| I TRAX INC Item 1A Risk Factors In addition to other information in this Annual 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 |
| Risks Related to Our Company If we are not able to implement our business strategy of deploying our integrated services effectively to existing and new clients, we will not be able to grow our revenue |
| Although we believe that there is significant demand for our services and products among businesses, there are many reasons why we may be unable to execute our business strategy, including our possible inability to: · deploy our integrated workplace health and productivity management solutions on a large scale; · attract a sufficiently large number of self-insured employers to purchase our services; · increase awareness of our brand; · strengthen user loyalty; · develop and improve our services and solutions; · continue to develop and upgrade our services and solutions; and · attract, retain and motivate qualified personnel |
| Our inability to achieve the above goals could adversely affect our revenue |
| Our credit facility contains certain covenants and financial tests that limit the way we conduct business |
| Our senior secured credit facility contains certain covenants and financial tests that limit the way we conduct business |
| Financial tests include a covenant measuring the ratio of our funded indebtedness to earnings before interest, taxes, depreciation and amortization (as defined in the credit agreement), or EBITDA, the ratio of our funded indebtedness to capitalization, and our fixed charges coverage ratio |
| Other covenants restrict our ability to incur certain debt and complete mergers and dispose of assets without our senior creditor’s consent |
| We amended our senior secured credit facility effective June 29, 2005, in anticipation of failing to meet certain covenants because of the restructuring of certain of our operations |
| (Please also see Note 4 in the notes to our consolidated financial statements for further information about the restructuring |
| ) As a result of this amendment, (1) the aggregate amount that can be borrowed under the facility increased to the lesser of dlra15cmam000cmam000 or the credit facility base calculation, in either case less the amount of 6 _________________________________________________________________ outstanding letters of credit; (2) compliance with the covenant for the ratio of funded indebtedness to EBITDA is waived through December 31, 2006; and (3) covenants setting minimum EBITDA targets for periods ending September 30, 2005 through December 31, 2006 were added |
| (Please also see Note 9 in the notes to our consolidated financial statements for further information on our credit facility |
| ) The covenants and financial tests in the credit facility may prevent us from accessing working capital, competing effectively or taking advantage of new business opportunities |
| The failure to comply with these covenants or meet these ratios and other tests could result in a default under our credit facility |
| Unless we are able to negotiate an amendment, forbearance or waiver, we may be required to repay all amounts then outstanding, which we could probably not do, and if we could do so, it would have a material adverse effect on our business, results of operations and financial condition |
| Borrowings under our credit facility also are secured by liens on substantially all of our assets and the assets of our subsidiaries |
| If we are in default under one of these credit facilities, our secured creditor could foreclose on all or substantially all of our assets and the assets of our subsidiaries |
| In addition, our credit facility matures on April 1, 2007 |
| Accordingly, on April 1, 2006, all indebtedness under the credit facility will be classified as a short-term liability |
| We cannot assure you that we will generate sufficient cash flow to repay our indebtedness, and we further cannot assure you that, if the need arises, we will be able to obtain additional financing or to refinance our indebtedness on terms acceptable to us, if at all |
| Any such failure to obtain financing could have a material adverse effect on our business, results of operations and financial condition |
| Although we earned a net profit in the quarters ended September 30, 2005 and December 31, 2005, we did not earn a net profit for the entire 2005 year and may not earn a net profit in 2006 due to the many factors, including the following: · our need to invest in the further development and enhancement of our workplace health and productivity management solutions; · our need to strengthen our position as a respected and preferred provider of integrated health and wellness solutions; and · our need to prepare for seasonal and other trends in the healthcare sector, and overall economic conditions, which may make our growth and results of operations inconsistent |
| Consequently, one or any combination of these factors may result in our inability to generate a net profit in 2006 |
| We may require additional capital to implement our growth strategy |
| We may require additional funds to continue development of our business, including by acquisition |
| We expect to obtain these funds from operating activities and, as necessary, financing activities |
| Financing activities may include equity or debt financings, which could dilute stockholder ownership in the business |
| We cannot provide assurance that additional funding will be available on acceptable terms, if at all |
| If adequate funds are not available, we may have to delay our growth strategy or scale-back or eliminate certain operations |
