Catamaran Corp - FORM 8-K/A - EX-99.3

Attached files

file	filename
8-K/A - Catamaran Corp	a8-kaform.htm
EX-23.1 - Catamaran Corp	ex231gtconsent.htm
EX-99.2 - Catamaran Corp	ex992ht2011auditedfinancia.htm
EX-99.4 - Catamaran Corp	ex994healthtranproforma.htm

EX 99.3

HEALTHTRAN LLC

UNAUDITED FINANCIAL STATEMENTS

FOR THE SIX MONTHS ENDED

NOVEMBER 30, 2011 AND 2010

HealthTran LLC

Contents



Balance sheets	1
Statements of earnings	2
Statements of changes in members' deficit	3
Statements of cash flows	4
Notes to financial statements	5

HealthTran LLC

Balance sheets



	November 30, 2011			May 31, 2011
Assets	(unaudited)
Current assets
Cash and cash equivalents	$	9,007,991		$	11,475,245
Restricted cash	664,973			663,954
Trade accounts receivable, less allowances for doubtful accounts of $426,736 and $404,693, respectively	21,736,933			22,896,251
Other current assets	1,926,526			1,713,657
Total current assets	33,336,423			36,749,107

Property and equipment, net	6,754,780			6,598,507
Goodwill	4,403,815			4,403,815
Intangibles, net	12,400,357			13,814,520
Customer acquisition costs, net	181,377			204,781
Debt issuance costs, net	1,295,660			1,411,156
Total assets	$	58,372,412		$	63,181,886

Liabilities and members' deficit
Current liabilities
Accounts payable	$	1,882,864		$	1,052,883
Current portion of long-term debt	2,807,360			2,523,945
Current portion of capital leases	161,110			270,299
Current portion of deferred revenue	117,891			219,044
Current portion of deferred rent and landlord incentives	365,542			336,146
Deposits received	7,601,753			7,613,430
Pharmacy network payable	9,582,970			10,665,081
Rebates payable	2,817,791			4,949,260
Accrued expenses	13,490,841			9,820,131
Other liabilities – current	3,720,087			3,691,492
Total current liabilities	42,548,209			41,141,711

Revolving loan, net of current portion	—			—
Long-term debt, net of current portion and discount	11,679,830			13,246,125
Capital leases, less current portion	92,203			146,671
Deferred revenue, less current portion	17,200			5,594
Deferred rent and landlord incentives, less current portion	395,962			560,724
Class C preferred units dividends payable (Note E)	345,205			5,046,483
Class C preferred units subject to mandatory redemption, net of discount (Notes D and E)	25,434,767			24,983,539
Class A warrants subject to put (Note D)	14,817,198			6,693,539
Total liabilities	95,330,574			91,824,386

Members’ deficit	(36,958,162		)	(28,642,500		)
Total liabilities and members’ deficit	$	58,372,412		$	63,181,886

The accompanying notes are an integral part of these financial statements

HealthTran LLC

Statements of operations



	Six months ended November 30,
	2011			2010
	(unaudited)
Revenue
Pharmacy benefit administration	$	119,220,808		$	130,871,061
Service revenue	7,859,675			7,688,684
Total revenue	127,080,483			138,559,745

Direct pharmacy benefit administration expenses, excluding depreciation and amortization	99,230,658			114,587,252
Gross profit	27,849,825			23,972,493

Operating expenses
Selling, general and administrative expenses	19,001,860			15,772,695
Stock-based compensation expense (Note E)	9,604,619			—
Settlement expense (Note F)	3,149,990			—
Depreciation and amortization	2,883,324			3,333,949
Total operating expenses	34,639,793			19,106,644

(Loss) earnings from operations	(6,789,968		)	4,865,849

Interest income	309			749
Interest expense	(8,546,891		)	(669,153		)
Dividends on Class C preferred units	(2,132,503		)	(2,189,550		)
Accretion of Class C preferred units discount	(451,228		)	(451,228		)
Net (loss) earnings	$	(17,920,281	)	$	1,556,667

The accompanying notes are an integral part of these financial statements

HealthTran LLC

Statements of changes in members' deficit




	Member Interests			Warrants		Total

Balances at June 1, 2010	$	(29,758,115	)	$	548,276	$	(29,209,839	)
Net earnings	1,556,667			—		1,556,667
Distributions (Note D)	(1,051,591		)	—		(1,051,591		)
Balances at November 30, 2010 (unaudited)	$	(29,253,039	)	$	548,276	$	(28,704,763	)

Balances at June 1, 2011	$	(29,190,776	)	$	548,276	$	(28,642,500	)
Net loss	(17,920,281		)	—		(17,920,281		)
Stock-based compensation expense (Note E)	9,604,619			—		9,604,619
Balances at November 30, 2011 (unaudited)	$	(37,506,438	)	$	548,276	$	(36,958,162	)

