SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended July 31, 1997
COMMISSION FILE NUMBER 0-26168
CAREADVANTAGE, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 52-1849794
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification Number)
485-C Route 1 South, Iselin, New Jersey 08830
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (908) 602-7000
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
74,389,886
Number of shares of Common Stock outstanding as of September 15, 1997
Transitional Small Business Disclosure Format
Yes X No__
This is Page 1 of 13 Pages.
<PAGE>
CAREADVANTAGE, INC
CONSOLIDATED BALANCE SHEETS
ASSETS July 31, October 31,
1997 1996
------------ ------------
Current assets:
Cash and cash equivalents $ 776,828 $ 1,167,147
Accounts receivable-stockholder 955,122 833,333
Accounts receivable-other 753,958 90,000
Other current assets 222,596 129,829
------------ ------------
Total current assets 2,708,504 2,220,309
Property and equipment, at cost less
accumulated depreciation 1,564,567 1,480,746
Intangible assets (net) 1,761,412 2,080,769
Other assets 85,417 79,184
------------ ------------
Total assets $ 6,119,900 $ 5,861,008
============ ============
LIABILITIES AND CAPITAL DEFICIENCY
Current liabilities:
Current portion of long-term debt $ 558,628 $ 623,472
Note payable-stockholder 2,000,000 2,000,000
Accounts payable-trade 731,068 569,346
Due to customer 0 485,594
Due to stockholder 0 1,525,694
Accrued salaries and employee benefits 393,433 512,505
Accrued expenses and other current
liabilities (Note F) 1,496,526 694,996
------------ ------------
Total current liabilities 5,179,655 6,411,607
Capital lease obligations, less
current portion (Note E) 571,707 996,591
Due to stockholder, less current portion 0 435,912
Notes payable-stockholder 1,862,823 0
Deferred revenue and other
long-term liabilities 640,813 0
------------ ------------
Total liabilities 8,254,998 7,844,110
Capital deficiency:
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 74,389,886 and 24,233,327 74,390 24,233
Additional capital 19,640,586 19,690,248
Accumulated deficit (21,850,074) (21,697,583)
Total capital deficiency (2,135,098) (1,983,102)
------------ ------------
Total liabilities and capital deficiency $ 6,119,900 $ 5,861,008
============ ============
The accompanying notes are an integral part of these statements.
2
<PAGE>
CAREADVANTAGE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
July 31, July 31,
1997 1996* 1997 1996*
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net revenues $ 4,088,791 $ 2,313,715 $ 10,424,189 $ 9,777,839
Costs of services 2,041,175 2,281,916 6,080,539 7,368,195
------------ ------------ ------------ ------------
Gross margin 2,047,616 31,799 4,343,650 2,409,644
------------ ------------ ------------ ------------
Operating expenses:
Selling, general and administration 1,277,863 1,493,013 4,017,060 4,256,713
Depreciation and amortization 75,421 27,387 235,960 200,338
------------ ------------ ------------ ------------
Total operating expenses 1,353,284 1,520,400 4,253,020 4,457,051
------------ ------------ ------------ ------------
Operating income(loss) 694,332 (1,488,601) 90,630 (2,047,407)
Interest 101,190 156,664 243,122 351,669
------------ ------------ ------------ ------------
Net income (loss) $ 593,142 ($ 1,645,265) ($ 152,492) ($ 2,399,076)
============ ============ ============ ============
Pro forma net income (loss)
per share of common stock $ .01 ($.03) ($.00) ($.04)
============ ============ ============ ============
Pro forma weighted average number
of common shares outstanding 74,389,886 65,149,000 74,389,886 55,319,000
============ ============ ============ ============
</TABLE>
*Reclassified to conform to current period classification.
The accompanying notes are an integral part of these statements.
3
<PAGE>
CAREADVANTAGE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended
July 31,
--------
1997 1996*
---- ----
Operating activities:
Net profit (loss) ($ 152,492) ($2,399,076)
Adjustments to reconcile net profit (loss)
to net cash Provided from (used for)
operating activities:
Depreciation and amortization 768,939 878,784
Deferred contract consideration 0
Expense associated with issuance of warrants 0 98,000
Change in assets and liabilities:
Due to/from customers/stockholders (1,370,125) (333,224)
Other assets (99,000) (23,976)
Accounts payable 161,722 (353,746)
Accrued expenses and other liabilities 1,323,271 411,140
Restricted cash account 0 (483,283)
----------- -----------
Cash provided from (used by)
operating activities 632,315 (2,205,381)
----------- -----------
Investing activities:
Capital expenditures (532,906) (33,536)
Acquisition of intangible assets 0 (79,462)
Acquistion of CHCM(cash proceeds-net of
transaction costs) 0 749,171
----------- -----------
Cash provided from (used by) investing
activities (532,906) 636,173
----------- -----------
Financing activities:
Principal payments under long-term debt (489,728) (367,825)
Proceeds from issuance of note payable 0 2,000,000
Net proceeds from issuance of common stock 0 925,000
----------- -----------
Cash provided from (used by) financing
activities (489,728) 2,557,175
----------- -----------
Net increase (decrease) in cash (390,319) 987,967
Cash - beginning of fiscal year 1,167,147 536,471
----------- -----------
Cash - end of period $ 776,828 $ 1,524,438
=========== ===========
*Reclassified to conform to current period classification.
The accompanying notes are an integral part of these statements.
4
<PAGE>
CAREADVANTAGE, INC.
NOTES TO FINANCIAL STATEMENT---JULY 31, 1997
(Unaudited)
CareAdvantage, Inc. ("CAI" or the "Company"), is a holding company which,
through its subsidiaries, CareAdvantage Health Systems, Inc. ("CAHS") and
Contemporary HealthCare Management, Inc. ("CHCM"), provides health care cost
containment services to health care insurers and other health services
organizations to reduce the costs of medical services provided to their
subscribers without reducing the quality of service.
Note A--Basis of Preparation:
The consolidated financial statements have been prepared by CAI and have not
been audited by the Company's independent auditors. The accompanying financial
statements include all adjustments (which include only normal recurring
adjustments) which in the opinion of management are necessary to present fairly
the financial position, results of operations and cash flows at July 31, 1997
and for all periods presented.
Certain information and note disclosures required to be included in the
financial statements prepared in accordance with generally accepted accounting
principles have been omitted. These consolidated financial statements should be
read in conjunction with the financial statements and notes thereto included
with the Company's October 31, 1996 Annual Report on Form 10-KSB filed with the
Securities and Exchange Commission. The results of operations for the period
ended July 31, 1997 are not necessarily indicative of operating results to be
expected for the full year.
Note B--Pro forma Net Income/(Loss) Per Share Common Stock:
Pro forma weighted average common shares outstanding include the 25,914,222
shares issued to CW Ventures II, L.P. ("CW Ventures") in connection with the
terms of the promissory note by CAHS in favor of CW Ventures, dated February 22,
1996 as if they had been issued on February 22, 1996 and the 24,242,,337 shares
issued to Blue Cross and Blue Shield of New Jersey, Inc. ("BCBSNJ") in
connection with the terms of the promissory note by CAHS in favor of BCBSNJ (as
assignee of Enterprise Holding Co., Inc.), dated February 22, 1996 as if they
had been issued as of November 1, 1995. The operations of the business of CHCM
purchased by the Company from BCBSNJ is included in the Company's results of
operations for the entire nine-month period ended July 31, 1996.
Note C--Contingencies:
Termination of Employment:
A former Medical Director of CAHS has asserted a claim against the Company. 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 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 have agreed to submit this claim to arbitration before the American
Arbitration Association 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 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. For a
discussion of pending litigation against the Company, see the Company's Form
10-KSB for the fiscal year ended October 31, 1996.
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, and has denied liability in all respects and has
specifically denied that the policy purchased by Mr. Bodino 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 its counsel, has insufficient information, at present, 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. The Company did not
maintain insurance coverage that 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 certain policy exclusions may be applicable to preclude
coverage for the claimed damages, either in whole or in part. BCBSNJ has further
asserted that it does not believe any such exclusions are applicable and that it
has furnished additional information to the carrier in support of its position.
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.
5
<PAGE>
CAREADVANTAGE, INC.
NOTES TO FINANCIAL STATEMENT---JULY 31, 1997
(Unaudited)
Note D:--Supplemental Cash Flow Information
Below is supplemental cash flow information related to the nine months
ended July 31, 1997 and 1996:
July 31,
--------
1997 1996
---- ----
Income Taxes Paid 0 0
Interest Paid, IBM capital lease obligations 117,000 154,000
Note E--Long-Term Debt and Leases:
Below is information related to the Company's long-term debt and capital
lease obligations at July 31, 1997 and October 31, 1996:
July 31, October 31,
1997 1996
---- ----
11.39% capital lease obligation due through 1999 1,130,335 1,509,442
11.25% MEDecision Note due through 12/31/96 0 110,621
Summit Revolving Credit Agreement due June 30, 2000 0 0
1,130,335 1,620,063
--------- ---------
Less Current Portion 558,628 623,472
--------- ---------
571,707 996,591
--------- ---------
6
<PAGE>
CAREADVANTAGE, INC.
NOTES TO FINANCIAL STATEMENT---JULY 31, 1997
(Unaudited)
Note F--Accrued expenses and other current liabilities:
Accrued expenses and other current liabilities consist of the following at
July 31, 1997 and October 31, 1996:
July 31, October 31,
1997 1996
---- ----
Accrued Interest 266,000 110,000
Accrued Professional Fees 123,000 119,000
Deferred revenue 615,000 0
Other accrued expenses 493,000 466,000
--------- -------
Total 1,497,000 695,000
========= =======
Note G--Employment Agreement:
Effective as of June 11, 1997 the Company entered into an Employment Agreement
with Thomas P. Riley, its current President and Chief Executive Officer (the
"Riley Employment Agreement") , which was attached as an exhibit to the
Company's Form 10-QSB for the quarter ended April 30, 1997 and is incorporated
by reference herein. The Riley Employment Agreement provides for a term
commencing June 10, 1997 and ending on December 31, 1998, with annual
compensation of $275,000 per annum. The Riley Employment Agreement further
provides for the payment of a bonus in the amount of $100,000 if Mr. Riley was
employed by the Company on June 30, 1997. Accordingly, the Company paid this
bonus and has recorded a charge of $100,000 for the three-month period ended
July 31, 1997.
Note H--Subsequent Events:
Re-negotiation of contract with Blue Cross Blue Shield of Rhode Island
("BCBSRI"):
The Company has completed renegotiating its Services Agreement with Blue Cross
and Blue Shield of Rhode Island ("BCBSRI") and executed a new Services Agreement
with BCBSRI. Previously, the Company had announced the re-negotiation of the
compensation component of the BCBSRI contract and reported that final
negotiations regarding the other provisions of the agreement were under way.
Under the terms of this agreement, effective January 1, 1997 through December
31, 1999, the Company will provide utilization management services to BCBSRI's
indemnity subscribers. The agreement calls for a combination of fixed fees paid
to the Company with additional revenues being recognized on a performance basis.
Excess Performance Fees From Blue Cross Blue Shield Vermont("BCBSVT")
The Company has earned performance revenues from Blue Cross and Blue Shield of
Vermont ("BCBSVT") for BCBSVT's contract year ended March 31, 1997 in excess of
amounts previously recorded by the Company. The Company has recognized
approximately $315,000 and $30,000 in performance revenues from this customer
for the quarters ended July 31, 1997 and April 30, 1997, respectively. There can
be no assurance, however, that the Company will continue to receive such
revenues in future quarters.