| Therefore, if we are unable to obtain adequate funds, we may suffer an adverse impact on our business, financial condition and results of operations |
| 7 _________________________________________________________________ Loss of advantageous pharmaceutical pricing could adversely affect our income and the value we provide to our clients |
| We receive favorable pricing from pharmaceutical manufacturers as a result of our class of trade designation, which means that we only sell pharmaceutical products to our clients’ employees, dependents and retirees |
| We also receive rebates on branded drugs from the pharmaceutical manufacturers |
| We pass on most of the benefit of our class of trade pricing and the branded drug rebates to our clients under the terms of client contracts |
| In the past, retail pharmacies have brought legal cases against pharmaceutical manufacturers challenging class of trade designations as unlawful price discrimination under the Robinson-Patman Act |
| Although these challenges have generally failed, there remains a possibility that we could lose the benefit of this favorable pricing, either due to a legal challenge or to a change in policies of the pharmaceutical manufacturers |
| Increasing competition for contracts to establish and manage employer-dedicated pharmacies and clinics increases the likelihood that we may lose business to our competitors |
| CHD Meridian Healthcare pioneered the field of employer-dedicated pharmacies and primary care clinics |
| Although CHD Meridian Healthcare has always faced competition from other methods by which business enterprises can arrange and pay for healthcare services for their employees, until recently we rarely experienced direct competition for a contract to manage a particular employer’s pharmacy or clinic |
| We have recently begun to see direct competition for employer-dedicated pharmacy management contracts |
| We expect this competition will increase over time |
| Although we believe that we have certain advantages in facing such competition, including our experience and know-how, some of our competitors and potential competitors, including prescription benefit management companies are substantially larger and better-capitalized than we are |
| We believe that the potential market for employer-dedicated pharmacies is large enough for us to meet our growth plans despite increasing competition, but there are no assurances that we will in fact be able to do so |
| Our ability to maintain existing clients, expand services to existing clients, add new clients so as to meet our growth objectives, and maintain attractive pricing for our services, will depend on the interplay among overall growth in the use of employer-dedicated facilities, entry of new competitors into our business, and our success or failure in maintaining our market position in relation to these new entrants |
| If we cannot successfully compete in the market for managing employer dedicated pharmacies, our business and results of operations could be negatively affected |
| In addition to this increasing head-to-head competition for contracts to establish and manage employer-dedicated facilities, we expect to continue to face competition for large employers’ healthcare budgets from other kinds of enterprises, including health insurers, managed health care plans, and retail pharmacy chains |
| Increased competition could reduce the profitability of our pharmacy operations |
| We may be forced to cut our management fees or pass on to our customers an increased share of the volume discounts and generic drug incentives that we receive from our wholesale drug distributor, which would adversely affect our financial results |
| Our business involves exposure to professional liability claims, and a failure to manage effectively our professional liability risks could expose us to unexpected expenses, thus resulting in losses |
| Under the terms of our contracts to manage employer sponsored clinics or pharmacies, we must procure professional liability insurance covering the operations of such facilities |
| We also typically agree to indemnify our clients against professional liability claims arising out of acts or omissions of healthcare 8 _________________________________________________________________ providers working at the clinics and pharmacies we manage |
| Further, under the terms of our service agreements with affiliated professional corporations, we are contractually obligated to procure malpractice insurance on behalf of the professional corporations and their employed healthcare providers |
| Finally, there also exists the possibility that we may be subject to professional liability claims even though neither the healthcare providers nor we were directly responsible for the injury |
| As a result of these contractual arrangements, we routinely incur expenses arising out of professional liability claims |
| If we fail to manage the professional liability claims and associated risk effectively, we may sustain financial losses |
| Although we maintain professional liability insurance with respect to such claims, our professional liability insurance policies are written on a “claims-made” basis, meaning that they cover only claims made during the policy period, and not events that occur during the policy period but result in a claim after the expiration of the policy |
| With this insurance strategy, we must renew or replace coverage each year to have coverage for prior years’ operations |
| Availability and cost of such coverage are subject to market conditions, which can fluctuate significantly |
| Certain of our past professional liability insurance policy years were insured by two insurance companies that are now either insolvent or under regulatory supervision |
