<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JULY 31, 1996
COMMISSION FILE NUMBER 0-26168
CAREADVANTAGE, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 52-1849794
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification Number)
485-C ROUTE 1 SOUTH, ISELIN, NEW JERSEY 08830
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (908) 602-7000
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
65,149,464
Number of shares of Common Stock outstanding as of September 18, 1996
Transitional Small Business Disclosure Format
Yes X No
--- ---
This is Page 1 of 18 Pages. The exhibit index is on Page 17.
<PAGE> 2
CAREADVANTAGE, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
ASSETS JULY 31, OCTOBER 31,
1996 1995*
---- ----
<S> <C> <C>
Current assets:
Cash and equivalents $ 1,524,438 $ 536,471
Due from customers 2,492,897 86,579
Other current assets 100,933 68,971
------------ ------------
Total current assets 4,118,268 692,021
Restricted cash account 483,283
Property and equipment 1,713,459 2,077,395
Intangible assets 4,279,898 1,576,091
Other assets 79,184 87,170
------------ ------------
$ 10,674,092 $ 4,432,677
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Current portion of long-term debt $496,394 $ 558,410
Accounts payable 642,000 1,265,219
Due to customers 2,073,094
Accrued expenses and other current liabilities 2,180,984 1,778,484
------------ ------------
Total current liabilities 5,392,472 3,602,113
Capital lease obligations, less current portion 1,493,178 1,493,178
Notes payable, less current portion 5,827,132 ---
Commitments and contingencies
Stockholders (deficit):
Common stock - par value $.001 per share; authorized
100,000,000 shares; issued and outstanding 65,149,464
and 41,726,510 65,149 41,726
Additional capital 16,657,910 15,658,333
Accumulated deficit (18,761,749) (16,362,673)
------------ ------------
Total stockholders' deficit (2,038,690) (662,614)
------------ ------------
$ 10,674,092 $ 4,432,677
============ ============
</TABLE>
*Reclassified to conform to current period classification.
The accompanying notes are an integral part of these statements.
2
<PAGE> 3
CAREADVANTAGE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
JULY 31, JULY 31,
----------------------- -----------------------
1996 1995* 1996 1995*
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net revenues $ 2,313,715 $ 3,316,534 $ 9,777,839 $ 5,957,926
Costs of services 1,976,531 2,922,524 6,696,035 5,138,082
----------- ----------- ----------- -----------
Gross profit 337,184 394,010 3,081,804 819,844
Operating expenses:
Selling, general and administration 1,193,013 2,263,274 3,253,227 5,191,349
Depreciation and amortization 332,772 321,906 872,498 876,105
Interest 156,664 351,669
Other costs 300,000 1,003,486 300,000
----------- ----------- ----------- -----------
Total operating expenses 1,982,449 2,585,180 5,480,880 6,367,454
----------- ----------- ----------- -----------
NET LOSS $(1,645,265) $(2,191,170) $(2,399,076) $ 5,547,610)
=========== =========== =========== ===========
NET LOSS PER SHARE OF COMMON STOCK $ (0.03) $ (0.05) $ (0.04) $ (0.13)
=========== =========== =========== ===========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING 65,149,000 41,727,000 55,319,000 41,727,000
=========== =========== =========== ===========
</TABLE>
*Reclassified to conform to current period classification.
The accompanying notes are an integral part of these statements.
3
<PAGE> 4
CAREADVANTAGE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
JULY 31,
-----------------------
1996 1995
---- ----
<S> <C> <C>
Operating activities:
Net (loss) $(2,399,076) $(5,547,610)
Adjustments to reconcile net loss to net cash used by operating
activities:
Depreciation and amortization 878,784 878,479
Deposit written off for abandoned acquisition 300,000
Expense associated with issuance of warrants 98,000
Change in assets and liabilities:
Due to/from customers (333,224) 277,225
Other assets (23,976) (732,019)
Restricted cash account (483,283)
Accounts payable (353,746) 448,423
Accrued expenses and other liabilities 411,140 789,936
----------- -----------
Cash used by operating activities (2,205,381) (3,585,566)
----------- -----------
Investing activities:
Capital expenditures (33,536) (2,108,285)
Acquisition of intangible assets (79,462) (1,738,952)
Acquisition of CHCM (cash proceeds-net of transaction costs) 749,171
----------- -----------
Cash provided from (used by) investing activities 636,173 (3,847,237)
----------- -----------
Financing activities:
Advances from a former affiliate - capitalized 2,896,628
Proceeds (principal payments) under long-term debt (367,825) 2,086,066
Proceeds from issuance of note payable 2,000,000
Net proceeds from issuance of common stock 925,000
----------- -----------
Cash provided from financing activities 2,557,175 4,982,694
----------- -----------
Net increase (decrease) in cash 987,967 (2,450,109)
Cash and equivalents - beginning of period 536,471 3,645,430
----------- -----------
Cash and equivalents - end of period $ 1,524,438 $ 1,195,321
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
4
<PAGE> 5
CAREADVANTAGE, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT
(UNAUDITED)
<TABLE>
<CAPTION>
COMMON STOCK
------------
NUMBER OF PAR VALUE ADDITIONAL ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT CAPITAL (DEFICIT) (DEFICIT)
------ ------ ------- ------- -------
<S> <C> <C> <C> <C> <C>
BALANCE AS OF OCTOBER 27, 1993 $ 1,000 $ 1,000
Acquisition of CAHS by Primedex 6,000,000 6,000,000
Capitalization of advances from Primedex 6,802,431 6,802,431
Stock dividend to Primedex stockholders 40,026,510 $40,026 (40,026) 0
October 1994 stock transferred for Primedex debenture holders 1,700,000 1,700 (1,700) 0
Net (loss) for the year ended October 31, 1994 $ (3,370,771)
---------- ------- ----------- ------------ -------------
BALANCE AS OF OCTOBER 31, 1994 41,726,510 41,726 12,761,705 (3,370,771) 9,432,660
Capitalization of advances from Primedex 2,896,628 2,896,628
Net (loss) for the year ended October 31, 1995 (12,991,902) (12,991,902)
---------- ------- ----------- ------------ ------------
BALANCE AS OF OCTOBER 31, 1995 41,726,510 41,726 15,658,333 (16,362,673) (662,614)
Issuance of common stock in connection with financing transaction 23,419,204 23,419 999,577 1,023,000
Issuance of common stock to employee 3,750 4 (4)
Net (loss) for the nine months ended July 31, 1996 (2,399,076) (2,399,076)
---------- ------- ----------- ------------ ------------
BALANCE AS OF JULY 31, 1996 65,149,464 $65,149 $16,657,910 $(18,761,749) $ (2,038,690)
========== ======= =========== ============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
5
<PAGE> 6
CAREADVANTAGE, INC.