Note I--Shareholder Option Agreement
Effective as of June 13, 1997, CW Ventures granted to BCBSNJ an option to
purchase from it 10,031,238 shares of Common Stock at $0.38 per share (the
"BCBSNJ Option"), as provided in the Option Agreement dated as of June 13, 1997,
between CW Ventures and BCBSNJ (the "Option Agreement"). If the fair market
value per share of Common Stock is greater than the exercise price of the BCBSNJ
Option on the applicable date of calculation, BCBSNJ may elect to pay such
exercise price by surrendering for cancellation a portion of the BCBSNJ Option
and receiving a number of shares of Common Stock according to a formula set
forth in the Option Agreement. The BCBSNJ Option is exercisable in the event the
Company achieves certain goals for defined periods through February 28, 2000,
all as more fully set forth in the Option Agreement. In addition, exercisability
of the BCBSNJ Option may be accelerated in certain circumstances, all as more
fully set forth in the Option Agreement. The option was granted by CW Ventures
to BCBSNJ in consideration BCBSNJ's revision of its services agreement with the
Company, the Joint Services Agreement with Allied Health Group, Inc. and
agreement to guaranty the Summit Bank Credit Agreement. The option grant will
result in a charge of approximately $15,000 which will be amortized over the
three year term of the amended services agreement.
7
<PAGE>
CAREADVANTAGE, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General Developments of Business:
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. The accountant's report to the
Company's financial statements included with the annual report filed on Form
10-KSB of the Company for the fiscal year ended October 31, 1996 contains an
explanatory paragraph indicating that there is substantial doubt about the
Company's ability to continue as a going concern. Although the Company has
experienced significant operating losses on a consolidated basis, resulting in a
deficit equity position, management has taken several steps to build on what it
believes to be a successful business model, including the re-negotiation of key
contracts. By continuing to provide high quality health care cost containment
services to its existing customer base of Blue Cross and Blue Shield (BCBS)
plans, management believes it can continue to leverage its reputation to other
similar customers. This strategy is particularly significant given the current
health care environment where large third-party payers are merging in an effort
to 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.
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.
Additionally, the Company intends to broaden its services offered with unique
and complementary cost-containment strategies. Management intends to evaluate
each service with regard to anticipated changes in the health care industry, the
cost to enter any such line of service as well as the availability 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 venture as well as through acquisitions.
Certain statements in this Form 10-QSB constitute forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995,
including those concerning management's expectations with respect to future
financial performance and future events, particularly relating to revenues from
performance-based services and re-negotiation 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.
In addition, certain risk factors exist which are beyond the control of the
Company, such as the Company's inability to prevent its customers from
terminating existing contracts by invoking standard termination clauses, all of
which can affect future financial performance of the Company.
Re-negotiation of contract with Blue Cross Blue Shield of Rhode Island
("BCBSRI"):
The Company has completed renegotiating its Services Agreement with Blue Cross
and Blue Shield of Rhode Island ("BCBSRI") and executed a new services agreement
with BCBSRI, which is attached as an exhibit hereto and incorporated herein by
reference. Previously, the Company had announced the re-negotiation of the
compensation component of the BCBSRI contract and reported that final
negotiations regarding the other provisions of the agreement were under way.
Under the terms of this agreement, effective January 1, 1997 through December
31, 1999, the Company will provide utilization management services to BCBSRI's
indemnity subscribers. The agreement calls for a combination of fixed fees paid
to the Company with additional revenues being recognized on a performance basis.
The Company has earned performance revenues from Blue Cross and Blue Shield of
Vermont ("BCBSVT") for BCBSVT's contract year ended March 31, 1997 in excess of
amounts previously recorded by the Company. The Company has recognized
approximately $315,000 and $30,000 in performance revenues from this customer
for the quarters ended July 31, 1997 and April 30, 1997, respectively. There can
be no assurance, however, that the Company will continue to receive such
revenues in future quarters.
Chief Executive Officer Employment Agreement ("Riley Employment Agreement")
Executed by The Chairman of the Board of Directors:
Effective as of June 11, 1997 the Company entered into an Employment Agreement
with Thomas P. Riley, its current President and Chief Executive Officer (the
"Riley Employment Agreement"); which was attached as an exhibit to the Company's
Form 10-QSB for the quarter ended April 30, 1997 and is incorporated by
reference herein. The Riley Employment Agreement provides for a term commencing
June 10, 1997 and ending on December 31, 1998, with annual compensation of
$275,000 per annum. The Riley Employment Agreement further provides for the
payment of a bonus in the amount of $100,000 if Mr. Riley is employed by the
Company on June 30, 1997. Accordingly, the Company paid this bonus and has
recorded a charge of $100,000 for the three-month period ended July 31, 1997.
8
<PAGE>
CAREADVANTAGE, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Net revenues:
Nine Months Ended
-----------------
July 31, 1997 July 31, 1996
------------- -------------
Amount Percent Amount Percent
------ ------- ------ -------
Revenues from fixed fee
arrangements $9,419,000 90% $6,789,000 69%
Revenues from performance-
based arrangements 861,000 8% 2,553,000 26%
Consulting revenues 144,000 2% 436,000 5%
----------- ---- ---------- ----
Total revenues $10,424,000 100% $9,778,000 100%
=========== ==== ========== ====
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 compilation of claims data typically lags the Company's
actual performance by several months, it is difficult to ensure complete
accuracy when recording performance-based revenues. 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
re-negotiation of the contract itself. While management believes its estimated
performance-based revenues contained in reported revenues for the three months
and nine months ended July 31, 1997 are accurate based upon the data available
to management. Information received by the Company after the filing of this Form
10-QSB could result in an adjustment of its estimates of performance-based
revenues (which would be reflected in subsequent quarters, if necessary).
Revenues:
Net revenues for the three-month and nine-month periods ended July 31, 1997 were
$4,089,000 and $10,424,000, respectively, compared to net revenues in the
corresponding periods of the prior fiscal year of $2,314,000 and $9,778,000,
respectively, representing an increase for the three-month and nine-month
periods of approximately $1,775,000 and $646,000, respectively. The increases
are primarily due to increased revenue from one of the Company's major customers
as a result of its re-negotiation of the contract on terms more favorable to the
Company. Additionally, the Company has entered into a joint services agreement
with Allied Health Systems, Inc. which has contributed approximately $178,000
and $295,000 to the Company's improved revenue position for the three months and
nine months ended July 31, 1997, respectively. The Company has also recorded
approximately $285,000 in the three-month period ended July 31, 1997,
representing excess performance revenues from BCBSVT for services performed in
prior periods in excess of amounts previously recorded by the Company.
These incremental revenues are largely offset by (i) loss of revenue from a
contract which was terminated by a customer and converted to a Fee for Service
agreement during the fourth quarter of the prior fiscal year and (ii) decreased
revenue from one of the Company's major customers as a result of its
re-negotiation of the contract which has resulted in decreased performance fee
revenues being recognized for the three- and nine-month period ending July 31,
1997. Additionally, the Company has experienced a shift in its revenue mix as a
result of the re-negotiation of two major contracts leading to increased Fixed
Fees being recognized for the nine-month period ending July 31, 1997 of
approximately $2,600,000 over the amount in the corresponding 1996 period.
Revenues from at-risk performance-based service contracts 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.
9
<PAGE>
CAREADVANTAGE, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Cost of services:
Cost of services for the three-month and nine-month periods ended July 31, 1997
were $2,041,000 and $6,081,000, respectively, compared to $2,282,000 and
$7,368,000 in the corresponding periods of the prior fiscal year, representing a
decrease for the three-month and nine-month period of approximately $241,000 and
$1,287,000, respectively. This decrease in the cost of services was primarily
due to decreases/(increases) in personnel costs of approximately ($113,000) and
$517,000, professional and consulting costs of approximately $104,000 and
$337,000 and information and communication costs of $119,000 and $255,000 and
depreciation and amortization of $127,000 and $139,000 and other expenses of
$4,000 and $39,000 for the three-month and nine-month periods ending July 31,
1997, respectively.
Operating expenses:
Selling, general and administrative:
Selling, general and administrative costs for the three-month and nine-month
periods ended July 31, 1997 were $1,278,000 and $4,017,000, respectively,
compared to $1,493,000 and $4,257,000 in the corresponding periods of the prior
fiscal year, representing a decrease for the three-month period of approximately
$215,000. This decrease is largely due to non-recurring charges incurred during
the corresponding period of the prior fiscal year and was partially offset by a
charge of $100,000 for a bonus paid to a senior officer of the Company. The
decrease during the nine-month period of approximately $240,000 was offset by
non-recurring charges incurred during the current fiscal year of approximately
$400,000 related to severance payments to a senior officer of the Company in the
approximate amount of $100,000 and payment of a bonus to an executive officer of
the Company in the approximate amount of $200,000 and $100,000 during the three
and nine month periods ended January 31, 1997 and July 31, 1997, respectively.
While management intends to take steps in the future to reduce general and
administrative costs, such reduction in costs may be offset to some extent, by
anticipated increases in selling, marketing and service development costs. There
is no assurance, however, that the Company will be successful in reducing
general and administrative costs.
Depreciation and amortization:
Depreciation and amortization costs for the three-month and nine-month periods
ended July 31, 1997 were $75,000 and $236,000, respectively, compared to $27,000
and $200,000 for the corresponding periods of the prior fiscal year. This
represents (i) an increase for the three-month period of approximately $48,000
and is primarily due to increased capital spending and is offset in part by
decreased goodwill amortization related to the acquisition of CHCM which was
written down during the fiscal year ended October 31, 1996 and (ii) an increase
in the nine-month period of approximately $36,000, which is partially due to
increased depreciation related to increased spending on capital expenditures
during fiscal year 1997.
Interest expense:
Net interest expense for the three-month and nine-month periods ended July 31,
1997 was $101,000 and $243,000, respectively, compared to $157,000 and $352,000
for the corresponding periods of the same fiscal period last year, representing
a decrease for the three and nine month periods ended July 31, 1997 of
approximately $56,000 and $109,000, respectively. The decreases are primarily
due to the elimination of interest on a promissory note issued to BCBSNJ on
February 22, 1996, which was converted to equity on September 30, 1996 and a
reduction in interest related to the Company's master lease agreement with IBM
Credit Corporation.
Results of operations:
Results of operations in the future are dependent on management's ability to
increase revenues and leverage 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 leverage costs in areas that will not adversely effect the operations of the
Company.
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CAREADVANTAGE, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Financial Condition:
Liquidity and Capital Resources:
At July 31, 1997, the Company had cash of $777,000 and a working capital
deficiency of approximately $2,471,000. At October 31, 1996, the Company's cash
balance was $1,167,000 and it had a working capital deficiency of approximately
$4,191,000. The decrease in working capital deficiency of approximately
$1,720,000 is due to the Company's ability to generate cash flows from
operations during the six and nine month periods ended April 30, 1997 and July
31, 1997, respectively, and reclassification of notes payable in the approximate
amount of $1,863,000 as a long-term liability, which was previously classified
as short-term obligation in prior periods.
The Company has entered into a Credit Agreement with Summit Bank for an
aggregate amount of $3 million dollars for use in funding its operating
activities and the Company's capital expansion needs. The Company's obligations
under this Credit Agreement are guaranteed by BCBSNJ. See "Future Financing
Needs" below.
Net cash (used)/provided from operating activities amounted to approximately
$632,000 and (2,205,381) for the nine-months ended July 31, 1997 and 1996. This
improvement is partially due to the increased operating income generated during
the second and third quarters of fiscal year 1997.
