<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED OCTOBER 31, 1996
COMMISSION FILE NUMBER 0-26168
CAREADVANTAGE, INC.
(NAME OF BUSINESS)
DELAWARE 52-1849794
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) identification no.)
485-C ROUTE 1 SOUTH, ISELIN, NEW JERSEY 08830
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (908) 602-7000
Securities registered pursuant to Section 12 (b) of the Exchange Act of 1934:
Title of class Name of each exchange on which registered
None
Securities registered pursuant to Section 12 (g) of the Act:
Common stock $.001 Par value
(Title of Class)
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
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to item 405
of Regulation s-b is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this form 10-KSB. / /
The Registrant's revenues for its most recent fiscal year were $11,792,157
$2,501,873
Aggregate market value of the voting stock held by non-affiliates of the
registrant as of January 29, 1997 (assuming solely for purposes of this
calculation that all directors and executive officers of the Registrant are
affiliates).
24,233,327
Number of shares of common stock outstanding as of January 29, 1997
Transitional Small Business Disclosure Format Yes x No
--- ---
PORTIONS OF THE FOLLOWING DOCUMENTS HAVE BEEN INCORPORATED BY REFERENCE
INTO THIS ANNUAL REPORT ON FORM 10-KSB: NONE
<PAGE> 2
PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
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"), is in the business of
providing health care cost containment services designed to enable health care
insurers and other health service organizations to reduce the costs of medical
services provided to their subscribers. The services provided include
utilization review in medical/surgical cases where pre-authorization is required
for hospitalization and for certain in-patient and out-patient procedures, case
management and disease management. The Company's services have been principally
provided to the statewide Blue Cross/Blue Shield health service organizations of
Rhode Island, Maine, Vermont, Delaware and New Jersey.
CAI was incorporated in August 1994 as a wholly-owned subsidiary of
Primedex Health Systems, Inc., a publicly traded New York corporation ("PMDX").
During the fiscal year ended October 31, 1994, the Company recruited most of the
members of its former management team and began to put in place the
infrastructure necessary to execute its growth and acquisition strategies. No
revenues were realized from the Company's inception through October 31, 1994, as
its principal operating activities were those of a development stage company.
Effective November 1, 1994, the beginning of its 1995 fiscal year, the Company
commenced principal operations and began realizing revenues from certain interim
and long-term service agreements. In December 1993, the Company acquired CAHS
(under its prior corporate name, Advantage Health Systems, Inc.). On June 12,
1995, a stock dividend of all of the issued and outstanding shares of common
stock of the Company was declared effective by PMDX. As a result, the Company
commenced trading as a publicly traded company. Through October 31, 1996, the
Company had a cumulative deficit of $21,997,583.
From its inception, through October 31, 1995, CAI relied on PMDX to
provide the bulk of its working capital. In addition to providing $6,000,000 for
the acquisition of CAHS, PMDX made a total of $9,700,059 in working capital
advances to CAI (the last such advance being made in July 1995). Pursuant to a
revised separation agreement between CAI and PMDX dated April 20, 1995, PMDX
agreed to capitalize all such advances in connection with CAI's separation from
PMDX.
In February 1996, the Company entered into a series of transactions
resulting in cash receipts of approximately $3,000,000 and a long-term service
agreement with Blue Cross and Blue Shield of New Jersey, Inc., ("BCBSNJ"), which
provided for the receipt of an additional $10,000,000 over a twelve (12) 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 possible
that up to $2,400,000 will have to be returned to BCBSNJ during calendar year
1997. See "Change of Control" below.
The Company's executive offices are located at 485-C Route 1 South,
Metropolitan Corporate Plaza, Iselin, New Jersey 08830 and its telephone number
is (908) 602-7000.
2
<PAGE> 3
RECENT EVENTS
Change in Control:
On February 22, 1996, the Company completed a series of transactions
with CW Ventures II, L.P. ("CW Ventures") and with BCBSNJ, which resulted in
both CW Ventures and BCBSNJ controlling the Company pursuant to a Stockholders'
Agreement entered into on such same date. The transactions included the sale to
CW Ventures on February 22, 1996 for $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 cancellation of a bridge note issued to CW Ventures on February
6, 1996 pursuant to a $150,000 loan extended by CW Ventures to the Company (the
"Bridge Financing"); of (i) 3,903,201 shares of the Company's common stock at a
purchase price of $0.2562 per share (after adjustment for the "one (1) for six
(6)" reverse stock split of the Company's outstanding common stock as discussed
below) for an aggregate of $1,000,000; and (ii) a $2,000,000 principal amount 8%
Exchangeable Note maturing on June 30, 1998 (the "CW Note") issued by CAHS . The
CW Note, which is guaranteed by the Company and CHCM and which is secured by
substantially all of the assets of the Company and its subsidiaries, was
originally exchangeable into that number of shares of the Company's common
stock as would equal approximately 23 1/3% of the outstanding shares of the
Company's common stock on a fully diluted basis as of February 22, 1996 so that
the 3,903,201 shares issued to CW Ventures together with the shares issuable
upon the exchange of the CW Note would comprise 35% of the outstanding shares
of the Company's common stock on a fully diluted basis as of February 22, 1996.
In addition, in connection with the Bridge Financing, the Company issued to CW
Ventures for nominal consideration five-year warrants (the "CS Warrants") to
purchase 166,667 shares of the Company's common stock at an exercise price
equal to $0.96 per share (after adjustment for the "one (1) for six (6)"
reverse stock split of the Company's outstanding common stock).
Concurrently with the February 22, 1996 closing of the transaction
with CW Ventures, CAHS purchased all of the outstanding capital stock of CHCM
from a wholly-owned BCBSNJ subsidiary, Enterprise Holding Company, Inc. ("EHC").
Although this acquisition 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 CHCM. The CHCM stock was acquired in exchange
for CAHS' $3,600,000 principal amount 8% Exchangeable Note maturing on June 30,
1998 (the "BCBSNJ Note") guaranteed by the Company and CHCM and secured by
substantially all of the assets of the Company and its subsidiaries. The
transaction was accounted for as a purchase of CHCM for an amount originally
approximating $3,427,000, plus assumed liabilities of approximately $360,000
and purchase costs of $64,000 and was subsequently adjusted as discussed below.
The excess of the purchase price over the fair value of CHCM's tangible assets
consisting of cash of approximately $848,000, and fixed assets, with a fair
value of approximately $27,000, was attributed to the value of the service
contract with BCBSNJ.
3
<PAGE> 4
As a result of current management's recent determination that the
Company's existing obligations under the Services Agreement between CHCM and
BCBSNJ (as hereinafter defined) could not be performed on a profitable basis,
the Company took a charge of approximately $1,173,000 in the fourth quarter for
the write-off of goodwill that arose in connection with the acquisition of CHCM
applicable to the Service Agreement with BCBSNJ. See "Notes to Financial
Statement - Write-down of intangible assets".
The BCBSNJ Note was exchangeable into that number of shares of the
Company's common stock as would equal approximately 40% of the outstanding
shares on a fully diluted basis as of February 22, 1996. On September 20, 1996,
the Company received notice that EHC assigned the BCBSNJ Note and all of its
rights and obligations thereunder as well as under the other transaction
documents entered into on February 22, 1996 with the Company, CAHS and CHCM, to
EHC's parent corporation, BCBSNJ.
Pursuant to the terms of the CW Note and the BCBSNJ Note, in the
event that the Company failed to realize at least $15 million in net revenues
for its fiscal year ending October 31, 1996 or failed to realize at least $1
million in adjusted earnings before income tax ("EBIT") in such period (with
respect to the BCBSNJ Note) or at least $2 million in EBIT (with respect to the
CW Note), it will be obligated to issue additional shares of the Company's
common stock to each of BCBSNJ (as assignee of EHC) and CW Ventures. Based upon
results of the Company's fiscal year ended October 31, 1996, the Company has
failed to realize at least $1 million in EBIT for such period which has resulted
in an increase in BCBSNJ's equity from 40% to 45% on a fully diluted basis as at
February 22, 1996. Similarly, the Company has failed to realize at least $2
million in EBIT for such period which has resulted in an increase in CW
Ventures' equity from 35% to 45% on a fully diluted basis as at February 22,
1996. In connection with this required issuance of additional stock, the Company
adjusted its original recording of the February 22, 1996 transactions and valued
the CHCM purchase at $3,000,000 based on the value of the 45% of the Company's
common stock ultimately issuable to BCBSNJ in consideration for CHCM. The
$3,000,000 value was determined based upon the cash paid by CW Ventures for its
right to receive 45% of the Company's common stock.
The Company, BCBSNJ (as assignee of EHC) and CW Ventures are parties
to a stockholders agreement dated February 22, 1996 (the "Stockholders'
Agreement") whereby each of BCBSNJ and CW Ventures have agreed to vote their
shares in the Company with respect to the election of the Company's Board of
Directors for: (i) two designees of CW Ventures; (ii) two designees of BCBSNJ;
(iii) two members of the Company's management acceptable to CW Ventures and
BCBSNJ; and (iv) one non-employee outside director acceptable to CW Ventures and
BCBSNJ. There is currently one (1) vacancy on the Board of Directors of the
Company, which vacancy is one of the management directorships. The Stockholders'
Agreement prevents the Company from taking certain material actions without
BCBSNJ's and/or CW Ventures' or their designated directors' consent.
At the closing of the February 22, 1996 transaction among the
Company, CAHS, CHCM and BCBSNJ, CHCM, as a wholly-owned subsidiary of the
Company, executed an approximately seven-
4
<PAGE> 5
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 (a portion of which is subject to recoupment--see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Financial Condition") 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.
Written Consent of Majority Stockholders:
Since the Company did not have a sufficient number of authorized but
unissued shares of common stock to permit the issuance of the required number of
shares upon exchange of the CW Note and the BCBSNJ Note, pursuant to action
taken at the June 6, 1996 and July 24, 1996 Board of Directors meetings of the
Company, the Company submitted to its stockholders: (i) a proposed amendment to
its certificate of incorporation changing its authorized shares of common stock
to 90,000,000 shares and creating a new class of "blank check" preferred stock,
$.10 par value, consisting of 10,000,000 shares and effecting a "one (1) for six
(6)" reverse stock split of its outstanding common stock (the "Charter
Amendment"); and (ii) the 1996 Stock Option Plan and the 1996 Director Stock
Option Plan. Pursuant to a written consent of stockholders in lieu of a meeting
dated August 23, 1996 taken by the stockholders holding a majority of the issued
and outstanding shares of common stock of the Company (the "Majority
Stockholders"), the Majority Stockholders approved, inter alia, the Charter
Amendment which became effective on September 27, 1996 upon its filing with the
Delaware Secretary of State, as well as the 1996 Stock Option Plan and the 1996
Director Stock Option Plan.
Pursuant to the terms of the BCBSNJ Note, the BCBSNJ Note was
automatically exchanged on September 30, 1996 into 13,375,083 (post stock-split
shares of common stock) resulting in the cancellation of the BCBSNJ Note and the
termination of: (i) the guarantees granted by the Company and CHCM in favor of
BCBSNJ (as assigned to it by EHC); and (ii) the liens on substantially all of
the assets of the Company and its subsidiaries in favor of BCBSNJ (as assignee
of EHC).
INDUSTRY OVERVIEW: HEALTH CARE REFORM, EXPENDITURES AND MANAGED CARE
In recent years, there have been substantial efforts to reform
national health care due to the ever-increasing cost of medical care in the
United States. Employer groups, increasingly concerned about the effect on their
"bottom line" of the cost of providing health insurance to their employees, are
no longer content to remain with a traditional insurance company which is not
cost effective in its management of health care coverage. Employer groups are
seeking the implementation of managed care concepts to improve their
profitability, while at the same time providing to their employees the same or
improved quality and availability of care. The insurance companies' clients are
demanding that their insurance companies begin focusing on disease management,
patient education, health risk assessment and wellness programs. Accordingly,
employees have become more aggressive in evaluating and selecting an insurer as
well as monitoring such insurer's
5
<PAGE> 6
performance. This has consequently created intense competition among traditional
indemnity insurers.
Nationally, market driven forces are causing insurance companies to
ally themselves with health care providers efficient in patient management. The
medical industry has shifted to care management initiatives to decrease
unnecessary variations in patient care and physician practices.
In order to remain viable in this competitive marketplace and
attract employer groups, traditional indemnity insurance companies have begun to
re-engineer to a managed care approach with an outcomes versus claims management
focus. They have done so by establishing cooperative relationships with
providers, who must become collaborators, not adversaries.
Management believes that while some insurers will try to accomplish
the transition without outside assistance, a majority will seek assistance from
firms with "managed care expertise," such as the Company. With its proprietary
criteria and protocols and physician employees and advisors representing the
full range of subspecialty areas within the health care delivery system, as well
as key employees with backgrounds in health care cost containment, management
believes the Company provides state of the art knowledge and experience in
health care cost containment services.
SERVICES AND PRODUCTS
The Company's comprehensive health care management programs provide
health care organizations with the systems, strategies, and mechanisms needed to
manage appropriate and cost effective health care services. These health care
management services adhere to Utilization Review Accreditation Commission, Inc.
("URAC") standards.
The cost containment services offered by the Company are
comprehensive and can be customized to meet the needs of its clients. These
services may be purchased separately or configured in a variety of resource sets
designed to interface with the client's systems. Management believes the
resources necessary for a successful health delivery system are clinical health
care management, information technologies and member or subscriber services. The
Company possesses substantial resources in these core areas and makes them
available to its clients in specific packages.
Management believes that its physician developed and driven criteria
and medical protocols ("critical pathways"), as well as its health care
management services, improve how attending physicians manage health care. The
Company's personnel work together on-site with clients and potential clients in
order to structure or re-engineer such clients' utilization review programs and
to implement various disease management strategies.
UTILIZATION REVIEW - Utilization review examines the appropriateness
of a particular medical event, such as a hospital admission, an additional day
of in-patient care, or a particular procedure. The Company provides clinical and
operational utilization review services employing its physician
6
<PAGE> 7
driven proprietary criteria and protocols. The Company actively disseminates its
criteria and medical protocols to local physicians and holds meetings with each
of its specialty physician advisors to inform them of their significant roles in
the utilization management process.
In addition, while many utilization management firms rely on calls
from nurse reviewers for the majority of communications with physicians, the
Company believes that clinical peers should discuss cases with attending
physicians. Accordingly, the Company uses nurse reviewers primarily to screen
cases. Staff medical directors and physician advisors of matched specialties
review questionable cases with attending physicians. The combination of academic
credentials, managed care experience, and on-site presence enables these
advisors to actively engage local specialists in a meaningful discussion on
questionable practices, thereby having a greater impact on cost containment.
Overall, the Company transforms the client's utilization management
program from an administrative exercise to a program that uses review criteria
and highly credible physician advisors to actively engage attending physicians
in treatment decisions. Management believes that these strengthened utilization
management methods can enable its clients to achieve utilization performance
approaching that of well managed health maintenance organizations.
CASE MANAGEMENT - Major case management services provide an
alternative plan which enhances or maintains the patient's quality of care but
reduces the expected expenses for the patient's treatment. Early identification
of patients severely compromised by an acute injury or episode of illness is the
key to successful implementation of major case management services. Patient
evaluation through pre-admission and concurrent review provide the foundation
for effective discharge planning and continuity of care. The Company provides a
comprehensive case management program which facilitates significant cost
containment and contributes to greater flexibility in the health care setting
for the patient.
Out-patient care coordination allows patients to access a variety of
health care services, such as home health care, rehabilitation and infusion
therapy services. The Company's out-patient care coordination services provide
an effective mechanism for cost containment while safeguarding the delivery of
quality health care services.
Case management also focuses on how the attending physician is
managing the care of patients with chronic diseases on an on-going basis. Health
risk assessment processes, designed and implemented by the Company, identify
high cost/high risk patients and enroll them in case management programs.
DISEASE MANAGEMENT - Management believes that specialists managing
patients with chronic disease should follow credible patient management
protocols, or "critical pathways", that reflect expert consensus on the most
appropriate treatment alternatives for patients at different disease stages and
with complicating factors, and that decisions to deviate from such guidelines
should be reviewed by an independent peer specialist.
7
<PAGE> 8
Implementation of a disease management program for a client begins
with disseminating care management "critical pathways" to, and then meeting
with, local specialists. The Company provides chronic disease case management
through a review process whereby the progress and treatment plans of a patient
are reviewed by the Company's specific disease specialists or advisors with the
patient's attending specialist. This case management ensures that any decisions
made by the attending physician to deviate from the critical pathway guidelines
are supported by sound clinical rationale.
CONTINUING PRODUCT DEVELOPMENT - The Company's management recognizes
that the health care market is continually changing and expanding, in part, due
to changes in medical technology and new medical information, as well as
improvements in information technology and telecommunication systems. In
response to the market and to the specific needs of our clients, the Company
continues to refine, improve and expand its existing services and products, as
well as to develop new services and products.
Some of the Company's current initiatives include the expansion of
its chronic disease case management services, on-going refinement of its
proprietary criteria and protocols, and development of specialty provider
networks. The Company also continues to jointly develop with a systems
subcontractor and software developer a new generation of customer service,
utilization review and medical/surgical case management software. Furthermore,
the Company's management believes that member/subscriber advisory services,
which focus on patient knowledge and participation in their own health care, are
products that will contribute to the more efficient and cost effective use of
the options available in the health care system. With respect thereto, the
Company hopes to develop Patient Education and Management Programs.
