<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended January 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 March 17, 1997
Transitional Small Business Disclosure Format
Yes |X| No |_|
This is Page 1 of 12 Pages.
<PAGE> 2
CAREADVANTAGE, INC
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS January 31, October 31,
1997 1996
------------ ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 265,478 $ 1,167,147
Accounts receivable-stockholder 610,000 833,333
Accounts receivable-other 209,168 90,000
Other current assets 82,547 129,829
------------ ------------
Total current assets 1,167,193 2,220,309
Property and equipment, at cost less accumulated depreciation 1,359,993 1,480,746
Intangible assets (net) 1,968,483 2,080,769
Other assets 83,618 79,184
------------ ------------
Total assets $ 4,579,287 $ 5,861,008
============ ============
LIABILITIES AND CAPITAL DEFICIENCY
Current liabilities:
Current portion of long-term debt $ 416,954 $ 623,472
Note payable-stockholder 2,000,000 2,000,000
Accounts payable-trade 392,317 569,346
Due to customers 309,122 485,594
Due to stockholders 2,408,272 1,525,694
Accrued salaries and employee benefits 428,682 512,505
Accrued expenses and other current liabilities 987,789 694,996
------------ ------------
Total current liabilities 6,943,136 6,411,607
Capital lease obligations, less current portion 969,703 996,591
Due to stockholders 435,912
Commitments and contingencies
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 19,640,091 19,690,248
Accumulated deficit (23,048,033) (21,697,583)
------------ ------------
Total capital deficiency (3,333,552) (1,983,102)
------------ ------------
Total liabilities and capital deficiency $ 4,579,287 $ 5,861,008
============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
2
<PAGE> 3
CAREADVANTAGE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended
January 31,
-----------------------------
1997 1996*
------------ ------------
Net revenues $ 2,369,301 $ 4,047,391
Costs of services 1,904,211 2,426,937
------------ ------------
Gross margin 465,090 1,620,454
Operating expenses:
Selling, general and administration 1,482,772 1,082,687
Depreciation and amortization 256,565 239,545
------------ ------------
Total operating expenses 1,739,337 1,322,232
Interest 76,203 54,536
Net income (loss) ($ 1,350,450) $ 243,686
============ ============
Pro forma net income (loss) per share of ($ .02) $ .01
common stock ============ ============
Pro forma weighted average number of 74,389,886 44,571,838
common shares outstanding ============ ============
*Reclassified to conform to current period classification.
The accompanying notes are an integral part of these statements.
3
<PAGE> 4
CAREADVANTAGE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three Months Ended
January 31,
-------------------------
1997 1996*
----------- -----------
<S> <C> <C>
Operating activities:
Net profit (loss) ($1,350,450) $ 243,686
Adjustments to reconcile net profit (loss) to net cash
Provided from (used for) operating activities:
Depreciation and amortization 256,565 239,545
Change in assets and liabilities:
Due to/from customers/stockholders 374,360 (905,999)
Other assets 42,848 12,589
Accounts payable (177,029) 236,597
Accrued expenses and other liabilities 208,970 215,575
----------- -----------
Cash provided from (used by) operating activities (644,736) 41,993
----------- -----------
Investing activities:
Capital expenditures (23,526) (2,528)
Acquisition of intangible assets (153,076)
----------- -----------
Cash provided from (used by) investing activities (23,526) (155,604)
----------- -----------
Financing activities:
Principal payments under long-term debt (233,407) (107,646)
----------- -----------
Cash provided from (used by) financing activities (233,407) (107,646)
----------- -----------
Net increase (decrease) in cash (901,669) (221,257)
Cash - beginning of fiscal year 1,167,147 536,471
----------- -----------
Cash - end of period $ 265,478 $ 315,214
=========== ===========
</TABLE>
*Reclassified to conform to current period classification.
The accompanying notes are an integral part of these statements.
4
<PAGE> 5
CAREADVANTAGE, INC.
NOTES TO FINANCIAL STATEMENTS - JANUARY 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"), operates in one business
segment, providing health care cost containment services to health care insurers
and other health services organizations to reduce the costs of medical services
provided to their subscribers without reducing the quality of service.