Net cash (used)/provided by investing activities amounted to approximately
($533,000) and $636,000 for the nine-months ended July 31, 1997 and 1996,
respectively. The decrease of approximately ($1,169,000) is primarily due to the
cash received from the acquisition by CHCM of approximately ($751,000) during
the nine-months ended July 31, 1996 and increased capital outlays incurred
during the current fiscal year of approximately ($500,000).
While there can be no assurances, management believes that its cash on hand,
projected future cash flows from operations and the Company's borrowing capacity
under the Summit Bank Credit Agreement will provide adequate capital resources
to support the Company's anticipated cash needs for the balance of the fiscal
year which ends on October 31, 1997. This projection assumes that the Company's
operations and revenues will continue at their current levels.
Net cash (used)/provided by financing activities amounted to approximately
($490,000) and $2,557,000 for the nine months ended July 31, 1997 and 1996. The
decrease of approximately ($3,047,000) is largely due to the proceeds received
from the issuance of a note payable to CW Ventures in the original principal
amount of $2,000,000 and the issuance of common stock of the Company with a
value of approximately $925,000 during the nine months ended July 31, 1996.
Financing:
Amounts payable pursuant to long-term financing arrangements as of July 31, 1997
were approximately $1,130,000, 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 expiring in
1999, and bears interest at 11.39% per annum. The Company's obligations under
this Master Lease arrangement are guaranteed by BCBSNJ.
In connection with the re-negotiation of the amended and restated services
agreement with BCBSNJ, which was completed in June 1997, the Company issued a
promissory note in the approximate amount of $1,863,000 to BCBSNJ with interest
accruing beginning in April 1997 and equal monthly payments of principal and
interest commencing on October 1, 1998. The promissory note bears interest at a
five-year U.S. treasury yield, adjusted quarterly, and matures on June 30, 2000.
While there can be no assurances that future operating results will be
sufficient to fund this obligation of the Company, such amounts are expected by
management to be funded through operations and no outside financing is
anticipated for this obligation.
As of July 31, 1997, the Company had $3.0 million of available credit under the
Summit Revolving Credit Agreement.
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CAREADVANTAGE, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Future Financing Needs:
In connection with management's decision to adopt and implement a new and more
comprehensive clinical software product, as well as increased emphasis on
developing in-house data management capabilities and training and educational
programs for its clinical staff and customers, the Company expects to incur
additional software and computer hardware costs during the fourth quarter of
fiscal 1997 of approximately $250,000. Such costs are expected to be financed
with the future operating cash flows of the Company. However, the Company may
draw down the term loan from Summit Bank (which was discussed in the Company's
10-QSB for the quarter ended April 30, 1997 and included as Exhibit No. 10(f)
thereto and is incorporated by reference herein), of which 1.5 million was
available at July 31, 1997. The remaining balance under the Summit Bank credit
facility is $1.5 million, which is available as a revolving credit line and is
to be used for general working capital needs, resulting in an aggregate facility
amount of $3.0 million.
Item 1. Legal Proceedings
Termination of Employment:
A former Medical Director of CAHS has asserted a claim against the Company which
was discussed in the Company's Form 10-QSB for the quarter ended January 31,
1997.
Potential Uninsured Exposure to Litigation:
The Company is involved in an action entitled Francis X. Bodino v. BCBSNJ and
CHCM (the "Bodino Action"), which was discussed in the Company's Form 10-QSB for
the quarter ended April 30, 1997.
Item 2. Changes in Securities--None
Item 5. Effective as of June 13, 1997, CW Ventures granted to BCBSNJ an option
to purchase from it 10,031,238 shares of Common Stock at $0.38 per share (the
"BCBSNJ Option"), as provided the Option Agreement dated as of June 13, 1997,
between CW Ventures and BCBSNJ (the "Option Agreement"), which is incorporated
herein by reference to Exhibit No.5 to schedule 13D respecting beneficial
ownership of Common Stock of the Company filed by BCBSNJ in June, 1997. If the
fair market value per share of Common Stock is greater than the exercise price
of BCBSNJ Option on the applicable date of calculation, BCBSNJ may elect to pay
such exercise price by surrendering for cancellation a portion of the BCBSNJ
Option and receiving a number of shares of Common Stock according to a formula
set forth in the Option Agreement. The BCBSNJ Option is exercisable in the event
the Company achieves certain goals for defined periods through February 28,
2000, all as more fully set for the in the Option Agreement. In addition,
exercisability of the BCBSNJ Option may be accelerated in certain circumstances,
all as more fully set forth in the Option Agreement. The option was granted by
CW Ventures to BCBSNJ in consideration of BCBSNJ's revisions of its Services
Agreement with the Company and the Joint Services Agreement with Allied Health
Group, Inc. (both discussed in the Company's Form 10-QSB filed for the fiscal
quarter ended April 30, 1997), and agreement to guaranty the Summit Bank Credit
Agreement.
Item 6. Exhibits and Reports on Form 8-K
Exhibit 10(a)--Agreement with BCBSRI
Exhibit 10(b)--Option Agreement between CW Ventures and BCBSNJ-incorporated by
reference from Exhibit No.5 of Schedule of 13D respecting beneficial ownership
of Common Stock of the Company filed with the Commission in June 1997 by BCBSNJ.
Exhibit 27--Financial Data Schedule
Reports on Form 8-K--None
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CAREADVANTAGE, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CareAdvantage, Inc
(Registrant)
September 15, 1997
/s/ Thomas P. Riley
---------------------------------
Thomas P. Riley
President and Chief Executive Officer
Acting Chief Financial Officer
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7/18/97
AGREEMENT
AGREEMENT made as of the 1st day of January, 1997, by and between Blue
Cross & Blue Shield of Rhode Island, a nonprofit hospital and medical service
corporation organized under the laws of the State of Rhode Island, with an
address at 444 Westminster Street, Providence, Rhode Island 02903 ("Blue
Cross"), and CareAdvantage Health Systems, Inc., a business corporation
organized under the laws of the State of Delaware, with an address at 485-C
Route 1 South, Iselin, New Jersey 08830-3037 ("CareAdvantage").
W I T N E S S E T H:
WHEREAS, Blue Cross is a nonprofit hospital and medical service
corporation organized for the purpose, inter alia, of underwriting and
administering various hospital and medical service plans; and
WHEREAS, CareAdvantage is a business corporation which provides
various health care management services, including without limitation
utilization review and medical management services, to third party payors and
administrators of health benefit plans; and
WHEREAS, CareAdvantage has previously provided and desires to continue
to provide certain medical management services to Blue Cross, in connection with
their existing and new health care plans and Blue Cross desires to enter into an
agreement with CareAdvantage for the provision of such services; and
WHEREAS, the parties hereto desire to set forth the terms and
conditions of their agreement for the provision to Blue Cross by CareAdvantage
of certain health care management services;
NOW, THEREFORE, in consideration of the mutual covenants herein
contained, and for good and valuable consideration, the receipt of which is
hereby acknowledged, the parties hereto agree as follows:
1. Term and Termination. (a) This Agreement shall commence on January 1,
1997 for a period to end no later than December 31, 1999 (the "Term").
(b) This Agreement shall be terminable by either party without cause
upon ninety (90) days' prior written notice.
(c) This Agreement shall be terminable by either party for cause upon
not less than twenty (20) days' prior written notice to the other party, setting
forth in detail the cause, and providing that the agreement is to be terminated
upon the expiration of twenty (20) days or such longer period which may be set
forth in the notice, unless the condition giving rise to the cause is corrected
within that time period. "Cause" shall include breach of the Agreement, the
insolvency of either party, or the seeking by either party of protection under
bankruptcy or receivership laws.
(d) On or before September 1, 1999 the parties hereto shall meet for
the purpose of discussing an extension of this Agreement on terms to be mutually
agreed. Absent the mutual written agreement of the parties hereto to extend this
Agreement on mutually acceptable terms, this Agreement shall terminate on
December 31, 1999.
2. Health Care Management Services. (a) During the Term hereof,
CareAdvantage shall provide to Blue Cross, when requested by Blue Cross, certain
care management services as more particularly specified herein and in Attachment
I attached hereto and incorporated herein by reference for the purpose of
assisting Blue Cross in the proper and effective administration of its health
benefit programs (underwritten and administered) and in the reduction of
inappropriate claims liability for its underwritten and administered health
benefit plans.
<PAGE>
(b) During the Term, the services provided by CareAdvantage under this
Agreement shall be supervised by Stephan D. Deutsch, M.D. or another physician
with similar qualifications approved by Blue Cross, which approval shall not be
unreasonably withheld; provided, however, that during the term hereof, Blue
Cross may withdraw its approval of any physician providing supervisory services
hereunder if Blue Cross reasonably determines that the supervisor is not
providing effective supervision in a manner which is compatible with Blue Cross
procedures, whereupon CareAdvantage shall remedy the supervisory problem to the
satisfaction of Blue Cross or replace such supervisor with a supervisor approved
by Blue Cross, with such action to be taken within ninety (90) days of a written
request from Blue Cross. Dr. Deutsch (or such other physician) shall spend half
time at Blue Cross in order to properly supervise the provision of such
services.
(c) In fulfilling its responsibilities under this Agreement,
CareAdvantage shall provide at least three and one-half medical management
physicians on a full-time equivalent basis: (i) one of which shall serve as the
Medical Director for Blue Cross; (ii) one-half of which shall act as a Director
responsible for the coordination of the provision of services which
CareAdvantage shall provide in accordance with the terms of Section 2(b); (iii)
two of which shall serve as Associate Medical Director and Physician Adviser to
conduct utilization review and case reviews for Blue Cross as required under the
terms of this Agreement; and (iv) such other physicians, nurses, experts, and
other personnel, which individuals shall be employed by, or under contract to,
CareAdvantage, as shall be necessary for CareAdvantage to perform its
obligations under this Agreement.
The Medical Director, Associate Medical Directors, and other
physicians, individuals and/or entities employed by, or under contract to
CareAdvantage to provide services under this Agreement shall in all respects be
satisfactory to Blue Cross in its reasonable judgment, including in medical
education, training, experience, judgment, and ability to effectively work with
and relate to Blue Cross employees, physicians under contract with Blue Cross,
and others in the medical community. The number, quality and performance of the
physicians and other individuals and/or entities employed by, or under contract
to, CareAdvantage to perform services hereunder shall be satisfactory to Blue
Cross in its reasonable judgment and shall be as required for CareAdvantage to
effectively and efficiently deliver such services.
CareAdvantage shall ensure the timely availability of appropriate
physicians, nurses and other personnel to provide the services under this
Agreement, as well as the reasonable continuity of such physicians, nurses and
personnel in order to provide stability to the medical management services being
performed and to maximize efficiency and productivity.
(d) In the performance of the utilization review services to be
provided by CareAdvantage pursuant to the terms of this Agreement, CareAdvantage
shall be responsible for recommending to Blue Cross what constitutes "medically
necessary" treatment and services, "medically indicated" treatment and services,
"emergency" treatment and services, "urgent care" and "experimental" and/or
"investigational" treatment and services, as such terms are defined by Blue
Cross pursuant to its contracts, administrative policies and rules and
regulations, and for recommending other medical determinations required to
properly perform utilization review and case management functions and the other
services, and in order to allow Blue Cross to determine whether benefits are
payable under health benefit plans administered or underwritten by Blue Cross.