OPERATIONS
The Company utilizes a multi-disciplinary team approach to ensure
effective medical cost management services. The Company, through its employees
and subcontracting physician advisors, reviews, evaluates and monitors the
medical necessity and appropriateness of the medical services prescribed for
members in its clients' health plans. Generally, the pre-admission review
process for elective and non-elective admission is initiated telephonically by
the member or provider. During this phase, clinical review staff evaluate the
need for, and/or initiate when appropriate, pre-certification, second surgical
opinion, insurance verification, pre-admission testing, pre-operative education,
pre-operative anesthesia evaluation, and continuing care planning. Additionally,
pre-admission review determines if the service requested is medically necessary
by utilizing review criteria, appropriate alternatives for providing service,
length of stay and the need for case management intervention.
During the pre-admission and concurrent review processes, patients
are evaluated by nurse case managers and physician employees or advisors to
identify anticipated needs for discharge. Patients with high cost diagnoses or
who require interdisciplinary problem solving to expedite discharge are
identified as candidates for major case management services. The Company's
clinical
8
<PAGE> 9
staff also plans for and coordinates the out-patient health care services
necessary for a timely discharge, such as home health care, rehabilitation and
infusion therapy services, thereby insuring the delivery of quality care while
containing costs.
The Company currently maintains a contracted network of 103
independent, multi-specialty physicians advisors, most of whom are active in
managed care practices and some of whom are affiliated with major teaching
hospitals. Several of these physicians are currently spending one-to-two days
per week on-site with and on behalf of the Company's clients, discussing
questionable cases with local specialists and leading the meetings with groups
of local specialists to disseminate and implement the care management "critical
pathways" necessary for effective case management. The Company also deploys its
nurse reviewers for telephonic review as well as in hospitals to conduct more
extensive on-site reviews of patients, whenever possible. On-site review is
performed for concurrent review and case management activities. These on-site
reviews also include collaboration with the Company's local and national board
certified physician employees and advisors. By reviewing on-site, these nurses
are in a better position to determine the need for continued stay, and to make
necessary arrangements for out-patient care.
For its services, the Company is compensated either: (i) on a
capitated (fixed-fee) per subscriber basis; (ii) on a performance-based method
whereby the Company shares in the realized cost savings per member as measured
against certain defined benchmark; (iii) on the basis of a combination of both
capitation and performance-based fees; and (iv) on a fee-for-service basis.
Accordingly, the Company has adopted the following accounting policies for
revenue recognition under each contract category:
(a) Revenue under the fixed-fee arrangements is recognized as
the services are provided and the related costs of services are
incurred. Although the fixed fee arrangements are not subject to
any fee adjustment based upon the attainment of target utilization
levels, such contracts may still expose the Company to potential
operating losses, particularly in the inception stages thereof.
(b) Revenue under the partial fixed fee/incentive agreements is
initially recognized for the monthly fixed fee component only as
services are provided and related costs of services are incurred.
Incentive (or reductions) compensation based upon performance are
recorded when such amounts can reasonably be determined.
(c) Revenue under full risk compensation arrangements is recorded based
upon the periodic monthly or quarterly interim payments, adjusted on
a periodic basis to cost and utilization data supplied by the client
to assess performances against established targets. Incentive (or
reductions) compensation based upon performance are recorded when
such amounts can reasonably be determined.
(d) Revenue under fee-for-service arrangements is recorded for special
projects or the review of cases assigned to the Company on a per
case or hourly basis.
9
<PAGE> 10
Contracts that provide for performance-based revenues often require
claims data that is supplied by the Company's customers to calculate the
achievement of goals for each period. Since claims data typically lag 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.
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
contract 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 is dependent upon its ability to
enter into additional contracts with new customers and/or expand the services
provided to existing customers.
CUSTOMERS AND MARKETING
The Company currently provides its services to five statewide Blue
Cross and Blue Shield ("BCBS") organizations in the states of Delaware, Maine,
Rhode Island, Vermont and New Jersey pursuant to one or a combination of the
compensation arrangements described above. The Company is dependant on at least
two of such customers for a substantial portion of its revenues, gross margins
and cash flow.
Effective November 1, 1996, a contract with one of the Company's
major customers was revised from fixed-fee basis to a fee-for-service basis. As
a result, the Company anticipates significantly reduced revenues and gross
margins from this customer during fiscal 1997. Based upon the terms and expected
efforts to be performed under the revised contract during fiscal 1997, the
Company anticipates revenues and gross margins of approximately $180,000 and
$50,000, respectively, compared to revenues and gross margins of $1,960,000 and
$1,137,000 in fiscal 1996.
On February 3, 1997, the Company received notice from one of its
customers, Blue Cross and Blue Shield of Delaware, Inc. ("BCBSDE"), that it
intends to cancel its consulting agreement with the Company effective March 1,
1997. The Company is still engaged in discussions with such customer and hopes
to enter into an agreement on terms acceptable to both parties; however, there
is no assurance that such an agreement can be reach. Revenues and gross
margins relating to BCBSDE for fiscal 1996 were $426,000 and $383,000,
respectively. No revenues were recognized relating to BCBSDE prior to the 1996
fiscal year.
The Company is currently in negotiation with two other customers.
There is no assurance that the revised terms of any revised contract will be on
terms more favorable than the terms of the existing contracts.
The Company intends to expand the scope of its market to other
organized health care delivery systems (such as preferred-provider and
physician-hospital organizations), self-insured employers, union trust funds,
health care management service organizations and administrative service
organizations (such as third-party insurance administrators).
Typically, the Company will enter into a service agreement with a
client pursuant to which the Company provides its utilization review and case
management services. The Company's services for an insurer generally cover all
insured under an indemnity insurance plan and/or members of a health maintenance
organization plan affiliated with the insurer. Typically, when the Company
contracts to provide its services to an insurer, the insurer's account
executives ordinarily plan to offer
10
<PAGE> 11
the Company's services to its group policyholders and those groups covered under
administrative-services-only (or "ASO") arrangements. The Company presently
enters into these service agreements with insurers with compensation based upon
either a capitated rate per subscriber or with fees and incentives based on the
achievement of certain health care cost and/or utilization targets. The latter
fee arrangement provides the opportunity for substantially increased earnings,
but also carries the risk of loss of revenues if the targets are not achieved.
COMPETITION
The Company faces intense competition in a highly fragmented market
of managed care services firms. Several managed care service firms currently
provide and aggressively market services which are in some respects similar to
the Company services. Management is aware of a significant number of independent
utilization review firms currently marketing utilization review services
directly to employers, small insurers, and third party administrators. In
addition to other utilization review and medical management companies, the
Company competes with insurance companies, third party health plan
administrators, health maintenance organizations and preferred provider
organizations which have developed in-house staffs to provide such services.
There are a variety of competitors offering component services such as physician
reviewers and demand management/patient advisory products. There are also a
number of organizations developing a variety of approaches to case and disease
management. Many of the Company's competitors have substantially greater
financial resources and employ substantially greater number of personnel.
The Company intends to compete on the basis of the quality of its
clinical staff and high degree of specialty-trained physician involvement, its
ability to leverage its products to achieve higher value at lower cost than
companies offering component services, its ability to develop tailored programs
for large clients, its willingness to accept risk in methods of compensation
based on results, its computer-based clinical decision making and information
systems and its current experience in developing outsourcing arrangements
acceptable to Blue Cross and Blue Shield Plans.
GOVERNMENT REGULATION
Health Care Regulation - Government regulation of health care cost
containment services, such as those provided by the Company, is a changing area
of law that varies from jurisdiction to jurisdiction and generally gives
responsible administrative agencies broad discretion. The Company is subject to
extensive and frequently changing federal, state and local laws and regulations
concerning company licensure, conduct of operations, acquisitions of businesses
operating within its industry, the employment of physicians and other licensed
professionals by business corporations and the reimbursement for services.
Regulatory compliance could have an adverse effect on the Company's present
business and future growth by restricting or limiting the manner in which it can
acquire businesses, market its services, and contract for services with other
health care providers by limiting or denying licensure or by limiting its
reimbursement for services provided.
11
<PAGE> 12
It should be noted that in providing utilization review and case
management services, the Company makes recommendations regarding what is
considered appropriate medical care based upon professional judgments and
established protocols. However, the ultimate responsibility for all health care
decisions is with the health care provider. Furthermore, the Company is not an
insurer, and the ultimate responsibility for the payment of medical claims is
with the insurer. Although the Company is not a health care provider, it could
have potential liability for adverse medical consequences. The Company could
also become subject to claims based upon the denial of health care services and
claims such as malpractice arising from the acts or omissions of health care
professionals (See "Legal Proceedings").
In order to receive reimbursement, the Company's operations in a
particular state are typically subject to certification by the appropriate state
agency. The Company has received such certification where required. In addition,
various state and federal laws regulate the relationships between providers of
health care services and physicians and other clinicians, including employment
or service contracts, investment relationships and referrals for certain
designated health services. These laws include the fraud and abuse provisions of
the Medicare or Medicaid statutes, which prohibit the solicitation, payment,
receipt or offering of any direct or indirect remuneration for the referral of
Medicare or Medicaid patients or for the ordering or providing of Medicare or
Medicaid covered services, items or equipment. Violations of these provisions
may result in civil or criminal penalties for individuals or entities including
exclusion from participation in the Medicare and Medicaid programs. Several
states have adopted similar laws that cover patients in private programs as well
as government programs. Because the anti-fraud and abuse laws have been broadly
interpreted, they may limit the manner in which the Company can acquire
businesses and market its services to, and contract for services with, other
health care providers.
The Company's management believes that its present operations are in
compliance with all applicable laws and regulations and that it maintains
sufficient comprehensive general liability and professional liability insurance
coverage to mitigate claims to which the Company may be subject in the future.
However, the Company is unable to predict what, if any, government regulations
affecting its business may be enacted in the future or how existing or future
regulations may be interpreted. To maintain future compliance, it may be
necessary for the Company to modify its services, products, structure or
marketing methods. This could increase the cost of compliance or otherwise
adversely affect the Company's operations, products, profitability or business
prospects.
Proposed Health Care Reform - If proposed federal and state health
care reform initiatives are enacted, the payments for and the availability of
health care services will likely be affected. Aspects of certain of these
proposals, such as reductions in Medicare and Medicaid payments, could adversely
affect the Company. Other aspects, such as universal health insurance coverage
and coverage of certain previously uncovered services, could have a positive
impact on the Company's business. The Company is unable to predict what impact,
if any, enacted health care reform legislation may have on its current and
future business, and no assurance can be given that any such reforms will not
have an adverse impact on its business operations or potential profitability.
12
<PAGE> 13
EMPLOYEES
In addition to its current network of 103 contracted physician
advisors, the Company employed 11 full-time physicians as of December 13, 1996.
Three of these physicians serve as officers of the Company or its subsidiaries
and the remaining physicians serve as on-site Medical Directors and Associate
Medical Directors in the states where the Company provides services.
At December 13, 1996, in addition to its physicians, the Company
employed a total of 108 full-time employees. Of this total, ninety-three (93)
are engaged in clinical activities including on-site nurse reviewers and
contract administrators. The fifteen (15) remaining employees include two
executives, administrative support, finance, marketing, information systems and
human resources.
ITEM 2. DESCRIPTION OF PROPERTIES
The Company's executive offices and operations, comprising
approximately 28,000 square feet of office space, are located in the
Metropolitan Corporate Plaza in Iselin, New Jersey. The Company has executed a
six-year lease for this facility commencing June 15, 1995, which provides for an
annual base rent of approximately $445,000 with annual escalations based on
increases in real estate taxes and operating expenses. The Company believes its
present facilities will be adequate for its short term needs and moderate
expansion.
The Company also maintains a rent-free operations office in
approximately 600 square feet of space in Providence, Rhode Island under an
arrangement with BCBS of Rhode Island, and approximately 300 square feet of
space in the BCBS of Maine Westbrook facility.
Substantially all of the equipment used in the Company's operations
in New Jersey is pledged as collateral under a capital lease agreement.
ITEM 3. LEGAL PROCEEDINGS
Potential Uninsured Exposure to Litigation:
On or about March 22, 1996, an action entitled Francis X. Bodino v.
BCBSNJ and CHCM (the "Bodino Action") was filed in the Law Division of the
Superior Court of New Jersey in Hudson County. The complaint alleges
misrepresentations with respect to the type and amount of coverage afforded by
Mr. Bodino's policy with BCBSNJ, specifically with respect to coverage for heart
transplantation. The complaint also alleges that representations made on behalf
of BCBSNJ by an employee of CHCM led Mr. Bodino's surgeon to believe that
contractually excluded heart transplant coverage was available. The complaint
demands a variety of money damages, as well as punitive damages, against both
defendants. The complaint also contains a claim for treble damages and counsel
fees under the New Jersey Consumer Fraud Act. BCBSNJ is presently defending the
Bodino Action on behalf of itself and CHCM, has denied liability in all respects
and has specifically denied that Mr. Bodino's policy covered heart
transplantation or that any misrepresentations or fraud
13
<PAGE> 14
occurred. BCBSNJ and CHCM have filed a motion for summary judgment which remains
pending as to all claims and is subject to further discovery. The Company, based
upon the advice of counsel, at present, has insufficient information to evaluate
CHCM's potential exposure, if any, in this litigation.
At the time of the events underlying the Bodino Action, CHCM was a
subsidiary of BCBSNJ and had been engaged by the Company, through CAHS, to
provide certain staff and assistance to CAHS in support of CAHS's obligation to
provide specified services for BCBSNJ, all in accordance with the terms of an
Interim Services Agreement dated as of April 1, 1995 by and among BCBSNJ, CHCM,
the Company and CAHS (the "Interim Services Agreement"). By letter dated
February 15, 1996, counsel for Mr. Bodino gave written notice to CHCM contesting
the denial of coverage and threatening litigation against CHCM and BCBSNJ. The
Company and CAHS purchased CHCM on February 22, 1996. (See "Change in Control"
above.) The Company did not maintain insurance coverage which would cover claims
against BCBSNJ or CHCM arising from events occurring prior to February 22, 1996,
which might constitute a breach under the Interim Services Agreement. The
Company has been informed by BCBSNJ that BCBSNJ has notified its carrier of the
claim and the carrier has advised BCBSNJ that it has not yet determined whether
and to what extent coverage may exist. The Company, based upon the advice of
counsel, is not presently able to determine whether the Bodino Action might
result in any loss to the Company or CHCM and, if so, whether any such loss
would be material.
Termination of Employment:
A claim has been asserted by a former Medical Director of CAHS. The
former Medical Director was employed from September 1995 through May 1996 when
he voluntarily resigned, allegedly due to a change of control of the Company in
February 1996. He contends that he is entitled to: (i) a severance payment equal
to one year's annual base compensation ($190,000); and (ii) vesting in 75,000
qualified stock options at a strike price of $1.25 per share. The former Medical
Director bases his claim on an executed written agreement drafted by a placement
firm, which memorializes some, but not all, of the terms and conditions of his
employment. The Company intends to vigorously contest this matter on the grounds
that the former Medical Director (i) is not entitled to severance; and (ii) has
no entitlement to stock options as the plan was never approved by the
shareholders. The former Medical Director alleges claims of breach of contract
and promissory estoppel; an action has not yet been commenced in any court. The
parties are currently engaged in settlement discussions in an effort to amicably
resolve this matter prior to litigation. At this time, the Company cannot
predict the likelihood of a favorable or unfavorable outcome.
Professional Liability:
In providing utilization review and case management services, the
Company makes recommendations regarding benefit plan coverage based upon
judgments and established protocols as to the appropriateness of the proposed
medical treatment. Consequently, the Company could have potential liability for
adverse medical results. The Company could become subject to claims based
14
<PAGE> 15
upon the denial of health care benefits and claims such as malpractice arising
from the acts or omissions of health care professionals. Although the Company
does not believe that it engages in the practice of medicine or that it delivers
medical services directly, no assurance can be given that the Company will not
be subject to litigation or liability which may adversely affect its financial
condition and operations in a material manner. Although the Company maintains
comprehensive general liability and professional liability insurance coverage,
including coverage for liability in connection with the performance of medical
utilization review services and typically obtains indemnification from its
customers, no assurances can be given that such coverage will be adequate in the
event the Company becomes subject to any of the above described claims.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Pursuant to a Written Consent of Stockholders in Lieu of a Special
Meeting dated August 23, 1996 (the "Written Consent") of the Company a written
consent was executed and delivered to the Company by stockholders holding a
majority of the issued and outstanding shares of common stock of the Company
(the "Majority Stockholders"). Pursuant to the Written Consent, the following
actions taken by the Company's Board of Directors (the "Board") on June 6, 1996
and July 24, 1996 were authorized, adopted, ratified and confirmed by the
Majority Stockholders by a vote of 5,619,868 shares in favor of and 0 shares
against:
(1) The filing of an amendment to the Company's Restated
Certificate of Incorporation (i) to effect a one-for-six
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 , consisting of 10,000,000 shares; and
(2) The 1996 Stock Option Plan, as amended, and the 1996
Director Stock Option Plan, as amended.
No other matters were submitted to a vote of the Company's security
holders during the fourth quarter of the fiscal year ended October 31, 1996.
15
<PAGE> 16
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a) Market Information: Since the Company's effective registration date
of June 12, 1995, the Company's Common Stock has traded in the
over-the-counter market and is currently quoted on the Electronic
Bulletin Board under the symbol CADV. The following table shows the
range of closing bid prices for each quarter of the Company's two
most recent fiscal years. Where applicable, prices have been
adjusted to give effect to a 1-for-6 reverse stock split which was
effective September 30, 1996. The prices reflect inter-dealer
prices, without retail mark-up, mark-down or commission, and may not
represent actual transactions.