Basis of Preparation:
The consolidated balance sheet at January 31, 1997 and the consolidated
statements of operations and cash flows for the three months ended January 31,
1997 and 1996 have been prepared by CareAdvantage, Inc. (the "Company") and have
not been audited by the Company's independent auditors. In the opinion of
management, the accompanying financial statements include all adjustments (which
include only normal recurring adjustments) necessary to present fairly the
financial position, results of operations and cash flows at January 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 filled with the
Securities and Exchange Commission. The results of operations for the period
ended January 31, 1997 are not necessarily indicative of operating results to be
expected for the full year.
Capital Deficiency:
Pursuant to the terms of promissory notes issued by CAHS to each of CW Ventures
II, L.P. ("CW Ventures") and Blue Cross and Blue Shield of New Jersey
("BCBSNJ")(as assignee of Enterprise Holding Company, Inc.)(the "CW Note" and
the "BCBSNJ Note", respectively), in connection with the change of control of
the Company, the Company was obligated to issue CW Ventures and BCBSNJ
additional shares of common stock of the Company to bring their ownership of the
Company up to approximately 45% each, on a fully-diluted basis, as of February
22, 1996. Accordingly, on February 27, 1997, the Company issued CW Ventures and
BCBSNJ, 25,914,222 and 24,242,337 shares of common stock of the Company
respectively. Pro forma weighted average common shares outstanding include the
CW Ventures shares as if they had been issued on February 22, 1996 and the
BCBSNJ shares as if they had been issued as of November 1, 1995, as the
operations of the business purchased from BCBSNJ (CHCM) is included in the
Company's results of operations for the entire three-month period ended January
31, 1996.
Contingencies:
Potential Uninsured Exposure to Litigation:
On or about March 22, 1996, an action entitled Francis X. Bodino v. BCBSNJ and
CHCM (the "Bodino Action") was filed in the Law Division of the Superior Court
of New Jersey in Hudson County. The complaint alleges misrepresentations with
respect to the type and amount of coverage afforded by Mr. Bodino's policy with
BCBSNJ, specifically with respect to coverage for heart transplantation. The
complaint also alleges that representations made on behalf of BCBSNJ by an
employee of CHCM led Mr. Bodino's surgeon to believe that contractually excluded
heart transplant coverage was available. The complaint demands a variety of
money damages, as well as punitive damages, against both defendants. The
complaint also contains a claim for treble damages and counsel fees under the
New Jersey Consumer Fraud Act. BCBSNJ is presently defending the Bodino Action
on behalf of itself and CHCM, has denied liability in all respects and has
specifically denied that Mr. Bodino's policy covered heart transplantation or
that any misrepresentations or fraud occurred. BCBSNJ and CHCM have filed a
motion for summary judgment which remains pending as to all claims and is
subject to further discovery. The Company, based upon the advice of counsel, at
present, has insufficient information to evaluate CHCM's potential exposure, if
any, in this litigation.
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
5
<PAGE> 6
CAREADVANTAGE, INC.
NOTES TO FINANCIAL STATEMENTS - JANUARY 31, 1997
(Unaudited)
dated February 15, 1996, counsel for Mr. Bodino gave written notice to CHCM
contesting the denial of coverage and threatening litigation against CHCM and
BCBSNJ. The Company and CAHS purchased CHCM on February 22, 1996. (See "Change
in Control" above.) The Company did not maintain insurance coverage which would
cover claims against BCBSNJ or CHCM arising from events occurring prior to
February 22, 1996, which might constitute a breach under the Interim Services
Agreement. The Company has been informed by BCBSNJ that BCBSNJ has notified its
carrier of the claim and the carrier has advised BCBSNJ that it has not yet
determined whether and to what extent coverage may exist. The Company, based
upon the advice of counsel, is not presently able to determine whether the
Bodino Action might result in any loss to the Company or CHCM and, if so,
whether any such loss would be material.
Termination of Employment:
A claim has been asserted by a former Medical Director of CAHS. The former
Medical Director was employed from September 1995 through May 1996 when he
voluntarily resigned, allegedly due to a change of control of the Company in
February 1996. He contends that he is entitled to: (i) a severance payment equal
to one year's annual base compensation ($190,000); and (ii) vesting in 75,000
qualified stock options at a strike price of $1.25 per share. The former Medical
Director bases his claim on an executed written agreement drafted by a placement
firm, which memorializes some, but not all, of the terms and conditions of his
employment. The Company intends to vigorously contest this matter on the grounds
that the former Medical Director (i) is not entitled to severance; and (ii) has
no entitlement to stock options as the plan was never approved by the
shareholders. The former Medical Director alleges claims of breach of contract
and promissory estoppel; an action has not yet been commenced in any court. The
parties 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.