| We have established reserves in connection with the six pending claims from such policy years |
| Although we believe such reserves are reasonable based on our historic loss experience, there is no assurance that these reserves will be sufficient to pay all judgments or settlements that may result from such claims |
| Our professional liability insurance for the period May 1, 2003 to April 30, 2004 provided for self-insured retention of dlra500cmam000 |
| A self-insured retention is the amount we assume under our insurance policy as if we are the insurer subject to the terms of the policy and related regulatory scheme |
| This means that we are partially uninsured against a variety of claims that may arise from such policy year |
| We have reserved for projected future professional liability expenses based on actuarial estimates of potential losses that may emerge in the future as a result of past operations |
| These reserves, however, could prove inadequate, as the size of our ultimate uninsured liability could exceed our established reserves and we could sustain losses in excess of our reserves |
| Since May 1, 2004 we have purchased primary professional liability insurance from a captive insurance subsidiary, Green Hills Insurance Company, or GHIC, and excess coverage from third-party insurers |
| GHIC maintains separate reserves based on actuarial estimates of potential losses up to the policy limits |
| However, there can be no assurance that these reserves will be sufficient to meet potential losses and we could be required to meet losses or loss adjustment expenses out of other resources |
| Our subsidiary insurance company, GHIC, subjects us to additional regulatory requirements and to risks associated with the insurance business |
| Operating an insurance subsidiary represents additional risk to our operations, including a potential perception among our existing and potential clients that we are not adequately insured |
| We have retained a third-party captive insurance company manager and have engaged an actuarial consulting firm for the insurance subsidiary |
| We are subject to the risks associated with any insurance business, which include investment risk relating to the performance of our invested assets set aside as reserves for future claims, the uncertainty of making actuarial estimates of projected future professional liability losses, and loss adjustment expenses |
| Failure to make an adequate return on our investments, to maintain the principal of invested funds, or to estimate future losses and loss adjustment expenses accurately could cause asserted and unasserted claims to exceed our reserves causing us to sustain losses |
| Also, 9 _________________________________________________________________ maintaining the insurance subsidiary has exposed us to substantial additional regulatory requirements, with attendant risks if we fail to comply with applicable regulations |
| If our clients do not provide us with accurate data, or if we do not process such data accurately, we may not be able to fulfill some of our client contracts |
| Implementation and delivery of some of our programs, including our disease management programs, is highly dependent on data about individuals supplied to us by our clients, and on our information technology systems that process such data upon receipt |
| If we do not receive timely and accurate data from our clients, or if our information technology systems do not process such data accurately, we may not be able to fulfill our client contracts, which could have a material adverse effect on our business, results of operations and financial condition |
| We may be sued and incur losses if we provide inaccurate health information on our website or inadvertently disclose confidential health information to unauthorized users |
| Because some users of our services access health content and services relating to the medical condition of the users on our website or 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 accessible from our website through links to other websites or through content and materials that may be posted by our users in chat rooms or bulletin boards |
| Any such liability could have a material adverse effect on our reputation and our business, results of operations or financial position |
| We also retain confidential healthcare information on our servers |
| Therefore, our facilities and infrastructure must remain secure and be perceived by clients to be secure |
| Although we operate our software applications from a secure facility managed by a reputable third party, our infrastructure may be vulnerable to physical or virtual break-ins, computer viruses, programming errors or similar disruptive problems |
| A material security breach could damage our reputation or result in liability to us |
| If we lose key employees or fail to recruit and retain other skilled employees, we may not be able to continue our growth |
| Our business greatly depends on, among others, Frank A Martin, chairman and director, R Dixon Thayer, chief executive officer and director, Dr |
| Raymond J Fabius, our president and chief medical officer, and David R Bock, executive vice president and chief financial officer |
| If we cannot retain any one of these individuals, we will lose employees with considerable operational experience and knowledge of our business, which could significantly reduce our ability to compete and succeed in the future |
| We maintain employment agreements with Messrs |
| Martin, Thayer and Bock and Dr |
| In December 2005, Mr |