The accompanying notes are an integral part of these financial statements

HealthTran LLC

Statements of cash flows



	Six months ended November 30,
	2011			2010
Operating activities	(unaudited)
Net (loss) earnings	$	(17,920,281	)	$	1,556,667
Adjustments to reconcile net (loss) earnings to net cash provided by operating activities
Depreciation expense	1,422,495			1,417,555
Amortization on customer acquisition costs	46,666			214,858
Amortization on purchased intangible assets	1,414,163			1,701,536
Amortization of debt issuance costs and debt discount	128,380			217,226
Amortization of landlord incentives	110,313			110,313
Accretion of Class C preferred units discount	451,228			451,228
Accretion of dividend on Class C preferred units	2,132,503			2,189,550
Interest expense due to change in fair value of Class A warrants subject to put	8,123,659			—
Stock-based compensation expense	9,604,619			—
Provision for (recovery of) bad debts	(26,120		)	121,998
Loss on disposal of property and equipment	407			6,073
Net change in operating assets and liabilities
(Increase) decrease in restricted cash	(1,019		)	60,181
(Increase) decrease in trade accounts receivable	1,185,438			(234,633		)
Increase in other current assets	(212,869		)	(145,858		)
Increase in accounts payable	829,981			491,677
Increase (decrease) in accrued expenses, deposits received, pharmacy network and rebates payable	445,453			(7,501,824		)
Decrease in deferred revenue	(89,547		)	(309,909		)
Decrease in deferred rent	(245,679		)	(284,377		)
Increase in other liabilities	28,595			61,866
Net cash provided by operating activities	7,428,385			124,127

Investing activities
Purchases of property and equipment	(1,579,175		)	(1,076,816		)
Customer acquisition costs	(23,262		)	—
Proceeds from disposal of assets	—			150
Net cash used in investing activities	(1,602,437		)	(1,076,666		)

Financing activities
Payments on long-term debt	(1,282,880		)	(3,659,281		)
Payments on revolving loan	—			(7,500,000		)
Proceeds from revolving loan	—			2,500,000
Payments on capital leases	(163,657		)	(185,494		)
Distributions	—			(1,051,591		)
Debt issuance costs incurred	(12,884		)	—
Dividend distributions on Class C preferred units	(6,833,781		)	—
Net cash used in financing activities	(8,293,202		)	(9,896,366		)

Net decrease in cash and cash equivalents	(2,467,254		)	(10,848,905		)

Cash and cash equivalents at beginning of period	11,475,245			13,933,725
Cash and cash equivalents at end of period	$	9,007,991		$	3,084,820

Supplemental disclosure of cash flow information
Cash paid during the period for interest	$	264,052		$	370,565

Noncash investing and financing activities
Adjustments to installment payments for purchase of business (Note I)	$	—		$	26,128
Property and equipment acquired with capital leases	$	—		$	343,950

The accompanying notes are an integral part of these financial statements

HealthTran LLC

Notes to the unaudited financial statements

Note A - Organization and basis of presentation

HealthTran LLC (the “Company”), a limited liability company registered in the state of Delaware, was established on September 18, 2000. The Company provides benefit administration services, including claims processing, benefit plan design, plan implementation, pharmacy networks, mail service, eligibility management, customer services, data reporting, drug utilization management, formulary management and contracting, communication and enforcing therapy guidelines to physicians, pharmacists, and patients, as well as consulting services.

Basis of Presentation

The accompanying financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). In the opinion of management, these statements include all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of the results of the period reported herein for the Company as a standalone entity prior to the acquisition of HealthTran LLC by SXC Health Solutions, Inc. (“SXC”) on January 1, 2012.

Please refer to Note M, Subsequent Events, for more details related to the acquisition of the Company by SXC.

Note B - Summary of accounting policies

Cash and cash equivalents

The Company considers all highly liquid cash investments with original maturity dates of three months or less to be cash equivalents. Cash subject to restrictions that prevents its use for current purposes is segregated in the balance sheets and discussed further in Note H.

Income taxes

Limited liability companies are not taxable entities under provisions of the Internal Revenue Code and, accordingly, the accompanying financial statements do not reflect a provision for federal or state income taxes. The tax effects of the Company's earnings are the responsibility of the members.

The Company adopted policies to account for unrecognized tax benefits on June 1, 2009. The Company recognizes the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more-likely-than-not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement with the relevant tax authority. The adoption of these policies did not have a material effect on the Company's financial statements.

As a result of the Company's adoption of these policies, the Company recorded $38,628 as a liability for unrecognized tax benefits as of June 1, 2009. The reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:



	Six months ended November 30,
	2011		2010
Balance at June 1	$	180,197	$	83,383
Additions for tax positions of prior years	57,370		—
Settlements	—		(61,309		)
Balance at November 30	$	237,567	$	22,074

The Company recognizes interest and penalties accrued related to unrecognized tax benefits, if any, in operating expenses for all periods presented.

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 disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Property and equipment

Property and equipment, including property and equipment under capital leases, are recorded at cost. Maintenance and repairs are expensed as incurred. Improvements that extend the useful lives of the assets or provide improved efficiency are capitalized. Leasehold improvements are amortized using the straight-line method, over the shorter of the useful life or the lease term.

Health Tran LLC

Notes to the unaudited financial statements, continued

Depreciation of property and equipment is computed using the straight-line method over the estimated useful lives of the assets:



Computer equipment	3 to 5 years
Computer equipment - acquired assets	1 to 3 years
Furniture, fixtures and equipment	5 to 7 years
Software	1.5 to 5 years
Building	39 years

External direct costs of materials and services consumed in developing or obtaining internal use computer software, and payroll and payroll-related costs for employees who are directly associated with and who devote time to an internal use computer software project, to the extent of the time spent directly on the project, are capitalized.