Subsequent Events:
Resignation of Senior Officer and Subsequent Consulting Agreement:
On March 17, 1997, a senior officer of the Company tendered his resignation as
Vice President, Treasurer, Secretary and Chief Financial Officer and was
retained by the Company as a consultant for a period of approximately seven
months. The former employee is to receive severance payments approximating
$100,000. In accordance therewith, the Company recorded a separation cost of
$100,000 for the quarter ended January 31, 1997.
Contract Cancellation:
Effective March 1, 1997, one of the Company's customers, Blue Cross Blue Shield
of Delaware ("BCBSDE"), canceled its consulting agreement with the Company. The
Company participated in lengthy discussions with such customer upon receiving
its cancellation notice on February 3, 1997; however, the Company was
unsuccessful in agreeing to terms that were acceptable to both parties. Revenues
and gross margins relating to BCBSDE for the quarter ended January 31,
6
<PAGE> 7
CAREADVANTAGE, INC.
NOTES TO FINANCIAL STATEMENTS - JANUARY 31, 1997
(Unaudited)
1997 were $102,000 and $50,231 respectively. No revenues were recognized
relating to BCBSDE during the three months ended January 31, 1996. The loss of
this customer will not have a material adverse impact on results of operations
and financial condition of the Company.
7
<PAGE> 8
CAREADVANTAGE, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General:
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. Reference is made in the accountants
report to the Company's financial statements included with the annual report
filed on Form 10-KSB for the fiscal year ended October 31, 1996. 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 an
infusion of equity capital and acquisition of CHCM. By continuing to provide
high quality health care cost containment services to its existing customer base
of Blue Cross and Blue Shield ("BCBS") plans, management believes it can
continue to leverage its reputation to other similar customers. This strategy is
particularly significant given the current health care environment where large
third-party payers are merging in an effort to protect their respective
franchises and expand their market reach. The various BCBS plans throughout the
country are no exception to this phenomenon and the Company believes it can
leverage its core competencies to participate in this consolidating environment.
Additionally, while the Company may have to seek additional financing to
accomplish its objectives, management intends to secure appropriate capital as
the business needs warrant. In this regard, the Company is currently negotiating
with several financial institutions for necessary financing of its future
operating and capital expansion needs. However, there is no assurance that such
financing will be received at all or received on a timely basis or on terms
acceptable to the Company.
Certain statements in this Form 10-QSB constitute "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995,
including those concerning management's expectations with respect to future
financial performance and future events, particularly relating to revenues from
performance-based services and renegotiations of existing and new contracts with
customers. Such statements involve known and unknown risks, uncertainties and
contingencies, many of which are beyond the control of the Company, which could
cause actual results and outcomes to differ materially from those expressed
herein.
Net revenues:
<TABLE>
<CAPTION>
Three Months Ended
------------------
January 31, 1997 January 31, 1996
---------------- ----------------
Amount Percent Amount Percent
------ ------- ------ -------
<S> <C> <C> <C> <C>
Revenues from fixed fee arrangements $2,187,301 92% $2,937,623 58%
Revenues from performance-based arrangements 80,000 4% 1,551,768 38%
Consulting revenues 102,000 4% 218,000 5%
---------- --- ---------- ---
Total revenues $2,369,301 100% $4,047,391 100%
========== === ========== ===
</TABLE>
The Company's contracts with its customers are complicated. For example,
contracts that provide for performance-based revenues require claims data that
is supplied by the Company's customers to calculate the achievement of goals for
each period. Because claims data typically lags the Company's actual performance
by several months, it is difficult to ensure maximum accuracy when recording
performance-based revenues. For these and other reasons, management is working
closely with its customers to secure more timely and accurate data to improve
the accuracy of reporting its revenues, including, in some cases, the
renegotiation of the contract itself.