Notwithstanding anything to the contrary contained in this Section 2(d), it
shall be Blue Cross' determination, and not CareAdvantage's determination, as to
whether benefits are payable under any Blue Cross underwritten or administered
health benefit plans. In making such determination of whether benefits are
payable under health benefit plans administered or underwritten by Blue Cross,
Blue Cross may rely upon CareAdvantage's determinations of what constitutes
"medically necessary" treatment and services, "medically indicated" treatment
and services, "emergency" treatment and services, and upon CareAdvantage's
determinations on other matters within the scope of its responsibilities to
provide services pursuant to and in accordance with the terms of this Agreement.
As a part of the utilization review services to be provided by
CareAdvantage pursuant to the terms of this Agreement, CareAdvantage is
responsible for conducting a periodic formal program for training, on-going
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monitoring, and evaluation of the performance of all staff physicians involved
in all levels of the review process. Included as part of the training shall be
orientation in the principles and procedures of utilization review, Utilization
Review Accreditation Committee Standards, National Committee for Quality
Assurance, and peer review.
CareAdvantage shall meet regularly with the management of the Health
Benefits Management Department of Blue Cross and appropriate senior management
to provide guidance on the use of staff and resources of the Health Benefits
Management Department to implement agreed upon utilization management strategies
and to provide proposals for CareAdvantage to effect reductions in per member
claims liability. The utilization management strategies and proposals made by
CareAdvantage must be reasonable and consistent with Blue Cross contracts,
policies and procedures. In the event that CareAdvantage determines that Blue
Cross has failed to take action with regard to utilization review, case
management, and/or a health care management proposal in a way so as to refuse to
adopt the recommendation of CareAdvantage, or dilute, alter, or materially
change the recommendation of CareAdvantage, and CareAdvantage determines that
the result of such action or inaction by Blue Cross is that the measurement of
CareAdvantage's performance for purposes of compensation under this Agreement is
materially and adversely affected, CareAdvantage shall so notify Blue Cross in
writing, and if Blue Cross does not alter or change its utilization review, case
management, and health care management policies in a manner which CareAdvantage
determines, in good faith, is reasonably acceptable to CareAdvantage, then
CareAdvantage shall have the right to terminate this Agreement by giving Blue
Cross ninety (90) days' prior written notice of such termination.
(e) Hiring of Employees. The parties agree that they shall not, except
with the prior written consent of the other, employ or contract with any person
employed by the other then or within the preceding twelve months who was
directly or indirectly involved in the performance of this Agreement. This
restriction against hiring shall remain in effect for the life of this Agreement
and one (1) year thereafter.
(f) Utilization Review Restrictions. Notwithstanding anything to the
contrary contained in this Agreement, Blue Cross does not intend to utilize
CareAdvantage to provide first level utilization review services. Rather, Blue
Cross intends to contract with individual physicians to provide such services.
Accordingly, CareAdvantage shall not provide first level utilization review
services hereunder unless and until so directed by Blue Cross in writing,
whereupon the parties will adjust the compensation under this Agreement to
reflect the termination of the physicians providing first level review under
contract to Blue Cross.
3. Nature of Relationship. (a) The parties hereto recognize that the
relationship established by this Agreement is purely contractual in nature, that
such parties are independent contractors, and that this Agreement does not
establish a joint venture, partnership, or other arrangement pursuant to which
such parties shall share profits or losses or shall be bound to pay or perform
the obligations of the other party. Neither party hereto shall be authorized to
act as an agent or representative for the other party hereto unless expressly
authorized in writing for each such purpose, and then only to the extent so
authorized. Neither party hereto may bind the other party in any respect, except
as previously authorized in writing signed by such party to be bound, and then
only to the extent expressly so authorized, and neither party hereto may hold
itself out to or represent to third parties that such party has the power or
authority to bind the party hereto, and any such purported representations shall
be null and void and of no further force and effect. Neither party hereto may
represent to any third party that the subject of this Agreement constitutes a
partnership, joint venture, or other risk-sharing arrangement or that any party
hereto is liable or responsible for the obligations of the other party hereto.
For all purposes hereof, Blue Cross and CareAdvantage shall be deemed to be
independent contractors, and neither party hereto shall be responsible for the
acts or omissions of the other party.
(b) Each party hereto recognizes and acknowledges that it makes no
representation regarding, and assumes no responsibility for, the quality of
health care services provided by providers under any health benefit plan
underwritten or administered by Blue Cross, and that neither party hereto has
any control over the kind and quality of health care services provided by
providers pursuant to health benefit plans administered or underwritten by Blue
Cross.
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4. Compensation. Effective January 1, 1997 Blue Cross shall pay
CareAdvantage for its services under this Agreement in accordance with
Attachment II, attached hereto and incorporated herein by reference.
5. Adjustments to Services and Compensation. The parties acknowledge that
the managed care business is continuously changing, and that during the Term it
may be desirable to reconfigure the services provided by and to adjust the
compensation payable to CareAdvantage under this Agreement. The parties agree to
negotiate such matters in good faith, provided, however, that in the event they
are unable to agree, either party may terminate this Agreement without cause
pursuant to Section 1(b).
6. Warranties and Representations. (a) CareAdvantage warrants and
represents to Blue Cross as follows, such warranties and representations to be
true as of the date hereof and during the Term hereof and any extension thereof:
(i) CareAdvantage is duly organized, validly existing, and in good
standing under the laws of its state of organization and
incorporation, and is qualified to do business in all states where
such business qualification is required, including without limitation,
Rhode Island;
(ii) CareAdvantage is duly licensed as a utilization review agent in
the State of Rhode Island, such Rhode Island license is valid, in full
force and effect, and has not been suspended or revoked, and
CareAdvantage is not the subject of any pending disciplinary or
administrative proceedings pertaining to such license not disclosed to
Blue Cross, and to its knowledge, CareAdvantage has otherwise taken
all action to comply with all applicable laws, rules and regulations
pertaining to acting as a utilization review agent in Rhode Island;
(iii) CareAdvantage is in compliance with all applicable federal,
state and local laws, rules and regulations required or necessary in
order to allow CareAdvantage to perform its obligations pursuant to
this Agreement.
(iv) CareAdvantage does not now have any material lawsuits,
administrative actions, claims, grievances, or other legal actions
pending against it which, if adversely determined, would materially
impair its ability to perform its obligations under this Agreement;
(v) There are no actions, pending or threatened, against
CareAdvantage, and there are no conditions which are threatened or, to
its knowledge, exist, including actions by regulatory authorities,
relating to the obligations of CareAdvantage set forth in this
Agreement, which, if they came to pass or continue would result in
CareAdvantage being in default hereunder or would materially impair
CareAdvantage's ability to perform its obligations under this
Agreement; and
(vi) CareAdvantage is adequately capitalized and has the financial and
personnel resources to perform its obligations under this Agreement,
and all of its employees or parties with whom it contracts who will
provide services under the terms of this Agreement are or shall be
duly qualified, licensed where required, and otherwise competent and
able to effectively perform the services and responsibilities of
CareAdvantage as required under this Agreement.
(b) Blue Cross warrants and represents to CareAdvantage as follows,
such warranties and representations to be true as of the date hereof and during
the Term hereof:
(i) Blue Cross is duly organized, validly existing, and in good
standing under the laws of its state of organization and
incorporation, and is qualified to do business in all states where
such business qualification is required, including without limitation,
Rhode Island;
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<PAGE>
(ii) Blue Cross is duly licensed as a nonprofit hospital and medical
service corporation and a utilization review agent in the State of
Rhode Island, such licenses are valid, in full force and effect, and
have not been suspended or revoked, and Blue Cross is not the subject
of any pending disciplinary or administrative proceeding pertaining to
such licenses not disclosed to CareAdvantage, and to its knowledge,
Blue Cross has otherwise taken all action to comply with all
applicable laws, rules and regulations pertaining to acting as a
nonprofit hospital and medical service corporation and a utilization
review agent in Rhode Island;
(iii) Blue Cross is in compliance with all applicable federal, state
and local laws, rules and regulations required or necessary in order
to allow Blue Cross to perform its obligations pursuant to this
Agreement;
(iv) Blue Cross does not now have any material lawsuits,
administrative actions, claims, grievances, or other legal actions
pending against it which, if adversely determined, would materially
impair its ability to perform its obligations under this Agreement;
(v) There are no actions, pending or threatened, against Blue Cross,
and there are no conditions which are threatened or, to its knowledge,
exist, including actions by regulatory authorities, relating to the
obligations of Blue Cross set forth in this Agreement, which, if they
came to pass or continue would result in Blue Cross being in default
hereunder or would materially impair Blue Cross' ability to perform
its obligations under this Agreement; and
(vi) Blue Cross is adequately capitalized and has the financial and
personnel resources to perform its obligations under this Agreement.
7. Insurance. (a) Each party hereto shall obtain and maintain throughout
the Term of this Agreement appropriate policies of insurance, as shall protect
the named insured and the other party hereto from claims of bodily injury, death
or property damage that may arise from any activities of either party hereto, or
their respective agents, servants or employees associated with this Agreement.
Such policies shall provide coverage for worker's compensation, comprehensive
general liability, vehicular and all-risk property insurance, and "errors and
omissions" liability insurance, and in the case of CareAdvantage only,
professional liability (i.e., malpractice) insurance, all such insurance having
such limits and deductibles, and upon such terms and conditions, as are common
and customary for comparable contracts, and all such coverage and such carriers
providing coverage to be mutually acceptable to the parties. A duplicate
original of each policy and certificate of renewal of each policy required under
this Section 7 shall be given to the party upon request. Each of the policies of
insurance shall include provisions naming the other party as one of the insured
and shall deny to the insured rights of subrogation against the other party
(provided such provisions are reasonably obtainable without invalidating the
insurance so provided or disproportionately increasing the premiums therefore);
provided, however, that in no event shall one party be required to maintain an
insurance policy with a waiver of subrogation provision if the other party is
not able to procure such waiver of subrogation provision in its insurance policy
of the same type. The parties hereto each shall exercise good faith, and
diligent efforts, to ensure that such parties' policies of insurance as required
hereunder shall contain the aforesaid waiver of subrogation provisions.
(b) The policies of insurance required to be maintained by the parties
under this Agreement shall be noncancelable and nonamendable unless notice in
writing is given to the other party not less than ten (10) days prior to the
effective date of any cancellation or amendment (but such notice shall not limit
the continuing obligations to maintain insurance pursuant to this Agreement). If
any such policy of insurance is a claims made policy and not an occurrence
policy, either appropriate claims made or tail insurance shall be maintained in
full force for that period of time, after termination of this Agreement,
required under applicable law to continue to provide insurance protection to
both parties pursuant to this Agreement, with respect to occurrences prior to
the termination of this Agreement.
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8. Indemnification. (a) CareAdvantage hereby indemnifies, exonerates and
holds harmless Blue Cross from and against any claim, loss, cost, damage,
expense or other liability arising out of the performance by CareAdvantage of
services under this Agreement, excepting only liability attributable to the
willful misconduct or the willful, wanton or reckless failure by Blue Cross, its
agents, servants, employees or independent contractors engaged by Blue Cross
(but not CareAdvantage) to perform their respective obligations under this
Agreement or Blue Cross' negligence or the negligence of Blue Cross' agents,
servants, employees or independent contractors engaged by Blue Cross (but not
CareAdvantage); provided, however, that if such negligence is attributable in
part to CareAdvantage or its agents, servants, employees, or independent
contractors engaged by CareAdvantage and in part to Blue Cross or its agents,
servants, employees or independent contractors engaged by Blue Cross (but not
CareAdvantage), Blue Cross shall be entitled to indemnification by CareAdvantage
under this Section 8. If the attribution of negligence on a comparative basis is
not made by a court of competent jurisdiction for any reason, including without
limitation, because such claim is settled by the parties involved, then the
determination of respective fault, if any, shall be made by an arbitrator
mutually acceptable to Blue Cross and CareAdvantage. This indemnity agreement
shall include indemnity against all costs, expenses and liabilities incurred in
and in connection with any such claim or liability, and proceedings brought
thereunder, and the reasonable cost of the defense thereof with legal counsel
reasonably acceptable to Blue Cross. Notwithstanding anything herein to the
contrary, this Section 8 is not intended to obligate CareAdvantage to compensate
Blue Cross for claims for medical services that Blue Cross is contractually
obligated to pay.