| Martin’s employment agreement renewed for a one-year term ending December 2006 |
| In February 2005, we entered into an employment agreement with Mr |
| Thayer for an initial term of three years |
| In April 2005, we entered into an employment agreement with Dr |
| Fabius for an initial term of three years, and in November 2004, we entered into an employment agreement with Mr |
| Bock for an initial term of three years |
| Each employment agreement may be terminated by us with or without cause and by the applicable executive with or without good reason |
| 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 10 _________________________________________________________________ additional personnel in all operational areas |
| We may be unable, however, to attract, assimilate or retain such highly qualified personnel |
| Although we have not experienced such difficulties in the recent past, we may do so in the future, especially if labor markets continue to tighten |
| If we cannot attract new personnel or retain and motivate current personnel, the service level we provide to our clients may suffer, which may cause us to lose clients and revenue |
| Our sales cycle is complex, which prolongs the sales cycle and complicates our ability to predict our growth |
| The workplace health and productivity management segment is growing rapidly and has many providers offering complex services that are quite different from one another, and require clients to incur substantial upfront and continuing costs |
| Potential clients, therefore, take a long time to evaluate and purchase such services |
| The sales and implementation process for our services is also lengthy because it involves a significant technical evaluation and requires our clients to commit time and other resources |
| Delays occur often because of clients’ internal budgets, processes associated with significant capital commitments, information technology related issues, and general caution associated with new services |
| Our sales cycle, therefore, is unpredictable and has generally ranged from 3 to 24 months from contact to contract |
| The time needed to implement our services is also difficult to predict, and the process may last 18 months in extreme circumstances |
| Therefore, before we see a single patient and record any revenue from a new site, we expend substantial time, effort and money that we may not recoup |
| Deterioration of the financial health of our clients, many of which are large US manufacturing enterprises, may impair our business volume and collections |
| An adverse trend in certain US manufacturing industries is leading to plant closings and layoffs that could eliminate or reduce the need for some of our employer-dedicated healthcare facilities |
| Because of the risks associated with client insolvency, and the concentration of CHD Meridian Healthcare’s client base, our business is to some extent dependent on the continued health of US manufacturing industries |
| Also, if our client becomes insolvent, we may not be able to recover outstanding accounts receivable owed by that client, we may suffer premature contract termination, and our operating results could be adversely affected |
| Moreover, because our professional liability insurance is written on a “claims-made” basis, we are protected from malpractice claims only if the company that insured us at the time of the alleged “occurrence” is the same company at the time the claim is filed |
| To continue coverage in such circumstances, we must obtain “tail” insurance coverage or continue to purchase insurance written on a “claims made” basis |
| We typically charge our clients for tail insurance coverage when the contract terminates |
| If a client is insolvent when the contract terminates, however, we may not be able to recoup the cost of tail insurance coverage, or other costs related to that facility’s shutdown |
| Our clients and we are dependent on software technologies and are therefore subject to frequent change and risks associated with Internet viruses and outages, which could destroy the information we maintain or prevent our clients from accessing important information |
| The web-based software applications we use to operate our on-site facilities and deliver other services depend on the continuous, reliable and secure operation of Internet servers and related hardware and software |
| Viruses and outages on the Internet could cause outages of our applications from time to time |
| To the extent that our services are interrupted, our users will be inconvenienced and our reputation may be diminished |
| If access to our system becomes unavailable at a critical time, our clients may 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 11 _________________________________________________________________ break-ins and similar events |
| We do not have 100prca redundancy for all of our computer and telecommunications facilities |
| Consequently, 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 and on-site facilities 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 |
| We are dependent on our ability to deploy and implement our services and information technology efficiently |
| Certain of our services are dependent on efficient deployment, implementation, and scalability of information technology, and each client has unique information technology needs |
| We must continue to develop efficiency in integrating systems and scalability to accommodate a greater number of clients, improved work flow, and new functionality |
| If we fail to respond to these requirements, our ability to process new business could be slowed, which ultimately could have a material adverse effect on our business, results of operations and financial condition |
