Had the Company used the fair value based accounting method for stock compensation expense prescribed by SFAS Nos. 123 and 148 for the first quarter ended March 31, 2005, the Company’s consolidated net loss and net loss per share would have been reduced to the pro-forma amounts illustrated as follows:

		2005
Net loss as reported		$	(420,000	)
Deduct total stock-based employee        compensation expense determined under fair        value based methods for all awards			(339,000	)
Pro forma net loss		$	(759,000	)
Net loss per common share as reported, basic and diluted		$	(0.04	)
Pro forma net loss per common share, basic and diluted		$	(0.05	)

Effective January 1, 2006, the Company adopted the fair value recognition provisions of SFAS No. 123 (revised 2004), “Share-Based Payment” (“SFAS 123R”) using the modified prospective method. Under this method, compensation cost in the first quarter of 2006 includes the portion vesting in the period for (1) all share-based payments granted prior to, but not vested as of January 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of SFAS No. 123 and (2) all share-based payments granted subsequent to January 1, 2006, based on the grant date fair value estimated in accordance with the revised provisions of SFAS 123R. Before adoption of SFAS No. 123R, pro forma disclosures reflected the fair value of each option grant estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions:

Dividend yield	0.00%
Expected volatility	94.44%
Risk-free interest rate	3.99%
Expected life	5 years

9

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I-TRAX, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

4. Share-Based Compensation (continued)

Under the Black-Scholes option-pricing model, the Company estimated volatility using only its historical share price performance over the expected life of the option. Under SFAS No. 123R, however, the Company estimates expected volatility using historical volatility of the Company’s common stock as well as historical volatility of the common stock of comparable companies over the expected life of the options. The expected life of the options has been determined using the simplified method as prescribed in SEC Staff Accounting Bulletin No. 107 (“SAB 107”). Results of prior periods do not reflect any restated amounts and the Company had no cumulative effect adjustment upon adoption of SFAS No. 123R under the modified prospective method. The Company’s policy is to recognize compensation cost for awards with only service conditions and a graded vesting schedule on a straight-line basis over the requisite service period for the entire award. Additionally, the Company’s policy is to issue new shares of common stock to satisfy stock option exercises.

		Number of Shares			Weighted Average Exercise Price			Options Exercisable			Weighted Average Exercise Price
December 31, 2005			3,841,652		$	1.79			1,382,185		$	2.33
Exercised			(147,330	)	$	0.89
Granted			140,000		$	2.65
Forfeited			(84,468	)	$	1.42
March 31, 2006			3,749,854		$	1.87			1,731,526		$	2.21

The weighted-average grant-date fair value of options granted during the first quarter of 2006 was $1.83. The intrinsic value for a stock option is defined as the difference between the current market value and the grant price. The total intrinsic value of options exercised during the first quarter of 2006 was $376,000.

As of March 31, 2006, there was $1,844,000 of total unrecognized compensation cost related to unvested share-based compensation arrangements that is expected to be recognized over a weighted-average period of 1.85 years. During the first quarter of 2006, cash received from options exercised was $132,000.

On January 25, 2006, the Company granted options to acquire 75,000 and 40,000 shares of common stock to certain employees and a director, respectively, with an exercise price of $2.64, which approximated the market value at the date of grant.

On February 16, 2006, the Company granted options to acquire 25,000 shares of common stock to an employee with an exercise price of $2.70 per share, which approximated the market value at the date of grant.