<TABLE>
<CAPTION>
1995 1996
------------------- --------------------
QUARTER ENDED HIGH LOW HIGH LOW
---- --- ---- ---
<S> <C> <C> <C> <C>
January 31 N/A N/A $2.52 $0.96
April 30 N/A N/A $2.34 $1.14
July 31 $9.00 $3.30 $1.02 $0.06
October 31 $4.20 $2.70 $1.02 $0.38
</TABLE>
(b) Holders: As of December 10, 1996, there were approximately 2,100
holders of record of the Company's common stock. No shares of the
Company's preferred stock have been issued. The Company believes
that, in addition, there are a number of beneficial owners of the
Company, whose shares are held in "Street Name."
(c) Dividends: During the two most recent years, the Company paid no
cash dividends on its Common Stock. The payment of future dividends
on its Common Stock is subject to the discretion of the Board of
Directors and is dependent on many factors, including the Company's
earnings and capital needs.
ITEM 6. 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. The Company has experienced
significant operating losses on a consolidated basis, and has a working capital
deficit of approximately $4,191,000, a capital deficiency of $1,983,000 and has
accumulated a deficit of $21,698,000 since its inception. In addition the
Company is currently in default of its Services Agreement with BCBSNJ. By
continuing to provide high quality health care cost containment services
to its existing customer base of four BCBS plans, management believes it can
continue to leverage its reputation to other similar customers. This
16
<PAGE> 17
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 will 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, on acceptable
terms to the Company or at all, or that the Company will successfully
renegotiate its contract with BCBSNJ. No adjustments have been made to the
accompanying financial statements to reflect the recoverability or
classification of recorded asset amounts or the classification of liabilities
should the Company be unable to continue as a going concern.
Certain statements in this Form 10-KSB 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"), the Board of
Directors and management have taken steps and expect to take certain additional
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 unique and complementary cost-containment strategies. Management
intends to evaluate each service in light of anticipated changes in the health
care industry, the cost to enter each such service 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 year of approximately $1,083,000
consisting of employment severance costs of $367,000 and direct expenses
related to the change in control and reorganization of $716,000. Future charges
to operations for related costs is possible; however, any such amounts and
timing are not yet determinable.
17
<PAGE> 18
RESULTS OF OPERATIONS
Net revenues:
<TABLE>
<CAPTION>
Year Ended
------------------------------------------------------------------
1996 1995
----------------------------- -----------------------------
Amount Percent Amount Percent
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues from fixed fee arrangements $10,910,988 93% $ 7,009,964 78%
Revenues from performance-based arrangements 355,169 3 1,855,814 21
Consulting revenues 526,000 4 105,189 1
----------- --- ----------- ---
Total revenues $11,792,157 100% $ 8,970,967 100%
=========== === =========== ===
</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 by several months, it is difficult to ensure
a high degree of 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. Failure of any one of these customers to
renew their contracts on reasonable terms 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.
On February 3, 1997, the Company received notice from one of its
customers, Blue Cross and Blue Shield of Delaware, Inc. ("BCBSDE"), that it
intends to cancel its consulting agreement with the company effective March 1,
1997. The Company is still engaged in discussions with such customer and hopes
to enter into an agreement on terms acceptable to both parties; however, there
is no assurance that such an agreement can be reached. Revenues and gross
margins relating to BCBSDE for fiscal 1996 were $426,000 and $383,000,
respectively. No revenues were recognized relating to BCBSDE prior to 1996
fiscal year.
One of these customers with which the Company is negotiating with is
BCBSNJ. The Company is seeking certain modifications to the existing Services
Agreement which will provide the Company with an opportunity to realize
performance-based fees. C W ventures may grant an There is no assurance that
the Company's efforts will be successful.
Net revenues for the years ended October 31, 1996 and October 31,
1995 were $11,792,157 and $8,970,967, respectively. The increase in the current
year was primarily attributable to the securement and service of additional
contracts that were entered into late in or subsequent to the prior fiscal year,
including the contract with BCBSNJ entered into in connection with the
acquisition of CHCM.
The current period was adversely impacted by a reduction in and
inability to recognize revenues as a result of the Company's failure to meet
certain predefined targets with respect to
18
<PAGE> 19
performance-based revenues from two significant customers. The reduction in
performance fees relating to one customer was for the period ended October 1995
which was determined and settled in July 1996 resulting in a
performance-based-fee shortfall of approximately $764,000. The other situation
related to performance-based-fees for a second customer for the six month period
ended June 1996. According to the customer's data, the Company failed to meet
certain targets for this period. Accordingly, no performance fees have been
recognized for the six-month period ended June 30, 1996. The customer and the
Company are currently investigating this data to determine whether such
information, if accurate, is the result of adverse events and circumstances
beyond the Company's control and, as a result, should be excluded from the
measurement of the Company's performance. There is no assurance that any of such
events occurred or that even if they did occur, that the customer will exclude
the effects of such events from the determination of the Company's performance.
Revenues from at-risk performance-based service contracts (through
which the majority of the Company's revenues are typically earned) generally
tend to follow a pattern whereby significant revenues are generated during the
initial term of the contract 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 is
dependent upon its ability to enter into additional contracts with new customers
and/or expand the services provided to existing customers.
Cost of services:
Cost of services for the years ended October 31, 1996 and October
31, 1995 were $9,585,000 and $8,683,000, respectively. The increase in the cost
of services was due to additional costs incurred pursuant to contracts with
customers during the current periods that commenced during the prior year or 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 year ended
October 31, 1996 were $4,487,000 compared to $7,115,000 in the prior fiscal
year. The decrease in the current period was due primarily to decreases in the
personnel costs, professional fees and consulting fees, offset in part, by costs
of $400,000 incurred in connection with the change of control transaction and
increases in facility costs as a result of the Company's relocation to its new
facility in the current period. Selling and marketing costs during the periods
presented were minimal.
While management has taken and intends to take additional steps to
reduce general and administrative costs, any future reductions in costs may be
offset to some extent, by anticipated increases in selling, marketing and
service development costs. There is no assurance, however, that
19
<PAGE> 20
management will be successful in reducing general and administrative costs by
any significant amount.
Depreciation and amortization:
Depreciation and amortization aggregated $1,208,000, of which
$846,000 is included in cost of services in the year ended October 31, 1996.
Depreciation and amortization includes amortization of intangible assets other
than the amount attributed to the Services Agreement of $310,000, amortization
of the amount attributed to the Services Agreement arising in connection with
the acquisition of CHCM of $205,000 and depreciation of property and equipment
of $693,000.
Interest expense:
Net interest expense during the year ended October 31, 1996 of
$582,000 includes interest expense incurred on the CW Note of $110,000 and
BCBSNJ Note of $165,000, which arose in connection with the change in control of
the Company and acquisition of CHCM and a debt discount of $98,000 for the value
of warrants issued in connection with the bridge financing by CW Ventures. See
"Notes to Financial Statements - Change in Control" In addition, approximately
$200,000 was incurred pursuant to capital lease obligations.
The interest expense on the BCBSNJ Note was forgiven and credited to
additional capital in connection with the exchange of the BCBSNJ Note into
common shares of the Company on September 30, 1996. Accordingly, effective
October 1, 1996, interest expense is no longer provided for on the BCBSNJ Note.
Pursuant to the terms of the CW Note issued in connection with the
change in control, interest expense related to the CW Note will also cease and
any accrued interest be forgiven should such debt instrument be exchanged into
shares of Common Stock of the Company.
Write-down of intangible assets:
As a result of current management's recent determination that the
Company's existing obligations under the Services Agreement between CHCM and
BCBSNJ could not be performed on a profitable basis, the Company took a charge
of approximately $1,173,000 in the fourth quarter for the write-down of the
Services Agreement with BCBSNJ. The agreement is currently being renegotiated.
The remaining value of the Services Agreement ($1,100,000) is based on
management's estimate of cash flows from the renegotiated agreement. Based on
management's current estimates, substantially all of such remaining amount will
be amortized in 1997 and 1998.
20
<PAGE> 21
In addition, as a result of management's decision to adopt and
implement a new and more comprehensive clinical related software product, the
Company took a charge of approximately $238,000 in the fourth quarter for the
write-off of software development costs incurred in the prior years in
connection with the modification of the existing clinical software product.
Both charges are reflected in "Write-down of intangible assets" on
the consolidated statement of operations.
Goodwill was recorded in a prior year in conjunction with the
Company's initial acquisition of proposed contract rights to provide utilization
review and case management services, that were at or near closure with three
third-party insurers in 1993. The initial terms of these service contracts were
anticipated to range from five to seven years. The Company initially adopted a
seven-year straight-line amortization method for the goodwill.
During fiscal 1995, in connection with the Company's evaluation of
the possibility of impairment of goodwill on the basis of its recoverability
from projected discounted net cash flows associated with its operations, the
Company's cash flow projections indicated that the Company would not recover the
goodwill attributable to the acquisition of the proposed contract rights.
Accordingly, in fiscal 1995, the Company recorded an impairment charge of
approximately $4,429,000, such amount representing the entire unamortized
balance of the Company's goodwill.
Other costs:
Other costs of $724,000 in the current year represent costs incurred in
connection with the change in control and related reorganization that the
Company does not deem as recurring operating expenses; however, 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 $367,000, professional fees and other costs
related to the change in control of approximately $227,000, loss on disposal of
assets of $130,000. Other costs during the year ended October 31, 1995
represented loss of a deposit of $300,000 on an abandoned acquisition,
separation costs of $640,000 less reimbursement of certain expenses related to
services provided to its customers in the 1994 fiscal year.
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. However, based upon the current level of revenues and
the current level of costs and expense, management does not expect the Company
to be profitable in the foreseeable future.
21
<PAGE> 22
FINANCIAL CONDITION
Liquidity and Capital Resources:
At October 31, 1996, the Company had cash of $1,167,000 and working
capital deficiency of approximately $4,191,000. At October 31, 1995, the
Company's cash balance was $536,000 and had a working capital deficiency of
approximately $2,910,000. The increase in cash was due to the receipt of
approximately $3,000,000 from CW Ventures and BCBSNJ pursuant to the
transactions resulting in the change of control of the Company, as well as the
additional cash received pursuant to the revised Services Agreement with BCBSNJ
in connection with the acquisition of CHCM. (See "Notes to Financial Statements
- - Change in Control".)
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 third parties of debt to fund its operating activities and capital
expenditures. During the second quarter of the 1996 fiscal year, the Company
secured equity and debt financing from the CW Group (see "Notes to Financial
Statement - Change in Control"). CW Ventures is a specialized venture capital
organization whose focus is health care related industries. Management views
positively the addition of both capital and expertise from CW Ventures. CW
Venture'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
October 31, 1996 were approximately $1,500,000 consisting 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. The Company's obligations under this
Master Lease arrangement are guaranteed by BCBSNJ. The other long-term financing
arrangement is the CW Note for $2,000,000. However, BCBSNJ has the right to
terminate the Services Agreement between BCBSNJ and CHCM as a result of defaults
by CHCM of such agreement. Should BCBSNJ terminate the Services Agreement, the
CW Note would become payable upon demand. Accordingly, the CW Note has been
classified as a current obligation on the consolidated balance sheet at October
31, 1996. (See "Notes to Financial Statements - Change in Control".)
22
<PAGE> 23
In addition, the Company has provided for approximately $1,962,000
to be repaid to BCBSNJ in nine equal monthly installments beginning in April
1997. Such amount represents cash received from the customer in excess of
revenues earned from such customer and could increase through the term of the
contract period ended December 31, 1996 to as much as $2,400,000. Neither
obligation bears interest or is secured or collateralized by any assets of the
Company.
In connection with management's decision to adopt and implement a
new and more comprehensive clinical software product, the Company expects to
incur additional software and computer hardware costs during the first and
second quarter of fiscal 1997 of approximately $450,000. Such costs are expected
to be financed in the form of an operating lease with the Company's existing
financing institution and guaranteed by BCBSNJ. There is no assurance that such
financing will be guaranteed by BCBSNJ or without such guarantee, available on
terms agreeable to the Company.
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Financial Statements and supplementary data required by this
item appear under the caption "Index to Consolidated Financial Statements" and
are included elsewhere herein.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On June 6, 1996, the Board of Directors of the Company selected and
approved the Accounting Firm of Richard A. Eisner & Company, LLP as independent
public accountants to audit the Company's financial statements for the fiscal
year ending October 31, 1996. Accordingly, the accounting firm of Moore
Stephens, PC (previously Mortenson and Associates--effective July 1, 1996,
Mortenson and Associates changed its name to Moore Stephens), which was the
independent accountant for the Company's most recent certified financial
statements (fiscal year ended October 31, 1995) was dismissed in its capacity as
the Company's accountants effective June 6, 1996.
There were no disagreements between the Company and Moore Stephens,
PC on any matter of accounting principles or practices, financial statement
disclosure or auditing scope or procedure in connection with the audits of the
two most recent fiscal years and any subsequent interim period to the date here.
The report of Moore Stephens, PC on the Registrant's financial
statements for the fiscal year ended October 31, 1994 contained no adverse
opinion or disclaimer of opinion and was not qualified as to uncertainty, audit
scope or accounting principles. The Report of Moore Stephens, PC on the
Registrant's financial statements for the fiscal year ended October 31, 1995 was
originally issued with a disclaimer of opinion dated December 27, 1995 because
of significant uncertainties. However, on February 22, 1996 these uncertainties
were resolved and the disclaimer of opinion was withdrawn and a dual-dated
report was issued, which was modified as to uncertainty about the
23
<PAGE> 24
Company's ability to continue as a going concern. Such uncertainty was the
result of recurring losses from operations, negative working capital and
potential required payments pursuant to the terms of certain liabilities to
which the Company was a party. Management of the Company concurred with the
position of the former independent public accountant.
24
<PAGE> 25
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
The Company's directors and executive officers are as follows:
<TABLE>
<CAPTION>
Name Age Positions with the Company
---- --- --------------------------
<S> <C> <C>
William J. Marino (1) 54 Chairman of the Board of Directors
Robert J. Pures (2) 52 Director
Eric Schlesinger (1) 40 Director
David McDonnell (1) (2) 55 Director
David Kass (2) 38 Director
Thomas P. Riley 39 Director, President and Chief
Executive Officer
Richard J. Strobel 40 Vice President, Treasurer,
Secretary and Chief Financial
Officer
</TABLE>
- -------------------------------------------------------------------------------
(1) Member of Compensation Committee
(2) Member of Audit Committee
There is no family relationship between any Director or Executive
Officer of the Company. At a meeting of the Company's Board of Directors held on
January 14, 1997, a Compensation Committee and Audit Committee was formed.
All directors of the Company are elected by the stockholders of the
Company or, in the case of a vacancy, are elected by the directors then in
office to hold office until the next annual meeting of stockholders of the
Company and until their successors are elected and qualify or until their
earlier resignation or removal.
The Company, BCBSNJ and CW Ventures are parties to the Stockholders'
Agreement, pursuant to which BCBSNJ and CW Ventures have agreed that each of
them shall be entitled to designate two members of the Board; two members will
be management of the Company acceptable to CW Ventures and BCBSNJ, and there
shall be one non-employee outside director who is acceptable to CW Ventures and
BCBSNJ. (See "Description of Business - Change in Control" above.) CW Ventures
has designated David J. Kass and Eric Schlesinger as members of the Board.
25
<PAGE> 26
BCBSNJ has designated William J. Marino and Robert J. Pures as members of the
Board.
The following sets forth certain information with respect to each
Director and Executive Officer of the Company:
William J. Marino--Since February 1996, a director of the Company.
Since December 1993, a director of Contemporary HealthCare Systems, Inc. Since
January 1994, President and Chief Executive Officer and director of Blue Cross
and Blue Shield of New Jersey, Inc. From January 1992 through December 1993,
Senior Vice President of Blue Cross and Blue Shield of New Jersey, Inc. Mr.
Marino also currently serves as director of Digital Solutions, Inc.
Robert J. Pures--Since February 1996, a director of the Company.
Since 1995, Senior Vice President - Administration, Chief Financial Officer and
Treasurer of Blue Cross and Blue Shield of New Jersey, Inc. From October 1985
through July 1995, Vice President - Finance and Treasurer of Blue Cross and Blue
Shield of New Jersey, Inc.
Eric Schlesinger--Since February 1996, a director of the Company.
Since September 1993, Vice President of CW Group a venture capital investment
company. From July 1989 through September 1993, Chief Marketing Officer of
Empire Blue Cross and Blue Shield.
David J. Kass--Since February 1996, a director of the Company. Since
August 1995, Vice President of CW Group. From May 1994 to August 1995, Senior
Vice President, Eastern United States of Genetrix, Inc. From June 1989 to May
1994, Executive Vice President, Chief Financial Officer and a director of
Medigene, Inc. Mr. Kass also serves as a director of Alignis, Inc. and
Complimentary Care, Inc.
Thomas P. Riley--Since August 1996, a director, President and Chief
Executive Officer of the Company. From February 1995 through February 1996, Vice
President of Charter Medical, a company engaged in the health care services
business. From April 1988 through February 1995, President and Chief Executive
Officer of National Mentor, Inc., a company engaged in the mental health care
services business.
David J. McDonnell--Since January 1997, a director of the Company.
Since December 1993, a director of Value Health, Inc., a company engaged in the
health care service business. From September, 1984 to December 1993, Chief
Executive Officer of Preferred Health Care, Inc., a company engaged in the
mental health care services business.