| We may be unable to compete successfully against companies offering services similar to ours, which will impair our revenue growth |
| On-site health centers and pharmacies dedicated to specific employers, and their employees and dependents, represent a small segment of the overall United States healthcare market |
| In this segment, we compete with large, self-insured employers that operate their own on-site facilities and third-party vendors such as Concentra, Whole Health Management and Medcor |
| We also compete against numerous other companies operating in other segments of the healthcare market |
| These companies include disease management companies, health insurers and plans, Internet health information companies and pharmacy benefit management companies, among others |
| Disease management and care enhancement companies that deliver a component of our services include Healthways, Lifemasters, Matria, Allere, SHPS, Inc, and Future Health |
| Pharmacy benefit management companies, which also deliver a component of our services, include Caremark Rx, Drugmax, Express Scripts and national pharmacy chains, such as Walgreens |
| Many of these companies are larger than we are and enjoy: · greater name recognition and larger marketing budgets and resources; · larger customer and user bases; · larger production and technical staffs; · substantially greater financial, technical and other resources; and · 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 |
| 12 _________________________________________________________________ If other companies develop intellectual property identical or similar to ours, we will lose what we believe to be our competitive advantage |
| Our intellectual property is important to our business |
| We rely on a combination of copyright, trademark and trade secret laws, confidentiality procedures and contractual provisions to protect our intellectual property |
| Our efforts to protect our intellectual property may not be adequate |
| Our competitors may duplicate our products or services |
| Conversely, we could be subject to intellectual property infringement claims as the number of our competitors grows and the content and functionality of services overlap with competing offerings |
| Defending against these claims, even if not meritorious, could divert our attention from operating our company |
| If we become liable to third parties for infringing their intellectual property rights, we could be required to pay a damage award, change our business model, and restructure our operations, which will result in a material adverse effect on our results of operations |
| The loss of a major client will significantly reduce our revenue |
| For the year ended December 31, 2005, we had one client that accounted for 13prca of our revenue |
| We anticipate that our results of operations in any given period will continue to be influenced to a certain extent by a relatively small number of clients |
| Accordingly, if we were to lose the business of such a client, our results of operations will be materially and adversely affected |
| Risks Related to Our Industry The healthcare industry is subject to general cost pressures that could reduce our revenue and gross margins |
| The healthcare industry is currently under pressure by governmental and private-sector revenue sources to cut costs |
| These pressures will continue and possibly intensify |
| Although we believe that our services assist public health agencies, hospitals, health plans and self-insured employers to control the high costs associated with treating patients, the pressures to reduce costs immediately may hinder our ability (or increase the length of time we require) to obtain new contracts |
| In addition, the focus on cost reduction may pressure our customers to restructure contracts and reduce our fees |
| We and our client are affected by changes in the laws governing health plan, hospital and public health agency reimbursement under governmental programs such as Medicare and Medicaid |
| There are periodic legislative and regulatory initiatives to reduce the funding of the Medicare and Medicaid programs in an effort to curtail or reduce overall Federal healthcare spending |
| Federal legislation has and may continue to significantly reduce Medicare and Medicaid reimbursements to most hospitals |
| These reimbursement changes are negatively affecting hospital revenues and operations |
| Such legislative initiatives or government regulations could reduce demand for our services, our revenue and gross margins |
| We are subject to judicial and statutory prohibitions on the corporate practice of medicine, and failure to comply with these prohibitions will expose us to heightened scrutiny by regulatory agencies, fines, litigation and possibly loss of revenue |
| There are judicial and statutory prohibitions on the corporate practice of medicine, which vary from state to state |
| The corporate practice of medicine doctrine prohibits a corporation, other than a professional corporation, from practicing medicine or employing physicians |
| Some states also prohibit a non-physician from splitting or sharing fees charged by a physician for medical services |
| The services we provide include establishing and managing medical clinics |
| Most physician services at clinics we manage 13 _________________________________________________________________ are provided by physicians who are employees of professional corporations with which we contract to provide non-professional services such as purchasing equipment and supplies, patient scheduling, billing, collection, accounting, and computer services |
