M. Rehtmeyer, Ph.D. 53 Executive Vice President
Anthony Tomaro, CPA 38 Vice President and Chief Financial Officer
David C. McCormack 33 Vice President and Chief Technology Officer
Yuri Rozenfeld 34 Vice President, General Counsel and Secretary
Please see information under Proposal No. 1 above for biographical
information of Dr. Rehtmeyer and Messrs. Martin and Palumbo.
Gary Reiss has been an Executive Vice President of I-trax since
February 2003 and the Chief Operating Officer of I-trax since February 2003 and,
previously, from February 2001 to March 2002. Mr. Reiss served as a Member of
the Office of the President of I-trax from March 2002 to February 2003. Mr.
Reiss was the Chief Operating Officer of Health Management from March 2000 to
February 2001. From November 1999 to March 2000, Mr. Reiss served as the Chief
Operating Officer of EduNeering, Inc., an electronic knowledge management
company, where he was responsible for positioning the company as a web provider
and portal. From 1996 to 1999, Mr. Reiss served as the Chief Operating Officer
of Allscripts. From 1992 to 1995, Mr. Reiss was an Executive Vice President and
Chief Operating Officer of PDS, a company he founded with Mr. Martin and which
was later acquired by Allscripts.
Anthony Tomaro, CPA has been the Chief Financial Officer of I-trax and
Health Management since January 2001 and Vice President of I-trax since February
2003. Prior to joining I-trax, Mr. Tomaro was a partner in the New York
certified public accounting firm of Massella, Tomaro & Co., LLP. He is a member
of the American Institute of Certified Public Accountants and New York State
Society of Certified Public Accountants. Since 1994, Mr. Tomaro has served as a
partner in accounting firms specializing in Securities and Exchange Commission
accounting and auditing services along with domestic taxes and consulting
services.
David C. McCormack has been the Chief Technology Officer of I-trax
since February 2001 and Vice President of I-trax since February 2003. Mr.
McCormack was the Vice President of Engineering of Member-Link Systems, Inc.
from January 1999 until it was acquired by Health Management in December 1999.
Mr. McCormack oversees all of I-trax's software development efforts. He has
developed and deployed systems in most major programming languages. From April
1997 until January 1999, Mr. McCormack served as a partner in a Virginia based
consulting firm, where he oversaw all software developed by the firm, including:
an inventory management system; an EDI transaction processing system; and an
electronic document management system. From January 1995 until April 1997, Mr.
McCormack acted as a consultant to Lockheed Martin Mission Systems during its
development of the Global Transportation Network (GTN) for the Air Force. Mr.
McCormack's prior responsibilities have included the design, development and
integration of mission critical systems for the Army, Navy and Air Force. Mr.
McCormack has a U.S. Government Top Secret clearance.
Yuri Rozenfeld has been the General Counsel of I-trax since July 2000,
Secretary of I-trax since March 2002 and Vice President since February 2003.
From July 2000 to March 2002, Mr. Rozenfeld served as the General Counsel and
Assistant Secretary of I-trax and of Health Management. From April 1997 to July
2000, Mr. Rozenfeld was an associate in the Business and Finance Group at
Ballard Spahr Andrews & Ingersoll, LLP, where he represented small- and mid-cap
public companies and venture capital funds in a broad range of corporate
matters, including stock and asset acquisitions, mergers, venture capital
investments, venture fund formations, partnership and limited liability company
matters and securities law matters. From 1995 to April 1997, Mr. Rozenfeld was
an associate specializing in product liability litigation with Riker, Danzig,
Scherer, Hyland & Perretti LLP.
G-249
Executive Compensation
The following Summary Compensation Table sets forth the compensation
earned by the following individuals: I-trax's Chief Executive Officer; its
President, appointed on October 15, 2002; and four other most highly compensated
executive officers who were serving as such as of December 31, 2002.
Summary Compensation Table
Annual Compensation Long-Term
Compensation
Name and Position Year Salary (1) Other Number of Options
--------------------------------------------------------------------------------------------------------------------
Frank A. Martin 2002 $ 173,543 (2) $ 6,000 (4) 1,750
Chairman, Chief Executive 2001 175,000 (3) 6,000 (4) 70,000
Officer and Treasurer 2000 146,063 (3) 4,500 (4) 70,000
John R. Palumbo 2002 $ 40,000 (2) $ 1,000 (4) 162,000
Vice-Chairman and President 2001 -- -- 20,000 (5)
2000 -- -- 20,000 (5)
Gary Reiss 2002 $ 173,543 (2) $ 6,000 (4) 1,750
Executive Vice President and 2001 175,000 (3) 6,000 (4) 140,000
Chief Operating Officer 2000 134,965 (3) 4,500 (4) 140,000
Carol M. Rehtmeyer, Ph.D. 2002 $ 131,168 (2) -- 31,250
Executive Vice President 2001 -- -- --
2000 -- -- --
Anthony Tomaro 2002 $ 150,000 (2) 11,500
Vice President and Chief 2001 150,000 (3) -- 40,000
Financial Officer 2000 -- -- 40,000 (6)
Yuri Rozenfeld 2002 $ 128,917 (2) 11,300
Vice President, General 2001 124,375 (3) -- 40,000
Counsel and Secretary 2000 49,271 (3) -- 40,000
----------------------------------
(1) Salary includes amounts deferred under I-trax's 401(k) Plan.