NOTES TO FINANCIAL STATEMENTS - JULY 31, 1996
(UNAUDITED)
CareAdvantage, Inc. ("CAI" or the "Company"), is a holding company which,
through its subsidiaries, CareAdvantage Health Systems, Inc. ("CAHS") and
Contemporary HealthCare Management, Inc. ("CHCM"), operates in one business
segment, providing health care cost containment services to health care insurers
and other health services organizations to reduce the costs of medical services
provided to their subscribers without reducing the quality of service.
BASIS OF PREPARATION:
The accompanying financial statements as at July 31, 1996 and for the nine month
and three month periods ended July 31, 1996 and 1995 are unaudited; however, in
the opinion of the management of the Company, such statements include all
adjustments (consisting of normal recurring accruals) necessary for a fair
statement of the information presented.
Pursuant to accounting requirements of the Securities and Exchange Commission
applicable to quarterly reports on Form 10-QSB, the accompanying financial
statements and these notes do not include all disclosures required by generally
accepted accounting principles for audited financial statements. Accordingly,
these statements should be read in conjunction with the consolidated financial
statements and notes thereto contained in the Company's Annual Report on Form
10-KSB, as amended, for the fiscal year ended October 31, 1995.
The results of operations for any interim period are not necessarily indicative
of the results for a full year.
CHANGE IN CONTROL:
On February 22, 1996, the Company completed a series of transactions with CW
Ventures II, L.P. ("CW Ventures") and with Blue Cross and Blue Shield of New
Jersey, Inc. ("BCBSNJ") which resulted in control of the Company being
transferred to CW Ventures and BCBSNJ. CW Ventures is a New York limited
partnership operating as a venture capital fund and managed by a general
partner, CW Partners III, L.P. ("CW Partners").
The transactions included the sale to CW Ventures pursuant to a $150,000 loan
extended by CW Ventures on February 6, 1996 (the "Bridge Financing") of a
$150,000 promissory note (the "Bridge Note") and the subsequent sale to CW
Ventures on February 22, 1996 for an additional $2,850,000 in cash payments by
CW Ventures (less $75,000 of CW Ventures' expenses reimbursed by the Company)
and in exchange for and in cancellation of the Bridge Note; of 23,419,204 shares
of the Company's Common Stock (at a purchase price of $0.0427 per share) and a
$2,000,000 principal amount 8% Exchangeable Note maturing on June 30, 1998 (the
"CW Note") issued by CareAdvantage Health Systems, Inc., a wholly-owned
subsidiary of the Company ("CAHS"), pursuant to a securities purchase agreement
(the "Purchase Agreement"). The CW Note, which is guaranteed by the Company and
CHCM (as such term is defined infa.), and which is secured by substantially all
of the assets of the Company and its subsidiaries, is exchangeable into that
number of shares of Common Stock as would equal approximately 23 1/3% of the
outstanding shares on a fully diluted basis so that the 23,419,204 shares issued
to CW Ventures together with the shares issuable upon exchange of the CW Note
would comprise approximately 35% of the outstanding shares of Common Stock on a
fully diluted basis. In addition, in connection with the Bridge Financing, the
Company issued to CW Ventures for nominal consideration, five-year warrants (the
"CW Warrants") exercisable to purchase 1,000,000 shares of Common Stock at an
exercise price per share of $0.16.
Concurrently with the February 22, 1996 closing of the Purchase Agreement, CAHS
purchased all of the outstanding capital stock of Contemporary HealthCare
Management, Inc. ("CHCM") from a wholly-owned BCBSNJ subsidiary, Enterprise
Holding Company, Inc. ("EHC") pursuant to a stock acquisition agreement (the
"Acquisition Agreement"). The CHCM stock was acquired in exchange for CAHS'
$3,600,000 principal amount 8% Exchangeable Note maturing on June 30, 1998 (the
"EHC Note"), guaranteed by the Company and CHCM and secured by substantially all
of the assets of the Company and its subsidiaries.
6
<PAGE> 7
CAREADVANTAGE, INC.
NOTES TO FINANCIAL STATEMENTS - JULY 31, 1996
(UNAUDITED)
The EHC Note is exchangeable into that number of shares of Common Stock as would
equal approximately 40% of the outstanding shares on a fully diluted basis.