(b) Blue Cross hereby indemnifies, exonerates and holds harmless
CareAdvantage from and against any claim, loss, cost, damage, expense or other
liability arising out of an act (or a failure to act) by Blue Cross contemplated
by or arising under this Agreement, excepting only liability attributable to the
willful misconduct or the willful, wanton or reckless failure by CareAdvantage,
its agents, servants, employees or independent contractors engaged by
CareAdvantage (but not Blue Cross) to perform their respective obligations under
this Agreement or CareAdvantage's negligence or the negligence of
CareAdvantage's agents, servants, employees or independent contractors engaged
by CareAdvantage (but not Blue Cross); provided, however, that if such
negligence is attributable in part to Blue Cross or its agents, servants,
employees, or independent contractors engaged by Blue Cross (but not
CareAdvantage) and in part to CareAdvantage or its agents, servants, employees
or independent contractors engaged by CareAdvantage, CareAdvantage shall be
entitled to indemnification by Blue Cross under this Section 8. If the
attribution of negligence on a comparative basis is not made by a court of
competent jurisdiction for any reason, including without limitation, because
such claim is settled by the parties involved, then the determination of
respective fault, if any, shall be made by an arbitrator mutually acceptable to
CareAdvantage and Blue Cross. This indemnity agreement shall include indemnity
against all costs, expenses and liabilities incurred in and in connection with
any such claim or liability, and proceedings brought thereunder, and the
reasonable cost of the defense thereof with legal counsel reasonably acceptable
to CareAdvantage.
Unless such claim or liability results from the willful misconduct of
or the willful, wanton or reckless failure by Blue Cross or its agents,
servants, employees or independent contractors engaged by Blue Cross (and not by
CareAdvantage) to perform their respective obligations under this Agreement (in
which case no such maximum or aggregate amount shall obtain) this indemnity
agreement shall in each instance be limited by and shall not exceed the
aggregate amount equal to the amount of the proceeds of insurance available to
satisfy the obligations of Blue Cross under this indemnity agreement.
(c) In no event shall either party hereunder be liable to the other
for lost profits or punitive damages on account of a default under this
Agreement or otherwise; provided, however, that the scope of the indemnification
provided by each party hereto may require the indemnitor hereunder to compensate
the indemnitee hereunder for damages which include punitive damages or lost
profits awarded to or incurred by a third party.
(d) An indemnitee entitled to indemnification under this Section 8
shall give notice to the indemnitor of a claim or other circumstances likely to
give rise to a request for indemnification promptly after the indemnitee becomes
aware of the same. An indemnitor shall be afforded the opportunity to undertake
the defense of
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and to settle by compromise or otherwise any claim for which indemnification is
available under this Section 8, with legal counsel approved by the indemnitee
(which approval shall not be unreasonably withheld or delayed). If an indemnitor
so assumes the defense of any claim, the indemnitee may participate in such
defense with legal counsel of the indemnitee's selection and at the expense of
the indemnitee. If the indemnitor, prior to the expiration of twenty (20) days
after receipt of notice of a claim by the indemnitee under this Section 8, has
not assumed the defense thereof, the indemnitee may thereupon undertake the
defense thereof on behalf of, and at the risk and expense of, the indemnitor,
with all reasonable costs and expenses of such defense to be paid by the
indemnitor. No compromise or settlement of any such claim shall be made without
the prior consent in writing of the indemnitee.
9. Notice of Certain New Business. During the term hereof, CareAdvantage
shall provide Blue Cross with prior notice, in the manner hereinafter provided,
before CareAdvantage provides any consulting services for the benefit of any
entity engaged in the health care industry (a "Health Care Entity"). In the
event that such Health Care Entity engages or conducts, directly or indirectly,
business in the States of Rhode Island or Massachusetts (a "Competitor Entity"),
CareAdvantage shall provide Blue Cross with one hundred (100) days' prior
written notice prior to providing services to such Competitor Entity. In the
event that such entity is not a Competitor Entity, CareAdvantage shall provide
Blue Cross with fifteen (15) business days' prior written notice prior to
providing services to such entity. It is the intention of Blue Cross not to
continue in a business relationship with CareAdvantage in the event
CareAdvantage provides services to a Competitor Entity. Accordingly, within ten
(10) business days after the receipt of either of the aforesaid notices, Blue
Cross shall notify CareAdvantage whether it considers such Health Care Entity to
be a Competitor Entity, whether or not designated a Competitor Entity by
CareAdvantage, and in the event Blue Cross determines such Health Care Entity to
be a Competitor Entity, whether or not Blue Cross intends to terminate this
Agreement on ninety (90) days' prior written notice, as allowed under Section
1(b) hereof. In no event shall CareAdvantage be required to give notice to Blue
Cross in the event it intends to provide services to a licensee of the Blue
Cross Blue Shield Association, provided, however, that CareAdvantage shall be
required to give notice in the manner required for a Competitor Entity in the
event that such Health Care Entity is a subsidiary or affiliate of such licensee
of the Blue Cross Blue Shield Association, and such subsidiary or affiliate
conducts or engages in business, directly or indirectly, in the States of Rhode
Island or Massachusetts.
10. Confidentiality. (a) Blue Cross and CareAdvantage have executed a
Nondisclosure Agreement governing the handling of "Proprietary Information"
between the parties, as such term is defined in the Nondisclosure Agreement. The
Nondisclosure Agreement between the parties, a copy of which is attached hereto
as Attachment III and incorporated herein by reference, shall continue to govern
the obligations of the parties with regard to Proprietary Information.
(b) Should Blue Cross enter into a contract with a vendor other than
CareAdvantage to manage a discrete segment of its business that is not managed
by CareAdvantage, then CareAdvantage will enter into a confidentiality agreement
with that vendor similar to the confidentiality agreement Blue Cross has with
the vendor.
11. Third-Party Beneficiaries. No individuals or entities are intended by
the parties hereto to be third-party beneficiaries to this Agreement, and this
Agreement shall not be construed or interpreted to confer rights or benefits on
any third-party and shall not be enforceable by any entity not a party to this
Agreement.
12. Further Contracts. The decision by Blue Cross to enter into this
Agreement with CareAdvantage shall not be construed or interpreted by
CareAdvantage as the intention of Blue Cross to enter into any other contract
with CareAdvantage for any other services, during the Term or following the
termination of this Agreement, and the parties hereto expressly acknowledge that
Blue Cross has no obligation to enter into any further contract or agreement
with CareAdvantage for the provision of any services, either during the Term or
following the termination of this Agreement. CareAdvantage is not authorized to
make representation to, and shall not make representation to, any third party
that Blue Cross has any obligation to enter into any other contract with
CareAdvantage either during the Term or following the termination of this
Agreement.
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13. Rights to Proprietary Data. (a) The parties hereto acknowledge that
Blue Cross has entered into a license agreement with Milliman & Robertson, Inc.
("M&R") pursuant to which Blue Cross has licensed from M&R certain Health Care
Management Guidelines for use by medical personnel in managing health care
delivery systems (the "M&R Guidelines"). The parties further acknowledge that
CareAdvantage has provided certain services to Blue Cross with regard to
modification of the M&R Guidelines, including meeting with physicians and
proposing and drafting modifications to the M&R Guidelines. CareAdvantage hereby
agrees that it has no right, title, or interest in the M&R Guidelines, and that
the M&R Guidelines are the property of Blue Cross, subject to the rights of M&R
under the license agreement between Blue Cross and M&R for the M&R Guidelines,
and CareAdvantage hereby forever remises, releases, and relinquishes any
interest, right, claim, or title in the M&R Guidelines, in any form whatsoever,
including as such M&R Guidelines may have been modified with the assistance of
CareAdvantage. Notwithstanding anything to the contrary contained in this
Section 13(a), this Agreement shall not limit CareAdvantage from entering into
any separate licensing agreement with M & R or with any other licensor of health
care delivery products, nor shall it prevent CareAdvantage from making any
modification to any such separately licensed product, whether with M & R or with
any other licensor of health care delivery products.
(b) CareAdvantage further hereby acknowledges and agrees that it has,
and shall have, no right, title or interest in any other manuals, instructions,
treatment protocols, critical path guidelines, materials, guidelines, studies,
analysis, case management programs, processes, procedures, modifications,
operating codes, methods of access, or access codes, produced or developed by
CareAdvantage and provided for the use or benefit of Blue Cross and/or its
subscribers or providers as part of the services provided by CareAdvantage, or
as part of any other services provided by CareAdvantage under this Agreement
(collectively, the "Work Product"), and that all such Work Product shall be the
property of Blue Cross. CareAdvantage shall have no right, title or interest in
such Work Product, unless (i) CareAdvantage has rights to such Work Product
pursuant to a valid, previously-existing patent, trademark, copyright, or
license, and then only to the extent of such patent, trademark, copyright, or
license, (ii) CareAdvantage shall have notified Blue Cross in writing prior to
the creation of such Work Product setting forth in detail the existence of such
patent, trademark, copyright, or license, and the proposed use of such patented,
trademarked, copyrighted or licensed material (hereafter referred to as
"CareAdvantage Protected Material") in any such Work Product, and (iii) Blue
Cross and CareAdvantage shall have agreed in writing in advance as to the
respective rights of Blue Cross and CareAdvantage to any Work Product which
would or could contain any such CareAdvantage Protected Material.
Notwithstanding anything to the contrary contained in this Section 13(b), "Work
Product" shall not be deemed to include (i) information (regardless of the
medium in which maintained), which is or becomes generally available to the
public, other than as a result of the disclosure thereof by CareAdvantage, its
agents or representatives, or (ii) information in any medium which is made
available to CareAdvantage on a non-confidential basis by a third party not
bound by a confidentiality agreement with or under an obligation of
confidentiality to Blue Cross.
14. Interpretation and Amendments. This Agreement constitutes the entire
understanding of the parties hereto and supersedes all prior representations and
understanding, whether oral or written. Any changes, amendments, or alterations
hereto shall not be effective unless agreed upon in writing signed by authorized
representatives of the parties hereto.
15. Notices. Any notices required to be given under this Agreement shall be
by certified mail, return receipt requested. Notice shall be directed to the
parties at the addresses listed below, or such other addresses as the party may
designate by written notice.
If to Blue Cross: Blue Cross & Blue Shield
of Rhode Island
444 Westminster Street
Providence, RI 02903
Attention: Chief Medical Officer
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With a copy to: Elia Germani, Esq.
General Counsel
Blue Cross & Blue Shield
of Rhode Island
444 Westminster Street
Providence, RI 02903
and John M. Boehnert, Esq.
Partridge, Snow & Hahn
180 South Main Street
Providence, RI 02903
If to CareAdvantage: Thomas Reilly
President and Chief Executive Officer
CareAdvantage Health Systems, Inc.