(2) Salary includes the following amounts deferred by the named executive
officers at the request of I-trax to conserve cash: Mr. Martin, $20,418; Mr.
Palumbo, $23,333; Mr. Reiss, $20,418; Dr. Rehtmeyer, $14,582; Mr. Tomaro,
$11,250; and Mr. Rozenfeld, $9,750. Repayment terms have not been set.
(3) Salary includes amounts deferred under I-trax's salary deferment program in
effect from November 2000 to December 31, 2001. Pursuant to the program, Mr.
Martin deferred $29,166 in 2000 and $135,357 in 2001; Mr. Reiss deferred $29,166
in 2000 and $135,357 in 2001; Mr. Tomaro deferred $70,665 in 2001; and Mr.
Rozenfeld deferred $8,958 in 2000 and $65,132 in 2001. Further, effective as of
December 31, 2001, these executive officers, surrendered the deferred salary in
exchange for warrants to acquire I-trax common stock. These officers received a
warrant to acquire one share of common stock exercisable at $.75 per share for
each $1.75 of deferred salary. Accordingly, if an officer exercises these
warrants in the future, the effective per share price for each share of common
stock that such officer would receive upon exercise would be $2.50. The price of
$2.50 per share was intended to equal the price per share paid by third-party
investors purchasing common stock from I-trax in 2001 private placements.
Accordingly, Messrs. Martin and Reiss each received warrants to purchase 94,013
shares, Mr. Tomaro received warrants to purchase 40,380 shares and Mr. Rozenfeld
received warrants to purchase 42,337 shares. Effective as of December 31, 2001
and pursuant to the salary deferment program described above, the named
executive officers were granted warrants to purchase 52,269 shares of common
stock at an exercise price of $2.50 per share and warrants to purchase 14,062
shares of common stock at an exercise price of $5.00 per share. The warrants
exercisable at $2.50 were allocated as follows: Mr. Martin, 19,687; Mr. Reiss,
19,687; Mr. Tomaro,
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6,250; and Mr. Rozenfeld, 6,645. The warrants exercisable at $5.00 were
allocated as follows: Mr. Martin, 4,375; Mr. Reiss, 4,375; Mr. Tomaro, 2,604;
and Mr. Rozenfeld, 2,708. These extra warrants were issued to all employees that
participated in the salary deferment program because similar warrants were
issued by I-trax to third-party investors in connection with the several private
placement completed by I-trax in 2001. As a condition to deferring pay in the
salary deferment program, I-trax promised the participating employees that they
would be treated in the same manner as third-party investors in I-trax.
(4) Automobile and parking allowance.
(5) These options were granted to Mr. Palumbo in connection with his service on
the board of directors of I-trax before he joined I-trax as an executive
officer.
(6) Grant approved by the board of directors on December 29, 2000, effective as
of January 1, 2001.
The following table contains information concerning the stock option
grants made to each of the named executive officers during the fiscal year ended
December 31, 2002. No stock appreciation rights were granted in 2002.
Option Grants in Last Fiscal Year 2002
Number of Percent of Total
Securities Options Granted to
Underlying Employees in Exercise Price
Name Options Granted Fiscal Year (1) (Dollars per Share) Expiration Date
--------------------------------------------------------------------------------------------------------------------
Frank A. Martin 1,750 0.3 $ 3.00 12/22/2012
John R. Palumbo 160,000 23.9 2.75 10/13/2012
2,000 0.3 3.00 12/22/2012
Gary Reiss 1,750 0.3 3.00 12/22/2012
Carol M. Rehtmeyer, Ph.D. 30,000 4.5 6.05 2/11/2012
1,250 0.2 3.00 12/22/2012
Anthony Tomaro 10,000 1.5 6.25 1/3/2012
1,500 0.2 3.00 12/22/2012
Yuri Rozenfeld 10,000 1.5 6.25 1/3/2012
1,300 0.2 3.00 12/22/2012
------------------------------------
(1) Based on options to acquire an aggregate of 668,578 shares granted in the
fiscal year.
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The following table contains information about each of the identified
executive officers option exercises in fiscal year 2002 and option holdings as
of December 31, 2002. No stock appreciation rights were outstanding at the end
of that year.
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option Values
Number of Securities
Shares Underlying Unexercised Value of Unexercised
Acquired on Value Options at Year End In-the-Money Options
Name Exercise Realized Exercisable/Unexercisable at Year End (1)
--------------------------------------------------------------------------------------------------------------------
Frank A. Martin -- -- 76,665 / 65,085 --
John R. Palumbo -- -- 76,000 / 126,000 --
Gary Reiss -- -- 184,162 / 97,588 --
Carol M. Rehtmeyer, Ph.D. -- -- 0 / 31,250 --
Anthony Tomaro -- -- 46,665 / 44,835 --
Yuri Rozenfeld -- -- 56,665 / 34,635 --
-------------------------------
(1) The closing price of I-trax common stock on December 31, 2002 was $2.75 per
share. All options held by the named executive officers are exercisable at $2.75
or more.
Employment Contracts
Health Management, I-trax's operating subsidiary, is party to an
employment agreement with Messrs. Martin, Reiss and Palumbo and Dr. Rehtmeyer.