Information regarding options outstanding at March 31, 2006 was as follows:

		Options Outstanding									Options Exercisable
Range of Exercise Price		Number Outstanding			Weighted Average Remaining Contractual Life			Weighted Average Exercise Price			Number Exercisable			Weighted Average Exercise Price
$0.00-$2.00			3,002,502			8.71		$	1.42			1,149,478		$	1.37
$2.01-$4.00			590,788			6.63		$	2.84			434,703		$	2.88
$4.01-$6.00			61,565			5.67		$	4.74			52,344		$	4.80
$6.01-$8.00			52,800			5.12		$	6.33			52,800		$	6.33
$8.01-$10.00			42,200			3.58		$	10.00			42,200		$	10.00
			3,749,854			8.22		$	1.87			1,731,525		$	2.21

 

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I-TRAX, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

5. Restructuring and Related Activities

During 2005, the Company completed an in-depth analysis of its structure and product development efforts. This analysis led to the conclusion that certain products and services that the Company had been offering were no longer essential to its integrated business model. The Company then implemented a restructuring of its operations and related activities, which was substantially completed as of June 30, 2005. A summary of the activity and balances of the restructuring and provision for loss contract reserve accounts was as follows:

		Balance at December 31, 2005			Cash Payments			Balance at March 31, 2006
Restructuring
One-time termination benefits		$	185,000			(84,000	)	$	101,000
Contract termination costs			141,000			(1,000	)		140,000
Restructuring total			326,000			(85,000	)		241,000
Provision for loss contracts		$	419,000			(143,000	)	$	276,000

 

6. Long Term Debt

The Company’s senior credit facility with Bank of America, N.A., which is secured by substantially all of the Company’s tangible assets, provides financing up to $15,000,000 through a revolving credit line.

The Company amended the facility on May 4, 2006 (effective March 31, 2006). Under the amendment, the maturity of the facility was extended from April 1, 2007 to October 1, 2007. The amendment also reset the “Fixed Charge Coverage Ratio” and redefined “EBITDA” to exclude non-cash stock-based compensation expense. Minimum EBITDA targets for periods ending March 31, 2006 through December 31, 2006 remain:

Period		Minimum EBITDA
July 1, 2005 - March 31, 2006		$	2,560,000
Last four fiscal quarters ending June 30, 2006			3,580,000
Last four fiscal quarters ending September 30, 2006			3,960,000
Last four fiscal quarters ending December 31, 2006			4,450,000

At March 31, 2005, the Company had $9,057,000 of debt outstanding under the senior credit facility and was in compliance with all covenants included in the facility. In addition, based on the borrowing base calculation, the Company had access to an additional $4,750,000 under the revolving line of credit.

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I-TRAX, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

7. Stockholders’ Equity

Warrants

On March 12, 2006, the Company issued a warrant to purchase 100,000 shares of the Company’s common stock at an exercise price of $2.70 per share to a consultant. The warrant vests over fifteen months and expires on March 12, 2009. The warrant was valued at $140,000, with $5,000 included as general and administrative expense in the accompanying condensed consolidated statements of operations.

The following table summarizes the Company’s activity as it relates to warrants:

		Shares Underlying Warrants
Balance outstanding at December 31, 2005			3,069,514
Granted			100,000
Exercised			(112,911	)
Expired			(12,000	)
Balance outstanding at March 31, 2006			3,044,603

At March 31, 2006, all outstanding warrants were exercisable at a weighted average exercise price of $2.87 per share.

Series A Convertible Preferred Stock

During the three months ended March 31, 2006, 282,786 shares of Series A Convertible Preferred Stock, and $1,068,000 in dividends accrued on such stock, were converted into an aggregate of 3,229,761 shares of common stock.

As of March 31, 2006, 570,253 shares of Series A Convertible Preferred Stock were issued and outstanding. Each share of Series A Convertible Preferred Stock converts into 10 shares of common stock. Each share of Series A Convertible Preferred Stock also accrues dividends at the rate of 8% per year on $25.00 per share, the original sale price. The Company accrued dividends of $337,000 for the three months ended March 31, 2006.

As of March 31, 2006, the Company had accrued aggregate dividends of $2,319,000, which at the Company’s option are payable in cash (subject to the consent of the senior secured creditor) or common stock valued at market price. If such dividends were paid in common stock at $3.39, the closing price of the common stock on March 31, 2006, the Company would be required to issue approximately 684,000 additional shares of common stock.