485-C Route 1 South
Iselin, NJ 08830-3037
With a copy to: President and Chief Executive Officer
CareAdvantage, Inc.
485-C Route 1 South
Iselin, NJ 08830-3037
16. Binding Effect. This Agreement shall be binding upon and inure to the
benefit of the parties hereto and their respective successors and assigns (if
permitted), and this Agreement shall not be assigned, except by prior written
agreement of the other party hereto, which agreement may be withheld in such
party's absolute and sole discretion. Any purported assignment in violation of
this Section 16 shall be null and void and of no further force and effect.
17. Waiver. A waiver of any breach of this Agreement by any party hereto
shall not be construed to be a continuing waiver for a similar breach.
18. Severability. In the event that any provision of this Agreement is
found by a court of competent jurisdiction to be unenforceable because it
extends for too long a period of time or over too broad a range of activities or
in too large a geographic area, such provision shall be interpreted to extend
only after the maximum period of time, range of activities or geographic areas
to which it may be enforceable.
19. Governing Law. This Agreement has been negotiated, entered and
delivered in Rhode Island, is intended to be performed primarily in Rhode
Island, and this Agreement shall be governed, construed and interpreted in
accordance with the laws of the State of Rhode Island. CareAdvantage hereby
irrevocably consents to the jurisdiction of the state and federal courts in the
State of Rhode Island for the adjudication of all rights and remedies pursuant
to the terms of this Agreement.
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IN WITNESS WHEREOF, the parties hereto have executed this Agreement by
their representatives thereunto duly authorized on the day and date first above
written.
Blue Cross & Blue Shield
of Rhode Island
By:_______________________________
Its duly authorized_______________
CareAdvantage Health Systems, Inc.
By:_______________________________
Stephan D. Deutsch, M.D.
Senior Vice President and
National Medical Director
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ATTACHMENT I.
CAREADVANTAGE HEALTH SYSTEMS
Health Care Management Services
January 1997 through December 1999
The services to be provided during the term of this Agreement shall include the
following health care management services:
Health Care Management Services
- -- CareAdvantage will provide physician and administrative support to
review and develop Blue Cross medical policies, interpret benefits,
assist with general provider relations, assist with Blue Cross quality
management, and assist with other general Blue Cross business.
- -- CareAdvantage will provide physician and administrative support to
develop, delineate the use of, credential and provide quality control
for different levels of care.
- -- CareAdvantage will provide physician and administrative support to
accomplish preauthorization, concurrent review, retrospective review,
and case management of medical and surgical admissions and inpatient
days within Blue Cross's service area.
- -- CareAdvantage will analyze out of state utilization and develop, along
with Blue Cross, strategies for enhanced utilization management of
these cases. Blue Cross will support CareAdvantage data requirements
for analysis and implementation of initiatives.
- -- CareAdvantage will continue to develop, in conjunction with Blue Cross
Specialty Advisory Committees, new admission and length of stay
guidelines, revise previously established guidelines as necessary and
assist in the development of specific treatment guidelines (e.g., for
community acquired pneumonia) as indicated by ongoing data analysis and
the implementation of new disease management programs.
- -- CareAdvantage will conduct periodic audits of specific services
provided by the Health Benefits Management Department and,
collaboratively with the department, develop a work plan to enhance the
effectiveness of these services such as general utilization management
and case management for catastrophic and high risk patients.
- -- CareAdvantage will conduct continuing inservice programs for Blue Cross
personnel regarding issues concerning utilization and case management
including treatment of specific diseases, use of levels of care and as
requested by the client in conjunction with the institution of new
programs. CareAdvantage will also participate with Blue Cross in
dissemination of new information to hospitals regarding these issues.
- -- CareAdvantage will assist Blue Cross in the development of specific
"real-time" daily case management reports that will compliment periodic
claims data analysis.
- -- CareAdvantage will assist Blue Cross in the development of innovative
approaches for physician education regarding new programs and data
feedback to physicians.
- -- CareAdvantage will provide the necessary physician and administrative
support to assist Blue Cross in contracting and medically managing
cases at out of state facilities designated as Centers of Excellence.
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- -- CareAdvantage will provide the necessary physician and administrative
support to identify and implement "infrastructure" changes at inpatient
facilities.
- -- CareAdvantage will develop strategies to manage care delivered in
patients' homes (including home health care and infusion therapy) and
skilled nursing facilities.
Case and Disease Management
- -- CareAdvantage will analyze the need for Disease Management Programs for
specific diseases (populations) including but not limited to
cardiology, oncology, asthma, diabetes, peptic ulcer disease,
gastroesophageal reflux and high risk pregnancies.
- -- CareAdvantage will assist and support ongoing general and specific Blue
Cross data analyses and assist in the development of new approaches to
data evaluation for disease/care management.
Other Initiatives
- -- CareAdvantage will choose specific inpatient and outpatient surgical
procedures, based on data analysis including incidence rates, and
develop appropriateness criteria for these procedures and tests based
on indications and levels of care. Initial focus will be in the
specialties of gynecology, general surgery, gastroenterology and
orthopedic surgery.
- -- CareAdvantage will assist Blue Cross in the further development of
office surgery for specific specialties including cost benefit
analysis, delineation of appropriate procedures, credentialing, and
quality control.
- -- CareAdvantage will develop and with Blue Cross support implement a
utilization review/managed care initiative for observation units.
Provider Reimbursement
- -- CareAdvantage will assist and support Blue Cross in the development of
physician incentive and sharing programs including analysis to
establish specific targets, implementation, and ongoing monitoring of
outcomes.
- -- CareAdvantage will assist Blue Cross in the designing and implementing
of a pilot program to include community physicians in the medical cost
management process.
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7/23/97 Attachment II
COMPENSATION AGREEMENT
In consideration of the services provided by CareAdvantage to Blue Cross in
accordance with Attachment I, Blue Cross shall pay CareAdvantage as compensation
the Monthly Service Fees and the Performance Service Fees in accordance with
this Attachment II.
1. Monthly Service Fees
(a) Computation for 1997. Except as provided in section 1(c), for each
month during 1997, Blue Cross shall pay CareAdvantage an amount ("Monthly
Service Fee") equal to the difference between
(i) the sum of:
(A) for the group AFA business, the product of $0.48 and the
number of members in such group for such month, plus
(B) for the fully insured group business, the product of $0.156
and the number of members in such group for such month, and
(ii) the sum of:
(A) for the period July 1, 1997, through December 31, 1997, the
product of $0.48 and the number of BlueCHIP members (not to
exceed 30,000 members) for such month, plus
(B) for the period July 1, 1997, through December 31, 1997, one
thousand five hundred ($1,500) dollars for each such month.
(b) Payment. The payments provided by subsection (a) shall be made on the
tenth (10th) working day of each month based upon enrollment projections
from the previous month's enrollment. At such time as actual enrollment
becomes available, appropriate adjustments will be made to correct for any
increase or decrease to the projections.
(c) Certain Adjustments. In the event the State of Rhode Island ("SORI")
account moves from group AFA business to fully insured group business, or
in the event of the movement of any other account or accounts representing
more than two and one-half (2.5%) percent of the combined members of the
group AFA business and the fully insured group business, then the rates
provided by section 1(a)(i)(B) shall be adjusted so that the Monthly
Service Fee payable after the move of such account is the same as that
which would have been payable had such account not moved.
(d) Computation for 1998 and 1999. The parties agree to negotiate in good
faith Monthly Service Fees for 1998 and 1999; provided, however, that until
such time as the parties agree otherwise or the termination of this
Agreement, the Monthly Service Fee for 1997 shall remain in effect
throughout 1998 and 1999.
2. Performance Service Fees
(a) Generally. For each calendar year during the term of this Agreement, in
addition to the amounts provided by Section 1, Blue Cross shall pay
CareAdvantage the amounts computed in accordance with this section
("Performance Service Fees").
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(b) Savings. Performance Service Fees for each calendar year will be based
on CareAdvantage's share of Savings for such year. Savings shall equal the
product of (i) the excess, if any, of (A) Projected PMPM over (B) Actual
PMPM for claims costs for health care services managed by CareAdvantage,
and (ii) the number of member months in each such calendar year for the
fully insured group business.
(i) Projected PMPM. Projected PMPM for a calendar year will be
computed in accordance with this subsection (i) and subsection (iii).
(A) For 1997, Projected PMPM will be calculated based on actual
experience for the fully insured group business for calendar
1996, paid through May 1998. Blue Cross will finalize Projected
PMPM for 1997 no later than June 30, 1998; Blue Cross will
estimate Projected PMPM for 1997 no later than April 30, 1997.
(B) For 1998, Projected PMPM will be calculated based on actual
experience for the fully insured group business for 1997, paid
through May 1999. Blue Cross will finalize Projected PMPM for
1998 no later than June 30, 1999; Blue Cross will estimate
Projected PMPM for 1998 no later than April 30, 1998.
(C) For 1999, Projected PMPM will be calculated based on actual
experience for the fully insured group business for 1998, paid
through May 2000. Blue Cross will finalize Projected PMPM for
1999 no later than June 30, 2000; Blue Cross will estimate
Projected PMPM for 1999 no later than April 30, 1999.
(ii) Actual PMPM. Actual PMPM for a calendar year will be calculated
180 days after the close of such year based on actual experience for
the fully insured group business for such calendar year, paid through
150 days after the close of such year, in accordance with subsections
2(b)(iii) and 2(e)(ii). Projections of Actual PMPM for a calendar year
shall be made in accordance with subsections 2(b)(iii) and 2(e)(i).
(iii) Certain Adjustments. Projected PMPM and Actual PMPM will be
computed in accordance with this subsection (iii) to remove, as
appropriate, claims costs for health care services that CareAdvantage
does not manage, the effect of unit cost increases or decreases (e.g.,
cost per day, admission, outpatient services), and age/gender changes
in the population, and to incorporate utilization trends in premium
rates.
(A) Claims Costs. Projected PMPM and Actual PMPM shall be
computed as follows:
(I) Hospital Inpatient. Projected PMPM and Actual PMPM shall
include all claims costs for hospital inpatient facilities
except those for mental health, substance abuse, maternity,
and ITS claims, and excluding professional fees. Any other
inclusions or exclusions will be prospectively agreed upon
by the parties.
(II) Hospital Outpatient. Projected PMPM and Actual PMPM
shall include claims costs for hospital outpatient
facilities only for those categories of services subject to
CareAdvantage review activities, i.e., ambulatory surgery,
home health care, home infusion, and observation room.
Hospital outpatient claims costs shall exclude claims costs
incurred for mental health, substance abuse and ancillary
services not provided in conjunction with those categories
of services subject to CareAdvantage review activities,
maternity-related services and ITS claims, as well as
professional fees. Any other inclusions or exclusions will
be prospectively agreed upon by the parties.
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(III) Classification. Classification of claims costs for
hospital inpatient, hospital outpatient, and professional
fees will be consistent with Blue Cross provider contracts
and administrative policies.
(IV) Future Agreements. Based on managed care initiatives
designated by Blue Cross to be performed by CareAdvantage,
the parties will agree on claims costs to be included or
excluded from PMPM calculations.
(B) Adjustment for Cost and Utilization Factors. On a quarterly
basis, the projected cost PMPMs are adjusted up or down in
concert with the updating of the hospital differential for base
period claims and specific cost factors. The utilization factor
is adjusted quarterly as trends included in rating are updated.
Performance is then measured by comparing Blue Cross's latest
actual PMPM cost estimate to the updated projected PMPM value.
(See Exhibit II.B. for an illustration of this process.)