Frank A. Martin and Gary Reiss
On December 29, 2000, Health Management entered into an employment
agreement with each of Messrs. Martin and Reiss. Each agreement is for an
initial term of three years ending on December 28, 2003. Thereafter, each
employment agreement extends automatically for successive periods of one year,
unless the applicable executive officer elects not to renew the agreement. Each
agreement provides for an annual base salary during the initial term of
$175,000.
Health Management may terminate Mr. Martin or Mr. Reiss' employment
with or without cause at any time. In addition, Mr. Martin or Mr. Reiss may
terminate their employments upon 90 days' notice or upon shorter notice for good
reason. Good reason includes the failure by Health Management to continue the
executive officer in his executive position, material diminution of the
executive officer's responsibilities, duties or authority, assignment to the
executive officer of duties inconsistent with his position or requiring the
executive officer to be permanently based anywhere other than within 25 miles of
Philadelphia, Pennsylvania.
In the event either employment agreement is terminated without cause or
for good reason, Health Management will pay the applicable executive officer
severance equal to one year's salary, payable over one year. In addition, in the
event either employment agreement is terminated without cause or for good
reason, the executive officer will remain subject to the non-competition
restrictions described below only as long as he is receiving severance payments.
Finally, all options granted to such executive officers will accelerate and vest
immediately.
With the exception of the circumstances described in the immediately
preceding paragraph, each executive officer agreed not to compete against Health
Management for a period of one year following the expiration of the initial term
or any renewal term, even if the actual employment is terminated prior to such
expiration. Each executive officer also agreed not to use or disclose any
confidential information of Health Management for at least five years after the
expiration of the original term or any renewal term, even if the actual
employment is terminated
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prior to such expiration. Finally, each executive officer agreed that any
invention he develops during his employment relating to the business of Health
Management will belong to Health Management.
Dr. Carol M. Rehtmeyer
On February 5, 2002, Health Management entered into an employment
agreement with Dr. Rehtmeyer. The agreement is for an initial term of three
years ending on February 5, 2005. Thereafter, the agreement extends
automatically for successive periods of one year, unless Dr. Rehtmeyer or Health
Management elects not to renew the agreement. The agreement provides for an
annual base salary during the initial term of $125,000.
Health Management may terminate Dr. Rehtmeyer's employment with or
without cause at any time. In addition, Dr. Rehtmeyer may terminate her
employment upon 90 days' notice or upon shorter notice for good reason. Good
reason includes the failure by Health Management to continue Dr. Rehtmeyer in
her executive position, material diminution of her responsibilities, duties or
authority, assignment to her of duties inconsistent with her position or
requiring her to be permanently based anywhere other than within 25 miles of
Omaha, Nebraska.
If the employment agreement is terminated without cause or for good
reason during the first year of the initial term, Health Management will pay Dr.
Rehtmeyer severance equal to one year's salary, payable over one year. If the
employment agreement is terminated without cause or for good reason after the
first year of the initial term, Health Management will pay Dr. Rehtmeyer
severance equal to six months' salary, payable over six months. In addition, if
the employment agreement is terminated without cause or for good reason, Dr.
Rehtmeyer will remain subject to the non-competition restrictions described
below only as long as she is receiving severance payments. If the employment
agreement is terminated without cause or for good reason following a change of
control of I-trax that results in a payment to Dr. Rehtmeyer on account of her
I-trax common stock, Health Management will not pay Dr. Rehtmeyer severance.
Finally, all options granted to Dr. Rehtmeyer will accelerate and vest
immediately in any circumstances described in this paragraph.
With the exception of the circumstances described in the immediately
preceding paragraph, Dr. Rehtmeyer agreed not to compete against Health
Management for a period of one year following the expiration of the initial term
or any renewal term, even if the actual employment is terminated prior to such
expiration. She also agreed not to use or disclose any confidential information
of Health Management for at least five years after the expiration of the
original term or any renewal term, even if the actual employment is terminated
prior to such expiration. Finally, Dr. Rehtmeyer also agreed that any invention
she develops during her employment relating to the business of Health Management
will belong to Health Management.
John R. Palumbo
On October 15, 2002, Health Management entered into an employment
agreement with Mr. Palumbo. The agreement is for an initial term of three years
ending on October 25, 2005. Thereafter, the agreement extends automatically for
successive periods of one year, unless Mr. Palumbo elects not to renew the
agreement. The agreement provides for an annual base salary during the initial
term of $200,000.
Health Management may terminate Mr. Palumbo's employment with or
without cause at any time. In addition, Mr. Palumbo may terminate his employment
upon 90 days' notice or upon shorter notice for good reason. Good reason
includes the failure by Health Management to continue Mr. Palumbo in his
executive position, material diminution of his responsibilities, duties or
authority, assignment to him of duties inconsistent with his position or
requiring him to be permanently based anywhere other than within 25 miles of
Philadelphia, Pennsylvania.
If the employment agreement is terminated without cause or for good
reason, Health Management will pay Mr. Palumbo severance equal to one year's
salary, payable over one year. In addition, in the event the employment
agreement is terminated without cause or for good reason, Mr. Palumbo will
remain subject to the non-competition restrictions described below only as long
as he is receiving severance payments. All options granted to Mr. Palumbo will
accelerate and vest immediately in any circumstances described in this
paragraph.