Richard J. Strobel--Since June 1996, Vice President, Treasurer,
Secretary and Chief Financial Officer of the Company. From April 1995 through
June 1996, Vice President - Finance and Administration and Chief Financial
Officer of GEN/Rx, Inc., a company engaged in the manufacture and distribution
of injectable drugs. From October 1993 though April 1995, Vice President -
Finance and Administration of American Pharmaceutical Company, a company
engaged in the repackaging and distribution of over-the-counter drugs. From
January 1987 through April 1993,
26
<PAGE> 27
Treasurer of Par Pharmaceutical, Inc., a company engaged in the development,
manufacture and distribution of generic drugs.
Compliance with Section 16(a) of the Securities Exchange Act of 1934
Section 16(a) of the Securities Exchange Act of 1934, as amended,
requires the Company's officers and directors, and persons who own more than 10%
of a registered class of the Company's equity securities, to file reports of
ownership and changes in ownership with the Securities and Exchange Commission
and NASDAQ, copies of which are required by regulation to be furnished to the
Company.
Based solely on review of the copies of such forms furnished to the
Company, the Company believes that during fiscal 1996 its officers, directors
and ten percent (10%) beneficial owners complied with all Section 16(a) filing
requirements with the exception that neither BCBSNJ nor EHC filed a Form 3
reporting EHC's acquisition in February 1996 of a note exchangeable for shares
of the Company's common stock and Robert Ailes, M.D., a former director of the
Company, failed to file a Form 4 in June 1996, on which new options granted to
Dr. Ailes were to be reported. BCBSNJ filed a Form 3 reporting its acquisition
of 13,375,083 shares of common stock, issued upon exchange of the note following
EHC's transfer of the note to BCBSNJ in October 1996, and Dr. Ailes filed a
Form 5 reporting the grant of options in November 1996.
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth information concerning the
compensation paid or accrued by the Company for each of the three fiscal years
ended October 31, 1996, to the individual performing the function of Chief
Executive Officer during such periods and each of the next four most highly
compensated executive officers. None of the named individuals was employed by
the Company prior to the 1995 fiscal year.
27
<PAGE> 28
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation Long-Term Compensation
----------------------------------------------------- ---------------------------
Other All
Year Annual Other
Name and Ended Compen- Number of Compen-
Principal Position October 31, Salary Bonus sation (5) Options sation
- ------------------ ----------- ------ ------ --------- --------- -------
<S> <C> <C> <C> <C> <C> <C>
Thomas P. Riley 1996 $127,500
President and Chief Executive Officer
Richard J. Strobel 1996 $ 90,856 400,000 $ 2,423(6)
Vice President, Treasurer, Secretary
and Chief Financial Officer
John J. Petillo, Ph.D. (1) 1996 $ 20,833 $ 28,371
Former Chairman, President 1995 $516,832 50,773 416,667 $ 4,206(6)
and Chief Executive Officer
Vincent M. Achilarre (2) 1996 $139,488 $ 54,871 $133,377
Former Vice President, Chief 1995 $202,563 $ 80,000 $ 5,769 20,000(7) $ 34,620(8)
Financial Officer and Treasurer
Robert Ailes, M.D. (3) 1996 $200,942 575,000 $ 4,908(6)
President and Chief Executive 1995 $250,000 58,333
Officer of CAHS
Stephan D. Deutsch, M.D. (4) 1996 $259,615 $ 23,077 250,000
Senior Vice President and Chief 1995 $ 76,293 $ 38,461 16,667
Medical Director of CAHS
</TABLE>
- --------
(1) Dr. Petillo resigned his positions as Chairman of the Board, President and
Chief Executive Officer effective February 22, 1996. Dr. Petillo was
retained by the Company as a consultant through February 22, 1997.
(2) Mr. Achilarre resigned his positions as Vice President, Chief Financial
Officer and Treasurer effective May 23, 1996.
(3) Dr. Ailes joined the Company, as President and Chief Executive Officer of
CAHS, effective June 1, 1995, and is paid an annual salary of $265,000
under the terms of his amended employment agreement. Dr. Ailes served as a
director of the Company from June 1, 1995 through June 6, 1996.
(4) Dr. Deutsch joined the Company on July 1, 1995, and is paid an annual
salary of $250,000 under the terms of his employment agreement.
(5) Other Annual Compensation includes taxable fringe benefits and unused
accrued vacation days that were paid.
(6) Represents Company matching contributions to a 401(k) profit
sharing/savings plan.
(7) Options for 3,333 shares were canceled pursuant to the Board's cancellation
of the 1995 Comprehensive Stock Incentive Plan.
(8) Includes forgiveness of a loan in the amount of $30,000 and Company
matching contributions to a 401(k) profit sharing/savings plan in the
amount of $4,620.
COMPENSATION PLANS
Stock Option Plans:
On June 6, 1996 and July 24, 1996, the Board of Directors of the Company
adopted and amended (i) the 1996 Stock Option Plan (the "1996 Plan") and (ii)
the 1996 Director Stock Option Plan (the "Director Plan" and, together with the
1996 Plan, the "Stock Plans"). The Stock Plans were approved and ratified by the
Majority Stockholders pursuant to the Written Consent. The key features of the
Stock Plans are summarized below.
On June 6, 1996, the Board canceled all options granted under the
Company's 1995 Comprehensive Stock Incentive Plan. Options to purchase 93,134
shares of Common Stock had
28
<PAGE> 29
been granted under the Company's 1995 Comprehensive Incentive Plan. The Company
believes that the 1996 Plan offers flexibility to the Company in the granting of
options and that adoption of the 1996 Plan is necessary to aid the Company in
attracting, retaining and motivating officers and employees who are in a
position to contribute materially to the successful conduct of the Company's
business and affairs. The Stock Plans are intended to furnish additional
incentives whereby present and future directors, officers and employees may be
encouraged to acquire, or to increase their holdings of, the Company's Common
Stock.
A total of 1,933,334 options have been granted and are outstanding under
the Stock Plans. Additional non-plan options aggregate 1,094,585 outstanding at
October 31, 1996. The table below indicates grants of options that have been
granted, to the named persons. Other awards under the Stock Plans are not yet
determinable.
STOCK OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
Number of
Shares % of Total Exercise
Underlying Options Price
Fiscal Options Granted to Per Expiration
Name Year Granted Employees Share Date
- ---- ------ ---------- ---------- ----- -----------
<S> <C> <C> <C> <C> <C>
Thomas P. Riley 1996 None N/A N/A N/A
Richard J. Strobel 1996 400,000 21% $ .78 June 2006
John J. Petillo, Ph.D. (1) 1995 416,667 N/A $1.68 January 2005
Vincent M. Achilarre (2) 1995 16,667 N/A $1.44 January 2005
Robert Ailes, M.D. (3) 1996 575,000 30% $1.50 June 2006
Stephan D. Deutsch, M.D. (4) 1996 250,000 13% $0.78 June 2006
</TABLE>
- ----------------------------
(1) Represents options granted to Mr. Petillo in fiscal 1995. Option price was
reset to $1.68 during fiscal 1996
(2) Represents options granted to Mr. Achilarre in fiscal 1995. Pursuant to a
severance agreement, the exercise price of the options were re-priced at
$1.44 during fiscal 1996.
(3) Effective June 6, 1996, Dr. Ailes was awarded options to purchase 575,000
shares of Common Stock (replacing options to purchase 58,333 shares
previously granted to Dr. Ailes during fiscal 1995) at an exercise price of
$1.50 per share.
(4) Effective July 24, 1996, Dr. Deutsch was awarded options to purchase
250,000 shares of Common Stock (replacing options to purchase 16,667 shares
previously granted to Dr. Deutsch during fiscal 1995) at an exercise price
of $0.78 per share.
29
<PAGE> 30
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
<TABLE>
<CAPTION>
Number of Value of
Shares Underlying Unexercised
Unexercised In-the-Money
Options at Options at
Shares to be October 31, 1996 October 31, 1996
Acquired Value Exercisable/ Exercisable/
Name on Exercise(#) Realized Unexercisable Unexercisable (1)
- ---- -------------- -------- ------------- -----------------
<S> <C> <C> <C> <C>
Thomas P. Riley 0 N/A N/A N/A
Richard J. Strobel 400,000 $0 111,111/288,889 $0/$0
John J. Petillo, Ph.D. 416,667 $0 416,667/0 $0/$0
Vincent M. Achilarre 16,667 $0 16,667/0 $0/$0
Robert Ailes, M.D. 575,000 $0 125,000/450,000 $0/$0
Stephan D. Deutsch, M.D. 250,000 $0 55,556/194,444 $0/$0
</TABLE>
- ----------------------------
(1) Based upon the average Bid and Asked prices on the OTC Bulletin Board of
the Company's Common Stock on December 31, 1995.
Description of the Stock Plans:
The 1996 Plan is administered by the Board of the Company. Pursuant
to the terms of the 1996 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
employees (including employees who have been granted Incentive Options) and
other persons who the Board may select. Under the 1996 Plan, an aggregate of 10%
of the Company's authorized number of shares of Common Stock or 9,000,000 shares
of Common Stock has been reserved for issuance pursuant to the 1996 Plan.
The Director Plan is also administered by the Board. Pursuant to the
terms of the Director 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 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; (iii) immediately exercisable, and (iv) for a duration not
to exceed ten (10) years from the date of
30
<PAGE> 31
grant. Options under the Director Plan may be granted only to Directors of the
Company. Under the Director Plan, an aggregate of 2% of the Company's authorized
number of shares of Common Stock or 1,800,000 shares of Common Stock has been
reserved for issuance pursuant to the Director Plan. No current member of the
Board has been granted any options under the Director Plan.
All options granted under the 1996 Plan and the Director Plan are
exercisable during the option holder's lifetime only by the option holder (or
his or her legal representative) and only while such option holder is in the
Company's employ or is a Company director. With respect to both the 1996 Plan
and the Director Plan, in the event of termination of employment or of his or
her directorship, such person shall have three (3) months from such date to
exercise such option to the extent the option was exercisable as at the date of
termination, but in no event subsequent to the option's expiration date. With
respect to the 1996 Plan, in the event of termination of employment due to death
or disability of the option holder, such person shall have twelve (12) months
from such date to exercise such option to the extent the option was exercisable
as at the date of termination, but in no event subsequent to the option's
expiration date. With respect to the Director Plan, in the event of termination
of the option holder's directorship due to death, such person shall have twelve
(12) months from such date to exercise such option to the extent the option was
exercisable as at the date of termination, but in no event subsequent to the
option's expiration date.
Both the 1996 Plan and the Director Plan contain customary
anti-dilution provisions which provide that, in the event of any change in the
Company's outstanding capital stock by reason of stock dividend,
recapitalization, stock split, combination, exchange of shares or merger or
consolidation, the Board shall adjust the aggregate number of shares of the
Common Stock reserved for issuance under both plans. In addition, the aggregate
number of outstanding options and the exercise price per share under both plans
shall be proportionately adjusted by the Board whose determination shall be
conclusive.
The Board of Directors has the authority to terminate both the 1996
Plan and the Director Plan as well as to make changes in and additions to such
plans. However, with respect to the 1996 Plan, the Board may not, unless
approved by the stockholders of the Company, change the aggregate number of
shares subject to the 1996 Plan, terminate modify or amend such plan so as to
adversely affect the rights of option holders previously granted under such
plan, change the requirement of eligibility to such plan or materially increase
the benefits accruing to participants under such plan. With respect to the
Director Plan, the Board may not, unless the option holder thereof consents,
materially impair the rights of such option holder under such plan.
EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT, AND CHANGE-IN-CONTROL
ARRANGEMENTS
On July 24, 1996, the Company extended an employment package to Mr.
Thomas Riley to act as President and Chief Executive Officer of the Company.
Pursuant to the employment arrangement, Mr. Riley shall receive annual
compensation of $275,000.
31
<PAGE> 32
On August 7, 1996, the Company entered into an employment agreement
with Mr. Richard J. Strobel to act as Vice President, Treasurer, Secretary and
Chief Financial Officer of the Company for a term of four (4) years. Pursuant to
the employment agreement Mr. Strobel shall receive annual compensation of
$175,000 plus options to purchase 400,000 shares of Common Stock of the Company
at the then market value of the Company's Common Stock on July 24, 1996 when the
Company's Board of Directors granted such options to Mr. Strobel, which market
price was $0.78. In addition, pursuant to the terms of the employment agreement,
should Mr. Strobel's employment with the Company be terminated for any reason
except "for cause" or death or disability, Mr. Strobel would receive six months
of his then annual salary.
Compensation of Directors:
Members of the Board of Directors of the Company presently receive
no annual remuneration for acting in that capacity. The Company anticipates that
its non-employee directors will be paid reasonable out-of-pocket expenses for
each attended meeting of the Board or any committee thereof. Certain members of
the Board of Directors of the Company will also be eligible for the grant of
options under the Director Plan that currently provides for each non-employee
Director to receive an annual grant of options to purchase 166,667 shares of the
Company's Common Stock. None of the current directors have been granted any
options pursuant to the Director Plan. See "Compensation Plans - Description of
Stock Plans" above.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the
beneficial ownership of the Common Stock by (i) all persons known to the Company
who own more than 5% of the outstanding Common Stock, (ii) each Director, (iii)
each executive officer named in the Summary Compensation Table, and (iv) all
executive officers, and Directors as a group, in each case, as of December 23,
1996. Unless otherwise indicated, the persons named in the table below have sole
voting and investment power with respect to all shares of Common Stock shown as
beneficially owned by them.
32
<PAGE> 33
BENEFICIAL OWNERSHIP OF COMMON STOCK BY
CERTAIN STOCKHOLDERS AND MANAGEMENT
<TABLE>
<CAPTION>
NAME NUMBER OF SHARES PERCENT OF
BENEFICIALLY OWNED(1) OWNERSHIP(2)
- ---- -------------------- -----------
<S> <C> <C>
Blue Cross and Blue Shield of
New Jersey, Inc. (3)(4)(5) ....................................... 37,617,420 77.60
CW Ventures II, L.P.(5)(6)(7) ....................................... 37,784,087 65.01
John J. Petillo(8)(9) ............................................... 1,850,625 7.51
David Kass(6)(10)(14) ...............................................
William J. Marino(3)(11) ............................................ 334 *
Robert J. Pures(3)(11)(15) ..........................................
Eric Schlesinger(6)(10) .............................................
David J. McDonnell(16) .............................................
Walter Channing(5)(6)(7)(12) ........................................ 37,784,087 65.01
Charles Hartman(5)(6)(7)(12) ........................................ 37,784,087 65.01
Barry Weinberg(5)(6)(7)(12) ......................................... 37,784,087 65.01
Thomas P. Riley(13) .................................................
Richard J. Strobel(13)(14) .......................................... 111,111 *
Current Directors and Executive Officers as
a Group(15) (seven persons) ......................................... 111,445 *
</TABLE>
- -------------------------------
* Less than one percent.
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission, which generally attribute beneficial
ownership of securities to persons who possess sole or shared voting or
investment power with respect to those securities. Includes outstanding
shares and shares subject to options exercisable within 60 days. Unless
otherwise indicated, the options indicated as owned by the persons named
above are exercisable within 60 days.
(2) The percent beneficially owned by any person or group who held options
exercisable within 60 days of December 23, 1996 has been calculated
assuming all such options have been exercised in full and adding the number
of shares subject to such options to the total number of shares issued and
outstanding.
(3) The business address of such person or entity is 3 Penn Plaza East, Newark,
New Jersey 07105.
(4) Includes 24,242,337 shares of Common Stock issuable by the Company for
failure to meet certain revenue and income thresholds. In the event that
the Services Agreement is terminated by BCBSNJ, CW Ventures will have the
right to purchase BCBSNJ shares in accordance with the terms of the
Stockholders' Agreement.
(5) BCBSNJ may be deemed a member of a "group," as such term is used in Section
13(d) of the Exchange Act, with CW Ventures, CW Partners III, L.P., the
general partner of CW Ventures ("CW Partners"), and Walter Channing,
Charles Hartman and Barry Weinberg, the general partners of CW Partners.
BCBSNJ on the one hand, and CW Ventures, CW Partners and Messrs. Channing,
Hartman and Weinberg, on the other, disclaim
33
<PAGE> 34
membership in a group for the purpose of Section 13(d) of the Exchange Act
or for any other purpose.
(6) The business address of such person or entity is 1041 Third Avenue, New
York, New York 10021.
(7) Includes 7,799,997 shares of Common Stock issuable upon conversion of
certain outstanding convertible notes, 25,914,222 shares of Common Stock
issuable by the Company for failure to meet certain revenue and income
thresholds and 166,667 shares of Common Stock issuable upon exercise of the
CW Warrants.
(8) The business address of such person is 65 Willowbrook Boulevard, Wayne, New
Jersey 07470
(9) Former Chairman of the Board of Directors and Chief Executive Officer of
the Company who resigned effective February 22, 1996. Includes 416,667
shares of Common Stock issuable upon exercise of outstanding stock options.
(10) Does not include the following shares beneficially owned by CW Ventures:
3,903,201 shares directly owned by CW Ventures and 7,799,997 and 166,667
shares of Common Stock issuable upon exercise of the CW Note and the CW
Warrants, respectively, and the 25,914,222 shares issuable for failure to
meet certain revenue and income thresholds. Messrs. Kass and Schlesinger
are each Vice President of CW Group, the management company of CW Ventures
and CW Partners, and Mr. Kass holds other positions with CW Ventures and
other related entities. Messrs. Kass and Schlesinger disclaim beneficial
ownership of such shares.