At the closing of the Acquisition Agreement, CHCM executed an approximately
seven-year services agreement terminating on December 31, 2002 (the "Services
Agreement") providing for the continued rendering of cost containment services
by CHCM to BCBSNJ. The Services Agreement required BCBSNJ to pay a monthly
"interim payment of $833,333 (subject to recoupment under certain circumstances)
to CHCM with respect to each service month in calendar 1996 and in subsequent
years, to pay a monthly service fee reduced by a "trailing monthly adjustment"
based on performance. As a result of the Company's inability to met certain
performance goals defined in the Services Agreement during 1996; however, it is
likely that approximately $2,000,000 will be returned to BCBSNJ during calendar
year 1997. Moreover, under the Services Agreement, BCBSNJ may terminate such
agreement for, inter alia, the Company's failure, in any BCBSNJ's fiscal year,
to achieve for BCBSNJ Total Savings (as defined therein) which are greater than
seventy-five percent (75%) of the applicable total target savings set forth
therein (the "Minimum Targeted Savings"). Although there are three (3) months
remaining in the 1996 BCBSNJ fiscal year, the Company believes it possible that
it will not achieve the Minimum Targeted Savings, thus allowing BCBSNJ to
terminate the Services Agreement. BCBSNJ has nevertheless stated in writing to
the Company that it currently does not intend to invoke any rights it may have
to terminate the Services Agreement in the event the Company fails to achieve
the Minimum Targeted Savings. However, there can be no assurance that BCBSNJ
will terminate the Services Agreement in the future if the Company does fail to
achieve the Minimum Targeted Savings. At the closing, BCBSNJ paid an aggregate
$731,679 to CHCM representing the balance of the outstanding intercompany
payables as of January 31, 1996. The Services Agreement permits BCBSNJ to
terminate same with or without cause, on 90 days prior notice. In the event of
termination without cause prior to January 1, 2001, BCBSNJ is required to pay
liquidated damages to CHCM equal to (i) 40% of the fair market value of the
Company as of such termination date after giving effect to BCBSNJ's required
payments, plus (ii) the present value of the future valuation of the Services
Agreement over the remainder of the first five years of the Services Agreement,
plus (iii) the present value of the future valuation of any third party contract
that the Company can establish was lost due to such termination without cause.
Although generally, CW Ventures on the one hand and EHC and BCBSNJ on the other
have equal rights to the collateral securing the obligations pursuant to the CW
Note and the EHC Note, the parties have executed an inter-creditor agreement
which provides, among other items, that (i) CW Venture's security interest
asserted against any such collateral shall be subordinate to BCBSNJ's rights
under a certain section of the Services Agreement (which provides BCBSNJ with
certain rights upon termination of the Services Agreement by BCBSNJ with or
without cause), (ii) BCBSNJ's and EHC's security interests in such collateral
other than receivables and cash proceeds therefrom shall be subordinate to CW
Venture's rights to such collateral except to the extent necessary to permit
BCBSNJ to effect the terms of a certain section of the Services Agreement, and
(iii) EHC and BCBSNJ agree to take no action to enforce their rights respecting
such collateral unless either the Services Agreement is terminated by BCBSNJ or
CW Ventures has attempted to enforce any of its rights respecting such
collateral.
Because the Company does not have a sufficient number of authorized but unissued
shares of Common Stock to permit issuance of the required number of shares upon
exchange of the CW Note and the EHC Note, the Company agreed to submit and,
pursuant to action taken at the June 6, 1996 Board of Directors meeting of the
Company, did approve for submission to its stockholders the Charter Amendment.
The Charter Amendment was approved by the majority stockholders on August 23,
1996. Upon the effectiveness of such Charter Amendment and upon compliance with
certain other conditions, the EHC Note will be automatically exchanged into
approximately 40% of the outstanding shares of Common Stock on a fully diluted
basis. In the event that the Charter Amendment does not become effective prior
to September 30, 1996, CW Ventures will be entitled to be paid a $500,000 fee by
the Company. The Company is currently taking steps to amend its charter and
anticipates effectuating this amendment prior to September 30, 1996.
7
<PAGE> 8
CAREADVANTAGE, INC.
NOTES TO FINANCIAL STATEMENTS - JULY 31, 1996
(UNAUDITED)
With respect to the CW Note, the holder has the right, at its option, at any
time and from time to time until the June 30, 1998 maturity date, to exchange
the CW Note in whole or in part, for additional shares of Common Stock. On the
maturity date, assuming the Charter Amendment has been duly adopted, the
Services Agreement is in full force and effect and certain other conditions are
complied with, the remaining principal balance of the CW Note will be
automatically exchanged into shares of Common Stock. Exchange by CW Ventures of
the entire principal amount of the CW Note for shares of Common Stock, together
with the 23,419,204 shares of Common Stock previously issued to CW Ventures as
described above, will result in CW Ventures owning approximately 35% of the
outstanding shares of Common Stock on a fully diluted basis.
The percentage ownership interests of CW Ventures and of BCBSNJ (through EHC) in
the Company's common stock are subject to increase if the Company fails to
realize at least $15 million in net revenues for its fiscal year ending October
31, 1996 or fails to realize at least $1 million in adjusted earnings before
income tax ("EBIT") in such period (with respect to the EHC Note) or at least $2
million in EBIT (with respect to the CW Note). Failure by the Company to realize
at least $15 million in net revenues for such period will result in an increase
in CW Ventures' and BCBSNJ's equity interests in the Company to approximately
45% each (on a fully diluted basis). Failure by the Company to realize at least
$1 million in EBIT for such period will result in an increase in BCBSNJ's equity
ownership in the Company on a fully diluted basis based upon the difference
between the actual EBIT and $1 million varying from 2% (to 42%) to 5% (to 45%).
Similarly, failure by the Company to realize at least $2 million in EBIT for
such period will result in an increase in CW Ventures' equity ownership in the
Company on a fully diluted basis based upon the difference between the actual
EBIT and $2 million varying from 3% (to 38%) to 10% (to 45%). No increase in
percentage ownership is required in either case if the Company realizes at least
$15 million in net revenues and at least $1 million in EBIT for the period (with
respect to the EHC Note) and at least $2 million in EBIT for the period (with
respect to the CW Note).