With the exception of the circumstances described in the immediately
preceding paragraph, Mr. Palumbo agreed not to compete against Health Management
for a period of one year following the expiration of the initial
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term or any renewal term, even if the actual employment is terminated prior to
such expiration. He also agreed not to use or disclose any confidential
information of Health Management for at least five years after the expiration of
the original term or any additional term, even if the actual employment is
terminated prior to such expiration. Finally, Mr. Palumbo also agreed that any
invention he develops during his employment relating to the business of Health
Management will belong to Health Management.
Change of Control Arrangements
The compensation committee, as administrator of I-trax's 2000 Equity
Compensation Plan and 2001 Equity Compensation Plan, can provide for accelerated
vesting of the shares of common stock subject to outstanding options in
connection with certain changes in control of I-trax.
SECTION 16(a) OF THE EXCHANGE ACT BENEFICIAL OWNERSHIP COMPLIANCE
I-trax's board members, executive officers and persons who hold more
than 10% of I-trax's outstanding common stock are subject to the reporting
requirements of Section 16(a) of the Exchange Act of 1934, as amended, which
require them to file reports with respect to their common stock ownership and
their transactions in common stock. Based upon the copies of Section 16(a)
reports that I-trax received from such persons for their 2002 fiscal year
transactions in I-trax common stock and their common stock holdings and the
written representations received from one or more of these persons that no
annual Form 5 reports were required to be filed by them for the 2002 fiscal
year, I-trax believes that all reporting requirements under Section 16(a) for
such fiscal year were met in a timely manner by I-trax's executive officers,
board members and greater than 10% stockholders.
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
Dr. Jones, a director of I-trax through December 22, 2002, is the
Director of the Division of Allergy & Immunology at the Los Angeles County and
University of Southern California Medical Center, which is operated by the Los
Angeles County Department of Health Services (DHS). The Los Angeles County DHS
purchased an information system from I-trax to support implementation of a
clinical disease management program for which it paid I-trax approximately
$61,000 in 2001.
In May 2000, Health Management entered into a consulting agreement with
Health Industry Investments, LLC, an affiliate of Mr. Green, a director of
I-trax. This consulting agreement was superseded by a new consulting agreement
between Health Management and Akin Gump Health Strategies, LLC, likewise an
affiliate of Mr. Green. Under the new consulting agreement, Health Strategies
agreed to introduce Health Management to potential customers for I-trax's
services and Health Management agreed to compensate Health Strategies if Health
Management closes transactions with such potential customers. I-trax has not
made any payment under the original or new consulting agreement. In addition,
under the original consulting agreement, I-trax granted Health Management in
April 2001, options to acquire 40,000 shares of I-trax common stock at an
exercise price of $2.75 as compensation for continuing to perform services under
the consulting agreement. These options vest over two years.
Effective as of December 29, 2000, Health Management issued to each of
Messrs. Martin and Reiss, the Chief Executive Officer and Chief Operating
Officer, respectively, 50,000 shares of Health Management common stock at a per
share purchase price of $10. The aggregate purchase price was payable pursuant
to a Promissory Note and Pledge Agreement in the principal amount of $499,750.
The principal amount of each Promissory Note and Pledge Agreement accrues
interest at an annual rate of 5.87%. The principal and interest on each
Promissory Note and Pledge Agreement was payable in five annual installments of
principal and interest beginning on December 29, 2001. Furthermore, in the event
these officers were performing their duties adequately and were accomplishing
I-trax's goals, the compensation committee of I-trax's board of directors had
the option of waiving and forgiving any of the annual payments of principal and
interest in lieu of granting such officers a cash bonus. These transaction were
rescinded in 2001.
From November 2000 through May 2001, I-trax completed an offering of
convertible promissory notes and stock purchase warrants. I-trax raised
$2,000,000 in this offering. Of this total, $700,000 was loaned to I-trax by
Woodglen Group, L.P., a 5% stockholder, $250,000 was loaned to
G-254
I-trax by Mr. Martin and $250,000 was loaned to I-trax by Mr. Reiss. The
convertible promissory notes had a maturity date of one year from the date of
issue and accrue interest at an annual rate of 8% with a default annual rate of
12%. The principal amount of, and accrued and unpaid interest under, the
convertible promissory notes were convertible into common stock. The stock
purchase warrants granted the holders a right to purchase one shares of common
stock for each $10 in original principal amount of convertible promissory notes.
The initial conversion price of the convertible promissory notes and the
exercise price of the stock purchase warrants were $10 per share, subject, in
each case, to full-ratchet anti-dilution adjustment in the event of a subsequent
offering with an effective per share price of less than $10.
On June 25, 2001 and pursuant to an Exchange Agreement dated May 14,
2001, the holders of the convertible promissory notes, including Woodglen Group,
L.P., a 5% stockholder, Mr. Martin and Mr. Reiss exchanged the principal of, and
accrued interest through May 15, 2001 under, the promissory notes in the
aggregate amount of $2,280,157 for I-trax common stock at the exchange price of
$2.50 per share. As consideration for the exchange, I-trax reset the exercise
price of the warrants to acquire 440,000 shares of common stock, originally
issued together with the convertible promissory notes, to $2.50 per share.
Accordingly, in the transaction, Woodglen Group, L.P. received 291,108 shares
and warrants to acquire 140,000 shares, Mr. Martin received 104,690 shares and
warrants to acquire 50,000 shares and Mr. Reiss received 104,361 shares and
warrants to acquire 50,000 shares.