Goodwill

Goodwill represents the excess of the purchase price over the fair value of identifiable tangible and intangible net assets relating to business acquisitions. Goodwill and intangible assets with indefinite useful lives are not amortized but instead are tested for impairment annually. For purposes of testing for goodwill impairment, the Company has determined that it has multiple reporting units with goodwill only assigned to one reporting unit.

For the periods presented, the Company does not have any indefinite-lived intangible assets, other than goodwill. Impairment testing is performed in two steps: (i) the Company assesses goodwill for potential impairment by comparing the fair value of the reporting unit with its carrying value, and (ii) if potential impairment is indicated because the reporting unit's fair value is less than its carrying amount, the Company measures the amount of impairment loss by comparing the implied fair value of goodwill with the carrying amount of that goodwill. The Company has performed its annual impairment test for goodwill as of May 31, 2011 and 2010, no impairment losses were recognized.

Impairment of long-lived assets

The Company evaluates long-lived assets, such as property and equipment and purchased intangible assets with finite lives, for impairment whenever events or changes in circumstances indicate the carrying value of an asset may not be recoverable. The fair value of the asset(s) is assessed based on the undiscounted future cash flows the asset(s) is expected to generate and the Company recognizes an impairment loss when estimated undiscounted future cash flows expected to result from the use of the asset(s) plus net proceeds expected from disposition of the asset(s), if any, are less than the carrying value of the asset(s). When an impairment is identified, the carrying amount of the asset(s) is reduced to its estimated fair value based on a discounted cash flow approach or, when available and appropriate, to comparable market values.

Identifiable intangible assets include amounts paid to acquire non-compete agreements and customer relationships. These costs are capitalized and amortized on a straight-line basis over their estimated useful lives that range from 3-13 years. These assets are reviewed for impairment whenever events or circumstances indicate that their carrying amount may not be recoverable.

During the six months ended November 30, 2011 and the twelve-months ended May 31, 2011, there were no indications that the carrying amounts of the Company's long-lived assets may not be recoverable.

Debt issuance costs

Costs incurred to arrange financing, including advisory fees, legal fees, and loan origination fees, are capitalized as debt issuance costs. Such costs are amortized over the life of the related financing on a straight-line basis. The amortization of debt issuance costs is included in interest expense in the statements of earnings. Unamortized debt issuance costs related to a previous credit agreement were charged to interest expense during the year when the previous credit agreement ended.

Revenue recognition

Pharmacy benefit administration

Revenue from sales of prescription drugs by pharmacies in the Company's third-party networks is recognized when the claims are adjudicated (approved or denied). When the Company bills/collects from its customers and pays its pharmacy network providers under separate contracts, the Company records amounts due from its customers as revenue and amounts due to its pharmacy network providers as expense. Revenues and expenses are inclusive of any member co-payments collected by the pharmacy network providers.

Management has determined that the Company acts as the principal in its network transactions. The Company acts as a principal due to its: having separate contractual relationships with customers and with pharmacies; performing part of the service and responsibility to validate and economically manage a claim through its claims adjudication process; setting prescription prices for the pharmacy, including instructing the pharmacy as to how that price is to be settled (co-payment requirements); having discretion in supplier selection; having credit risk for the price due from the customer; and involvement in the determination of product or service specifications.

Health Tran LLC

Notes to the unaudited financial statements, continued

The Company also performs rebate-processing services for which it earns revenue. Amounts received and amounts paid by the Company are recorded on a gross basis and separately presented as a component of revenues and expenses, respectively. Management has determined that the Company acts as the principal in its rebate transactions. The Company acts as a principal due to its: responsibility for collections of amounts due from pharmaceutical companies and aggregators; independent contracts entered into with the pharmaceutical companies, aggregators and suppliers; performing part of the service including the responsibility to validate and manage claims through the billing, collection, reporting and payment processes.

When rebates originate from the sale of prescription drugs by pharmacy network providers filling prescriptions under the Company's pharmacy network contracts, the Company reduces expenses by the amount of the rebate earned and deducts from its revenues any rebates paid to its customers.

Service revenue

The Company's service revenue consists of claims processing and consulting services. The Company recognizes claims processing revenue on a per transaction basis upon the completion of processing the claim transaction. Consulting services revenue is recognized as services are performed.

Deferred revenue and customer acquisition costs

The Company typically enters into multiple year contracts with customers and may receive fees from customers at the beginning of a contract generally referred to as implementation fees. When received, the Company records these fees as deferred revenue and amortizes the balance on a straight-line basis over the contract term.

As of November 30, 2011 and May 31, 2011, the Company recorded deferred revenue totaling $135,091 and $224,638, respectively, of which $117,891 and $219,044, respectively, are included in current liabilities and $17,200 and $5,594 respectively, are reported as long-term deferred revenue.

The Company is capitalizing certain incremental direct costs related to the acquisition of customer contracts, and is capitalizing setup and other direct installation activities performed at the inception of a specific arrangement with a specific customer enabling performance under the terms of a specific arrangement with the customer. These costs are collectively referred to as “customer acquisition costs.” Customer acquisition costs are amortized on a straight-line basis over the contract term.