As noted above, the percentage ownership interests of CW Ventures and BCBSNJ
will be increased if CAI fails to meet certain performance targets. Management
believes, based upon CAI's results of operations through July 31, 1996 and
expectations for the fourth fiscal quarter of 1996, that the performance targets
will not be met. As a result, following the completion of the 1996 fiscal year,
approximately 155,000,000 additional shares will be issued to CW Ventures and
approximately 145,000,000 additional shares will be issued to BCBSNJ in order to
bring the ownership percentage of each to 45% on a fully diluted basis. On a pro
forma basis, CAI would have approximately 493,000,000 shares outstanding and its
net loss per share for the nine months ended July 31, 1996 would have been
$0.01.
In connection with the investment by CW Ventures and CAHS' acquisition of CHCM,
CW Ventures, EHC and the Company have entered into a stockholders' agreement
(the "Stockholders' Agreement" relating to the future governance of the Company.
Pursuant to the Stockholders' Agreement, CW Ventures and EHC have agreed to vote
their shares of Common Stock to maintain a seven-person Board of Directors to be
comprised of the following members: (i) two designees of CW Ventures, (ii) two
designees of EHC, (iii) two members of the Company's management acceptable to CW
Ventures and EHC, and (iv) one non-employee director acceptable to CW Ventures
and EHC.
The Stockholders' Agreement also prohibits the Company from taking certain
actions without the consent of CW Ventures and its designees to the Board of
Directors and also provides CW Ventures and EHC with pro rata rights of first
refusal with respect to any proposed issuance by the Company of its debt or
equity securities (other than pursuant to a registered public offering). In
addition, CW Ventures and EHC each have a right of first refusal with respect to
any proposed transfer of Common Stock by the other party which exceeds 1% of the
Company's then total outstanding Common Stock, other than with respect to public
sales and distributions of shares of Common Stock by CW Ventures to its partners
in the ordinary course of business. The Stockholders' Agreement also provides CW
Ventures with the right to purchase EHC's shares of Common Stock in the event
that the Services Agreement is terminated by BCBSNJ. The Company is also
prohibited from taking certain actions without the
8
<PAGE> 9
CAREADVANTAGE, INC.
NOTES TO FINANCIAL STATEMENTS - JULY 31, 1996
(UNAUDITED)
consent of EHC or EHC's designees to the Board of Directors. The rights granted
by the Company to CW Ventures described above terminate on the later to occur of
(i) February 22, 1998 and (ii) the date the CW Note is exchanged for Common
Stock, provided that such rights will terminate earlier if the Company realizes
net income of at least $400,000 in any consecutive full four (4) fiscal
quarters. In the event that CW Ventures' approval rights terminate and it holds
at least 5% of the outstanding Common Stock, CW Ventures will possess the same
approval rights granted to EHC for as long as EHC possesses such rights. The
Stockholders' Agreement itself terminates on the later to occur of (i) each of
EHC and CW Ventures having less than 5% of the outstanding Common Stock, (ii)
the termination of the Services Agreement and (iii) February 22, 1998.
In connection with its investment, CW Ventures obtained proxies to vote a total
of 10,300,000 shares of Common Stock, subject to certain limitations. John
Petillo, former Chairman of the Board of Directors and Chief Executive Officer,
granted CW Ventures a proxy dated February 22, 1996 with respect to 8,600,000
shares of Common Stock owned by him (the "Petillo Proxy") which terminated on
June 30, 1996, and the Company granted CW Ventures a proxy dated February 22,
1996 with respect to 1,700,000 shares of Common Stock over which the Board has
voting power (the "CAI Proxy"), which terminated upon the adoption of the
Charter Amendment in accordance with the terms of the Separation Agreement dated
April 20, 1995 between the Company and Primedex Health Systems, Inc. (a copy of
which is filed as an exhibit to the Company's Registration Statement on Form S-1
(file No. 33-8917). Since the Petillo Proxy expired on June 30, 1996, CW
Ventures did not have the power to vote the shares of Common Stock subject to
the Petillo Proxy in connection with the adoption of the Charter Amendment by
the Majority Stockholders. See "Recent and Subsequent Events--Written Consent of
Majority Stockholders."
Pursuant to a registration rights agreement dated as of February 22, 1996 among
the Company, CW Ventures, and EHC, the Company is required to file a "shelf"
registration statement with the Securities and Exchange Commission on or prior
to June 30, 1996, and to use its best efforts to have such registration
statement declared effective as soon thereafter as possible, covering the shares
of Common Stock issued to CW Ventures and the shares issuable upon exchange of
the CW Notes and the EHC Note, so as to permit the public offering and
distribution of such shares. There is no requirement that any of such shares
will be distributed pursuant to such registration statement. The Company has
secured from each of CW Ventures and EHC a waiver to file such registration
statement until September 30, 1996 and the Company expects to secure a further
waiver of time to file.
ACQUISITION OF CHCM:
In connection with the change of control of the Company (see "Change in Control"
above), on February 22, 1996, the Company's wholly-owned subsidiary, CAHS
acquired all of the stock of CHCM, a former subsidiary of BCBSNJ. CHCM's
operating activities consisted of providing health care containment services,
including utilization review and case management to BCBSNJ. While the
acquisition of CHCM was consummated on February 22, 1996, results of operations
of CHCM have been reflected in the Company's financial statements since April
30, 1995 pursuant to an Interim Services Agreement between the Company and
BCBSNJ whereby the Company had effective control and responsibility of the day
to day operations of the BCBSNJ's former subsidiary.
In consideration of the Company's acquisition of all of the issued and
outstanding stock of CHCM from BCBSNJ, the Company issued a $3,600,000 8%
Exchangeable Note (the "Exchangeable Note") to a wholly-owned subsidiary of
BCBSNJ. The Exchangeable Note will be automatically exchanged, subject to
certain conditions, into approximately 40% of the outstanding shares of common
stock of the Company on a fully diluted basis. The Exchangeable Note becomes due
and payable on June 30, 1998 in the event such note is not exchanged for stock
prior to such date.