Effective as of June 25, 2001, I-trax completed a private placement of
440,000 shares of common stock at $2.50 per share, yielding to I-trax
$1,100,000. Woodglen Group, L.P., a 5% stockholder, invested $850,000 in this
private placement. As consideration for completing the private placement, I-trax
issued to the participating investors stock purchase warrants to purchase one
share of common stock for each $10 invested in this private placement at an
exercise price of $5.00 per share. I-trax, therefore, issued warrants to acquire
a total of 110,000 shares of common stock, of which a warrant to acquire 85,000
shares of common stock was issued to Woodglen Group, L.P.
During the first and second quarters of 2001, Mr. Martin loaned I-trax
$515,000 to fund I-trax's working capital deficiency. Of this amount, I-trax
repaid $240,000 in June 2001. On June 25, 2001, Mr. Martin exchanged the
remaining $275,000 of the loan, and accrued interest of $9,163, into common
stock at the exchange price of $2.50 per share. I-trax issued 113,664 shares in
this exchange. In addition, I-trax issued Mr. Martin a stock purchase warrants
to acquire 103,000 shares at an exercise price of $2.50 per share as
consideration for this bridge financing. The terms of this exchange transaction
and warrant issuance, including the exchange price and the calculation of the
number of warrants granted, were intended to be identical to those applicable to
the debt exchange transaction closed by I-trax on June 25, 2001 and described
above.
During the first and second quarters of 2001, Mr. Reiss loaned I-trax
$240,000 to fund I-trax's working capital deficiency. I-trax repaid this amount
in June 2001. On June 25, 2001, as consideration for the loan, I-trax issued Mr.
Reiss stock purchase warrants to acquire 48,000 shares of common stock at an
exercise price of $2.50 per share. The terms of the warrant issuance, including
the calculation of the number of warrants granted, were intended to be identical
to those applicable to the debt exchange transaction closed by I-trax on June
25, 2001 and described above.
On March 2, 2001, I-trax entered into an Amended and Restated
Promissory Note and Warrant Purchase Agreement with a group of investors led by
Psilos Group Partners, L.P. (collectively, the "Psilos Group") pursuant to which
the Psilos Group agreed, among other things, to loan I-trax up to $1,000,000.
The Psilos Group included Nantucket, a venture fund managed by Mr. Martin. As
consideration, I-trax granted the Psilos Group warrants to acquire .05264 shares
of common stock at $.50 per share for each $1 of the face amount of the loan.
The loan accrues interest at an annual rate of 8%, with an annual default rate
of 12%, and is due five years from original date of issuance. The Psilos Group
funded $692,809 of the $1,000,000 and received warrants to purchase 364,694
shares of common stock. Of such total amounts, Nantucket funded $75,000 and
received warrants to purchase 39,480 shares of common stock. Effective as of
January 4, 2002, all Psilos Group investors exercised their warrants using a
cashless exercise feature and received an aggregate of 340,316 shares of common
stock.
Beginning in November 2000, in an effort to conserve cash, I-trax
established a salary deferment program whereby certain executive officers,
including Messrs. Martin, Reiss, Tomaro, McCormack and Rozenfeld, and other
employees agreed to defer all or a portion of their salaries. To induce
employees to participate in the salary deferment program, I-trax agreed to pay
interest at an annual rate of 8% on the deferred salary. In addition, I-trax
G-255
promised participating employees that they would receive (1) an option to
convert deferred salary into equity on the same basis as third-party investors
in I-trax and (2) "coverage warrants" to the extent they were also granted to
third-party investors while participating employees were deferring pay. I-trax
ended the salary deferment program on December 31, 2001. As of December 31,
2001, I-trax accrued $1,038,876 on account of deferred salaries and interest
thereon. Certain participating employees, including Messrs. Martin, Reiss,
Tomaro, McCormack and Rozenfeld, agreed to exchange a total of $814,595 of
accrued salary, together with interest thereon, for warrants to acquire 465,480
shares of common stock with an exercise price of $0.75 per share. The number of
warrants issued to each employee electing to surrender accrued salary was
calculated by dividing the employee's total accrued salary and interest thereon
by $1.75. Accordingly, if an employee elected to exchange accrued salary for
warrants and later exercised these warrants, the effective per share price for
the shares of common stock that the employee would receive would be $2.50. The
price of $2.50 per share was intended to equal the price per share paid by
third-party investors purchasing common stock in several private placements
completed by I-trax in 2001. I-trax also granted the participating employees
warrants to acquire 142,193 shares of common stock at an exercise price of $2.50
per share and warrants to acquire 20,538 shares of common stock at $5.00 per
share. These extra warrants were issued to all employees that participated in
the salary deferment program because similar warrants were issued by I-trax to
third-party investors in connection with the several private placement completed
by I-trax in 2001.
During the third and fourth quarters of 2001, Mr. Reiss loaned I-trax
$296,000, Mr. Martin loaned I-trax $280,000 and Alan Sakal, I-trax's Senior Vice
President, loaned I-trax $100,000, in each case, to fund I-trax's working
capital deficiency. I-trax repaid Mr. Sakal's loan in January 2002. The
outstanding loans accrue interest at an annual rate of 8%. On December 20, 2001,
as consideration for the loans, I-trax issued Messrs. Reiss, Martin and Sakal
stock purchase warrants to acquire 29,600 shares, 28,000 shares and 10,000
shares of common stock, respectively, at an exercise price of $5.00 per share.