As of November 30, 2011 and May 31, 2011, customer acquisition costs, net of accumulated amortization, totaled $181,377 and $204,781, respectively. Amortization expense for the six months ended November 30, 2011 and 2010 was $46,666 and $214,858 respectively, and is included in operating expenses.

Receivables

All of the Company's trade receivables are due from customers. Credit is extended based on an evaluation of a potential customer's financial condition and collateral is not required. Amounts billed to customer accounts are generally due within 30 days, and become past due after such time. Accounts considered past due are subject to additional interest charges and penalties at the discretion of Company management.

The Company presents its receivables due from customers net of an allowance for doubtful accounts. The Company determines its allowance by considering a number of factors, including length of time the account is past due, the Company's previous history with the customer, the customer's current ability to pay its obligation, and the condition of the general economy and industry as a whole.

When the Company earns revenue before billing its customers, due to minimum invoice thresholds or other criteria determined by management, the Company reports the revenue in the relevant revenue category described previously. The aggregate unbilled amount is recorded as unbilled receivables.

Deferred rent and landlord incentives

The Company recognizes rent expense on a straight-line basis under non-cancelable operating lease agreements conveying the right to use property or equipment for a stated period of time. As of November 30, 2011 and May 31, 2011, the Company had $301,869 and $326,922 of deferred rent which is included in deferred rent and landlord incentives on the balance sheets which reflects the difference between cash payments to the landlord and the amount recorded as rent expense during the six months ended November 30, 2011 and 2010, respectively.

When the Company receives allowances or incentives from a landlord for leasehold improvements (“LHI”), the LHI allowance received from the landlord is recorded as deferred rent and amortized as a reduction to rent expense on a straight-line basis over the lease term. During the six months ended November 30, 2011 and 2010, the Company amortized $110,313 of the allowance as a reduction to rent expense. As of November 30, 2011 and May 31, 2011, the Company had $459,635 and $569,948, respectively, of unamortized LHI allowances which was recorded as deferred rent and landlord incentives on the balance sheets.

Advertising expense

The Company expenses advertising costs, as incurred. Advertising costs for the six months ended November 30, 2011 and 2010 was $718,389 and $75,029, respectively.

Health Tran LLC

Notes to the unaudited financial statements, continued

Note C - Property and equipment

Property and equipment, including owned equipment and equipment under capital leases, consists of the following:



	As of November 30, 2011
	Owned			Leased			Total

Buildings and land	$	281,176		$	—		$	281,176
Computer equipment	6,131,987			289,071			6,421,058
Furniture, fixtures and equipment	954,227			957,200			1,911,427
Software	15,694,975			13,787			15,708,762
Leasehold improvements	1,986,835			—			1,986,835
	25,049,200			1,260,058			26,309,258
Less accumulated depreciation	(18,752,986		)	(801,492		)	(19,554,478		)
Total property and equipment	$	6,296,214		$	458,566		$	6,754,780



	As of May 31, 2011
	Owned			Leased			Total
Buildings and land	$	281,177		$	—		$	281,177
Computer equipment	6,182,893			289,071			6,471,964
Furniture, fixtures and equipment	957,196			957,200			1,914,396
Software	14,305,644			13,787			14,319,431
Leasehold improvements	1,963,233			-			1,963,233
	23,690,143			1,260,058			24,950,201
Less accumulated depreciation	(17,669,049		)	(682,645		)	(18,351,694		)
Total property and equipment	$	6,021,094		$	577,413		$	6,598,507

Depreciation expense includes depreciation on owned assets in addition to assets recorded under capital leases. Depreciation expense for the six months ended November 30, 2011 and 2010 was $1,422,495 and $1,417,555, respectively.

Note D - Debt

Long-term debt consists of the following:



	November 30, 2011			May 31, 2011

Term Note	$	13,906,250		$	14,843,750
Term Note discount	—			—
Key Note payable 3	144,538			425,645
Key Note payable 4	333,674			383,433
Key Note payable 5	102,728			117,242
Class C preferred units subject to mandatory redemption	30,000,000			30,000,000
Class C preferred units discount	(4,565,233		)	(5,016,461		)
Class A warrants subject to put	14,817,198			6,693,539
Total debt	54,739,155			47,447,148
Less current portion	(2,807,360		)	(2,523,945		)
Total long-term debt	$	51,931,795		$	44,923,203

Credit agreement

In May 2011, the Company entered into a new debt agreement (the “Credit Agreement”) with a finance company to refinance its Senior Debt Facility and provide additional working capital. The Credit Agreement includes both a revolving line of credit (the “Revolver”) and a term note (the “Term Note”). The Revolver of $10,000,000 and Term Note of $15,000,000 are secured by substantially all the assets of the Company, and require the Company to comply with certain financial covenants including a fixed charge coverage ratio and senior debt leverage ratio, as determined on a quarterly basis, and to comply with certain non-financial covenants. As of November 30, 2011 and 2010, the Company was in compliance with the covenant requirements under the Credit Agreement and previous Senior Debt Facility, respectively.

HealthTran LLC

Under the Credit Agreement, the Revolver and Term Note bear interest at rates equal to the Prime Rate plus the Applicable Margin. As of November 30, 2011, the interest rates for the Revolver and Term Note were 3.25% and 3.25%, respectively. As of May 31, 2011, the interest rate under the Company's previous Senior Debt Facility's term note and revolving line of credit was 3.25%, respectively.