The transaction was accounted for as a purchase of CHCM for $3,600,000. The
excess of the purchase price of $3,600,000 over the fair value of CHCM's assets
of $3,078,294 was recorded as goodwill and is being amortized on a straight line
basis over ten years.
9
<PAGE> 10
CAREADVANTAGE, INC.
NOTES TO FINANCIAL STATEMENTS - JULY 31, 1996
(UNAUDITED)
The following unaudited proforma statement of operations for the nine month
periods ended July 31, 1996 and 1995, give effect to the purchase transaction as
though such transaction occurred at November 1, 1995 and November 1, 1994,
respectively, the beginning of the fiscal years.
<TABLE>
<CAPTION>
Nine Months Ended July 31,
--------------------------
1996 1995
---- ----
<S> <C> <C>
Net revenues $ 9,700,170 $ 7,500,000
Net loss (2,457,789) (4,328,495)
Net loss per share of common stock $ (.04) $ (.07)
Weighted average number of common shares outstanding 65,149,464 65,149,464
</TABLE>
SETTLEMENT OF ARBITRATION AND SEPARATION AGREEMENT:
Effective April 4, 1996, a settlement agreement was reached between an employee
and CAHS and was guaranteed by the Company. The employee voluntarily resigned
from his employment effective April 11, 1996. In connection therewith, CAHS and
the Company agreed to payments settling all claims aggregating $592,500. A
payment in the amount of $120,000 was made to the former employee on April 12,
1996. The balance of $472,500 is in the form of a promissory note with an
interest rate of 7% per annum to be paid over 36 equal monthly installments of
$14,589.43 commencing May 4, 1996. The promissory note is secured by an
irrevocable standby letter of credit secured by a declining balance, interest
bearing restricted cash investment account.
RECENT AND SUBSEQUENT EVENTS:
Board Actions:
At meetings of the Board of Directors held on June 6, 1996 and July 24, 1996,
the directors resolved to adopt proposed amendments to the Company's Certificate
of Incorporation to: (i) effectuate a "one-for-six" reverse stock split of the
Company's common stock in lieu of the "one-for-twenty" reverse stock split
previously adopted but not yet submitted for shareholder approval, (ii) reduce
its authorized number of shares of common stock to 90,000,000 shares, (iii)
authorize 10,000,000 shares of a newly created class of preferred stock with a
par value of $.10 per share. In addition, the Board of Directors adopted the
1996 Stock Option Plan and the 1996 Director Stock Option Plan .
Written Consent of Majority Stockholders:
Pursuant to a Written Consent of Stockholders in Lieu of Meeting dated August
23, 1996 of the Company by stockholders holding a majority of the issued and
outstanding shares of common stock of the Company, the following actions taken
by the Company's Board of Directors on June 6, 1996 and July 24, 1996 were
authorized, adopted, ratified and confirmed by the Majority Stockholders:
(1) The filing of an amendment to the Company's Restated Certificate of
Incorporation (i) to effect a one-for-six reverse split (the "Reverse
Split") of the outstanding shares of the common stock, $0.001 par value
per share of the Company, (ii) to reduce the Company's authorized
number of shares of Common Stock to 90,000,000 shares and (iii) to
create a new class of "blank check" preferred stock, $0.10 par value
per share (the "Preferred Stock"), consisting of 10,000,000 shares; and
10
<PAGE> 11
CAREADVANTAGE, INC.
NOTES TO FINANCIAL STATEMENTS - JULY 31, 1996
(UNAUDITED)
(2) The 1996 Stock Option Plan, as amended, and the 1996 Director Stock
Option Plan, as amended (collectively, the "Stock Option Plans").
Preferred Stock:
The Preferred Stock is issuable in such series and with such designations,
preferences, conversion rights, cumulative, relative, participating, optional or
other rights, including voting rights, qualifications, limitations or
restrictions thereof as determined by the Board of Directors of the Company. As
such, the Board of Directors of the Company will be entitled to authorize the
creation and issuance of 10,000,000 shares of Preferred Stock in one or more
series with such limitations and restrictions as may be determined in the
Board's sole discretion, with no further authorization by stockholders required
for the creation and issuance thereof.
Stock Option Plans:
The 1996 Stock Option Plan is administered by the Board of Directors of the
Company. Pursuant to the terms of the 1996 Stock Option Plan, the Board will
select persons to be granted options and will determine: (i) whether the
respective option is to be a non-statutory, non-qualified option or an incentive
option; (ii) the number of shares of the Company's Common Stock purchasable
under such option; (iii) the time or times when the option becomes exercisable,
except that no incentive or non-statutory, non-qualified option shall be
exercised and sold by the recipient prior to six (6) months from the date of
grant; (iv) the exercise price cannot be less than 100% of the fair market value
of the Common Stock on the date of grant (110% of such fair market value for
incentive options granted to a person who owns or who is considered to own stock
possessing more than 10% of the total combined voting power of all classes of
stock of the Company; and (v) the duration of the option, which cannot exceed
ten (10) years. Incentive Options may only be granted to employees (including
officers) of the Company and/or any of its subsidiaries. Non-statutory,
non-qualified Options may be granted to any employee (including employees who
have been granted Incentive Options) and other persons who the Board of
Directors may select. Under the 1996 Stock Option Plan, an aggregate of 10% of
the Company's authorized number of shares of Common Stock (which, after the
Charter Amendment has become effective upon its filing with the Delaware
Secretary of State, shall be equal to 9,000,000 shares of Common Stock) has been
reserved for issuance pursuant to the 1996 Stock Option Plan.