The terms of these warrants, including the calculation of the number of warrants
granted, were intended to be identical to the warrants issued by I-trax in a
private placement of $1,100,000 of common stock and warrants closed on June 25,
2001 and described above.
Effective as of December 31, 2001, Mr. Martin exercised warrants to
purchase 94,013 shares of common stock by agreeing to cancel a portion of a loan
in the amount of $70,510 payable by I-trax to Mr. Martin. The exercised warrants
were originally issued to Mr. Martin under the salary deferment program
described above.
Lauren Reiss-Pollard, a daughter of Mr. Reiss, is an employee of Health
Management. Mrs. Reiss-Pollard received cash compensation of $78,000 in 2001 and
$80,717 in 2002.
Sean Martin, the son of Mr. Martin, is an employee of Health
Management. Mr. Sean Martin received cash compensation of $62,500 in 2002.
In addition to advances to I-trax made by Messrs. Martin and Reiss
described elsewhere in this section, in 2001 Messrs. Martin and Reiss advanced
to I-trax an aggregate of $380,000 and subsequent to year ended 2002, Messrs.
Martin and Reiss advanced to I-trax an aggregate of $140,000. These advances
accrue interest at an annual rate of 8%. I-trax and Messrs. Martin and Reiss
have not yet agreed on repayment terms.
Effective February 6, 2002, I-trax acquired WellComm in a two-step
reorganization pursuant to a Merger Agreement dated January 28, 2002 by and
among I-trax, WC Acquisition, Inc., an Illinois corporation and a wholly-owned
subsidiary of I-trax, WellComm and Mr. Blazek and Dr. Rehtmeyer. In the merger,
I-trax issued WellComm stockholders approximately $2,200,000 in cash and
1,488,000 shares of I-trax common stock. Dr. Rehtmeyer also received options to
acquire 56,000 shares of I-trax common stock at a nominal exercise price. After
the merger, Mr. Blazek and Dr. Rehtmeyer were elected to I-trax's board of
directors.
I-trax funded the acquisition of WellComm by selling a 6% convertible
senior debenture in the aggregate principal amount of $2,000,000 to Palladin
Opportunity Fund LLC pursuant to a Purchase Agreement dated as of February 4,
2002 between Palladin and I-trax. Pursuant to the purchase agreement, I-trax
also issued Palladin a warrant to purchase an aggregate of up to 307,692 shares
of common stock at an exercise price of $5.50 per share. The outstanding
principal and any interest under the debenture are payable in full on or before
February 3, 2004. Further, outstanding principal and any interest may be
converted at any time at the election of Palladin into I-trax common stock. As a
result of this transaction, Palladin became a 5% stockholder.
G-256
In 2002, Mr. Blazek loaned I-trax $234,500, Dr. Rehtmeyer loaned I-trax
$92,750 and Jane Ludwig, a Vice President of I-trax, loaned I-trax $22,750.
Subsequent to year ended 2002, Mr. Blazek loaned I-trax $149,200 and Dr.
Rehtmeyer loaned I-trax $50,800. These loans are due on February 27, 2004 and
are accruing interest at an annual rate of 8%.
A relative of Mr. Reiss advanced to I-trax $350,000 in 2002. I-trax
repaid $125,000 of this sum in 2002 and $140,000 subsequent to year ended 2002.
The balance is due on demand and is accruing interest at an annual rate of 8%.
Subsequent to year ended 2002, Mr. Blazek, acting in his capacity as
limited agent of certain I-trax stockholders that that acquired I-trax common
stock as a result of the acquisition of WellComm by I-trax, loaned I-trax
$139,500. I-trax and Mr. Blazek have not yet agreed on repayment terms.
Subsequent to year ended 2002, Acorn II, an investment fund affiliated
with Woodglen Group, L.P., a 5% stockholder, loaned I-trax $150,000. The loan is
due on December 31, 2003 and is accruing interest at an annual rate of 12%.
Pursuant to a consulting agreement dated July 1, 2002, I-trax engaged
Mr. Wheeler to analyze and, if necessary, improve the company's accounting
practices and financial reporting. Under this consulting agreement, in 2002 Mr.
Wheeler received compensation from I-trax of $23,334.
The Certificate of Incorporation of I-trax limits the liability of
I-trax's directors for monetary damages arising from a breach of their fiduciary
duty as directors, except for any breach of the director's duty of loyalty to
I-trax or its stockholders, for acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of law, for any
transaction from which the director derived an improper personal benefit and as
otherwise required by Delaware General Corporation Law. This limitation of
liability does not limit equitable remedies such as injunctive relief or
rescission.
I-trax's bylaws require I-trax to indemnify its directors and officers
to the fullest extent permitted by Delaware law, including in circumstances in
which indemnification is otherwise discretionary under Delaware law.
G-257
AUDIT COMMITTEE REPORT
The audit committee of the board of directors developed an updated
charter for the committee in 2000, which was approved by the full board. The
complete text of the charter is reproduced in Exhibit A to this proxy statement.
The audit committee of the board of directors recommends to the board
the accounting firm to be retained to audit the company's financial statements
and, once retained, consults with and reviews recommendations made by the
accounting firm with respect to financial statements, financial records, and
financial controls of the company.