(11) Does not include the 13,375,083 shares of Common Stock issued upon exercise
of the BCBSNJ Note and the 24,242,337 shares issuable for failure to meet
certain revenue and income thresholds. Messrs. Marino and Pures, the
President and Chief Executive Officer and the Senior Vice
President-Administration, Chief Financial Officer and Treasurer,
respectively, of BCBSNJ disclaim beneficial ownership of such shares.
(12) Includes 3,903,201 shares directly owned by CW Ventures and 7,799,997 and
166,667 shares of Common Stock issuable upon exercise of the CW Note and
the CW Warrants, respectively, and the 25,914,222 shares issuable for
failure to meet certain revenue and income thresholds. Messrs. Channing,
Hartman and Weinberg are the general partners of CW Partners, and as such
may be deemed to beneficially own such shares. Messrs. Channing, Hartman
and Weinberg disclaim beneficial ownership of such shares except to the
extent of their respective direct and indirect partnership interests in CW
Ventures.
(13) The business address of such person is 485-C Route 1 South, Iselin, NJ
08830-3037.
(14) Consists of shares issuable upon exercise of currently exercisable
incentive stock options.
(15) Does not include the following shares beneficially owned by CW Ventures or
BCBSNJ, as the case may be: the 3,903,201 shares directly owned by CW
Ventures and 7,799,997 and 166,667 shares of Common Stock issuable upon
exercise of the CW Note and the CW Warrants, respectively, and the
25,914,222 shares issuable for failure to meet certain revenue and income
thresholds, 13,375,083 shares of Common Stock issued upon exercise of the
BCBSNJ Note and the 24,242,337 shares issuable for failure to meet certain
revenue and income thresholds. Includes an aggregate of 111,000 shares
issuable upon the exercise of currently exercisable stock options.
(16) The business address of such person is 301 Aqua Court, Naples, Florida
34102.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company has entered into a series of transactions with BCBSNJ. In
February, 1996, the
34
<PAGE> 35
Company issued the BCBSNJ Note, in the original principal amount of $3,600,000,
which provided for conversion into 13,375,083 shares of common stock and the
issuance of an additional 24,242,337 shares of common stock for failure of the
Company to meet certain revenue and income thresholds. For further description
of the BCBSNJ Note, see "Description of Business - Change in Control." CHCM and
BCBSNJ are parties to the Services Agreement. The Services Agreement requires,
among other things, 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 year 1996 and, in subsequent years, to pay a monthly
service fee reduced by a "trailing monthly adjustment" based on performance. For
further description of the Services Agreement, see "Description of Business -
Change in Control." As of December 23, 1996, BCBSNJ is the beneficial owner of
37,617,420 shares of Common Stock, constituting 77.60% of the outstanding common
stock, assuming exchange of the BCBSNJ Note only and the issuance of the
additional shares of Common Stock due to BCBSNJ because of the failure of the
Company to meet revenue and income levels in its fiscal year ended October 31,
1996. In addition, several of the Company's directors and executive officers are
affiliated with BCBSNJ; Robert Pures, a director of the Company, is Senior Vice
President, Chief Financial Officer and Treasurer of BCBSNJ; William Marino, a
director of the Company and CHCM, is also director, President and Chief
Executive Officer of BCBSNJ.
The Company has also entered into a series of transactions with CW
Ventures. In February, 1996, the Company issued the CW Note, in the original
principal amount of $2,000,000, which provides for exchange into 7,799,997
shares of common stock and the issuance of an additional 24,914,222 shares of
common stock for failure to meet certain revenue and income thresholds. For
further description of the CW Note, see "Description of Business - Change in
Control." In February, 1996 the Company also issued to CW Ventures the CW
Warrants. For further description of the CW Warrants, see "Description of
Business - Change in Control." As of December 23, 1996, CW Ventures is the
beneficial owner of 37,780,594 shares of common stock, constituting 65.01% of
the outstanding common stock, assuming conversion of the CW Note and exercise of
the CW Warrants only and the issuance of the additional shares of common stock
due CW Ventures because of the failure of the Company to meet net revenue and
income levels for its fiscal year ended October 31, 1996. In addition, several
of the Company's directors and executive officers are affiliated with CW
Ventures: David Kass is a director of the Company, CAHS and CHCM and is also the
Chief Financial Officer of CW Ventures; and Eric Schlesinger is Vice President
of CW Group, the management company of CW Ventures and CW Partners.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit No. Description of Exhibit
- ---------- ----------------------
<S> <C>
2.1 Deposit Agreement dated October 31, 1994 among Midlantic Bank, N.A., PMDX
and the Registrant (1)
</TABLE>
35
<PAGE> 36
<TABLE>
<S> <C>
2.2 Certificate of Merger of Care Advantage Health Systems (f/k/a Advantage Health
Systems, Inc.), a Georgia corporation into CareAdvantage Health Systems, Inc.,
a Delaware corporation (1)
3.1 Registrant's Certificate of Incorporation (1)
3.11 Amended and Restated Certificate of Incorporation (4)
3.2 Registrant's By-Laws (1)
4.1 Form of Common Stock Certificate (1)
4.2 Registrant's 1995 Comprehensive Stock Incentive Plan (1)
4.21 Registrant's 1996 Stock Option Plan (4)
4.22 Registrant's 1996 Director Stock Option Plan (4)
4.3 Stock Option Agreement dated as of January 27, 1995 with John J. Petillo with
respect to 2,500,000 shares of the Registrant's Common Stock (1)
4.4 Stock Option Agreement dated as of January 27, 1995 with Robert T. Caruso with
respect to 1,700,000 shares of the Registrant's Common Stock (1)
4.6 Stock Option Agreement dated as of January 24, 1995 with Paul G. Shoffeitt with
respect to 1,500,000 shares of the Registrant's Common Stock (1)
4.7 Warrant dated October 31, 1994 granting MEDecision, Inc. the right to purchase
300,000 shares of the Registrant's Common Stock (1)
4.8 Stock Option Agreements dated September 7, 1995 with Vincent M. Achilarre with
respect to 120,000 shares of the Registrant's Common Stock (2)
4.9 Stock Option Agreement dated September 7, 1995 with James J. McQueeny with
respect to 75,000 shares of the Registrant's Common Stock (John K. Lloyd, a
director, and Leon G. Smith, a former director, have identical options) (2)
10.1 Separation Agreement dated April 20, 1995 between PMDX and the Registrant (1)
10.2 Agreement dated as of January 1, 1995 between Maine BCBS and CAHS (1)
10.3 Products and Services Agreement dated November 7, 1994 between MEDecision,
Inc. and CAHS (1)
</TABLE>
36
<PAGE> 37
<TABLE>
<S> <C>
10.5 Employment Agreement dated as of November 1, 1994 between John J. Petillo and
the Registrant (subsequently canceled) (1)
10.6 Fee Agreement dated as of January 5, 1995 between John J. Petillo and the
Registrant (subsequently canceled) (1)
10.8 Employment Services dated November 8, 1993 between Paul G. Shoffeitt and AHS
and Amendment Letter dated January 24, 1995 among Paul G. Shoffeitt, John J.
Petillo, Robert T. Caruso, the Registrant, CAHS and PMDX (subsequently
terminated) (1)
10.9 Registration Rights Agreement dated as of December 14, 1994 between John J.
Petillo and the Registrant (1)
10.10 Registration Rights Agreement dated as of December 14, 1994 between Robert T.
Caruso and the Registrant (1)
10.11 Registration Rights Agreement dated as of January 24, 1995 between Paul G.
Shoffeitt and the Registrant (1)
10.12 Letter of Intent dated September 30, 1994 between the Registrant and New Jersey
BCBS, amendments thereto of December 29, 1994, February 27, 1995 and April
4, 1995 and Interim Services Agreement as of April 1, 1995 between the Registrant
and New Jersey BCBS (1)
10.12(a) December 22, 1995 Letter Agreement between the Registrant and New Jersey
BCBS extending the Letter of Intent and Interim Services Agreement to March 31,
1996 (2)
10.13 Lease Agreement dated April 14, 1995 between the Registrant and Metropolitan
Life Insurance Company (1)
10.14 Letter of Intent dated January 2, 1996 between CW Ventures II, L.P., the
Registrant and its CareAdvantage Health Systems, Inc. subsidiary (2)
10.15 Securities Purchase Agreement dated February 22, 1996 among CW Ventures,
CAHS and the Registrant (3)
10.16 CW Exchangeable Note (3)
10.17 Stock Acquisition Agreement dated February 22, 1996 among EHC, CHCM,
CAHS and the Registrant (3)
</TABLE>
37
<PAGE> 38
<TABLE>
<S> <C>
10.18 EHC Exchangeable Note (3)
10.19 Services Agreement dated February 22, 1996 among BCBSNJ, CHCM, CAHS
and the Registrant (3)
10.20 Stockholders' Agreement dated February 22, 1996 among, EHC, CW Ventures
and the Registrant (3)
10.21 Employment Agreement, dated as of August 7, 1996 between the Registrant and
Richard J. Strobel
16 Letter regarding change in accountants, incorporated by reference to exhibit filed on
CAI's Form 8-K dated June 6, 1996.
21 Subsidiaries of Registrant
</TABLE>
- --------------
(1) Incorporated by reference to exhibit filed with CAI's Registration
Statement on Form S-1 (File No. 33-89176).
(2) Incorporated by reference to exhibit filed with CAI's Annual Report on Form
10-KSB for the year ended October 31, 1995.
(3) Incorporated by reference to exhibit filed with CAI's Annual Report on Form
10-KSB for the year ended October 31, 1995.
(4) Incorporated by reference to exhibit filed with CAI's Information Statement
dated September 6, 1996.
38
<PAGE> 39
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
<TABLE>
<S> <C>
CareAdvantage, Inc.
(Registrant)
Date: February 5, 1997 By: /s/ Thomas Riley
---------------- ----------------
Thomas Riley, President and
Chief Executive Officer, Director
</TABLE>
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
<TABLE>
<S> <C>
Date: February 5, 1997 By: /s/ Thomas Riley
---------------- ----------------
Thomas Riley, President and
Chief Executive Officer, Director
Date: February 5, 1997 By: /s/ Richard J. Strobel
---------------- ----------------------
Richard J. Strobel,
Vice President, Secretary, Treasurer,
Chief Financial and Accounting Officer
Date: February 5, 1997 By: /s/ William J. Marino
---------------- ----------------------
William J. Marino, Director
Date: February 5, 1997 By: /s/ Robert J. Pures
---------------- --------------------
Robert J. Pures, Director
Date: February 5, 1997 By: /s/ Eric Schlesinger
---------------- ---------------------
Eric Schlesinger, Director
Date: February 5, 1997 By: /s/ David Kass
---------------- ---------------
David Kass, Director
Date: February 5, 1997 By: /s/ David McDonnell
---------------- -------------------
David McDonnell, Director
</TABLE>
39
<PAGE> 40
CAREADVANTAGE, INC.
PART II
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE
FILED WITH THE ANNUAL REPORT OF THE COMPANY ON FORM 10-KSB
FOR THE FISCAL YEAR ENDED OCTOBER 31, 1996
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
INCLUDED IN PART II:
Report of Independent Public Accountants F-2
Report of Independent Public Accountants F-3
Consolidated Balance Sheets at October 31, 1996 and October 31, 1995 F-4
Consolidated Statements of Operations for the years ended October 31, 1996,
October 31, 1995 and October 31, 1994 F-5
Consolidated Statements of Cash Flows for the years ended October 31, 1996,
October 31, 1995 and October 31, 1994 F-6
Consolidated Statement of Changes in Capital Deficiency for the
years ended October 31, 1996, October 31, 1995 and October 31, 1994 F-7
Notes to Consolidated Financial Statements F-8 through F-21
</TABLE>
--------------------------------------
Other financial statement schedules are omitted because the conditions requiring
their filing do not exist or the information required thereby is included in the
financial statements filed, including the notes thereto.
F-1
<PAGE> 41
INDEPENDENT AUDITOR'S REPORT
To the Stockholders and Board of Directors of
CareAdvantage, Inc. and Subsidiaries
New York, New York
We have audited the accompanying consolidated balance sheet of
CareAdvantage, Inc. and its subsidiaries as of October 31, 1995, and the related
consolidated statements of operations, stockholders' equity [deficit], and cash
flows for each of the two fiscal years in the period ended October 31, 1995.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the consolidated
financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall consolidated financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the consolidated financial
position of CareAdvantage, Inc. and its subsidiaries as of October 31, 1995, and
the consolidated results of their operations and their cash flows for each of
the two fiscal years in the period ended October 31, 1995, in conformity with
generally accepted accounting principles.
The accompanying consolidated financial statements have been
prepared assuming that the Company will continue as a going concern. As shown in
the consolidated financial statements, and as discussed in the Notes to the
consolidated financial statements, the Company has suffered recurring losses
from operations, has an accumulated deficit since its inception, and has
negative working capital. Those conditions raise substantial doubt about the
Company's ability to continue as a going concern. Management's plans in regard
to those matters are also described in the Notes. Realization of the carrying
value of the Company's remaining assets included in the balance sheet referred
to in the first paragraph is dependent on the success of the Company's plans.
The consolidated financial statements do not include any adjustments that might
result from the outcome of those uncertainties.
/s/ MOORE STEPHENS, P.C.
------------------------------
MOORE STEPHENS, P.C.
Certified Public Accountants.
Cranford, New Jersey
December 27, 1995
F-2
<PAGE> 42
[RICHARD A. EISNER & COMPANY LETTERHEAD]
REPORT OF INDEPENDENT AUDITORS
To the Stockholders and
Board of Directors of
CareAdvantage, Inc.
New York, New York
We have audited the accompanying consolidated balance sheet of
CareAdvantage, Inc. and subsidiaries as of October 31, 1996 and the related
consolidated statements of operations, capital deficiency and cash flows for the
year then ended. These consolidated financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audit
provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
CareAdvantage, Inc. and subsidiaries as of October 31, 1996, and the
consolidated results of their operations and their cash flows for the year then
ended, in conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in the
notes to the consolidated financial statements, the Company has incurred
substantial losses from operations since inception and as at October 31, 1996
has a capital deficiency of approximately $2,000,000 and a working capital
deficiency of approximately $4,400,000. In addition, the Company is currently in
default of a significant service agreement. These conditions raise substantial
doubt about the Company's ability to continue as a going concern. Management's
plans in regard to these matters are also described in the notes. The
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
/s/ RICHARD A. EISNER & COMPANY LLP
- ------------------------------------
RICHARD A. EISNER & COMPANY LLP
New York, New York
January 7, 1997
F-3
<PAGE> 43
CAREADVANTAGE, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS October 31, October 31,
1996 1995*
------------ ------------
<S> <C> <C>
Current assets:
Cash and equivalents $ 1,167,147 $ 536,471
Accounts receivable-stockholder 833,333
Accounts receivable-other 90,000 86,579
Other current assets 129,829 68,971
------------ ------------
Total current assets 2,220,309 692,021
Property and equipment, at cost less 1,480,746 2,077,395
accumulated depreciation (Note 4)
Intangible assets (Note 3) 2,080,769 1,576,091
Other assets 79,184 87,170
------------ ------------
$ 5,861,008 $ 4,432,677
============ ============
LIABILITIES AND CAPITAL DEFICIENCY
Current liabilities:
Current portion of long-term debt (Note 5) $ 623,472 $ 558,410
Note payable-stockholder (Note 6) 2,000,000
Accounts payable 569,346 1,265,219
Due to customer (Note 7) 485,594
Due to stockholders (Note 7) 1,525,694
Accrued payroll and related benefits 512,505 273,002
Accrued expenses and other current liabilities 694,996 1,505,482
------------ ------------
Total current liabilities 6,411,607 3,602,113
Capital lease obligations, less current portion (Note 5) 996,591 1,493,178
Due to stockholder, less current portion (Note 7) 435,912
Commitments and contingencies (Note 10)
Capital deficiency (Note 8):
Preferred Stock - par value $.10 per share; authorized 10,000,000 shares;
none issued and outstanding
Common stock - par value $.001 per share; authorized 90,000,000 shares;
issued and outstanding 24,233,327 and 41,726,510 24,233 41,726
Additional capital 19,690,248 15,658,333
Accumulated deficit (21,697,583) (16,362,673)
------------ ------------
Total capital deficiency (1,983,102) (662,614)
------------ ------------
$ 5,861,008 $ 4,432,677
============ ============
</TABLE>
*Reclassified to conform to current period classification.
The accompanying notes are an integral part of these statements.
F-4
<PAGE> 44
CAREADVANTAGE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
------------------------------------------------------
1996 1995* 1994*
------------ ------------ ------------
<S> <C> <C> <C>
Net revenues (Note 2) $ 11,792,157 $ 8,970,967 $ -0-
Cost of services 9,584,991 8,683,056 1,043,911
------------ ------------ ------------
Gross profit 2,207,166 287,911 (1,043,911)
------------ ------------ ------------
Operating expenses:
Selling general and administration 4,487,496 7,114,937 3,002,930
Depreciation and amortization 362,289 969,528 735,037
Write-down of intangible assets (Note 3) 1,386,451 4,428,571
Other costs 724,032 690,000 (1,411,107)
------------ ------------ ------------
Total operating expenses 6,960,268 13,203,036 2,326,860
------------ ------------ ------------
Interest 581,808 76,777
------------ ------------
NET LOSS $ (5,334,910) $(12,991,902) $ (3,370,771)
============ ============ ============
PRO FORMA NET LOSS PER SHARE OF COMMON STOCK ($ 0.23) ($ .95) ($ 0.48)
(NOTE 2) ============ ============ ============
PRO FORMA WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING (NOTE 2) 23,013,800 13,641,960 6,954,418
============ ============ ============
</TABLE>
*Reclassified to conform to current period classification.