The Company is currently in the process of negotiating contracts with two of its
existing customers. There is no assurance that the revised terms of any revised
contract will be on terms more favorable than the terms of the existing
contracts. Based on discussions with one such customer to date, management
expects that a new contract will be entered into and will provide a mechanism(s)
for the Company to secure more timely and accurate data from which to record its
performance-based revenue fees. However, there is no assurance that such a
mechanism(s) will guarantee timely and accurate recording of these
performance-based fees. The Company is also in negotiations with BCBSNJ. The
8
<PAGE> 9
CAREADVANTAGE, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Company is seeking certain modifications to the existing service agreement under
which the Company is technically in default. Such modifications will provide the
Company with an opportunity to realize performance-based fees. There is no
assurance that the Company will be successful in its negotiations with such
customers.
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 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.
Net revenues for the quarter ending January 31, 1997 and 1996 were $2,369,301
and $4,047,391, respectively, representing a decrease of approximately
$1,678,090. This decrease is primarily due to a reduction in recognized
performance-based fees from one of the Company's major customers.
Revenues from at-risk performance-based service contracts (where the majority of
revenues are typically earned) generally tend to follow a pattern whereby
significant revenues are generated during the initial term of the contact as
savings opportunities are the greatest and then decline thereafter as the
opportunity for additional savings diminishes. As a result, the Company's
ability to increase revenues and gross margins are dependent upon its ability to
enter into additional contracts with new customers and/or expand the services
provided to existing customers.
Cost of services:
Costs of services for the three months ended January 31, 1997 and 1996 were
$1,904,211 and $2,426,937 respectively, representing a decrease of approximately
$524,000. This decrease in the cost of services was primarily due to decreases
in personnel costs of approximately $266,000, and professional and consulting
costs of approximately $202,000.
Operating expenses:
Selling, general and administrative:
Selling, general and administrative costs for the three months ended January 31,
1997 and 1996 were $1,482,772 and $1,082,687 respectively, representing an
increase of approximately $400,000. This increase is attributable to increases
in personnel costs of approximately $400,000, and is largely due to
non-recurring charges related to the Company's ongoing reorganization efforts.
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 by any material amount.
Depreciation and amortization:
Depreciation and amortization costs were $256,565 and $239,545 for the three
months ended January 31, 1997 and 1996, respectively, representing an increase
of approximately $17,000. The increase is primarily due to amortization related
to the acquisition of CHCM, offset in part by a decrease in the amortization
related to software development costs that were written off during the year
ended October 31, 1996.
Interest expense:
Net interest expense was $76,203 and $65,749 for the three months ended January
31, 1997 and 1996, respectively, representing an increase of approximately
$15,000. The increase is primarily due to interest on the CW Note offset in part
by decreased interest related to the Company's master lease agreement with IBM
Credit Corporation.
9
<PAGE> 10
CAREADVANTAGE, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Interest expense related to the CW Note will cease and any accrued interest
forgiven should the CW Note be exchanged into shares of Common Stock of the
Company pursuant to the terms of the CW Note.
Loss from operations:
Results of operations in the future are dependent on management's ability to
increase revenues and reduce both direct costs of services and general and
administrative costs. While there can be no assurance that such efforts will be
successful, management believes that opportunities exist to increase revenues
and reduce costs in areas that will not adversely effect the operations of the
Company. However, based upon the current level of revenues and the current level
of costs and expense, management does not expect the Company to be profitable in
the foreseeable future.
Financial Condition:
Liquidity and Capital Resources:
At January 31, 1997, the Company had cash of $265,000 and a working capital
deficiency of approximately $5,775,943. At October 31, 1996, the Company's cash
balance was $1,167,000 and it had a working capital deficiency of approximately
$4,191,298. This decrease is due to the Company's inability to generate cash
flows from operations. Accordingly, it is anticipated that the Company will not
be able to generate cash flows from operations in the foreseeable future.
Management feels that the outcome of current contract negotiations with a few of
its customers is critical to the future profitability and improved operating
cash flows of the Company.
Since the Company's inception, the Company's operating activities have not
generated sufficient cash to fund its operations; as a result, the Company has
relied on the sales of capital stock , capital contributions and guarantees by
thirds parties of debt to fund its operating activities and capital
expenditures. Relatedly, while the Company's current level of liquidity may not
be sufficient in the future to accommodate the Company's growth plans,
management intends to secure appropriate capital to accomplish its objectives.
There is no assurance, however, that such financing will be received on a timely
basis or on terms acceptable to the Company. See "Financing" below.