Accordingly, the audit committee has (a) reviewed and discussed the
audited financial statements with management; (b) discussed with Goldstein Golub
Kessler LLP, the company's independent auditors, the matters required to be
discussed by Statement on Auditing Standards No. 61 (Communications with Audit
Committees); (c) received the written disclosures and the letter from Goldstein
Golub Kessler LLP required by Independence Standards Board Standard No. 1
(Independence Discussions with Audit Committees); and (d) discussed with
Goldstein Golub Kessler LLP its independence from management and the company,
including the matters in the written disclosures required by the Independence
Standards Board. The audit committee also discussed with Goldstein Golub Kessler
LLP the overall scope and plans for its audit. The audit committee met with
management and Goldstein Golub Kessler LLP to discuss the results of the
auditors' examinations, their evaluations of the company's internal controls,
and the overall quality of the company's financial reporting.
In reliance on the review and discussions referred to above, the audit
committee recommended to the board of directors that the audited financial
statements be included in the company's Annual Report on Form 10-KSB for the
year ended December 31, 2002.
This report of the audit committee does not constitute soliciting
material and should not be deemed filed or incorporated by reference into any
other I-trax filing under the Securities Act of 1933, as amended, or the
Securities Exchange Act of 1934, as amended, except to the extent that I-trax
specifically incorporates this report by reference therein.
Members of the Audit Committee
William S. Wheeler, Chairman
David R. Bock
FORM 10-KSB
The Company will mail without charge, upon written request, a copy of
the Company's Form 10-KSB Report for fiscal year ended December 31, 2002,
including its financial statements. Requests should be sent to I-trax, Inc., One
Logan Square, Suite 2615, 130 N. 18th Street, Philadelphia, Pennsylvania 19103,
Attn: Corporate Secretary.
STOCKHOLDER PROPOSALS FOR 2004 ANNUAL MEETING
Stockholders who intend to have a proposal considered for inclusion in
I-trax's proxy materials for presentation at I-trax's 2004 annual meeting of
stockholders pursuant to Rule 14a-8 under the Exchange Act of 1934, as amended,
must submit the proposal to the company at its offices at One Logan Square,
Suite 2615, 130 N. 18th Street, Philadelphia, Pennsylvania 19103, Attn: Yuri
Rozenfeld, not later than December 27, 2003. Stockholders who intend to present
a proposal at such meeting without inclusion of such proposal in I-trax's proxy
materials pursuant to Rule 14a-8 under the Exchange Act of 1934, as amended, are
required to provide advance notice of such proposal to I-trax at the
aforementioned address not later than December 27, 2003. I-trax reserves the
right to reject, rule out of order, or take other appropriate action with
respect to any proposal that does not comply with these and other applicable
requirements, including conditions established by the Securities and Exchange
Commission.
G-258
OTHER MATTERS
I-trax's board of directors knows of no other matters to be presented
for stockholder action at the 2003 annual meeting. However, if other matters do
properly come before the annual meeting or any adjournments or postponements
thereof, the board of directors intends that the persons named in the proxies
will vote upon such matters in accordance with their best judgment.
G-259
EXHIBIT A
I-TRAX, INC.
Audit Committee Charter
Role
The Audit Committee of the Board of Directors shall be responsible to
the Board of Directors for oversight of the quality and integrity of the
accounting, auditing, and reporting practices of the Company and shall perform
such other duties as may be directed by the Board. The Committee shall maintain
free and open communication with the Company's independent auditors and
management of the Company and shall meet in executive session at least annually.
In discharging this oversight role, the Committee is empowered to investigate
any matter brought to its attention, with full power to retain outside counsel
or other experts for this purpose.
Membership and Independence
The membership of the Committee shall consist of at least three
directors who are generally knowledgeable in financial and auditing matters,
including at least one member with accounting or related financial management
expertise. Each member shall be free of any relationship that, in the opinion of
the Board, would interfere with his or her individual exercise of independent
judgment, and shall meet the director independence requirements for serving on
audit committees as set forth in the American Stock Exchange's listing standards
applicable to companies with securities traded on The American Stock Exchange.
The Chairperson of the Audit Committee, who shall be appointed by the Board of
Directors, shall be responsible for leadership of the Committee, including
preparing agendas for and presiding over meetings, making Committee assignments
and reporting to the Board of Directors. The chairperson will also maintain
regular liaison with the Chief Executive Officer and Chief Financial Officer of
the Company and the lead independent audit partner.
Responsibilities
Internal Control
o Discuss with management and the independent auditors the quality
and adequacy of the Company's computer systems (and their
security), internal accounting controls and personnel.
o Review with the independent auditors and management any
management letter issued by the independent auditors and
management's responses thereto.
Financial Reporting
o Keep informed of important new pronouncements from the accounting
profession and other regulatory bodies, as well as other
significant accounting and reporting issues, that may have an
impact on the Company's accounting policies and/or financial
statements.
o Review the audited financial statements and management's
discussion and analysis of financial condition and results of
operations and discuss them with management and the independent
auditors. These discussions shall include consideration of the
quality of the Company's accounting policies and principles as
applied in its financial reporting, including review of
estimates, reserves and accruals, review of judgment areas,
review of audit adjustments, whether or not recorded, and such
other inquiries as may be appropriate. Based on the review, the
Committee shall make a recommendation to the Board as to the
inclusion of the Company's audited financial statements in the
Company's annual report on Form 10-KSB.