| The professional corporations control hiring and supervise physicians and all medical functions |
| We have option agreements with the physician-owners of these affiliated professional corporations that entitle us to require the physician-owners to sell the stock of the professional corporations to any licensed physician we designate |
| This structure is intended to permit consolidation of the professional corporations’ financial statements with ours, while maintaining sufficient separation to comply with the corporate practice of medicine doctrine and with fee splitting and fee sharing prohibitions |
| Although we do not believe that this structure violates the corporate practice of medicine doctrine or fee splitting or fee sharing prohibitions, such a claim may be successfully asserted against us in any jurisdiction, which may subject us to civil and criminal penalties, or we could be required to restructure our contractual arrangements with clients |
| Any restructuring of contractual arrangements could result in lower revenue, increased expenses and reduced influence over the business decisions of those operations |
| Alternatively, some existing CHD Meridian Healthcare contracts could be found to be illegal and unenforceable, which could result in their termination and an associated loss of revenue, or inability to enforce valuable provisions of those contracts |
| We have custody of confidential patient records and if we fail to comply with regulations applicable to maintaining such records we may be fined or sued |
| Our personnel who staff our on-site pharmacies and clinics have custody of confidential patient records |
| The web-based software applications we use to operate our on-site facilities and deliver other services also contain confidential patient records |
| In our capacity as a covered entity or, in some instances, as a business associate of a covered entity, we and the records we hold are subject to a rule entitled Privacy of Individually Identifiable Health Information, or Privacy Rule, promulgated by the US Department of Health and Human Services under the Health Insurance Portability and Accountability Act of 1996, or HIPAA, and also to any state laws that may have more stringent privacy requirements |
| We attempt to protect the privacy and security of confidential patient information in accordance with applicable law |
| We could, however, face claims of violation of the Privacy Rule, invasion of privacy or similar claims, if our patient records or computer servers were compromised, or if our interpretation of the applicable privacy requirements, many of which are complex, were incorrect or allegedly incorrect, or if we failed to maintain a sufficiently effective compliance program |
| Such security failures could also cause significant negative publicity, depress our stock price and lead to litigation |
| Furthermore, although we believe that the Privacy Rule protects our ability to obtain patient identifiable medical information for disease management purposes from certain of our clients, state legislation or regulations will preempt Federal legislation if state legislation or regulations are more restrictive |
| Accordingly, new Federal or state legislation or regulations restricting the availability of this information for disease management purposes could prevent us from performing services for our existing clients, and result in termination of our disease management contracts and loss of revenue |
| We are subject to fraud and abuse statutes because we bill the Medicare and Medicaid programs to recover amounts that offset the healthcare costs of our clients and if we violate such statutes, we will be subject to civil and criminal penalties |
| In recent years, various government entities have actively investigated potential violations of fraud and abuse statutes and regulations by healthcare providers and by pharmaceutical manufacturers |
| The fraud and abuse provisions of the Social Security Act provide civil and criminal penalties and potential exclusion from the Medicare and Medicaid programs for persons or businesses who offer, pay, solicit or receive remuneration in order to induce referrals of patients covered by Federal healthcare programs (which include Medicare, Medicaid, TriCare and other Federally funded health programs) |
| 14 _________________________________________________________________ Although our services and those of our affiliated professional corporations are generally paid for by employer clients, we bill the Medicare and Medicaid programs and private insurance companies, as agent of our affiliated professional corporations, to recover reimbursable amounts that offset the healthcare costs borne by our clients |
| We are therefore subject to various regulations under the Medicare and Medicaid programs, including fraud and abuse prohibitions |
| We believe that we are compliant with these requirements, but could face claims of non-compliance if our interpretations of the applicable requirements, many of which are complex, were incorrect or allegedly incorrect, or if we fail to maintain a sufficiently effective compliance program |
| The professionals who staff our affiliated professional corporations as well as those we employ are subject to state and Federal licensure requirements and if we fail to comply with such licensure requirements, we may be scrutinized by regulatory agencies and fined |
| The doctors, nurses and other healthcare professionals who staff our affiliated professional corporations, the nurses who staff our care communication centers, and the pharmacists and other healthcare professionals, who staff our on-site pharmacies and clinics, are subject to individual licensing requirements |