The 1996 Director Stock Option Plan is also administered by the Board of
Directors of the Company. Pursuant to the terms of the 1996 Director Stock
Option Plan, the Board may select non-employee individual Directors to be
granted options. Each such option grant shall be (i) in the amount to purchase
1,000,000 shares of Common Stock (which, after the Charter Amendment has become
effective upon its filing with the Delaware Secretary of State, shall be equal
to 166,667 shares of Common Stock); (ii) at an exercise price which cannot be
less than 100% of the fair market value of the Common Stock on the date of
grant; (ii) immediately exercisable, and (iv) for a duration of five (5) years
from the date of grant. Options under the 1996 Director Stock Option Plan may be
granted only to Directors of the Company. Under the 1996 Director Stock Option
Plan, an aggregate of 2% of the Company's authorized number of shares of Common
Stock (which, after the Charter Amendment has become effective upon its filing
with the Delaware Secretary of State, shall be equal to 1,800,000 shares of
Common Stock) has been reserved for issuance pursuant to the 1996 Director Stock
Option Plan. No current member of the Board of Directors currently qualifies for
grant of Options under the 1996 Director Stock Option Plan.
11
<PAGE> 12
CAREADVANTAGE, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL:
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. Reference is made in the accountants
report to the Company's financial statements included with the annual report
filed on Form 10-KSB as amended, for the fiscal year ended October 31, 1995.
Although the Company has experienced significant operating losses on a
consolidated basis, resulting in a deficit equity position, management has
recently taken several steps to build on what it believes to be a successful
business model, including an infusion of equity capital and acquisition of CHCM.
By continuing to provide high quality health care cost containment services to
its existing customer base of five Blue Cross and Blue Shield ("BCBS") plans,
management believes it can continue to leverage its reputation to other similar
customers. This strategy is particularly significant given the current health
care environment where large third-party payers are merging in an effort to
protect their respective franchises and expand their market reach. The various
BCBS plans throughout the country are no exception to this phenomenon and the
Company believes it can leverage its core competencies to participate in this
consolidating environment. Additionally, while the Company may have to seek
additional financing to accomplish its objectives, management intends to secure
appropriate capital as the business needs warrant. There is no assurance,
however, that such financing will be received on a timely basis or on acceptable
terms to the Company.
CAI has had a short operating history during which it devoted substantially all
of its efforts in establishing new business. During mid-1994, the Company
recruited most of the members of its management team and began to put in place
the infrastructure necessary to execute its growth and acquisition strategies.
No revenues were realized by the Company from the inception of operations
through October 31, 1994, as its principal operations were those of a
development stage company. Effective with November 1,1994, the beginning of its
1995 fiscal year, the Company commenced principal operations and began realizing
revenues from its interim and long-term service agreements.
The Company recently entered into a series of transactions resulting in cash
receipts of approximately $3,500,000 and a long-term service agreement with its
largest customer, which provides for the receipt of an additional $10,000,000
over a twelve month period. However, as a result of the Company's inability to
meet certain performance goals defined in the long-term Service Agreement, it is
likely that approximately $2,000,000 will have to be returned to BCBSNJ during
calendar year 1997. See "Notes to Financial Statements - Change of Control and
Acquisition of CHCM".
Certain statements in this Form 10-QSB constitute "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995,
including those concerning management's expectations with respect to future
financial performance and future events, particularly relating to revenues from
performance-based services and renegotiations of existing and new contracts with
customers. Such statements involve known and unknown risks, uncertainties and
contingencies, many of which are beyond the control of the Company, which could
cause actual results and outcomes to differ materially from those expressed
herein.
REORGANIZATION:
As a result of the recent series of transactions consummated by the Company
which resulted in a change in control of the Company and the acquisition of CHCM
(see "Notes to Financial Statements - Change in Control and Acquisition of
CHCM"), the Board of Directors and management have taken and expect to take
certain actions to increase revenues, reduce and re-deploy personnel and other
costs and ultimately increase shareholder value.
Management is of the opinion that it must continue to refine its current service
lines in order to continue to add value to existing and potential customers. In
addition, the Company intends to broaden its services offered with
12
<PAGE> 13
CAREADVANTAGE, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
unique and complementary cost-containment strategies. Management intends to
evaluate each service in light of anticipated changes in the healthcare
industry, the cost to enter such line as well as the availability and timeliness
of competent resources. To further expand its line of services, the Company
intends to pursue alternatives to its internal product and service development
efforts by entering into strategic alliances and joint ventures as well as
through acquisitions.
As a result of the reorganization efforts to date, the Company has recorded a
charge to operations in the current quarter of $300,000 and approximately
$1,000,000 for the nine-month period ended July 31, 1996 for certain employment
severance costs, and direct expenses related to the change in control and
reorganization. Such costs are included in "Other costs" on the consolidated
statements of operations (see "Other costs" below). Future charges to operations
for related costs is possible; however, any such amounts and timing are not yet
determinable.
NET REVENUES:
<TABLE>
<CAPTION>
Nine Months Ended
-----------------
July 31, 1996 July 31, 1995
------------- -------------
Amount Percent Amount Percent
------ ------ ------ -------
<S> <C> <C> <C> <C>
Revenues from fixed fee arrangements $6,789,269 69% $4,496,606 75%
Revenues from performance-based arrangements 2,552,570 26% 1,356,131 23%
Consulting revenues 436,000 5% 105,189 2%
---------- --- ---------- ---
Total revenues $9,777,839 100% $5,957,926 100%
========== === ========== ===
</TABLE>
The Company currently provides services to five customers. The Company's
contracts with its customers are complicated. For example, contracts that
provide for performance-based revenues require claims data that is supplied by
the Company's customers to calculate the achievement of goals for each period.
Because claims data typically lags the Company's actual performance by several
months, it is difficult to ensure maximum accuracy when recording
performance-based revenues. For these and other reasons, management is working
closely with its customers to secure more timely and accurate data to improve
the accuracy of reporting its revenues, including, in some cases, the
renegotiation of the contract itself.