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I-TRAX, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

8. Commitments and Contingencies

Litigation

The Company is involved in legal disputes on a variety of matters related to the ordinary course of the Company’s business. After reasonable diligence, the Company’s management believes that the estimated losses of the Company from such legal disputes have been adequately provided for in other current and other long-term liabilities to the extent probable and reasonably estimable and management expects these disputes will be resolved without a material adverse effect on the Company’s consolidated financial position or results of operations. Nonetheless, it is possible that the Company’s future results of operations for any particular quarterly or annual period may be materially affected by changes in the status of such legal disputes.

Compliance with Healthcare Regulations

Because the Company operates in the healthcare industry, it is subject to numerous laws and regulations of Federal, state, and local governments. These laws and regulations include, but are not limited to, matters regarding licensure, accreditation, government healthcare program participation requirements, reimbursement for patient services, and Medicare and Medicaid fraud and abuse. Government activity has stayed high with respect to investigations and allegations concerning possible violations of fraud and abuse laws and regulations by healthcare providers. Violations of these laws and regulations could result in, among other things, expulsion from government healthcare programs, fines, penalties, and restitution for billed services.

The Company’s management believes that the Company is in compliance with laws and regulations applicable to the Company’s business. Further, compliance with such laws and regulations is subject to future government review and interpretation as well as regulatory actions unknown or unasserted at this time.

Significant Customers

As of March 31, 2006, two customers represented 14% and 13% of the Company’s accounts receivable as reflected on the condensed consolidated balance sheet. As of March 31, 2005, two customers represented 21% and 12% of the total accounts receivable.

For the three months ended March 31, 2006, one customer accounted for 11% of the Company’s revenue. For the three months ended March 31, 2005, one customer accounted for 13% of the Company’s revenue.

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I-TRAX, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

9. Professional Liability and Related Reserves

Since 2004, the Company has secured medical malpractice and general liability insurance for certain of its direct and indirect subsidiaries through Green Hills Insurance Company, a Risk Retention Group (“GHIC”), incorporated as a subsidiary of CHD Meridian LLC under the laws of the State of Vermont. In years prior to 2004, the Company secured such insurance in the commercial market.

On an annual basis, the Company uses independent actuaries to estimate its exposures for claims obligations (for both asserted and unasserted claims) related to deductibles and exposures in excess of coverage limits. The Company maintains reserves for these obligations. Loss and loss adjustment expense reserves are recorded monthly and represent management’s best estimate of the ultimate net cost of all reported and unreported losses incurred. The reserves for unpaid losses and loss adjustment expenses are estimated using individual case-basis valuations and statistical analyses. Those estimates are subject to the effects of trends in claim severity and frequency. Although considerable variability is inherent in such estimates, management believes the reserves for losses and loss adjustment expenses are adequate. The estimates are reviewed and adjusted continuously as experience develops or new information becomes known; such adjustments are included in current operations.

At March 31, 2006, the Company’s estimated loss reserve for cost and settlement of reported claims predating GHIC was $1,362,000, which is included in other current liabilities on the condensed consolidated balance sheet. The Company also maintains a reserve for incurred but not reported losses and loss adjustment expense predating or otherwise not assumed by GHIC.  At March 31, 2006, this reserve was $2,000,000, which is included in other long-term liabilities on the condensed consolidated balance sheet.

During the three months ended March 31, 2006, GHIC increased its reserves for reported claims and incurred but not reported losses and loss adjustment expense by $274,000 to $2,179,000, which is included in other current liabilities on the condensed consolidated balance sheet.

 

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I-TRAX, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations of I-trax, Inc. and its subsidiaries should be read in conjunction with our unaudited condensed consolidated financial statements and related notes appearing on the preceding pages as well as our audited financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2005 filed on March 22, 2006 (“2005 Annual Report”).