Revolver

The Company may borrow up to the lesser of $10,000,000 or 80% of the Company's eligible non-rebate accounts receivable and 70% of the Company's eligible rebate accounts receivable, as reduced by certain letters of credit, corporate credit card, and merchant credit card processing reserves. Revolving loans may be borrowed, repaid and reborrowed, until May 3, 2016 (the term loan maturity date), on which date the entire unpaid principal balance of the revolving loan and all accrued and unpaid interest thereon shall be due and payable. After the term loan maturity date, no further revolving loans shall be made. As of November 30, 2011, $8,414,917 was available for borrowing under the revolver based on eligible accounts receivable.

There was no balance outstanding on the Revolver at November 30, 2011 or May 31, 2011.

Term Note

The Term Note matures on May 3, 2016, and bears interest on the outstanding principal, payable monthly. Principal payments on the note are due in 60 monthly installments commencing on May 31, 2011. The first 12 monthly installments are in the amount of $156,250; the next 36 monthly installments are in the amount of $250,000; and the last 12 installments are in the amount of $343,750. Of the $15,000,000 of net proceeds from the new Term Note, $9,830,059 was used to repay all amounts outstanding under the Senior Debt Facility with the remaining $5,169,941 retained by the Company for working capital purposes. All unamortized related debt discount relating to the former Senior Debt Facility was expensed as interest expense.

Warrants

In conjunction with the Company's previous Senior Debt Facility, the finance company received multiple warrants:

•

In conjunction with the previous Senior Debt Facility agreement, a warrant was issued in March 2005 which expires in 2012, to purchase 300,000 Class A membership units of the Company for $4 per unit (aggregate of $1,200,000). The warrant was allocated a value of $198,622, based on the relative fair values of the debt and the warrant. The Company has the option to purchase the warrant for $4,800,000 at any time.

•

In conjunction with the revised previous Senior Debt Facility agreement, a warrant was issued in December 2007, which expires in 2014, to purchase 104,667 Class A membership units of the Company for $11.46 per unit (aggregate of $1,200,000). The warrant was allocated a value of $548,276, based on the relative fair values of the debt and the warrant. The Company has the option to purchase the warrant for $4,800,000 at any time.

Upon the close of the securities purchase agreement in December 2009, the previous finance company exercised its warrant to purchase Class A units which were issued in 2005 as part of the original Credit Agreement. The previous finance company purchased 300,000 Class A units at $4 per unit (aggregate of $1,200,000). The Class A units relating to the exercise of this warrant were subsequently redeemed by the Company for $3,000,000 (at $10 per unit).

In conjunction with the securities purchase agreement executed in December 2009, the warrant issued in 2007 was amended as follows: (1) the number of units was amended to 113,270 from 104,667, and (2) the warrant price was amended to $7.65 from $11.46. These adjustments were made pursuant to an anti-dilution agreement entered into in conjunction with the warrant agreement that allowed for adjustments to the warrant price and number of shares for diluting issuances such as the securities purchase transaction completed in December 2009.

Key notes payable

In February 2007, the Company borrowed $2,450,262 under Key Note payable 3 to finance equipment purchases. The Key Note payable 3 matures on March 6, 2012. Monthly principal and interest payments are due in sixty equal installments of $48,782 beginning March 6, 2007. The effective interest rate on the Key Note payable 3 is 7.49%. The balance of the payable at November 30, 2011 and May 31, 2011 was $144,538 and $425,645, respectively.

In February 2011, the Company borrowed $416,180 under Key Note payable 4 to finance equipment purchases. The Key Note payable 4 matures on February 24, 2015. Monthly principal and interest payments are due in forty-eight equal installments of $9,230 beginning March 24, 2011. The effective interest rate on the Key Note payable 4 is 3.10%. The balance of the payable at November 30, 2011 and May 31, 2011 was $333,674 and $383,433, respectively.

In April 2011, the Company borrowed $122,031 under Key Note payable 5 to finance equipment purchases. The Key Note payable 5 matures on April 29, 2015. Monthly principal and interest payments are due in forty-eight equal installments of $2,706 beginning May 29, 2011. The effective interest rate on the Key Note payable 5 is 3.10%. The balance of the payable at November 30, 2011 and May 31, 2011 was $102,728 and $117,242, respectively.

Class C preferred units subject to mandatory redemption and Class A warrants subject to put

In December 2009, the Company entered into a securities purchase agreement (the “Agreement”) with an investing party as part of a minority recapitalization transaction. Under this Agreement, in exchange for $30,000,000 in net proceeds received, the Company issued 30,000 units of a newly created equity class designated Class C preferred units (the “Class C preferred”), as well as warrants to purchase 860,114 units of

HealthTran LLC

the Company's Class A units (the “Class A warrants”). In conjunction with this transaction, the Company incurred approximately $1.8 million in transaction costs. Of the $30,000,000 in proceeds received, $28,398,000 was distributed to the sole holder of the Company's Class A units, and $1,602,000 was used to redeem certain Class B units (refer to Note E).

Refer to Note E for the key features of the Class C preferred.