The Company is currently in the process of negotiating contracts with two of its
existing customers, one of which would commence on November 1, 1996 and the
second to commence on January 1, 1997. One such customer has indicated that if
an agreement in principle or further progress has not been achieved by October
31, 1996, the customer shall issue a Notice of Termination (the "Notice")
pursuant to the existing contract effective October 31, 1996. However, both
parties agree that issuance of the Notice shall not preclude further
negotiations to enter into a contract for the period commencing November 1,
1996. Based upon discussions with the customer to date, management expects that
a new contract will be entered into. Failure of either one of these customers to
renew their contracts would have a material adverse effect on the financial
position and results of operations of the Company. While the Company hopes to
broaden the scope of services to be performed and thus increase revenues from
such customers, there is no assurance that any new contracts will be negotiated
on terms more favorable than the existing contracts.
The Company is also in negotiations with BCBSNJ. The Company is seeking certain
modifications to the existing service agreement which will provide the Company
with an opportunity to realize performance-based fees. There is no assurance
that the Company's efforts will be successful.
13
<PAGE> 14
CAREADVANTAGE, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Net revenues for the nine months and three month periods ended July 31, 1996
were $9,777,839 and $2,313,715, respectively, compared to net revenues in the
corresponding periods of the prior fiscal year of $5,957,926 and $3,316,534. The
increases in the nine month period of $3,819,913 (or 64%) was primarily
attributable to the securement and service of additional contracts that were
entered into subsequent to the periods of the prior fiscal year, as well as the
revised contract with BCBSNJ entered into in connection with the acquisition of
CHCM.
The current periods were adversely impacted by a reduction in revenues of
$1,064,000 as a result of management's decision to record performance-based
revenues from a significant customer at a rate approximating 45% of the
performance-based fees recognized for actual results achieved in the prior year.
These actual results were received from the customer in July 1996. This decision
was made based upon the fact that the Company relies on this customer for
information regarding progress made toward achieving stated savings targets and
little relevant information has been made available to management thus far in
calendar year 1996. The Company is working with this customer to receive updated
and relevant information on a more timely basis.
Revenues from at-risk performance-based service contracts (where the majority of
revenues are typically earned) generally tend to follow a pattern whereby
significant revenues are generated during the initial term of the contact as
savings opportunities are the greatest and then decline thereafter as the
opportunity for additional savings diminishes. As a result, the Company's
ability to increase revenues and gross margins are dependent upon its ability to
enter into additional contracts with new customers and/or expand the services
provided to existing customers.
Notwithstanding the Company's ability to enter into additional contracts with
new customers or expand its services to existing customers, management
anticipates that net revenues for the next quarter will approximate $3,000,000.
Based upon the level of revenues and results of operations to date and
anticipated results for the balance of the current fiscal year, management does
not expect the Company to meet certain revenue and income thresholds pursuant
to agreements entered into in connection with the change in control of the
Company. See "Notes to Financial Statements - Change in Control." As a result,
it is likely that additional shares of the Company's Common Stock will be
issued to CW Ventures and EHC, resulting in further dilution of ownership of
other shareholders.
COST OF SERVICES:
Cost of services for the nine months ended July 31, 1996 was $6,696,035
compared to $5,138,082 in the corresponding period of the prior fiscal year.
The increase in the cost of services was due to additional costs incurred
pursuant to contracts with customers during the current period that did not
exist in the prior period, in particular, the costs associated with the service
of BCBSNJ pursuant to the Interim Services Agreement entered into with BCBSNJ,
which became effective on April 1, 1995.
OPERATING EXPENSES:
Selling, general and administrative:
Selling, general and administrative costs during the nine and three month
periods ended July 31, 1996 were $3,253,227 and $1,193,012, respectively,
compared to $5,191,349 and $2,263,274 in the corresponding periods of the prior
fiscal year. The decreases in the current periods was due primarily to decreases
in the personnel costs, professional fees and consulting fees, offset in part,
by increases in facility costs as a result of the Company's relocation to its
new facility. Selling and marketing costs during the periods presented were
minimal.
14
<PAGE> 15
CAREADVANTAGE, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
While management intends to take steps in the future to reduce general and
administrative costs, such reduction in costs may be offset to some extent, by
anticipated increases in selling, marketing and service development costs. There
is no assurance, however, that management will be successful in reducing general
and administrative costs by any material amount.
Depreciation and amortization:
Depreciation and amortization of $872,498 during the nine month period ended
July 31, 1996 reflects amortization of intangible assets of $318,000;
amortization of goodwill arising in connection with the acquisition of CHCM of
$128,600 and depreciation of property and equipment of $425,000. Amortization
and depreciation is expected to approximate $325,000 per quarter in the
foreseeable future.
Interest expense:
Interest expense during the nine months ended July 31, 1996 of $351,669 is
comprised of interest expense incurred on the CW Note of $70,000 and EHC Note of
$120,000, which arose in connection with the change in control of the Company
and acquisition of CHCM. See "Notes to Financial Statements - Change in Control
and Acquisition of CHCM." In addition, approximately $154,000 was incurred
pursuant to capital lease obligations.
Interest expense related to the exchangeable debt instruments issued in
connection with the change in control and acquisition of CHCM will cease and any
accrued interest forgiven should such debt instruments be exchanged into shares
of Common Stock of the Company pursuant to the terms of the agreements.
Other costs:
Other costs of $1,003,486 in the current nine month period represents costs
incurred in connection with the change in control and related reorganization
(see "Reorganization" above) that the Company does not deem as recurring
operating expenses, however, as discussed above, certain expenses within this
component of the statement of operations may continue to be incurred in the
future. Expenses reflected in "Other costs" include severance and separation
costs related to the change in control and reorganization of approximately
$838,000, professional fees related to the change in control of approximately
$68,000 and costs associated with the issuance of warrants in connection with
the change of control transaction of $98,000. Other costs during the nine months
ended July 31, 1995 represented loss of a deposit of $300,000 on an abandoned
acquisition.