Forward Looking Statements

The following discussion also contains forward-looking statements. All statements, other than statements of historical facts, included in this quarterly 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 readers of this report should not place undue reliance on our forward-looking statements. Actual results or events could differ, possibly materially, from the plans, intentions and expectations disclosed in our forward-looking statements. We have identified important factors in the cautionary statements below and in our 2005 Annual Report that we believe could cause actual results or events to differ, possibly materially, from our forward-looking statements. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments we may make. We undertake no duty to update these forward-looking statements, even though our situation may change in the future.

Risk Considerations

You are cautioned not to place undue reliance on the statements and other discussion set forth in this quarterly report. These statements and other discussion speak only as of the date this quarterly report is filed with the Securities and Exchange Commission, and these statements are based on management’s current expectations and are subject to uncertainty and changes in circumstances. Factors that may cause actual results to differ materially from management expectations include, but are not limited to:

·	effects of increasing competition for contracts to establish and manage employer-dedicated pharmacies and clinics;

·	loss of advantageous pharmaceutical pricing;

·	inability to meet covenants and financial tests related to our senior secured credit facility;

·	long and complex sales cycles;

·	loss of a major client;

·	cost pressures in the healthcare industry;

 

 

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·	exposure to professional liability claims and a failure to manage effectively our professional liability risks;

·	economic uncertainty; and

·	each of the factors discussed under “Item 1A. - Risk Factors” in our 2005 Annual Report.

Basis of Presentation

The accompanying unaudited condensed consolidated 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-Q and Regulation S-X. In our opinion, the unaudited condensed consolidated financial statements have been prepared on the same basis as the annual financial statements and reflect all adjustments necessary to present fairly our financial position as of March 31, 2006 and the results of the operations and cash flows for the three months ended March 31, 2006. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities and the reported amounts of revenues and expenses during the covered periods. We base our estimates and judgments on our historical experience and on various other factors that we believe are reasonable under the circumstances. We evaluate our estimates and judgments, including those related to revenue recognition, bad debts, and goodwill and other intangible assets on an ongoing basis. Notwithstanding these efforts, there can be no assurance that actual results will not differ from the respective amount of those estimates.

Business Overview

I-trax is an integrated health and productivity management company formed by the merger on March 19, 2004 of I-trax, Inc. and Meridian Occupational Healthcare Associates, Inc., which did business as CHD Meridian Healthcare. We offer a range of health and productivity-related services to large, self-insured employers. Our services can be integrated or blended as necessary or appropriate based on each client’s needs. The services include on-site health centers, which deliver primary care, acute care corporate health, occupational health and pharmacy care management services, as well as integrated disease management, wellness, and disability management programs. We believe we are the nation’s largest provider of on-site healthcare on an outsourced basis.

We believe our services improve the health status of employees and mitigate the upward cost trend experienced by employers, employees, and government agencies. By proactively managing the healthcare needs of our clients’ employees and their families, we believe our programs improve health, increase productivity, reduce absenteeism, reduce the need for future critical care, and manage overall costs. We also believe the breadth of our services allows our clients the flexibility to meet each of the following needs in a cost-effective and professional manner: pharmacy; primary care; occupational health; corporate health; wellness; lifestyle management; and disease management.

We deliver our services at or near the client’s work site by opening, staffing and managing a health center or pharmacy dedicated to the client and its eligible population. We also provide support services to enhance our on-site health centers by using the Internet and our call center services. In all, we provide care “face to face,” telephonically, and via the Internet. We believe that our integrated care delivery model enhances the trusted relationship established by our clinical providers on-site with their patients, using the support services of our call center and our Internet programs.

 

As of March 31, 2006, we were providing services to clients that include large financial institutions, consumer products manufacturers, health plans, integrated delivery networks, automotive and

 

 

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automotive parts manufacturers, and diversified industrial companies. For 92 of these clients, we operated 196 on-site facilities in 32 states, providing a variety of health management programs. Our client retention rate is high due to strong client relationships that are supported by the critical nature of our services, the benefits achieved by employer and employee constituents, and the utilization of multi-year service contracts.