Key features of the Class A warrants issued include:


•	Immediately exercisable into 860,114 Class A units, representing an approximate 7.5% common equity interest in the Company, at an exercise price of $.001 per unit;


•	Fully detachable from the Agreement and Class C preferred units;


•	Put rights granted to the investing party are exercisable at any time on or after (i) an uncured or non-waived event of default, (ii) a change of control or any redemption of the Class C preferred, or (iii) December 22, 2016 (the mandatory redemption date for the Class C preferred);


•	Put rights granted include both the Class A warrants and the underlying Class A units issuable under the warrants upon exercise by the investing party; and


•	Put price to be paid by the Company equal to:

-For Class A units - liquidation value per unit calculated assuming all outstanding options/warrants of the Company exercised

-For Class A warrants - liquidation value per unit calculated assuming all outstanding options/warrants of the Company exercised, less exercise price payable under Warrant.

The Company may call all of the warrants/underlying Class A units held upon first anniversary of the redemption of the Class C preferred.

The fair value of the Class A warrants subject to put was determined to be $6,317,193 on the date of issuance. As of the end of each reporting period, management is required to re-measure the estimated value of the Company's Class A units to determine any change in the fair value of the Class A warrants subject to put, and will record any change in such value to interest expense. Based on a revaluation analysis conducted as of May 31, 2011 the fair value of Class A warrants subject to put was re-measured at $ 6,693,539. Based on a revaluation analysis conducted as of November 30, 2011, the fair value of the Class A warrants subject to put was re-measured at $14,817,198, with the resulting increase in fair value of $8,123,659 recognized as interest expense for the six months ended November 30, 2011.

Because of the mandatory redemption features of the Class C preferred units and the put rights of the Class A warrants, both are required to be recorded as debt rather than equity. Furthermore, the initial value of the Class A warrants has been recorded as a discount against the Class C preferred units and this discount will be accreted to a non-operating expense account on a straight line basis through December 22, 2016, the mandatory redemption date of the Class C preferred units.

The transaction costs incurred relating to the Agreement have been treated as a deferred charge and are being amortized to interest expense from the date of issuance through the mandatory redemption date of the Class C preferred (i.e. through December 22, 2016).

Maturities of total debt are as follows:



	As of November 30, 2011
Year ending May 31,
2012 (six months)	$	1,241,065
2013	3,133,624
2014	3,137,826
2015	3,193,425
2016	3,781,250
Thereafter	40,251,965
Total debt	$	54,739,155

Note E - Membership units

The Company has three classes of membership units: Class A units, Class B units and Class C preferred units.

Class A units

At November 30, 2011 and May 31, 2011, the Company had 9,700,000 Class A units authorized, issued and outstanding. Holders of Class A units are entitled to one vote for each share held and generally vote as a single class. Class A units are entitled to allocation of earnings or losses generated by the Company's operations, subject to limitations relating to the Class C preferred units.

HealthTran LLC

Class B units

At November 30, 2011 and May 31, 2011, the Company had 794,800 Class B units authorized with 557,500 and 496,000 units issued and outstanding, respectively. Key features of the Class B units include:


•	The Class B units are granted to key employees, officers, directors and other service providers of the Company and do not have an exercise price, vest immediately, do not expire, are non-transferable, do not have any voting rights with respect to the Company, and do not have allocation rights to net income or net loss generated by the Company's operations;

•

Holders of the Class B units only have the right to receive distributions from the Company in connection with the sale of all or substantially all of the Company's assets (i.e. upon a qualifying “change of control event”) provided the holder is still employed by the Company at the time of the change of control event (i.e. the units are immediately forfeited upon the voluntary or involuntary termination of the employee's employment with the Company prior to a change of control event);


•	The Company has the right to call the Class B units upon a change of control event.

In December 2009, in conjunction with the closing of the securities purchase agreement (see Note D), the owners of the Company elected to redeem 160,200 Class B units at a purchase price of $10 per unit ($1,602,000 in aggregate). The Company recorded this transaction as stock-based compensation within the statements of earnings.

As discussed in Note M, on November 16, 2011, the Company entered into a Unit Purchase Agreement with SXC, whereby SXC would acquire all of the Company's equity interests in exchange for $250.0 million in cash, as adjusted for unpaid Company transaction expenses, indebtedness, working capital, and other customary reserves and post-closing adjustments. The closing date for this transaction occurred on January 1, 2012. Based on the net purchase price proceeds projected to be available to the Class A and Class B unit holders on the projected closing date of this transaction, the Company estimated the redemption value of the outstanding Class B units as of November 30, 2011 at approximately $9,604,619. The Company recorded stock-based compensation of $9,604,619 for the six months ended November 30, 2011 relating to the Class B units outstanding.

Class C preferred units subject to mandatory redemption

At November 30, 2011 and May 31, 2011, the Company had 30,000 and 30,000 Class C preferred units (the “Class C preferred”) authorized, respectively, with 30,000 and 30,000 units issued and outstanding, respectively. Key features of the Class C preferred units include:


•	14% annual preferred yield, compounded quarterly. Prior to redemption, dividends may be paid at the discretion of the Company subject to restrictions under the Credit Agreement (as described below);


•	Liquidation value equal to unpaid Class C preferred capital plus unpaid Class C preferred dividends;


•	Mandatory redemption on December 22, 2016 at the liquidation value;


•	Redemption or payment of dividends related to Class C preferred is subject to compliance with all covenants of the Credit Agreement with the Company's finance company;


•	Pursuant to the Agreement and the Company's amended limited liability company agreement, tax distributions are permitted to be paid to the holders of Class A units and Class C preferred, subject to limits placed by the Credit Agreement.