(I) Hospital Price Factors. Estimates of hospital price
increases or decreases are calculated quarterly on a
liability per unit basis. For DRG hospitals, the inpatient
measure is liability per case and for others it is liability
per day. For outpatient services, liability per visit is
used for all hospitals. The time frame for measuring
increases are hospital fiscal years (ending September 30).
For the current fiscal year, liability for year-to-date
claims data is annualized/completed and then modified to
reflect any applicable year-end adjustments as provided for
in the hospital contracts. For DRG hospitals, a projection
of case mix change is provided separately and incorporated
into the calculations. Prior year liabilities are then
updated for all hospitals before calculating the price
increases.
For subsequent fiscal years, the factors reflect best
estimates available for inflationary increases or decreases,
as well as projected changes in case mix based on historical
trends. In addition, other types of influences--either known
or anticipated--are incorporated into the calculations
whenever possible, provided that some basis exists for
estimating the impact.
(II) Hospital Utilization Trend Factors. On a quarterly
basis, updated utilization trend factors are incorporated
into premium rates. The trend factor to project the base
period forward is based on a matrix that calculates the
overall utilization trend factor for the period being used.
This overall factor is also based on estimated enrollment
for that period, and the distribution of the quarterly
utilization trend factors weighted by the enrollment.
Quarterly, at the request of CareAdvantage, Blue Cross will
review with CareAdvantage (or its representative) the
utilization trend factors.
(C) Age/Gender Adjustment. At the time of final settlement for
each payment period, the Actual PMPM used to measure the
incremental change from the Projected PMPM will be age/gender
adjusted to account for any shifts in enrollment demographics.
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(D) SORI Adjustment. SORI claims experience will be included in
the calendar year 1996 base period experience used to calculate
the 1997 Projected PMPM. The SORI claims experience used in the
1996 base period will coincide with the timing of the shift of
the SORI account to fully insured status in 1997. For example, if
the entire SORI account shifts on July 1,1997, then the SORI
claims experience will be included in the calendar year 1996 base
period from July 1, 1996 to December 31, 1996. In the event that
different groups of the SORI account shift to fully insured
status at different times, the inclusion of these groups into the
calendar year 1996 base period experience will match the timing
of the shift of each group in 1997.
(c) Allocation of Savings for 1997. For calendar year 1997 of this
Agreement, Savings shall be allocated between Blue Cross and CareAdvantage
as provided herein. (See Exhibit II.A. for an illustration of this
process.)
(i) Blue Cross Recoupment of Monthly Service Fee for Fully Insured
Business. Blue Cross shall be allocated 100% of Savings for such year
up to an amount equal to the amount paid to CareAdvantage for the
fully insured group business for such year pursuant to Section
1(a)(i)(B).
(ii) CareAdvantage Recoupment of Certain Expenses. CareAdvantage shall
be allocated 100% of Savings for such year in excess of that allocated
to Blue Cross pursuant to Section 2(c)(i) up to an amount equal to (A)
$1,400,000, less (B) the amount paid to CareAdvantage for the group
AFA business and the fully insured group business for such year
pursuant to Section 1(a)(i). For interim payment periods,
CareAdvantage shall be allocated 100% of Savings in excess of that
allocated to Blue Cross pursuant to Section 2(c)(i) up to an amount
equal to (A) the appropriate pro rata share of $1,400,000, less (B)
the amount paid to CareAdvantage for the group AFA business and the
fully insured group business for that interim period.
(iii) Sharing of Remaining Savings. Savings in excess of that
allocated in (i) and (ii) of this subsection shall be allocated 65% to
Blue Cross and 35% to CareAdvantage.
(iv) Allocation of Savings for 1998 and 1999. The parties agree to
negotiate in good faith the allocation of Savings for 1998 and 1999;
provided, however, that until such time as the parties agree otherwise
or the termination of this Agreement, the allocation of Savings for
1997 shall remain in effect throughout 1998 and 1999.
(d) Reports and Interim Payment Schedule. Blue Cross will provide
CareAdvantage with monitoring reports showing projected Savings (including
Projected PMPM and projected Actual PMPM computed in accordance with
subsection 2(e)(i) in conjunction with the following interim payment
schedule:
(i) 1997. Interim payment periods for 1997:
(A) January 1, 1997, through March 31, 1997, with claims payments
through March 31, 1997;
(B) January 1, 1997, through June 30, 1997, with claims payments
through June 30, 1997;
(C) January 1, 1997, through September 30, 1997, with claims
payments through September 30, 1997;
(D) January 1, 1997, through December 31, 1997, with claims
payments through
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December 31, 1997;
(E) January 1, 1997, through December 31, 1997, with claims
payments through March 31, 1998.
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(ii) 1998. Interim payment periods for 1998:
(A) January 1, 1998, through March 31, 1998 with claims payments
through March 31, 1998;
(B) January 1, 1998, through June 30, 1998, with claims payments
through June 30, 1998;
(C) January 1, 1998, through September 30, 1998, with claims
payments through September 30, 1997;
(D) January 1, 1998, through December 31, 1998, with claims
payments through December 31, 1998;
(E) January 1, 1998, through December 31, 1998, with claims
payments through March 31, 1999.
(iii) 1999. Interim payment periods for 1999:
(A) January 1, 1999, through March 31, 1999, with claims payments
through March 31, 1999;
(B) January 1, 1999, through June 30, 1999, with claims payments
through June 30, 1999;
(C) January 1, 1999, through September 30, 1999, with claims
payments through September 30, 1999;
(D) January 1, 1999, through December 31, 1999, with claims
payments through December 31, 1999;
(E) January 1, 1999, through December 31, 1999, with claims
payments through March 31, 2000.
(e) Payments.
(i) Interim Payments. Blue Cross will for each calendar year make
interim settlements with CareAdvantage in accordance with this
subsection (i). Interim settlements will be based on CareAdvantage's
share of projected Savings as calculated 45 days following the close
of each of the five interim payment periods for each year. In
calculating projected Savings, the Actual PMPMs used for the first
three interim settlements in a calendar year will be seasonally
adjusted and projected to reflect the fact that the experience
available will not be from a complete calendar year; in calculating
CareAdvantage's share of projected Savings for the first three interim
settlements, the amounts paid pursuant to this section shall be based
on the member months for the interim payment period. Any amounts owing
CareAdvantage shall be paid by Blue Cross within 90 days of the close
of each interim payment period; for each calendar year beginning with
the third interim payment for such year, any amounts owing Blue Cross
(after adjusting for previous interim payments) may be offset by Blue
Cross against amounts otherwise payable by Blue Cross for such year
pursuant to Section 1(a).
Interim Payment 1: 20% of CareAdvantage's projected allocation of
Savings
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Interim Payment 2: 40% of CareAdvantage's projected allocation of
Savings (adjusted for any previous interim
payments)
Interim Payment 3: 60% of CareAdvantage's projected allocation of
Savings (adjusted for any previous interim
payments)
Interim Payment 4: 80% of CareAdvantage's projected allocation of
Savings (adjusted for any previous interim
payments)
Interim Payment 5: 100% of CareAdvantage's projected allocation
of Savings (adjusted for any previous interim
payments)
(ii) Final Settlement. Final settlement for each calendar year will based
on claims paid through 150 days after the close of each such calendar year.
Final settlement will be adjusted to reflect prior interim payments for
such year, as well as the items set forth in subsection 2(b)(iii). Any
amounts owing CareAdvantage for a calendar year shall be paid by Blue Cross
within 270 days of the close of such calendar year; any amounts owing Blue
Cross shall be paid by CareAdvantage within 45 days after a receipt of an
invoice from Blue Cross.
3. Applicable Products and Members. The computations required by this Schedule
II shall include the followings populations:
(a) HealthMate 2000 (including HealthMate 2000 MHCF)
(b) Other Plans:
(i) HealthMate
(ii) Classic Managed
(iii) Classic Non-Managed
(iv) Value Care 200
(v) Point of Service
(vi) Direct Pay--Age Rated
(vii) Direct Pay--Regular
(viii) Direct Pay--Students
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Attachment III
NONDISCLOSURE AGREEMENT
This NONDISCLOSURE AGREEMENT (the "Agreement") is made and entered into
this 14th of February, 1995, by and between Blue Cross & Blue Shield of Rhode
Island, a Rhode Island nonprofit hospital and medical service corporation with
an address at 444 Westminster Street, Providence, Rhode Island 02903 ("Blue
Cross") and CareAdvantage, Inc., a Delaware corporation with an address at Two
Penn Plaza East, Newark, New Jersey 07105 ("CareAdvantage").
W I T N E S S E T H:
WHEREAS, the parties to this Agreement are presently engaged in business
discussions regarding the provision of administrative and managed care services
to health benefit plans; and
WHEREAS, in connection with such discussions each of the parties hereto
desires to evaluate and examine certain books, records, financial information
and other confidential and/or proprietary information relating to the business
of the other party hereto; and
WHEREAS, the information which may be disclosed and/or revealed in
connection with such examination is confidential, proprietary and/or otherwise
of such a nature as to render public disclosure of the same potentially harmful
to the interests of the parties hereto.
NOW, THEREFORE, in consideration of the foregoing recitals and the
agreements and covenants set forth herein, and for other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties hereto agree as follows:
SECTION 1. Proprietary Information.
1.1 (a) As used in this Agreement, the term "Proprietary Information" shall
mean with regard to each of the parties hereto all trade secrets and
confidential, proprietary and other information disclosed by such party in
accordance with the terms hereof from the inception of the business discussions
as aforesaid (which discussions may have commenced prior to the date of this
Agreement), including without limitation, any and all reimbursement policies,
any and all financial, operational, policy, marketing, underwriting and customer
information, any and all other business information manuals, know-how, uses,
capabilities, operating codes, methods of access, access codes, instructions,
materials, studies, analyses, communications, data, methods, processes,
procedures, patents, ideas, modifications, inventions, discoveries, developments
or improvements relating to any existing or future developments or improvements
relating to any existing or future product, product design, or packaging,
production, marketing or distribution process, method or facility, research
project or result, and the like regarding such party or its products, business,
technology, employees, customers, systems, computer programs or software, or
prospects, whether disclosed directly by such party or one of its
Representatives to the other party hereto or obtained by the other party hereto
indirectly in whole or in part from such sources, and whether transmitted orally
or in written documents, memoranda, reports, correspondence, drawings or other
man or machine readable media, and all other documentation and information with
respect to such party. As used herein, the term "Representatives" shall mean
such party's directors, officers, employees, advisors, agents, contractors
and/or controlling persons.
(b) Notwithstanding any other provision of this Agreement to the contrary,
the term "Proprietary Information" shall not be deemed to include the following:
(i) information which is or becomes generally available to the public, other
than as a result of the disclosure thereof by a party hereto which has received
Proprietary Information in accordance with the terms hereof; or (ii) information
which is made available to a party hereto on a non-confidential basis by a third
party not bound by a confidentiality agreement with or under an obligation of
confidentiality to the other party hereto, as evidenced by written records of
said receiving party.
<PAGE>
1.2 The parties hereto agree and acknowledge that all Proprietary
Information shall be used solely for the purpose of evaluating a possible
transaction between Blue Cross and CareAdvantage and in no event shall any
Proprietary Information be utilized in any manner which is or may be detrimental
to either of the parties hereto. Blue Cross and CareAdvantage shall keep all
Proprietary Information that they receive in accordance with the terms hereof
confidential and neither Blue Cross nor CareAdvantage shall, without the prior
written consent of the party which has disclosed any Proprietary Information,
disclose, or permit any of its Representatives to disclose, such Proprietary
Information to any other person or entity, other than in connection with the
transaction described above. Each of the parties hereto further agrees and
acknowledges that it shall transmit and/or disclose the Proprietary Information
such party receives in accordance with the terms hereof to only those of its
Representatives who: (i) have been informed of the confidential and proprietary
nature of such Proprietary Information; (ii) have previously agreed, in writing,
to be bound by the terms and conditions set forth in this Agreement; and (iii)
need to review such Proprietary Information in order to permit said party to
properly evaluate the above-described potential transaction.