Critical Accounting Policies

A summary of significant accounting policies is disclosed in Note 2 to the consolidated financial statements included in our 2005 Annual Report. Our critical accounting policies are further described under the caption “Critical Accounting Policies” in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our 2005 Annual Report.

Effective January 1, 2006, we adopted Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment” (“SFAS 123R”), using the modified prospective method. Under this method, compensation cost in the first quarter of 2006 included the portion vesting in the period for (1) all share-based payments granted prior to, but not vested as of January 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of SFAS No. 123 and (2) all share-based payments granted subsequent to January 1, 2006, based on the grant date fair value estimated in accordance with the revised provisions of SFAS 123R. Prior to adoption of SFAS 123R, we accounted for stock based compensation under the recognition and measurement principles of Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations, the disclosure-only provisions of SFAS No. 123, “Accounting for Stock-Based Compensation” and the disclosures required by SFAS No. 148, “Accounting for Stock-Based Compensation-Transition and Disclosure.” In accordance with APB Opinion No. 25, no stock-based compensation cost was reflected in prior year net income for grants of stock options to employees because we granted stock options with an exercise price equal to the market value of the stock on the date of grant.

As of March 31, 2006, there was $1,844,000 of total unrecognized compensation cost related to unvested share-based compensation arrangements that is expected to be recognized over a weighted-average period of 1.85 years.

Other than the adoption of SFAS 123R, there have been no changes in the nature of our critical accounting policies or the application of those policies since December 31, 2005.

Key Financial Trends and Analytical Points

Milestones. During the quarter ended March 31, 2006, we:

·	reported net revenue of $30,525,000, an increase of 11.1%, from $27,465,000 for the quarter ended March 31, 2005;

·	generated $231,000 of operating income as compared to last year’s operating loss of $241,000 for the comparable period;

·	increased our earnings before interest, taxes, depreciation and amortization, or EBITDA, to $1,090,000 from $811,000 for last year’s first quarter (2006 EBITDA includes $285,000 of share-based compensation resulting from the implementation of SFAS 123R);

 

 

 

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·	reduced our net losses to $29,000 in the first quarter of 2006 from $420,000 for the first quarter of 2006; and

·	implemented SFAS 123R, resulting in additional general and administrative expense of $285,000 during this quarter.

In managing our business, we make use of EBITDA, which is a non-GAAP financial measure. We believe that EBITDA is a reliable and useful performance indicator for measuring the growth of our core operations. It also allows us to monitor the trend in our core operations. Our results of operations for the three months ended March 31 and reconciliation of net income to EBITDA for those periods follows:

		2006			2005
Revenue			30,525,000			27,465,000
Total costs and expenses			30,294,000			27,706,000
Operating income (loss)			231,000			(241,000	)
Other expenses			170,000			172,000
Income before taxes			61,000			(413,000	)
Provision for taxes			90,000			7,000
Net loss			(29,000	)		(420,000	)
Reconciliation of net income to EBITDA
Net loss			(29,000	)		(420,000	)
Add: Depreciation and amortization			915,000			1,097,000
Add: Provision for income taxes			90,000			7,000
Add: Interest			114,000			127,000
EBITDA			1,090,000			811,000

Working Capital. We rely on our senior credit facility to meet our working capital needs. At March 31, 2006, we had $4,750,000 available under our credit facility to fund our working capital deficit of $822,000. Our working capital deficit at December 31, 2005 was $3,067,000. While our current liabilities have remained fairly consistent, increasing $81,000 from December 31, 2005, our current assets have increased by $2,326,000 due to higher client receivables and increased cash balances. In addition, as a result of the conversion of certain of our Series A Convertible Preferred Stock, accrued dividends payable upon conversion of such Series A Convertible Preferred Stock, which we pay in shares of common stock, decreased to $2,319,000 at March 31, 2006 from $3,048,000 at December 31, 2005.