The accompanying notes are an integral part of these statements.
F-5
<PAGE> 45
CAREADVANTAGE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
------------------------------------------------------
1996 1995* 1994*
------------ ------------ ------------
<S> <C> <C> <C>
Operating activities:
Net (loss) ($5,334,910) ($12,991,902) ($3,370,771)
Adjustments to reconcile net loss to net cash used by
operating activities:
Depreciation and amortization 1,208,215 1,344,010 735,037
Write-down of intangible assets 1,386,451 4,728,571
Expense associated with issuance of warrants and other 241,539 14,162
Change in assets and liabilities:
Due to/from customers/stockholders 1,610,446 613,846 (703,625)
Other assets (52,873) (178,844) (274,096)
Accounts payable (695,873) 1,147,214 118,004
Accrued expenses and other liabilities (932,046) 1,344,945 433,541
------------ ------------ ------------
Cash used by operating activities (2,569,051) (3,977,998) (3,061,910)
------------ ------------ ------------
Investing activities:
Capital expenditures (77,275) (661,619) (96,091)
Acquisition of intangible assets (1,293,256)
Acquisition of CHCM (cash proceeds - net of transaction costs) 783,527
------------ ------------ ------------
Cash provided from (used by) investing activities 706,252 (1,954,875) (96,091)
------------ ------------ ------------
Financing activities:
Advances from a former affiliate - capitalized 2,858,392 6,802,431
Principal payments under long-term debt (431,525) (34,478)
Proceeds from issuance of note payable and CW warrants 2,000,000
Net proceeds from issuance of common stock 925,000 1,000
------------ ------------ ------------
Cash provided from financing activities 2,493,475 2,823,914 6,803,431
------------ ------------ ------------
Net increase (decrease) in cash 630,676 (3,108,959) 3,645,430
Cash and equivalents - beginning of period 536,471 3,645,430 -0-
------------ ------------ ------------
Cash and equivalents - end of period $ 1,167,147 $ 536,471 $ 3,645,430
============ ============ ============
Interest paid $ 280,518 $ 19,800 $ -0-
============ ============ ============
Taxes paid $ -0- $ -0- $ -0-
============ ============ ============
</TABLE>
*Reclassified to conform to current period classification
The accompanying notes are an integral part of these statements.
F-6
<PAGE> 46
CAREADVANTAGE, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN CAPITAL DEFICIENCY
<TABLE>
<CAPTION>
COMMON STOCK
---------------------------
NUMBER OF PAR VALUE ADDITIONAL ACCUMULATED CAPITAL
SHARES AMOUNT CAPITAL (DEFICIT) DEFICIENCY
--------- --------- ---------- ----------- ----------
<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)
October 1994 stock transferred for Primedex
debenture holders 1,700,000 1,700 (1,700)
Net (loss) for the year ended October 31, 1994 (3,370,771) (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)
One-for-six reverse stock split (34,772,092) (134,772) 34,772
---------- ------ ---------- ----------- -----------
6,954,418 6,954 15,693,105
Issuance of common stock and warrants in
connection with financing transactions 3,903,201 3,903 1,019,093 1,022,996
Issuance of common stock to employee 625 1 (1)
Exchange of BCBSNJ Note 13,375,083 13,375 2,978,051 2,991,426
Net (loss) for the year ended October 31, 1996 (5,334,910) (5,334,910)
---------- ------- ------------ ------------ ------------
BALANCE AS OF OCTOBER 31, 1996 24,233,327 $24,233 $19,690,248 $(21,697,583) $ (1,983,102)
========== ======= ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
F-7
<PAGE> 47
CAREADVANTAGE, INC.
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 1996
THE COMPANY AND BASIS OF PRESENTATION:
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.
The accompanying financial statements have been prepared assuming
that the Company will continue as a going concern. As shown in the accompanying
financial statements, the Company has a working capital deficiency of
approximately $4,191,000 and a capital deficiency of approximately $1,983,000
and has incurred significant losses since its inception. In addition, the
Company is currently in default on its Service Agreement with Blue Cross and
Blue Shield of New Jersey, Inc. ("BCBSNJ") and is currently renegotiating such
agreement. These factors raise substantial doubt about the Company's ability to
continue as a going concern. Management believes it can continue to leverage
its reputation with its Blue Cross Blue Shield customers to other similar
customers; however, the Company will have to seek additional financing to
accomplish its objectives. There is no assurance that such financing will be
received on a timely basis, on acceptable terms to the Company or at all or
that the Company will successfully renegotiate its agreement with BCBSNJ. No
adjustments have been made to the accompanying financial statements to reflect
the recoverability or classification of recorded asset amounts or the
classification of liabilities should the Company be unable to continue as a
going concern.
1. CHANGE IN CONTROL:
On February 22, 1996, the Company completed a series of transactions
with CW Ventures II, L.P. ("CW Ventures") and with BCBSNJ. The transactions
included the sale to CW Ventures of (i) 3,903,201 shares of the Company's common
stock at a purchase price of $0.2562 per share for an aggregate of $1,000,000;
and (ii) a $2,000,000 principal amount 8% Exchangeable Note maturing on June 30,
1998 (the "CW Note"). The CW Note, which is collateralized by substantially all
of the assets of the Company and its subsidiaries, was originally exchangeable
into that number of shares of the Company's common stock as would equal
approximately 23 1/3% of the outstanding shares of the Company's common stock on
a fully diluted basis as of February 22, 1996 so that the 3,903,201 shares
issued to CW Ventures together with the shares issuable upon the exchange of the
CW Note would comprise 35% of the outstanding shares of the Company's common
stock on a fully diluted basis as of February 22, 1996 (such percent was
subsequently adjusted as discussed below). In addition, in connection with the
Bridge Financing, the Company issued to CW Ventures for nominal consideration
five-year warrants to purchase 166,667 shares of the Company's common stock at
an exercise price equal to $0.96 per share (after adjustment for the "one (1)
for six (6)" reverse stock split of the Company's outstanding common stock).
F-8
<PAGE> 48
Concurrently with the February 22, 1996 closing of the transaction
with CW Ventures, CAHS purchased all of the outstanding capital stock of CHCM
from a wholly-owned BCBSNJ subsidiary. Although this acquisition was
consummated in 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 CHCM pending a sale of CHCM to the Company. The CHCM stock was acquired in
exchange for CAHS' $3,600,000 principal amount 8% Exchangeable Note maturing on
June 30, 1998 (the "BCBSNJ Note") collateralized by substantially all of the
assets of the Company and its subsidiaries. The BCBSNJ Note was originally
exchangeable into that number of shares of the Company's common stock as would
equal approximately 40% of the outstanding shares on a fully diluted basis as
of February 22, 1996. The transaction was accounted for as a purchase of CHCM
for an amount originally approximating $3,427,000 (the face amount of the
BCBSNJ Note less an original issue discount of approximately $173,000), plus
assumed liabilities of approximately $360,000 and purchase costs of $64,000 and
was subsequently adjusted as discussed below. The excess of the purchase price
over the fair value of CHCM's tangible assets consisting of cash of
approximately $848,000 and fixed assets, with a fair value of approximately
$27,000 was allocated to the service contract with BCBSNJ.
Pursuant to the terms of the CW Note and the BCBSNJ Note, because
the Company failed to realize at least $15 million in net revenues or specified
earnings before taxes for its fiscal year ending October 31, 1996, it is
obligated to issue additional shares of common stock resulting in an increase of
both BCBSNJ and CW Ventures equity to 45% on a fully diluted basis. As a result,
as of October 31, 1996, the Company adjusted the carrying amount of the CHCM
purchase to $3,000,000, equal to the consideration received from CW Ventures for
its 45% interest in the Company.
The Company, BCBSNJ and CW Ventures are parties to a stockholders
agreement dated February 22, 1996 (the "Stockholders' Agreement") whereby each
of BCBSNJ and CW Ventures have agreed to vote their shares in the Company with
respect to the election of the Company's Board of Directors for: (i) two
designees of CW Ventures; (ii) two designees of BCBSNJ; (iii) two members of the
Company's management acceptable to CW Ventures and BCBSNJ; and (iv) one
non-employee outside director acceptable to CW Ventures and BCBSNJ. There is
currently one (1) vacancy on the Board of Directors of the Company, which
vacancy is one of the management directorships. The Stockholders' Agreement
prevents the Company from taking certain material actions without BCBSNJ's
and/or CW Ventures' or their designated directors' consent.
Since the Company did not have a sufficient number of authorized but
unissued shares of common stock to permit the issuance of the required number of
shares upon exchange of the CW Note and the BCBSNJ Note, the stockholders of the
Company approved an amendment to the Company Certificate of Incorporation which
decreased the authorized shares of common stock to 90,000,000 shares, created a
new class of "blank check" preferred stock, $.10 par value, consisting of
10,000,000 shares and effected a "one (1) for six (6)" reverse stock split of
the Company's
F-9
<PAGE> 49
outstanding common stock (the "Charter Amendment"). As a result, and pursuant to
the terms of the BCBSNJ Note, the BCBSNJ Note was automatically exchanged on
September 30, 1996 into 13,375,083 shares of common stock of the Company.
The following unaudited proforma statement of operations for the
years ended October 31, 1996 and 1995, give effect to the purchase of CHCM as
though such purchase occurred at November 1, 1995 and November 1, 1994,
respectively, the beginning of the fiscal years.
The proforma adjustments principally include adjustments to revenue
and expense assuming that the Company's current agreement with BCBSNJ was
effective as of November 1, 1994.
<TABLE>
<CAPTION>
Year Ended October 31,
------------------------------
1996 1995
------------ ------------
<S> <C> <C>
Net revenues $ 11,668,000 $ 11,715,000
Net loss (5,342,000) (10,852,000)
Net loss per share of common stock ($0.24) ($0.53)
Weighted average number of common shares outstanding 23,053,000 20,329,000
</TABLE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles of Consolidation:
The consolidated financial statements include the accounts of CAI,
and its wholly-owned subsidiary, CAHS and CAHS's wholly-owned subsidiary, CHCM.
Significant intercompany accounts and transactions have been eliminated in
consolidation. References herein to the "Company" refer to CAI, CAHS and CHCM,
collectively.
Revenue Recognition:
No revenues were realized from the inception of operations through
October 31, 1994, as the principal operations were those of a development stage
company. However, under the terms of service agreements with two major insurers,
the Company was reimbursed for certain direct expenses incurred in
pre-operational activities. Such reimbursement aggregating $250,000 and
$1,411,107 at October 31, 1995 and 1994, respectively, has been reflected as
reimbursement for direct expenses and reflected in "Other Costs" under operating
expenses in the Company's Consolidated Statements of Operations.
For its services, the Company is compensated either (i) on a
capitated (fixed-fee) per subscriber basis; (ii) on a performance-based method
whereby the Company shares in the realized cost savings per member as measured
against certain defined benchmarks; (iii) on the basis of a combination of both
capitation and performance-based fees; and (iv) on a fee-for-service and
consulting fee basis. Accordingly, the Company has adopted the following
accounting policies for revenue recognition under each contract category:
F-10
<PAGE> 50
(a) Revenue under the fixed-fee arrangements is recognized as the
services are provided and the related costs of services are
incurred. Although the fixed fee arrangements are not subject to any
fee adjustment based upon the attainment of target utilization
levels, such contracts may still expose the Company to potential
operating losses, particularly in the inception stages thereof.
(b) Revenue under the partial fixed fee/incentive agreements is
initially recognized for the monthly fixed fee component only as
services are provided and related costs of services are incurred.
Incentive (or reductions) based upon performance are recorded when
such amounts can reasonably be determined.
(c) Revenue under full risk compensation arrangements is recorded based
upon the periodic monthly or quarterly interim payments, adjusted on
a quarterly basis to cost and utilization data supplied by the
client to assess performance against established targets. Incentive
(or reductions) based upon performance are recorded when such
amounts can reasonably be determined.
(d) Revenue under fee-for-service arrangements is recorded for special
projects or the review of cases assigned to the Company on a per
case or hourly basis.
Depreciation and Amortization:
Depreciation is computed by the straight-line method and is based on
the estimated useful lives of the various assets. Estimated useful lives of
depreciable assets range from 3 to 7 years. Leasehold improvements are amortized
using the straight-line method over the six year term of the related lease.
Intangible assets are amortized over their expected useful lives of 5 to 7 years
on either the straight line method or based on the ratio of current revenues
from the asset to total current and expected future revenues. Based on current
estimates, substantially all of the intangible assets will be amortized in
1997 and 1998.
Per Share Data:
Net loss per share data has been reflected on a pro forma basis
which gives effect to the 13,375,083 shares issued to BCBSNJ as if they were
issued on April 30, 1995, the date the operations of CHCM have been reflected in
the Company's financial statements (See Note 1). All other shares are based on
the weighted average shares outstanding after giving efect to the 1 for 6
reverse stock split effected in September 1996. Per share data for 1995 has
been restated on a pro forma basis and historical per share data has been
omitted for 1995 and 1996 since they would not be comparable or indicative of
the future. Common stock equivalents and the CW Ventures convertible note have
not been included since they would reduce the net loss per share.
Cash Equivalents:
For purposes of the statement of cash flows, the Company considers
all highly liquid money market instruments with original maturity of three
months or less to be cash equivalents.
F-11
<PAGE> 51
Concentration of Credit Risk:
Financial instruments that potentially subject the Company to credit
risk consist of trade receivables. The Company currently markets its services to
Blue Cross and Blue Shield companies. The risk associated with this
concentration is believed by the Company to be limited due to management's
understanding that such entities are well capitalized. Collateral is not
required.
Estimates:
Preparation of these financial statements in conformity with
generally accepted accounting principles require the use of management's
estimates. Actual results could differ from such estimates.
The values of intangible assets are based on management's best
estimates of future revenues and cash flows to be derived from such assets. Such
estimates are subject to change based upon ongoing contract negotiations with
the Company's customers, including BCBSNJ.
Fair Value of Financial Instruments:
The fair value of financial instruments approximates their carrying
amount.
Major Customers:
Three of the Company's customers accounted for approximately 66%
(BCBSNJ), 14% and 12% of net revenues in 1996 and 58% (BCBSNJ), 25% and 16% of
net revenues in 1995. The loss of any one of these customers would have a
material adverse impact on the Company's business.
Effective November 1, 1996, the contract with the Company's
customer representing 12% of revenues was revised from fixed-fee basis to a
fee-for-service basis. As a result, the Company anticipates significantly
reduced revenues and gross margins from this customer during fiscal 1997. Based
upon the terms and expected efforts to be performed under the revised contract
during fiscal 1997, the Company anticipates revenues and gross margins of
approximately $180,000 and $50,000, respectively, compared to revenues and
gross margins of $1,960,000 and $1,137,000 in fiscal 1996.
The Company is currently in negotiation with two other customers.
There is no assurance that the revised terms of any revised contract will be on
terms more favorable than the terms of the existing contracts.
On February 3, 1997, the Company received notice from one of its
customers, Blue Cross and Blue Shield of Delaware, Inc. ("BCBSDE"), that it
intends to cancel its consulting agreement with the Company effective March 1,
1997. The Company is still engaged in discussions with such customer and hopes
to enter into an agreement on terms acceptable to both parties; however, there
is no assurance that such an agreement can be reached. Revenues and gross
margins relating to
F-12
<PAGE> 52
BCBSDE for fiscal 1996 were $426,000 and $383,000, respectively. No revenues
were recognized relating to BCBSDE prior to the 1996 fiscal year.
3. INTANGIBLE ASSETS:
Intangible assets net of accumulated amortization consist of the
following:
<TABLE>
<CAPTION>
October 31,
-------------------------
1996 1995
---------- ----------
<S> <C> <C>
Service Agreement $1,100,000
License fees 600,000 $ 800,000
Software development costs 380,769 776,091
---------- ----------
$2,080,769 $1,576,091
========== ==========
</TABLE>
Software Development Costs:
Software development costs are capitalized when project
technological feasibility is established and concluding when the product is
ready for release. Research and development costs related to software
development are expensed as incurred. Amortization of software development costs
amounted to $236,816, $67,164 and $0 for the years ended October 31, 1996,
October 31, 1995 and October 31, 1994, respectively.
As a result of management's decision to adopt and implement a new
and more comprehensive clinical related software product, the Company took a
charge of approximately $238,000 in the fourth quarter of fiscal 1996 for the
write-off of software development costs incurred in the prior years in
connection with the modification of the existing clinical software product.
License Agreement:
The Company signed a five (5) year agreement commencing November 1,
1994 for products and services (the "License Agreement") with a software
development company. Pursuant to the License Agreement, the Company was granted
a perpetual license for 100 users under a non-exclusive five year license for
the use of certain existing software, as well as, a non-exclusive five year
license for use of a new generation of customer service, utilization review and
medical/surgical case management software to be developed with CAHS's
assistance.
The License Agreement required an advance payment by CAHS of
$1,000,000 constituting a prepayment of all license fees for the 100 user
perpetual license and all maintenance fees for the initial five year term of the
License Agreement commencing November 1, 1994.
F-13
<PAGE> 53
Service Agreement:
As a result of current management's recent determination that the
Company's existing obligations under the Services Agreement between CHCM and
BCBSNJ could not be performed on a profitable basis, the Company took a charge
of approximately $1,173,000 in the fourth quarter for the write-down of Services
Agreement with BCBSNJ based on the present value of estimated future net cash
flows.