Class C preferred unit dividends were $2,132,503 and $2,189,550, for the six months ended November 30, 2011 and 2010, respectively. As of November 30, 2011 and May 31, 2011, $345,205 and $5,046,483, respectively, in Class C preferred unit dividends payable are included in long-term debt within the accompanying balance sheets. Prior to redemption of the Class C preferred units, dividends may be paid at the discretion of the Company.

Note F - Commitments and contingencies

Operating leases

The Company leases its office space as well as equipment under non-cancelable agreements. Rent expense was $554,976 and $567,747, respectively, for the six months ended November 30, 2011 and 2010.

Future minimum lease payments under operating leases are as follows:



	As of November 30, 2011
Year ending May 31,
2012 (six months)	$	686,928
2013	1,338,448
2014	745,655
2015	87,273
2016	16,793
Thereafter	—
Total future minimum operating lease payments	$	2,875,097

HealthTran LLC

Capital leases

The Company leases certain equipment under capital lease agreements. Future minimum lease payments under capital leases are as follows:



	As of November 30, 2011
Year ending May 31,
2012 (six months)	$	109,349
2013	111,831
2014	37,277
Total future minimum capital lease payments	258,457
Less amounts representing interest	(5,144		)
Present value of minimum capital lease payments	253,313
Less current portion	(161,110		)
Future minimum rental payments, net	$	92,203

Litigation

During the year ended May 31, 2009, a former client filed a lawsuit in the district Court of Arapahoe County, Colorado against the Company. The complaint alleged, among other things, breach of contract. The Company answered the former client's claims and brought counterclaims alleging, among other things, breach of contract and unjust enrichment. In January 2011, the former client's receivership agent and the Company entered into a settlement agreement for all claims of both parties. In accordance with the terms of the settlement agreement, the Company made a payment totaling $200,000 to the former client in January 2011.

During the fiscal year ended May 31, 2010, a former client alleged damages suffered by it due to actions or inactions of the Company over the last several years, and elected to pursue arbitration against the Company. An arbitration hearing was held in May 2011 and on November 1, 2011 an interim arbitration award was issued in favor of the former client. On November 30, 2011, both parties entered into a settlement agreement, whereby HealthTran accrued in November 2011 and paid in December 2011 a total of $3,276,727, of which $126,737 related to prior rebates payable to the former client and the remaining $3,149,990 representing full settlement of the arbitration award.

As discussed in Note I, in October 2008, the Company acquired certain assets and assumed certain liabilities from a U.S. based prescription benefit management company (“PBM Seller”) for $4,958,272. Of this purchase price, the Company paid the PBM Seller $1,224,558 in cash at closing, with the remaining purchase price payable in the form of three annual installment payments that were subject to adjustment based on the gross revenue generated from the acquired assets in the first year following the acquisition relative to certain gross revenue targets defined within the asset purchase agreement. Following the Company's communication in October 2009 to the PBM Seller of the revised annual installment payments to be paid to the PBM Seller based on the first year gross revenue generated from the acquired assets relative to the gross revenue targets, the PBM Seller notified the Company that it was disputing the calculation of such payments. On December 21, 2011, the PBM Seller filed a lawsuit in Northern District of Illinois Eastern Division United States District Court against the Company. The complaint alleges, among other things, breach of contract. No trial date is yet scheduled.

The Company is subject to other legal proceedings and claims that arise in the ordinary course of business. In the opinion of management, these other actions are unlikely to materially affect the Company's financial position.

Note G - Affiliate and related party transactions

The Company entered into a service agreement with J&L Management Services, LLC, related through common ownership, to receive various management services. J&L Management Services, LLC has billed the Company $258,334 and $250,002, respectively, for the six months ended November 30, 2011 and 2010, related to this service agreement. As of November 30, 2011 and May 31, 2011, there were $16,409 and $0, respectively, due from J&L Management Services, LLC.

Note H - Restricted cash

Periodically the Company establishes CDs with monies received from the Company's customers (“Security CDs”). Proceeds from the Security CDs' are available to the Company, in the event of a customer default, to secure its customers' payment obligations under the Company's service agreements. As of November 30, 2011 and May 31, 2011, the company held $564,619 and $563,766 respectively in a Security CD which is included in restricted cash on the balance sheet.

The Company also maintains a LOC CD account as part of their compliance with States' requirements for their Discount Healthcare (“DHC”) line of business. As of November 30, 2011 and May 31, 2011, the Company held $100,354 and $100,188, respectively, in an LOC CD which is included in restricted cash on the balance sheets.