Notwithstanding anything to the contrary contained in the immediately
preceding paragraph or elsewhere in this Agreement, CareAdvantage shall not
disclose any of the Proprietary Information to anyone other than Paul Shoffeitt,
John Lincoln, and Vincent Achilarre, and without limiting the foregoing
restriction, CareAdvantage shall not disclose the Proprietary Information to any
individual who is an officer, director, shareholder, or employee of Primedex
Health Systems, Inc. or Primedex Corporation. If CareAdvantage shall at any time
wish to disclose any of the Proprietary Information to anyone other than Messrs.
Shoffeitt, Lincoln, and Achilarre, CareAdvantage shall so notify Blue Cross in
writing, designating the individual(s) to whom such Proprietary Information is
requested to be conveyed, stating the reasons for such disclosure to such
individual(s), and warranting and representing that no such individual(s) to
whom such disclosure is sought are an officer, director, shareholder, or
employee of Primedex Health Systems, Inc. or Primedex Corporation. Such
information shall not be disclosed to any such individuals unless Blue Cross
shall consent to such disclosure in writing following receipt of the aforesaid
notice, and Blue Cross may without such consent in its sole and absolute
discretion.
1.3 In the event that Blue Cross, CareAdvantage, or any of their respective
Representatives who have received any Proprietary Information in accordance with
the terms of this Agreement becomes legally compelled to disclose any
Proprietary Information, the party so compelled will provide prompt notice
thereof to the party hereto which has disclosed such Proprietary Information in
accordance with the terms hereof so that said disclosing party may seek a
protective order or other appropriate remedy and/or waive compliance with the
provisions of this Agreement. Any person or party which is legally compelled to
disclose any Proprietary Information shall furnish only the portion of the
Proprietary Information which it is legally required to disclose and shall use
his, hers or its best efforts to obtain a protective order or other reliable
assurances that confidential treatment will be accorded to such Proprietary
Information.
SECTION 2. Ownership of confidential Information. The parties hereto agree
and acknowledge that each of the parties hereto which discloses any Proprietary
Information in accordance with the terms hereof is and shall remain the
exclusive owner of such Proprietary Information and all patent, copyright, trade
secret, trademark and other intellectual property rights therein. No license or
conveyance of any such rights to the party receiving said Proprietary
Information is granted or implied under the terms of this Agreement.
SECTION 3. Nonduplication. Neither of the parties hereto shall copy or
duplicate, in any manner whatsoever, any paper, material, item, man or machine
readable media regarding or otherwise relating to or other tangible
manifestations of any Proprietary Information, unless expressly authorized to do
so, in writing, by the party hereto which has disclosed such Proprietary
Information, and then only for the purpose expressly authorized by said
disclosing party.
SECTION 4. Return of Proprietary Information. Each of the parties hereto
shall return all Proprietary Information to the party hereto which has disclosed
the same, and shall return to such disclosing party any and all papers,
materials, items, man or machine readable media regarding or otherwise relating
to or other tangible manifestations of such Proprietary Information, and all
copies or duplications thereof, within two (2) days after: (i) said disclosing
party's request therefor; or (ii) the termination of business discussions
between the parties hereto (the"Return Date"). In addition, each of the parties
hereto shall, within five (5) days after the Return Date, destroy all copies of
any analyses, compilations, studies or other documents prepared by such party
for its internal
2
<PAGE>
use which reflect or otherwise relate in any manner whatsoever to any
Proprietary Information such party has received in accordance with the terms
hereof and shall certify, in writing, its compliance with the terms of this
Section 4. Neither of the parties hereto shall disclose any such papers,
materials, items, man or machine readable media regarding or otherwise relating
to the Proprietary Information or other tangible manifestations of any
Proprietary Information such party has received in accordance with the terms
hereof or the contents thereof to any third party without the prior written
consent of the party hereto which has disclosed such Proprietary Information in
accordance with the terms hereof.
SECTION 5. Applicability. The obligations of Blue Cross and CareAdvantage
set forth in this Agreement shall be binding upon, and Blue Cross and
CareAdvantage shall be responsible for all actions of, their respective
Representatives.
SECTION 6. Enforcement. The parties hereto expressly agree and acknowledge
that: (i) the restrictions on disclosure, reproduction and misappropriation set
forth in this Agreement represent a reasonable and necessary protection of the
legitimate interests of the parties and that each party's failure to observe and
comply with the covenants and agreements herein contained shall constitute a
breach of this Agreement; (ii) it is and will continue to be difficult to
ascertain the nature, scope and extent of the damage caused by such breach; and
(iii) a remedy at law with regard to a breach hereunder will be inadequate.
Accordingly, it is the intention of the parties hereto that, in addition to any
other rights and remedies which any party may have in the event of any breach of
this Agreement, such party shall be entitled, and is expressly and irrevocably
authorized by the other party hereto, to demand and obtain specific performance
and/or temporary and permanent injunctive relief with regard to said breach,
without the necessity of posting a bond or other security, and all other
appropriate equitable relief, against the other party hereto in order to prevent
any breach or threatened breach of this Agreement by such other party. The
parties hereby irrevocably consent to the jurisdiction of the state and federal
courts of the State of Rhode Island.
SECTION 7. Representations and Warranties of Blue Cross and CareAdvantage.
7.1 Blue Cross, and the individual executing this Agreement on behalf of
Blue Cross, represents and warrants to CareAdvantage that Blue Cross' execution,
delivery and performance of this Agreement has been duly authorized by the
appropriate corporate action, the person executing this Agreement on behalf of
Blue Cross is thereunto duly authorized, and this Agreement constitutes the
legal, valid and binding obligation of Blue Cross and is enforceable in
accordance with its terms.
7.2 CareAdvantage, and the individual executing this Agreement on behalf of
CareAdvantage, represents and warrants to Blue Cross that CareAdvantage's
execution, delivery and performance of this Agreement has been duly authorized
by the Agreement on behalf of CareAdvantage is thereunto duly authorized, and
this Agreement constitutes the legal, valid and binding obligation of
CareAdvantage and is enforceable in accordance with its terms.
SECTION 8. Miscellaneous.
8.1 Severability. Nothing contained herein shall be construed so as to
require the commission of any act contrary to law, and wherever there is any
conflict between any provisions contained herein and any present or future
statute, law, ordinance or regulation, the latter shall prevail, provided,
however, that the provision of this Agreement which is affected shall be
curtailed and limited only to the extent necessary to bring it within the
requirements of the law, and the remainder of this Agreement shall not be
affected thereby.
8.2 Further Assurances. Each of the parties hereto shall execute and
deliver any and all additional agreements, documents and other assurances, and
shall do any and all acts reasonably necessary in connection with the
performance of their obligations hereunder, to effectuate the intent of the
Agreement.
8.3 Survival. The rights and obligations of the parties set forth herein
shall survive the execution and delivery of this Agreement and the termination
of business discussions between the parties hereto and shall continue in full
force and effect.
3
<PAGE>
8.4 Waiver. Failure or delay to insist upon compliance with any provision
hereof shall not operate as, and shall not be construed as, a waiver or
amendment of such provision or a waiver of the right to insist upon compliance
with such provision or to take remedial steps to recover damages or other relief
for noncompliance. Any express waiver of any provision of this Agreement shall
not operate and shall not be construed as a waiver of any subsequent breach,
regardless of whether such breach occurs under similar or dissimilar
circumstances. No term or provision of this Agreement shall be deemed to be
waived unless such waiver is set forth in a written instrument signed by all of
the parties hereto.
8.5 Assignment. This Agreement shall be binding on, and shall inure to the
benefit of, Blue Cross and CareAdvantage and their respective successors and
assigns; provided, however, that neither Blue Cross nor CareAdvantage may assign
any of their respective rights or delegate any of their respective obligations
under this Agreement without the prior written consent of the other party to
this Agreement.
8.6 Notice. All notices, authorizations or other communications required to
be delivered in writing under the terms of this Agreement shall be deemed to
have been duly delivered on the date of service, if served personally on the
receiving party, or on the third business day after mailing, if mailed to the
receiving party by registered or certified mail, and properly addressed as
follows:
If to Blue Cross: Blue Cross & Blue Shield of Rhode Island
444 Westminster Street
Providence, Rhode Island 02903
Attn: John H. Grant
With a copy to: Blue Cross & Blue Shield of Rhode Island
444 Westminster Street
Providence, Rhode Island 02903
Attn: Elia Germani, Esq.
If to CareAdvantage: CareAdvantage, Inc.
Two Penn Plaza East
Newark, New Jersey 07105
Attn: Vincent M. Achilarre
CareAdvantage or Blue Cross may change their respective addresses for
purposes of this Section 8.6 by providing the other parties with notice of the
new address in the manner set forth above.
8.7 Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original, but all of which shall
constitute one and the same instrument.
8.8 Integration. This Agreement embodies and constitutes the entire
agreement and understanding between the parties with respect to the transactions
contemplated hereunder, and all prior or contemporaneous agreements,
understandings, representations and statements, whether oral or written, are
hereby merged into this agreement.
8.9 Amendment. Neither this Agreement, nor any provisions hereof, may be
modified, amended, supplemented or altered except by written agreement executed
and delivered by all of the parties hereto.
8.10 Governing Law. The parties hereby agree and acknowledge that this
Agreement, and the rights, remedies and obligations of the parties hereunder,
shall be governed by and construed in accordance with the laws of the State of
Rhode Island.
8.11 Additional Rights and Remedies. The rights and remedies contained
herein shall not be in lieu of, but shall be in addition to, the rights and
remedies of any party with regard to a breach by the other party hereto of the
Rhode Island Uniform Trade Secrets Act (R.I. Gen. Laws ss.ss. 6-41-1 et seq.),
or any similar act which may apply (in accordance with the terms hereof) to the
conduct governed and/or the information protected hereunder.
4
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year first above written.
Witness: BLUE CROSS & BLUE SHIELD OF RHODE ISLAND
/s/Donnamarie Cahill By: /s/John H. Grant
- ------------------------- -------------------------
Name: John H. Grant
-------------------------
Title: Vice President
-------------------------
CAREADVANTAGE, INC.
/s/Donnamarie Cahill By: /s/Vincent M. Achilarre
- ------------------------- -------------------------
Name: Vincent M. Achilarre
-------------------------
Title: Chief Financial Officer
-------------------------
5
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<S> <C>
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<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-START> NOV-01-1996
<PERIOD-END> JUL-31-1997
<CASH> 776,828
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<CURRENT-ASSETS> 2,708,504
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<BONDS> 2,434,530
0
0
<COMMON> 74,390
<OTHER-SE> (2,209,488)
<TOTAL-LIABILITY-AND-EQUITY> 6,119,900
<SALES> 0
<TOTAL-REVENUES> 10,424,189
<CGS> 0
<TOTAL-COSTS> 6,080,539
<OTHER-EXPENSES> 4,253,020
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<INTEREST-EXPENSE> 243,122
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<INCOME-TAX> 0
<INCOME-CONTINUING> (152,492)
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<NET-INCOME> (152,492)
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