Both the service agreement write-down and the software development
cost write-off charges are reflected in "Write-down of intangible assets" on the
consolidated statements of operations. The remaining values of intangible assets
are based on management's estimates of fair value based on future cash flows
generated from those assets. Such estimates are subject to change based on
contract negotiations with the Company's customers.
4. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following:
<TABLE>
<CAPTION>
October 31,
----------------------------
1996 1995
----------- -----------
<S> <C> <C>
Computer equipment $ 360,776 $ 230,785
Furniture and fixtures 458,815 445,497
Office machines and telephone equipment 5,791 4,794
Leasehold improvements 101,631 90,410
Equipment under capital lease, consisting of:
Computer equipment 860,042 860,042
Telephone equipment 156,384 384,559
Leasehold Improvements 308,953 291,467
----------- -----------
Totals 2,252,392 2,307,554
Less: accumulated depreciation and amortization (771,646) (230,159)
----------- -----------
$ 1,480,746 $ 2,077,395
=========== ===========
</TABLE>
Amortization in connection with equipment under capital leases
amounted to $361,185, $123,617 and $-0- during 1996, 1995 and 1994,
respectively.
5. CAPITAL LEASE OBLIGATION:
The following is a schedule by years of future minimum lease
payments under capital leases together with the present value of the net minimum
lease payments as of October 31, 1996:
F-14
<PAGE> 54
<TABLE>
Fiscal Year Ending October 31,
<S> <C>
1997 $ 659,388
1998 659,388
1999 440,163
2000 and later --
Total minimum lease payments 1,758,939
Less: amount representing interest 249,497
----------
Present value of future net minimum lease payments 1,509,442
Less: current portion of obligations under capital lease 512,851
----------
Capital lease obligations, net of current portion $ 996,591
==========
</TABLE>
The Company's obligations under the Agreement are guaranteed by BCBSNJ.
6. NOTE PAYABLE - STOCKHOLDER:
In connection with the change of control transaction (see Note 1
"Change in Control") the Company issued CW Ventures a $2,000,000 principal
amount 8% Exchangeable Note maturing on June 30, 1998 (the "CW Note"). The CW
Note, which is guaranteed by the Company and CHCM and which is collateralized by
substantially all of the assets of the Company and its subsidiaries, was
originally exchangeable into that number of shares of the Company's common stock
as would equal approximately 23 1/3% of the outstanding shares of the Company's
common stock on a fully diluted basis as of February 22, 1996 so that the
3,903,201 shares issued to CW Ventures together with the shares issuable upon
the exchange of the CW Note would comprise 35% of the outstanding shares of the
Company's common stock on a fully diluted basis as of February 22, 1996. In
addition, in connection with the Bridge Financing, the Company issued to CW
Ventures for nominal consideration five-year warrants to purchase 166,667 shares
of the Company's common stock at an exercise price equal to $0.96 per share
(after adjustment for the "one (1) for six (6)" reverse stock split of the
Company's outstanding common stock). Upon exchange of the CW Note into common
stock of the Company, all accrued interest on the CW Note would be forgiven and
contributed to the capital of the Company.
CHCM has not met certain targeted savings criteria of the Services
Agreement. Accordingly, BCBSNJ has the right to terminate the agreement. BCBSNJ
has indicated to the Company that they currently do not intend to invoke their
right to terminate the Services Agreement. However, they have not waived their
future rights or remedies available to them as a result of such default. Should
BCBSNJ terminate the Services Agreement, the CW Note would become payable upon
demand. Accordingly, the CW Note has been classified as a current obligation on
the consolidated balance sheet at October 31, 1996 (See "Notes to Financial
Statements - Change in Control").
F-15
<PAGE> 55
7. DUE TO CUSTOMER AND STOCKHOLDER:
Due to customer and due to stockholder represents cash received
during the respective contract periods in excess of revenue earned during the
same periods. Based upon the settlement and repayment terms with a customer, the
Company is obligated to make thirteen monthly installments of $58,824 commencing
June 1996. The amount due to BCBSNJ, a stockholder of the Company, as at October
31, 1996 is $1,961,606. Such amount, which could increase through the term of
the contract period ended December 31, 1996 to as much as $2,400,000, shall be
repaid in nine equal monthly installments commencing April 1997. Neither
obligation bears interest nor is collateralized by any assets of the Company.
8. CAPITAL DEFICIENCY:
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 the terms of the
options. Under the 1996 Stock Option Plan, an aggregate of 10% of the Company's
authorized number of shares of Common Stock or 9,000,000 shares has been
reserved for issuance.
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
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;
(iii) immediately exercisable, and (iv) for a duration of ten (10) years from
the date of grant. An aggregate of 1,800,000 shares has been reserved for
issuance pursuant to the 1996 Director Stock Option Plan. No current member of
the Board of Directors has been granted any options under the 1996 Director
Stock Option Plan.
F-16
<PAGE> 56
There was no stock option activity during the year ended October 31,
1994. The following is a summary of stock option activity during the years ended
October 31, 1996 and October 31, 1995:
<TABLE>
<CAPTION>
1996 1995
----------------------------------- ------------------------------
Price per Price per
Share Share Share Share
--------- --------------- --------- ----------------
<S> <C> <C> <C> <C>
Outstanding at beginning of period 1,187,725 $1.32 to $18.00 -0-
Granted 1,933,334 $ .78 to $1.50 1,187,725 $1.32 to $18.00
Canceled 93,140 $2.82 to $18.00
Outstanding at end of period 3,027,919 $ .78 to $2.82 1,187.725 $1.32 to $18.00
========= =========
</TABLE>
Options for 1,539,031 shares were exercisable at October 31, 1996 at prices
ranging from $.78 to $2.82 per share.
Warrants:
In addition to the 166,667 warrants issued to CW Ventures in
connection with the change in control, in the year ended October 31, 1995, the
Company issued warrants to purchase 50,000 shares of the Company's Common Stock
at the per share price equal to eighty percent of the average closing sales
price of the stock for the sixty consecutive business days preceding the date of
exercise to one of its vendors. The warrants expire upon the earlier of the
termination of the Agreement for Products and Services between the Company and
the vendor or October 31, 1999.
9. INCOME TAX:
The tax effects of temporary differences that give rise to
significant portions of the deferred tax assets and deferred tax liabilities are
as follows:
F-17
<PAGE> 57
<TABLE>
<S> <C>
Deferred tax assets:
Net operating loss carryforwards $ 5,000,000
Settlements accrued but not paid 97,000
-----------
$ 5,097,000
===========
Deferred tax liabilities:
Excess of book over tax cost basis of fixed
assets and software costs $ 94,000
===========
Net deferred tax asset $ 5,003,000
Valuation allowance (5,003,000)
-----------
$ 0
===========
</TABLE>
The Company's deferred tax asset has been fully reserved as its
future realization can not be determined. The Company has net operating loss
carryforwards of approximately $15,000,000 at October 31, 1996, expiring through
2011. Pursuant to Section 382 of the Internal Revenue Code, the carryforwards
are subject to limitations on annual utilization based upon an ownership change
that took place in 1996. It is reasonably possible that the amount of the
carryforward and its annual utilization may be reduced upon examination by the
Internal Revenue Service. The valuation allowance on the Company's deferred tax
asset increased by approximately $1,603,000 and $3,400,000 for the years ended
October 31, 1996 and October 31, 1995 respectively. The principal reason for
the difference between the income tax benefit that would result from
applying the federal tax rate to the Company's pretax loss and the reported
benefit of $0 are the valuation allowance and a permanent difference related to
the amortization and write down of the BCBSNJ Services Agreement.
10. COMMITMENTS, CONTINGENCIES AND OTHER MATTERS:
Potential Uninsured Exposure to Litigation:
On or about March 22, 1996, an action entitled Francis X. Bodino v.
BCBSNJ and CHCM (the "Bodino Action") was filed in the Law Division of the
Superior Court of New Jersey in Hudson County. The complaint alleges
misrepresentations with respect to the type and amount of coverage afforded by
Mr. Bodino's policy with BCBSNJ, specifically with respect to coverage for heart
transplantation. The complaint also alleges that representations made on behalf
of BCBSNJ by an employee of CHCM led Mr. Bodino's surgeon to believe that
contractually excluded heart transplant coverage was available. The complaint
demands a variety of money damages, as well as punitive damages, against both
defendants. The complaint also contains a claim for treble damages and counsel
fees under the New Jersey Consumer Fraud Act. BCBSNJ is presently defending the
Bodino Action on behalf of itself and CHCM, has denied liability in all respects
and has specifically denied that Mr. Bodino's policy covered heart
transplantation or that any misrepresentations or fraud occurred. BCBSNJ and
CHCM have filed a motion for summary judgment which remains pending as to all
claims and is subject to further discovery. The Company, based upon the advice
of counsel, at present, has insufficient information to evaluate CHCM's
potential exposure, if any, in this litigation.
F-18
<PAGE> 58
At the time of the events underlying the Bodino Action, CHCM was a
subsidiary of BCBSNJ and had been engaged by the Company, through CAHS, to
provide certain staff and assistance to CAHS in support of CAHS's obligation to
provide specified services for BCBSNJ, all in accordance with the terms of an
Interim Services Agreement dated as of April 1, 1995 by and among BCBSNJ, CHCM,
the Company and CAHS (the "Interim Services Agreement"). By letter dated
February 15, 1996, counsel for Mr. Bodino gave written notice to CHCM contesting
the denial of coverage and threatening litigation against CHCM and BCBSNJ. The
Company and CAHS purchased CHCM on February 22, 1996. (See "Change in Control"
above.) The Company did not maintain insurance coverage which would cover claims
against BCBSNJ or CHCM arising from events occurring prior to February 22, 1996,
which might constitute a breach under the Interim Services Agreement. The
Company has been informed by BCBSNJ that BCBSNJ has notified its carrier of the
claim and the carrier has advised BCBSNJ that it has not yet determined whether
and to what extent coverage may exist. The Company, based upon the advice of
counsel, is not presently able to determine whether the Bodino Action might
result in any loss to the Company or CHCM and, if so, whether any such loss
would be material.
Termination of Employment:
A claim has been asserted by a former Medical Director of CAHS. The
former Medical Director was employed from September 1995 through May 1996 when
he voluntarily resigned, allegedly due to a change of control of the Company in
February 1996. He contends that he is entitled to: (i) a severance payment equal
to one year's annual base compensation ($190,000); and (ii) vesting in 75,000
qualified stock options at a strike price of $1.25 per share. The former Medical
Director bases his claim on an executed written agreement drafted by a placement
firm, which memorializes some, but not all, of the terms and conditions of his
employment. The Company intends to vigorously contest this matter on the grounds
that the former Medical Director (i) is not entitled to severance; and (ii) has
no entitlement to stock options as the plan was never approved by the
shareholders. The former Medical Director alleges claims of breach of contract
and promissory estoppel; an action has not yet been commenced in any court. The
parties are currently engaged in settlement discussions in an effort to amicably
resolve this matter prior to litigation. At this time, the Company cannot
predict the likelihood of a favorable or unfavorable outcome.
Professional Liability:
In providing utilization review and case management services, the
Company makes recommendations regarding benefit plan coverage based upon
judgments and established protocols as to the appropriateness of the proposed
medical treatment. Consequently, the Company could have potential liability for
adverse medical results. The Company could become subject to claims based upon
the denial of health care benefits and claims such as malpractice arising from
the acts or omissions of health care professionals. Although the Company does
not believe that it engages in the practice of medicine or that it delivers
medical services directly, no assurance can be given that the Company will not
be subject to litigation or liability which may adversely affect its financial
condition and operations in a material manner. Although the Company maintains
comprehensive
F-19
<PAGE> 59
general liability and professional liability insurance coverage, including
coverage for liability in connection with the performance of medical utilization
review services and typically obtains indemnification from its customers, no
assurances can be given that such coverage will be adequate in the event the
Company becomes subject to any of the above described claims.
Operating Leases:
The Company leases facilities and equipment under operating leases.
On April 14, 1995, the Company entered into a noncancelable
operating lease for approximately 28,000 square feet of office space commencing
on June 15, 1995. The term of the lease is for six years and provides for annual
base rent in the amount of $445,408 with annual escalation based on increase in
real estate taxes and operating expenses.
Rent expense for the years ended October 31, 1996, October 31, 1995
and October 31, 1994 was $475,316, $410,208 and $36,982, respectively.
Employee Benefit Plans:
Effective January 1, 1995, the Company adopted a
profit-sharing/savings plan pursuant to Section 401(k) of the Internal Revenue
Code, whereby eligible employees may contribute on a tax deferred basis a
percentage of compensation, but not in excess of the maximum allowable by tax
law. The plan provides for a matching contribution by the Company up to a
maximum level which in no case exceeds 3% of the employees' compensation.
Company contributions are fully vested after three years of continuous service
and employees' contributions are fully vested immediately.
The Company's matching contribution was $55,836 and $32,292 in
fiscal year 1996 and 1995, respectively.
At a special meeting of the Board of Directors on December 19, 1995,
the directors approved the full vesting in the Company's 401(k)
profit-sharing/savings plan for all employees of the Company as of closing date
of the bridge financing of CW Ventures.
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. The Company paid all payments required under the settlement agreement
on October 29, 1996.
F-20
<PAGE> 60
11. RECENT ACCOUNTING PRONOUNCEMENTS:
In October 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123, Accounting for Stock Based
Compensation. The statement requires, among other things, that equity
instruments issued to employees and others be valued at fair value, as described
in the statement. Adoption of the accounting methods prescribed by Statement No.
123 for equity instruments issued to employees is not mandatory and the Company
does not intend to adopt such provisions. Certain other requirements of the
statements were effective during the Company's fiscal year ended October 31,
1996 and had no effect on the Company's financial statements. The Company must
adopt the disclosure requirements of statement No. 123 in its fiscal year ending
October 31, 1997 and does not anticipate any significant effect on its financial
statements.
F-21
<PAGE> 61
Exhibit Index
-------------
Exhibit
Number Description
- ------- -----------
10.21 Employment Agreement, dated as of August 7, 1996 between the Registrant
and Richard J. Strobel
16 Letter regarding change in accountants, incorporated by reference to
exhibit filed on CAI's Form 8-K dated June 6, 1996.
21 Subsidiaries of Registrant
27 Financial Data Schedule
<PAGE> 1
EXHIBIT 10.21
EMPLOYMENT AGREEMENT
AGREEMENT (this "Agreement"), dated as of August 7, 1996, by
and between CAREADVANTAGE, INC., a Delaware corporation having its principal
place of business at 485-C Route 1 South, Iselin, New Jersey 08830-3037 (the
"Company"); and RICHARD J. STROBEL, having a residence at 4 Diane Court,
Woodcliff Lake, New Jersey 07675 (the "Employee").
W I T N E S S E T H
WHEREAS, the Company is desirous of employing the Employee as
its Vice President, Treasurer, Secretary and Chief Financial Officer; and
WHEREAS, the Employee is desirous of being so employed by the
Company.
NOW, THEREFORE, in consideration of the mutual
representations, warranties, covenants and undertakings of the parties hereto,
and for other good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, the parties hereto, intending to be legally
bound, do hereby agree as follows:
1. EMPLOYMENT.
(a) The Company hereby employs the Employee as its
Vice President, Treasurer, Secretary and Chief Financial Officer to perform such
duties as are consistent with the Employee's title and such other related duties
as the Board of Directors of the Company (the "Board") shall otherwise request
from time to time.
(b) The Employee shall devote his best efforts and
full business time to his duties hereunder and the business and affairs of the
Company, which the parties hereto agree shall not be less than forty (40) hours
a week.
2. COMPENSATION. As compensation for his services to the
Company hereunder, the Company shall pay to the Employee the following:
(a) Base Salary. The Employee shall receive a base
salary at the rate of not less than One Hundred Seventy-Five Thousand Dollars
($175,000) per annum (the "Base Salary"), payable in accordance with the normal
payroll practices of the Company.
(b) Stock Options. The Company hereby grants to the
Employee options (the "Options") to purchase up to Two Million Four Hundred
Thousand (2,400,000) fully paid and nonassessable shares of the Company's common
stock (the "Common Stock"), at an exercise
1
<PAGE> 2
price of $.13 per share, constituting the market price on July 24, 1996 when the
Board agreed to grant the Options to the Employee under a new stock option plan
adopted by the Board and to be submitted to the stockholders of the Company for
ratification. The Options shall vest and become exercisable as hereinafter set
forth:
(i) With respect to Options to purchase Two
Million (2,000,000) shares of Common Stock (subject to adjustment), Six Hundred
Sixty-Six Thousand Six Hundred Sixty-Eight (666,668) shares of Common Stock
shall vest and be immediately exercisable upon the date hereof, while Six
Hundred Sixty-Six Thousand Six Hundred Sixty-Six (666,666) shares of Common
Stock shall vest and become exercisable upon the first and second anniversary of
the Effective Date; and
(ii) On the anniversary of the Effective
Date for each year of the Term (as such term is defined in Section 3 hereof),
Options to purchase One Hundred Thousand (100,000) shares of Common Stock
(subject to adjustment) per year, shall vest and become exercisable if
performance targets for the Company set by the Board are satisfied.