Note I - Intangibles

On October 1, 2008, the Company purchased certain assets and assumed certain liabilities from a U.S based prescription benefit management company (“PBM Seller”) for $4,958,272. The results of the operations for the PBM Seller have been included in the Company's statements

HealthTran LLC

of earnings since the acquisition date. During the six months ended November 30, 2010, post closing purchase price adjustments were made, reducing the estimated future installment payments in the amount of $26,128. As a result of this reduction, during the six months ended November 30, 2010, intangible assets acquired were reduced from $4,379,831 to $4,353,703. Estimated future installment payments are $3,720,087 as of November 30, 2011. Intangible assets were as follows:



		As of November 30, 2011
	Estimated life	Gross carrying value		Accumulated amortization			Net intangibles

Customer relationships	9.7	$	18,697,998	$	(7,337,116	)	$	11,360,882
Non-compete agreements	5	7,865,000		(6,841,152		)	1,023,848
Branding	3	19,400		(3,773		)	15,627
		$	26,582,398	$	(14,182,041	)	$	12,400,357



		As of May 31, 2011
	Estimated life	Gross carrying value		Accumulated amortization			Net intangibles

Customer relationships	9.7	$	18,697,998	$	(6,562,686	)	$	12,135,312
Non-compete agreements	5	7,865,000		(6,204,653		)	1,660,347
Branding	3	19,400		(539		)	18,861
		$	26,582,398	$	(12,767,878	)	$	13,814,520

Amortization expense for the six months ended November 30, 2011 and 2010 was $1,414,163 and $1,701,536, respectively.

The future estimated aggregate amortization expense for intangible assets is as follows:



	As of November 30, 2011
Year ending May 31,
2012 (six months)	$	1,143,706
2013	1,847,410
2014	1,318,195
2015	1,307,934
2016	1,307,934
Thereafter	5,475,178
	$	12,400,357

Note J - Employee benefit plan

The Company provides a 401(k) plan for substantially all employees. Effective January 2009, the Company matches 100% of employee contributions up to a 3% maximum of compensation, as well as 50% of the next 2% contributed. Employee contributions in excess of 5% of compensation are not matched by the Company. The plan expense for the six months ended November 30, 2011 and 2010 was approximately $310,300 and $280,477, respectively.

Note K - Concentrations of credit risk and significant customers

The Company is subject to concentration of credit risk with respect to its cash and cash equivalents, which the Company attempts to minimize by maintaining its cash and cash equivalents with institutions of sound financial quality. At times, cash balances may exceed limits federally insured by the Federal Deposit Insurance Corporation (“FDIC”). No losses related to such balances have been incurred to date. In October 2008, through the temporary Transaction Account Guarantee Program, full coverage is offered for non-interest bearing deposit accounts at FDIC-insured institutions that agree to participate in the program and remained in effect for participating institutions until December 31, 2010. Effective December 31, 2010, the Federal Deposit Insurance Act was amended to provide unlimited insurance coverage of non-interest bearing accounts; therefore, the Company does not have funds which are not federally insured.

Revenues from major customers

During the six months ended November 30, 2011, the top four customers of the Company from a revenue perspective accounted for 43% of the Company's total revenue. During the six months ended November 30, 2010, the top five customers of the Company from a revenue perspective accounted for 48% of the Company's total revenue. The top four customers of the Company from a revenue perspective accounted for 13% and 14% of accounts receivable as of November 30, 2011 and May 31, 2011, respectively.

Note L - Fair value measurements

HealthTran LLC

The Company records the Class A warrants at fair value. The Company follows a framework for measuring fair value. That framework provides a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurements) and the lowest priority to unobservable inputs (level 3 measurements). The three levels of the fair value hierarchy are described below:

Level 1

Inputs to the valuation methodology are unadjusted quoted prices for identical assets or liabilities in active markets.

Level 2

Inputs to the valuation methodology include:


•	Quoted prices for similar assets or liabilities in active markets;


•	Quoted prices for identical or similar assets or liabilities in inactive markets;


•	Inputs other than quoted prices that are observable for the asset or liability;


•	Inputs that are derived principally from or corroborated by observable market data by correlation or other means. If the asset or liability has a specified (contractual) term, the Level 2 input must be observable for substantially the full term of the asset or liability.

Level 3

Inputs to the valuation methodology are unobservable and significant to the fair value measurement. The asset's or liability's fair value measurement level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Valuation techniques used need to maximize the use of observable inputs and minimize the use of unobservable inputs.

The Company has the option to measure financial instruments and certain other assets and liabilities at fair value on an instrument-by-instrument basis. The Company has not elected the fair value option for all financial assets and liabilities.

Class A warrants

The fair value of the Company's Class A warrants is measured using level 3 inputs are based on unobservable and significant fair value measurements.

The method described above may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, while the Company believes its valuation method is appropriate and consistent with other market participants, the use of different methodologies or assumptions could result in a different fair value measurement at the reporting date.

Note M - Subsequent events

Subsequent events have been evaluated and disclosed through March 9, 2012, the date of issuance of these financial statements.

HealthTran LLC acquired by SXC Health Solutions, Inc.

On November 16, 2011, SXC entered into a Unit Purchase Agreement (the “Purchase Agreement”) to acquire all of the equity interests of the Company in exchange for $250.0 million in cash, as adjusted for any unpaid Company transaction expenses, indebtedness, and certain other customary reserves and working capital adjustments as defined in the Purchase Agreement. This acquisition transaction closed effective January 1, 2012. The Purchase Agreement contains customary representations, warranties and covenants.

Catamaran Corp - FORM 8-K/A - EX-99.3 - March 14, 2012

Attached files

Catamaran Corp Reports