During the three months ended March 31, 2006, we increased the outstanding balance under our credit facility by $592,000, from $8,465,000 at December 31, 2005 to $9,057,000 at March 31, 2006.

Operating trend. We intend to increase revenue by strengthening and expanding our core business and by emphasizing our market position as the leading provider of outsourced on-site healthcare.

Results of Operations

Three Months ended March 31, 2006 Compared to Three Months ended March 31, 2005

Revenue for the three months ended March 31, 2006 was $30,525,000, an increase of $3,060,000, or 11.1%, from $27,465,000 for the three months ended March 31, 2005. Comparable site sales for the first quarter increased 8% compared with the year-ago quarter. Our sites under management have increased from 181 as of March 31, 2005 to 197 as of March 31, 2006.

 

 

 

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Operating expenses, which represent our direct costs of servicing our clients, amounted to $23,443,000 for the three months ended March 31, 2006, an increase of $2,292,000, or 10.8%, from $21,151,000 for the three months ended March 31, 2005. This increase is attributable to expenses associated with revenue growth quarter over quarter, as operating expenses as a percentage of revenue marginally improved to 76.8% for the first quarter of 2006 from 77.0% for the first quarter of 2005.

General and administrative expenses, which represent our corporate costs, increased by $489,000 to $5,992,000 for the three months ended March 31, 2006 from $5,503,000 for the three months ended March 31, 2005. Our general and administrative expenses as a percentage of revenue decreased modestly from 20.0% to 19.6% for the three months ended March 31, 2005 and 2006, respectively. The implementation of SFAS 123R resulted in additional general and administrative expenses of $285,000, or 0.9% of revenue.

Depreciation and amortization expenses were $859,000 for the three months ended March 31, 2006, a decrease of $193,000 as compared to $1,052,000 for the three months ended March 31, 2005. In 2005, we amortized $67,000 of software development costs, which were subsequently impaired in our restructuring activities during the second quarter of 2005. The remaining difference is due to fully depreciated or amortized assets.

Interest expense for the three months ended March 31, 2006 was $114,000, representing a decrease of $13,000, from $127,000 for the three months ended March 31, 2005. Interest expense primarily includes interest payable under our senior secured credit facility. Our average balance outstanding during the three months ended March 31, 2006, was $7,154,000 as compared to $8,105,000 for the comparable period in 2005.

Amortization of financing costs for the three months ended March 31, 2006 was $56,000, representing an increase of $11,000 from $45,000 for the three months ended March 31, 2005. The increase is due to additional financing costs capitalized in connection with our senior secured credit facility amendments during 2005.

For the three months ended March 31, 2006, our net loss was $29,000, as compared to a net loss of $420,000 for the three months ended March 31, 2005.

Liquidity and Capital Resources

Operating Activities

Cash provided by operating activities during the three months ended March 31, 2006 was $1,214,000. The following factors accounted for our operating cash surplus:

(1)  Our net loss for the quarter was $29,000, which included non-cash charges of $285,000 for stock-based compensation, $915,000 of non-cash depreciation and amortization and $16,000 for other non-cash charges.

(2) Our accounts receivable and other current assets balances increased by $893,000 reflecting continued growth in pharmaceutical purchases and revenue, partially offset by a reduction of prepaid insurance related to Green Hills Insurance, our Risk Retention Group.

(3) Our liabilities (which include accounts payable, accrued expenses, accrued restructuring charges and other current and long term liabilities) increased by $920,000. Contributing

 

 

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factors to this increase were increased pharmaceutical purchases in accounts payable offset by the satisfaction of previously accrued other current liabilities.

Investing Activities

Net cash used in investing activities was $389,000 for the three months ended March 31, 2006, which consists primarily of capital expenditures on technology upgrades.