LOSS FROM OPERATIONS:
Results of operations in the future are dependent on management's ability to
increase revenues and reduce both direct costs of services and general and
administrative costs. While there can be no assurance that such efforts will be
successful, management believes that opportunities exist to increase revenues
and reduce costs in areas that will not adversely effect the operations of the
Company.
FINANCIAL CONDITION:
Liquidity and Capital Resources:
At July 31, 1996, the Company had cash of $1,524,000 and working capital
deficiency of approximately $1,274,000. At October 31, 1995, the Company's cash
balance was $536,000 and it had a working capital deficiency of approximately
$2,910,000. The improvement in both measures of liquidity was due to the receipt
of approximately $3,500,000 from CW Ventures and BCBSNJ pursuant to the
transactions resulting in the change of
15
<PAGE> 16
CAREADVANTAGE, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
control of the Company and acquisition of CHCM. See Notes to Financial
Statements - Change in Control and Acquisition of CHCM".
Since the Company's inception, the Company's operating activities have not
generated sufficient cash to fund its operations; as a result, the Company has
relied on the sales of capital stock , capital contributions and guarantees by
thirds parties of debt to fund its operating activities and capital
expenditures. During the second quarter of the current fiscal year, the Company
secured equity financing from the CW Group (see "Notes to Financial Statement -
Change in Control"). The CW Group is a specialized venture capital organization
whose focus is on health care related industries. Management views positively
the addition of both capital and expertise from the CW Group. The CW Group's
representatives on the Board of Directors of the Company have assisted
management over the past several months with strategy. And while the Company's
current level of liquidity may not be sufficient in the future to accommodate
the Company's growth plans, management intends to secure appropriate capital to
accomplish its objectives. There is no assurance, however, that such financing
will be received on a timely basis or on acceptable terms to the Company. See
"Financing" below.
Financing:
Amounts payable pursuant to long-term financing arrangements as of July 31, 1996
were approximately $7,800,000. A substantial portion ($5,600,000) of such debt
arose in connection with the transactions resulting in the change of control of
the Company and acquisition of CHCM (see Notes to Financial Statements Change in
Control and Acquisition of CHCM") and consists of a $2,000,000 8% Exchangeable
Note maturing on June 30, 1998 issued to CW Ventures by CAHS and a $3,600,000 8%
Exchangeable Note maturing June 30, 1998 issued to a wholly-owned subsidiary of
BCBSNJ by CAHS. It is expected that both notes will be exchanged into shares of
CAI common stock upon amendment to the Company's Certificate of Incorporation,
which will among other things, authorize a sufficient number of additional
shares of common stock to accommodate any such exchange.
The balance of the debt consists primarily of capital lease obligations pursuant
to a Master Lease Agreement with IBM Credit Corporation for the financing of
computer and telephone equipment, installation, software and related system
integration expenses. The term of the Master Lease is four years and bears
interest at 11.39% per annum. This Master Lease arrangement is guaranteed by
BCBSNJ.
16
<PAGE> 17
CAREADVANTAGE, INC.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is a defendant in certain actions arising in the normal
course of business. In the opinion of management, the ultimate
disposition of these actions is not expected to have a material effect
on the financial condition or results of operations of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Pursuant to a Written Consent of Stockholders in Lieu of Meeting dated August
23, 1996 of the Company by stockholders holding a majority of the issued and
outstanding shares of common stock of the Company, the following actions taken
by the Company's Board of Directors on June 6, 1996 and July 24, 1996 were
authorized, adopted, ratified and confirmed by the Majority Stockholders:
(1) The filing of an amendment to the Company's Restated Certificate of
Incorporation (i) to effect a one-for-six reverse split (the "Reverse
Split") of the outstanding shares of the common stock, $0.001 par value
per share of the Company, (ii) to reduce the Company's authorized
number of shares of Common Stock to 90,000,000 shares and (iii) to
create a new class of "blank check" preferred stock, $0.10 par value
per share (the "Preferred Stock"), consisting of 10,000,000 shares; and
(2) The 1996 Stock Option Plan, as amended, and the 1996 Director Stock
Option Plan, as amended (collectively, the "Stock Option Plans").
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits - None
Reports on Form 8-K - The Registrant filed a Current Report on Form
8-K, dated June 6, 1996.
17
<PAGE> 18
CAREADVANTAGE, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CareAdvantage, Inc.
------------------------------------------
(Registrant)
September 18, 1996 /s/ Richard J. Strobel
------------------------------------------
Richard J. Strobel
Vice President and Chief Financial Officer
18
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE NINE MONTHS ENDED JULY 31,
1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM 10-QSB.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> OCT-31-1996
<PERIOD-START> NOV-01-1995
<PERIOD-END> JUL-31-1996
<CASH> 1,524,438
<SECURITIES> 0
<RECEIVABLES> 2,492,897
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 4,118,268
<PP&E> 1,713,459
<DEPRECIATION> 0
<TOTAL-ASSETS> 10,674,092
<CURRENT-LIABILITIES> 5,392,472
<BONDS> 7,320,310
0
0
<COMMON> 65,149
<OTHER-SE> (2,103,839)
<TOTAL-LIABILITY-AND-EQUITY> 10,674,092
<SALES> 0
<TOTAL-REVENUES> 9,777,839
<CGS> 0
<TOTAL-COSTS> 6,696,035
<OTHER-EXPENSES> 5,129,211
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 351,669
<INCOME-PRETAX> (2,399,076)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,399,076)
<EPS-PRIMARY> $0.04
<EPS-DILUTED> $0.04
</TABLE>