G-260
External Audit
o Review the performance of the independent auditors and recommend
to the Board the independent auditors to be engaged to audit the
financial statements of the Company and, if appropriate, the
termination of that relationship. In doing so, the Committee will
request from the auditors a written affirmation that the auditors
are independent, discuss with the auditors any relationships that
may impact the auditors' independence (including non-audit
services), and recommend to the Board any actions necessary to
oversee the auditors' independence.
o Oversee the independent auditors relationship by discussing with
the independent auditors the nature, scope and rigor of the audit
process, receiving and reviewing audit reports, and providing the
auditors full access to the Committee (and the Board) to report
on appropriate matters.
Reporting to Board of Directors
o Report Audit Committee activities to the full Board and issue
annually a report (including appropriate oversight conclusions)
to be included in the Company's proxy statement for its annual
meeting of shareholders.
o Review the Audit Committee Charter with the Board of Directors
annually.
G-261
PROXY I-TRAX, INC. PROXY
One Logan Square, Suite 2615, 130 N. 18th Street, Philadelphia, PA 19103
This Proxy is Solicited on Behalf of the Board of Directors of I-trax, Inc.
for the Special Meeting of Stockholders to be held March 17, 2004
The undersigned holder of Common Stock of I-trax, Inc. ("I-trax")
hereby appoints Frank A. Martin and Yuri Rozenfeld, or either of them, proxies
for the undersigned, each with full power of substitution, to represent and to
vote as specified in this Proxy all Common Stock of I-trax that the undersigned
stockholder would be entitled to vote if personally present at the Special
Meeting of Stockholders (the "Special Meeting") to be held on Wednesday, March
17, 2004 at 10:00 a.m., local time, at 1735 Market Street, 51st Floor,
Philadelphia, Pennsylvania, and at any adjournments or postponements of the
Special Meeting.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE FOLLOWING PROPOSALS:
/x/ Please mark votes as in this example.
1. A proposal to approve the issuance of up to 13,859,200 shares of I-trax FOR AGAINST ABSTAIN
Common Stock and 400,000 shares of I-trax Series A Convertible Preferred / / / / / /
Stock to be delivered in connection with the Merger Agreement, dated as of
December 26, 2003, as amended, among Meridian Occupational Healthcare
Associates, Inc. (d/b/a CHD Meridian Healthcare) ("CHD Meridian"), I-trax,
DCG Acquisition, Inc., a wholly-owned subsidiary of I-trax, and CHD
Meridian Healthcare, LLC, a company of which I-trax is the sole member.
2. A proposal to approve the merger of DCG Acquisition, Inc., a wholly-owned FOR AGAINST ABSTAIN
subsidiary of I-trax with and into CHD Meridian. / / / / / /
3. A proposal to approve the sale of up to 1,100,000 shares of I-trax FOR FOR AGAINST ABSTAIN
AGAINST ABSTAIN Series A Convertible Preferred Stock to raise a portion of / / / / / /
the cash consideration to be used in the merger and for working capital.
4. A proposal to ratify and approve the issuance, in a private placement that FOR AGAINST ABSTAIN
closed on October 31, 2003, of 1,400,000 shares of I-trax Common Stock and / / / / / /
warrants to purchase 840,000 shares of I-trax Common Stock, and approve the
issuance of 840,000 shares of I-trax Common Stock upon the exercise of such
warrants.
In their discretion, the proxies are authorized to vote upon such other
business as may properly come before the Special Meeting.
(CONTINUED AND TO BE SIGNED ON REVERSE SIDE)
WHEN PROPERLY EXECUTED, THIS PROXY WILL BE VOTED IN THE MANNER DIRECTED
HEREIN BY THE UNDERSIGNED STOCKHOLDER. IF NO DIRECTION IS MADE, THIS PROXY WILL
BE VOTED FOR THE ABOVE DESCRIBED PROPOSALS 1, 2, 3 AND 4, AND IN THE DISCRETION
OF THE PROXY HOLDERS, UPON SUCH OTHER BUSINESS AS MAY PROPERLY COME BEFORE THE
SPECIAL MEETING OR ANY ADJOURNMENT OR POSTPONEMENT THEREOF. The undersigned
stockholder may revoke this proxy at any time before it is voted by delivering
to the Secretary of I-trax either a written revocation of the proxy or a duly
executed proxy bearing a later date, or by appearing at the Special Meeting and
voting in person.
PLEASE MARK, SIGN, DATE AND RETURN THIS CARD PROMPTLY USING THE
ENCLOSED RETURN ENVELOPE. If you receive more than one proxy card, please sign
and return ALL cards in the enclosed envelope.
The undersigned acknowledges receipt of the accompanying
Notice of Special Meeting of Stockholders and Proxy
Statement.
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Signature
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Signature (if held jointly)
Date:_________________________________________________, 2004
When shares are held by joint tenants, both should sign. If
signing as attorney, executor, administrator, trustee,
guardian, custodian, corporate official or in any other
fiduciary or representative capacity, please give your full
title as such.
Please sign your name exactly as it appears on this proxy, and mark, date and
return this proxy as soon as possible in the enclosed envelope.
G-262