Financing Activities

Net cash provided by financing activities was $733,000 for the three months ended March 31, 2006, driven primarily by additional draws of $592,000 under our senior secured credit facility and cash received upon stock option exercises of $132,000. We used these funds to finance our working capital requirements (which increased due to additional revenue, expenses and accounts receivable generated from increases in same-site operations as well as the addition of new facilities during the quarter), capital expenditures and development expenses.

Our senior secured credit facility provides financing up to the lesser of $15,000,000 or the credit facility base calculation, in each case less outstanding letters of credit. We amended the facility effective March 31, 2006. The amendment (1) extended that maturity date of the facility from April 1, 2007 to October 1, 2007, (3) re-set the “Fixed Charge Coverage Ratio” covenant, and (3) redefined “EBITDA” to exclude non-cash stock-based compensation expense. Minimum EBITDA requirements for periods ending March 31, 2006 through December 31, 2006 are as follows:

Period		Minimum EBITDA
July 1, 2005 - March 31, 2006		$	2,560,000
Last four fiscal quarters ending June 30, 2006			3,580,000
Last four fiscal quarters ending September 30, 2006			3,960,000
Last four fiscal quarters ending December 31, 2006			4,450,000

As of March 31, 2006, we were in compliance with our credit facility covenants. As of March 31, 2006, $9,057,000 was outstanding under the credit facility, which was classified as long-term, and $1,000,000 was outstanding under a letter of credit. We had $4,750,000 available under the credit facility at March 31, 2006.

Our ratio of current assets to current liabilities (excluding dividends payable on Series A Convertible Preferred Stock in shares of common stock) was 1.06 at March 31, 2006, as compared to 1.00 at December 31, 2005. We believe that these ratios demonstrate adequate financial liquidity and we believe that availability under our credit facility and our cash and cash equivalents of $6,944,000 at March 31, 2006 (which includes approximately $5,729,000 held at Green Hills) will be sufficient to meet our anticipated cash needs for the next 12 months.

Future Capital Requirements

Our primary future cash needs will be to fund working capital and pay for anticipated capital expenditures. We had capital expenditures totaling $389,000 during the three months ended March 31, 2006 and anticipate similar quarterly expenditures throughout 2006.

We cannot, however, provide assurances that our actual cash requirements will not be greater than we currently anticipate. We will, from time to time, consider the acquisition of, or investment in,

 

 

 

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complementary businesses, products, services and technologies, which would most likely effect our liquidity requirements or cause us to issue additional equity or debt securities.

If sources of liquidity are not available or if we cannot generate sufficient cash flow from operations during the next 12 months, we might be required to obtain additional sources of funds through additional operating improvements, capital market transactions (including the sale of common stock), asset sales or financing from third parties, or a combination thereof. We cannot provide assurance that these additional sources of funds will be available or, if available, would have reasonable terms.

Material Commitments

We have various contractual obligations which are recorded as liabilities in our condensed consolidated financial statements. Other items, such as operating lease contract obligations are not recognized as liabilities in our condensed consolidated financial statements but are required to be disclosed.

The following table summarizes our significant contractual obligations at March 31, 2006, and the effect such obligations are expected to have on our liquidity and cash in future periods:

		Payments due by period
Contractual obligations:		Total			Less than 1 year			1-3 years			3-5 years			More than 5 years
Operating leases		$	5,926,000		$	1,737,000		$	2,648,000		$	1,540,000		$	1,000
Less: Amounts reimbursed by clients			897,000			617,000			252,000			28,000			--
		$	5,029,000		$	1,120,000		$	2,396,000		$	1,512,000		$	1,000

 

From time to time, we enter into operating leases for offices and equipment leases on behalf of our clients in order to facilitate the delivery of our services at client locations. In such cases, our clients agree to reimburse us for the expenses incurred related to these operating leases.