3. TERM. The Company hereby agrees to employ the Employee as
Vice President, Treasurer, Secretary and Chief Financial Officer of the Company
for a period of four (4) years (the "Initial Period") commencing as of August 7,
1996 (the "Effective Date") and ending on August 6, 2000, subject to earlier
termination of such employment hereunder as provided in this Agreement. After
the expiration of the Initial Period, the Employee's employment hereunder shall
be automatically extended for successive, additional (1) year periods (each such
period, an "Extension Period"), unless and until such employment hereunder shall
have been terminated as provided in this Agreement. Notwithstanding the
foregoing, this Section 3 shall in no manner limit the right of the Company or
the Employee to terminate the Employee's employment hereunder in accordance with
Section 6 hereof.
4. BENEFITS. Subject to the provisions of this Agreement, the
Company shall provide the following benefits to the Employee for services
rendered during the Term:
(a) Insurance Benefits. The Employee shall be
entitled to participate in, and receive benefits under, the following insurance
benefit programs and plans provided by the Company: medical insurance, dental
insurance, term life insurance and disability insurance, as in effect from time
to time. The Employee shall also be entitled to such other insurance benefits of
the Company when and as such benefits may be in effect from time to time and are
generally available to employees at the senior executive level. In addition,
nothing herein shall preclude the Employee from receiving any additional
compensation in the form of salary, bonuses or otherwise or from participating
in any future benefit plan for employees of the Company, in each case as and to
the extent approved and determined by the Board.
(b) Retirement Benefits. The Employee shall be
entitled to participate in, and receive benefits under, the following retirement
benefit program provided by the Company: the Company's 401(k) savings program.
The Employee shall also be entitled to such
2
<PAGE> 3
other retirement benefits of the Company when and as such benefits may be in
effect from time to time and are generally available to employees at the senior
executive level.
(c) Vacation. The Employee shall be entitled to an
aggregate of not less than four (4) weeks of paid vacation for each twelve (12)
month period commencing with the Effective Date during the Employee's employment
hereunder, which vacation must be taken by the Employee during the twelve (12)
month period in which it is earned.
(d) Sick Leave. The Employee shall be entitled to
such sick leave as determined in accordance with applicable Company policies as
established by the Company's Board, from time to time.
5. EXPENSES.
The Employee is hereby authorized to incur necessary
and reasonable travel and business-related expenses incurred in the performance
of his duties hereunder, and the Company, upon the Employee's presentation from
time to time of appropriate documentation evidencing such expenses, shall either
pay directly or reimburse the Employee for such expenses, all as in accordance
with applicable Company policies as established by the Company's Board.
6. TERMINATION OF EMPLOYMENT. The following provisions set
forth the terms and conditions pursuant to which the employment of the Employee
hereunder may be terminated:
(a) The employment of the Employee hereunder shall be
terminated upon the death of the Employee.
(b) The employment of the Employee hereunder may be
terminated by the Company or the Employee by notice given to the other party not
less than three (3) months prior to the expiration of the Initial Period or the
then current Extension Period, as the case may be, and such employment shall be
terminated effective as of the expiration of such Period.
(c) The employment of the Employee hereunder may be
terminated by the Company in the event of the occurrence of any of the following
conditions or events:
(i) failure of the Employee to perform his
duties hereunder as a result of physical or mental incapacity for either a
continuous period of three (3) months or a total of four (4) out of any six (6)
consecutive months (performance of duties for a period of less than two (2)
weeks shall not be deemed to interrupt an otherwise continuous period) (any
dispute as to the Employee's incapacitation shall be resolved by an independent
physician, reasonably acceptable to the Employee and the Board, whose
determination shall be final and binding upon both the Employee and the
Company);
(ii) failure of the Employee to perform his
duties hereunder, other than as a result of physical or mental incapacity, after
a demand for performance is delivered
3
<PAGE> 4
to the Employee by the Board and the Employee's failure to cure such
nonperformance within thirty (30) days of such demand;
(iii) commission by the Employee of any act
(including, without limitation, acts of moral turpitude or excessive absenteeism
not related to illness or vacations) that is damaging or detrimental to, or that
could be expected to be damaging or detrimental to, the Company, its business or
reputation (whether such action is in performance of his duties hereunder or
otherwise);
(iv) the conviction of the Employee of a
felony; or
(v) any other material breach of this
Agreement by the Employee.
Upon or after the date of occurrence of any of the events or conditions
described above, the Company may deliver written notice to the Employee of its
election to terminate his employment hereunder.
(d) Resignation. The Employee may at any time
terminate his employment hereunder by giving the Company three (3) months prior
written notice of his resignation, delivered to the Board.
(e) Without Cause. The employment of the Employee
hereunder may be terminated by the Company without cause, in its sole and
absolute discretion.
7. SEVERANCE. In the event that the Employee's employment
hereunder is terminated, from and after the effective date of such termination,
the Company shall be under no further liability or obligation of any kind
whatsoever to the Employee, except as set forth as follows:
(a) Death, Resignation and Without Cause. In the
event such termination occurs pursuant to Sections 6(a), (d) and (e) hereof (or,
in the event of a termination pursuant to Section 6(a) hereof, the Employee's
estate or legal representative) shall be entitled to receive from the Company
within forty-five (45) days of such date of termination: (i) the Base Salary for
services rendered up to the effective date of termination; plus (ii) one hundred
(100%) percent of the Employee's Base Salary for the six (6) month period
immediately succeeding such date of termination; (iii) reimbursement for
expenses incurred by the Employee pursuant to Section 5 hereof up to the
effective date of termination; and (iv) any and all compensation or benefits
that have accrued up to the effective date of termination (the payments and
benefits set forth in subclauses (i) through (iv) above, collectively the "Basic
Severance Benefits").
(b) No Extension and For Cause. In the event that
such termination occurs pursuant to Sections 6(b) and 6(c) hereof, then the
Employee shall be entitled to receive the Basic Severance Benefits; provided,
however, that the Employee shall not be eligible to receive any payment as set
forth in Section 7(a)(ii) hereof.
4
<PAGE> 5
8. INDEMNIFICATION.
(a) The Company shall indemnify, defend and hold the
Employee harmless, to the maximum extent permitted by law, against all
judgments, fines, amounts paid in settlement and all reasonable expenses,
including attorneys' fees incurred by the Employee, in connection with the
defense of, or as a result of any action or proceeding (or any appeal from any
action or proceeding) in which the Employee is made or is threatened to be made
a party by reason of the fact that the Employee is or was an officer of the
Company, regardless of whether such action or proceeding is one brought by or in
the right of the Company, to procure a judgment in its favor (or other than by
or in the right of the Company). In connection with the Company's defense of the
Employee pursuant to this Section 8(a), the Company hereby covenants that it
shall not agree to any compromise or settlement without the prior written
consent of the Employee, that any counsel retained or employed by the Company
shall be reasonably acceptable to the Employee, and that the Employee shall have
the right to participate in any such defense. Each of the parties hereto shall
give prompt notice to the other of any action or proceeding from which the
Company is obligated to indemnify, defend and hold harmless the Employee of
which it or he (as the case may be) gains knowledge.
(b) The Company hereby represents and warrants that
the Employee is and covenants that the Employee shall continue to be covered and
insured up to the maximum limits provided by all insurance which the Company
maintains to indemnify its officers (and to indemnify the Company for any
obligations which it incurs as a result of its undertaking to indemnify its
officers).
9. ARBITRATION. Any dispute, controversy or claim between the
parties hereto arising out of or relating to this Agreement (except with respect
to any disputes, controversies or claims arising under or with respect to
Sections 11 and 12 hereof), either during or after the Term, shall be settled by
arbitration conducted in the State of New Jersey, in accordance with the
Commercial Rules of the American Arbitration Association then in force (the
"Rules") and New Jersey law. In the event that one party hereto requests
arbitration, it shall serve upon the other party hereto (the "Non-Requesting
Party") a written demand for arbitration stating the substance of the
controversy, dispute or claim, the contention of the party requesting
arbitration and the name and address of the arbitrator appointed by them. The
Non-Requesting Party, within twenty (20) days after receipt of such demand,
shall accept the arbitrator appointed by the other party or shall appoint an
arbitrator and notify the other party of the identity of the arbitrator so
selected in which case the two (2) arbitrators shall appoint a third. The
decision or award of the single arbitrator or, in the case of three (3)
arbitrators, the decision or award of any two (2) of the three (3) arbitrators
shall be final and binding upon the parties hereto. In the event that the two
(2) arbitrators fail in any instance to appoint a third arbitrator within twenty
(20) days of the appointment of the second arbitrator, either arbitrator or
either party hereto may apply to the American Arbitration Association for
appointment of the third arbitrator in accordance with the Rules. Should the
Non-Requesting Party fail or refuse to accept the arbitrator appointed by the
other party and fail or refuse to appoint an arbitrator within twenty (20) days
after receipt of the demand for arbitration, the single arbitrator shall have
the right to decide the dispute, controversy
5
<PAGE> 6
or claim alone, and such arbitrator's decision or award shall be final and
binding upon the parties. The decision of the arbitrator or arbitrators shall be
in writing and shall set forth the basis therefor. The parties hereto shall
abide by all awards rendered in such arbitration proceedings and all such awards
may be enforced and executed upon in any court having jurisdiction over the
party against whom enforcement of such award is sought.
10. SEVERABILITY. It is the intention of the parties that the
provisions of this Agreement shall be enforced to the fullest extent permissible
under the laws and public policies of each state and jurisdiction in which such
enforcement is sought, but that the unenforceability (or the modification to
conform with such laws or public policies) of any provisions hereof, shall not
render unenforceable or impair the remainder of this Agreement. Accordingly, if
any provision of this Agreement shall be determined to be invalid or
unenforceable, either in whole or in part, this Agreement shall be deemed
amended to delete or modify, as necessary, the offending provisions and to alter
the balance of this Agreement in order to render the same valid and enforceable
to the fullest extent permissible.
11. NON-DISCLOSURE. The Employee shall not, at any time during
or following the period of his employment by the Company, disclose, use,
transfer or sell, except in the course of his employment by the Company
hereunder, any confidential information or proprietary data of the Company or
any of its subsidiaries so long as such information or data remains confidential
and has not been disclosed or is not otherwise in the public domain, except as
required by law or pursuant to legal process or in connection with an
administrative proceeding before a governmental agency.
12. NONCOMPETITION AGREEMENT. For good and valuable
consideration, the receipt and sufficiency of which is hereby acknowledged by
the parties hereto, during the period of the Employee's employment by the
Company and for a period of six (6) months after the effective date of the
termination of the Employee's employment by the Company hereunder, the Employee
shall not, directly or indirectly: (a) work for, consult with, or provide any
services to an entity or individual which provides utilization
review/utilization management and/or disease management services that are
similar to those services rendered by the Company or any affiliate and/or the
other services that are or may be reasonably expected to be provided by the
Company or any affiliate from time to time, in any geographic area the Company
or any affiliate is providing or is contracted to provide such services; (b)
induce or attempt to induce any officers, employees, representatives or agents
of the Company or any affiliate to terminate or modify their relationship with
the Company or any affiliate or to violate any of the provisions of their
agreements with the Company or any affiliate; or (c) solicit, entice away, or
otherwise interfere with the relationship of the Company or any affiliate with
any customers, distributors or suppliers of the Company or any affiliate.
13. EQUITABLE RELIEF. The Employee hereby acknowledges that
the services to be rendered by him are of a special, unique and extraordinary
character, that it would be very difficult or impossible to replace such
services and that the other material provisions of this Agreement (including,
without limitation, Sections 11 and 12 hereof) are of crucial importance
6
<PAGE> 7
to the Company. Accordingly, the Employee hereby acknowledges and agrees that if
he breaches or threatens to commit a breach of any of the material provisions
hereof, the Company shall have the following rights and remedies, each of which
rights and remedies shall be independent of the others and severally
enforceable, and each of which is in addition to, and not in lieu of, any other
rights and remedies available to the Company at law or in equity:
(a) The right and remedy to have the Employee
enjoined (whether by temporary restraining order, temporary injunction or
permanent injunction) (without the posting of any bond or security) by any court
of competent jurisdiction from breaching or continuing to breach any material
provision hereof, it being agreed that any breach or threatened breach of any
material provision hereof would cause irreparable injury to the Company and that
money damages would not provide an adequate remedy to the Company.
(b) The right and remedy to have the material
provisions hereof specifically enforced by any court of competent jurisdiction,
it being agreed that any breach or threatened breach of any material provision
hereof would cause irreparable injury to the Company and that money damages
would not provide an adequate remedy to the Company.
(c) The right and remedy to require the Employee to
account for and pay over to the Company all compensation, profits, monies,
accruals, increments or other benefits derived or received by the Employee as
the result of any action or transaction constituting a breach of any material
provision hereof.
(d) The right and remedy to require the Employee to
account for and pay over to the Company all costs and expenses incurred by the
Company resulting from the Employee's breach of any material provision hereof
(including, without limitation, reasonable attorneys' fees and expenses in
dealing with his breach or any suits or actions with regard thereto) and for all
damages (compensatory along with punitive) that may be awarded in connection
therewith.
14. NO CONFLICT. The Employee and the Company each hereby
represents and warrants to the other that the execution, delivery and
performance of this Agreement by him or it (as the case may be) shall not
violate any agreement or other obligation of any kind, written or oral, to which
he or it (as the case may be) is subject.
15. SURVIVAL. The provisions of Sections 11 and 12 hereof
shall expressly survive the expiration or termination hereof, regardless of the
reasons therefor.
16. ASSIGNMENT. This Agreement is personal in nature and
neither of the parties hereto shall, without the consent of the other, assign or
transfer this Agreement or any rights or obligations hereunder, except that the
Company shall have the right to sell, assign or otherwise transfer its rights
and obligations under, and interest in, this Agreement at any time in connection
with (a) a transfer to a parent, subsidiary or affiliate, (b) a reorganization,
(c) a merger, consolidation or other business combination or (d) a sale of
substantially all of its assets
7
<PAGE> 8
(whether through asset or stock sale or otherwise). This Agreement and all of
the provisions hereof shall be binding upon, and inure to the benefit of, the
parties hereto and their successors (including successors by merger,
consolidation or similar transactions), permitted assigns, executors,
administrators, personal representatives, heirs and distributees.
17. MISCELLANEOUS.
(a) Notices. All notices hereunder shall be given in
writing by personal delivery (which shall include delivery by express couriers
such as Federal Express), telex, telecopy or prepaid registered or certified
mail, return receipt requested, to the addresses of the proper parties as set
forth below:
<TABLE>
<S> <C>
To the Employee: Mr. Richard J. Strobel
4 Diane Court
Woodcliff Lake, New Jersey 07675
To the Company: CareAdvantage, Inc.
485-C Route 1 South
Iselin, New Jersey 08830-3037
Attn: Chief Executive Officer
with copy to: Epstein Becker & Green, P.C.
250 Park Avenue
New York, New York 10017
Attn: Jeffrey H. Becker, Esq.
</TABLE>
Any notice given as aforesaid shall be deemed received upon actual delivery. Any
party hereto (or any person designated to receive a copy of any notice) may
change his or its (as the case may be) designated address by notice served as
herein set forth upon the other party designated to receive notice.
(b) Law Governing. This Agreement shall be governed
by and construed in accordance with the laws of the State of New Jersey
applicable to contracts made and to be wholly performed in that state.
(c) Headings. The section headings contained in this
Agreement are for convenience of reference only and are not intended to
determine, limit or describe the scope or intent of any provision of this
Agreement.
(d) Entire Agreement. This Agreement contains the
entire understanding between the parties with respect to the subject matter
hereof and supersedes any prior or contemporaneous understandings and
agreements, written or oral, between them respecting such subject matter.
8
<PAGE> 9
(e) Counterparts. This Agreement may be executed in
counterparts, each of which shall be deemed an original but both of which taken
together shall constitute one instrument.
(f) Amendments. This Agreement may not be amended
except by a writing executed by the party against whom or which such amendment
is to be enforced.
IN WITNESS WHEREOF, each of the parties hereto have caused
this Agreement to be signed as of the day and year first above written.
CAREADVANTAGE, INC.
By:
------------------------------------
Print Name: Thomas Riley
Title: Chief Executive Officer
------------------------------------
Richard J. Strobel
9
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF REGISTRANT
<TABLE>
<CAPTION>
STATE OR OTHER NAME UNDER
JURISDICTION OF WHICH BUSINESS
NAME INCORPORATION IS CONDUCTED
---- --------------- --------------
<S> <C> <C>
CareAdvantage Health Systems, Inc. Delaware CareAdvantage Health Systems, Inc.
Contemporary HealthCare New Jersey Contemporary HealthCare
Management, Inc. Management, Inc.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED
FINANCIAL STATEMENTS AS OF AND FOR THE YEAR ENDED OCTOBER 31, 1996 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM 10-KSB.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1996
<PERIOD-START> NOV-01-1995
<PERIOD-END> OCT-31-1996
<CASH> 1,167,147
<SECURITIES> 0
<RECEIVABLES> 903,333
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 2,220,309
<PP&E> 1,480,746
<DEPRECIATION> 0
<TOTAL-ASSETS> 5,861,008
<CURRENT-LIABILITIES> 6,411,607
<BONDS> 996,591
0
0
<COMMON> 24,233
<OTHER-SE> (2,007,335)
<TOTAL-LIABILITY-AND-EQUITY> 5,861,008
<SALES> 0
<TOTAL-REVENUES> 11,792,157
<CGS> 0
<TOTAL-COSTS> 9,584,991
<OTHER-EXPENSES> 6,960,268
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 581,808
<INCOME-PRETAX> (5,334,910)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,334,910)
<EPS-PRIMARY> (0.23)
<EPS-DILUTED> (0.23)
</TABLE>