| All of our healthcare professionals and facilities subject to such licensing requirements are licensed in the state where 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 increase our administrative costs |
| Further, in the event a state regulatory agency alleges that we do not comply with relevant licensing requirements, we may be subject to fines and administrative action |
| The recently launched Medicare prescription drug benefit legislation could reduce the demand for the prescription drug benefits we provide |
| The Medicare Prescription Drug, Improvement and Modernization Act of 2003 went into effect in January 2006 |
| This law provides Medicare beneficiaries with insurance coverage that offers access to prescription medicines |
| The prescription drug benefit is called Medicare Part D Under Medicare Part D, drug benefits are 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 is an annual open period during which Medicare beneficiaries will choose their drug plan from among those available in their area of residence |
| We are still assessing how this law will affect our business |
| Subsidies for employers providing retiree drug benefits will decrease the costs to those employers of providing such benefits, and therefore, may increase the number of employers willing to provide retiree drug benefits, which would positively affect our business |
| On the other hand, employers that now offer prescription drug benefits may decide no longer to do so, on the basis that their retirees now will be able to obtain such benefits on their own through Medicare |
| In that case, such employers would have less need for employer-dedicated pharmacies of the kinds that we establish and manage, which would adversely affect our business |
| 15 _________________________________________________________________ Risks Related to Investment in Our Stock The price of our common stock is volatile and investors may lose money if they invest in our stock |
| Our stock price has been and we believe will continue to be volatile |
| For example, from March 1, 2004 through March 1, 2006, the price of our stock has fluctuated from a high of dlra5dtta70 to a low of dlra1dtta07 |
| Our stock’s volatility is influenced by the market’s perceptions of the healthcare sector in general, or other companies believed to be similar to us, and by the market’s perception of our operations and future prospects |
| Many of these perceptions are beyond our control |
| In addition, as of March 1, 2006, 36cmam081cmam877 shares of our common stock were issued and outstanding and the three-month average daily trading volume of our common stock was approximately 370cmam000 shares |
| Therefore, the ability to achieve relatively quick liquidity without a negative impact on our stock price is limited |
| Shares reserved for future issuance upon the conversion of outstanding shares of Series A Convertible Preferred Stock and upon the exercise of issued options and warrants will cause dilution to our common stockholders |
| As of March 1, 2006, 5cmam702cmam533 shares of our common stock were reserved for issuance upon conversion of outstanding shares of Series A Convertible Preferred Stock and 6cmam824cmam972 shares of our common stock were reserved for issuance upon the exercise of our outstanding warrants and options |
| In addition, outstanding shares of our Series A Convertible Preferred Stock accrue dividends at the rate of 8prca per year, which is payable in common stock or cash when shares of our Series A Convertible Preferred Stock are converted |
| Under the current terms of our senior secured credit facility, however, we are required to pay the dividends in shares of common stock |
| If such dividends were converted into common stock at dlra2dtta05, the closing price of our common stock on December 31, 2005, we would issue approximately 1cmam487cmam000 additional shares of common stock |
| Our stockholders, therefore, would experience dilution of their investment upon conversion or exercise, as applicable, of these securities |
| Provisions of our certificate of incorporation could impede a takeover of our company, even though a takeover may benefit our stockholders, or delay or prevent a change in management |
| Our board of directors has the authority, without further action by the stockholders, to issue from time to time, shares of preferred stock in one or more classes or series, and to fix the rights and preferences of such preferred stock, subject, however, to the limitations contained in the certificate of designations filed with respect to our Series A Convertible Preferred Stock |
| We are subject to provisions of Delaware corporate law which, subject to certain exceptions, prohibit us from engaging in any “business combination” with a person who, together with affiliates and associates, owns 15prca or more of our common stock (referred to as an interested stockholder) for a period of three years following the date that such person became an interested stockholder, unless the business combination is approved in a prescribed manner |
| Additionally, bylaws establish an advance notice procedure for stockholder proposals and for nominating candidates for election as directors |
| These provisions of Delaware law and of our certificate of incorporation and bylaws may have the effect of delaying, deterring or preventing a change in our existing management or control, may discourage bids for our common stock at a premium over market price and may adversely affect the market price, and the voting and other rights of the holders of our common stock |