Cash and cash equivalents decreased approximately $902,000 as of January 31,
1997 from October 31, 1996 and approximately $222,000 as of January 31, 1996
from October 31, 1995, due to changes in cash flows from operating, investing,
and financing activities which are explained below.
Net cash used in operating activities amounted to approximately $645,000 for the
three months ended January 31, 1997. The decrease of approximately $645,000 is
partially due to the repayment of amounts related to cash received from one of
its customers in excess of revenues earned from such customer. The remaining
balance of this obligation is $309,122 and does not bear interest nor is it
secured or collateralized by any assets of the Company.
Net cash used in investing activities amounted to approximately $23,526 and
$155,604 for the three months ended January 31, 1997 and 1996, respectively. The
decrease of approximately $132,000 is primarily due to the reduction in software
development costs of approximately $153,076 which were incurred during the same
period of last year when the Company was implementing its new computer system.
Net cash used in financing activities amounted to approximately $233,407 for the
three months ended January 31, 1997. This use was largely due to the repayment
of a note payable to one of the Company's vendors of approximately $126,000.
This note has been fully satisfied as of January 31, 1997 and the Company has no
further obligation thereunder.
Financing:
Amounts payable pursuant to long-term financing arrangements as of January 31,
1997 were approximately $1,400,000, 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
10
<PAGE> 11
CAREADVANTAGE, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
term of the Master Lease is four years and bears interest at 11.39% per annum.
The Company's obligations under this Master Lease arrangement are guaranteed by
BCBSNJ.
The Company has provided for approximately $2,400,000 to be repaid to BCBSNJ (a
stockholder of the Company), representing cash received in excess of revenues
earned from such customer. However, the Company is in negotiation with BCBSNJ to
modify the terms of the Service Agreement with BCBSNJ and has not reached a
mutually satisfactory arrangement with this customer.
Future Financing Needs:
In connection with management's decision to adopt and implement a new and more
comprehensive clinical software product, the Company expects to incur additional
software and computer hardware costs during the second and third quarter of
fiscal 1997 of approximately $450,000. Such costs are expected to be financed in
the form of a capital lease arrangement. Accordingly, the Company is negotiating
with several lending institutions to secure the best available financing for
this obligation, which would be guaranteed by BCBSNJ. There is no assurance that
such financing will be guaranteed by BCBSNJ or without such guarantee, will be
available on terms agreeable to the Company.
Item 1. Legal Proceedings
Termination of Employment:
A claim has been asserted by a former Medical Director of CAHS. The former
Medical Director was employed from September 1995 through May 1996 when he
voluntarily resigned, allegedly due to a change of control of the Company in
February 1996. He contends that he is entitled to: (i) a severance payment equal
to one year's annual base compensation ($190,000); and (ii) vesting in 75,000
qualified stock options at a strike price of $1.25 per share. The former Medical
Director bases his claim on an executed written agreement drafted by a placement
firm, which memorializes some, but not all, of the terms and conditions of his
employment. The Company intends to vigorously contest this matter on the grounds
that the former Medical Director (i) is not entitled to severance; and (ii) has
no entitlement to stock options as the plan was never approved by the
shareholders. The former Medical Director alleges claims of breach of contract
and promissory estoppel; an action has not yet been commenced in any court. The
parties 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.
Item 2. Changes in Securities
On February 27, 1997, the Company issued CW Ventures and BCBSNJ 25,914,222 and
24,242,337 shares of common stock of the Company, respectively, pursuant to the
terms of the CW Note and the BCBSNJ Note. The offer and sale of these shares
were not registered under the Securities Act of 1933, as amended. These shares
were issued pursuant to the exemption contained in Section 4(2) of the
Securities Act of 1933, as amended.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the quarter ended
January 31, 1997.
Item 6. Exhibits and Reports on Form 8-K
Exhibits -- No. 10 - "Consulting Agreement"
Reports on Form 8-K -- None
11
<PAGE> 12
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)
March 20, 1997 /s/ Thomas P. Riley
-------------------------------------
Thomas P. Riley
President and Chief Executive Officer
Acting Chief Financial Officer
12
<PAGE> 13
EXHIBIT INDEX
-------------
Exhibit No. Description
----------- -----------
10 Consulting Agreement
27 Financial Data Schedule
<PAGE> 1
EXHIBIT 10
CONSULTING AGREEMENT
CONSULTING AGREEMENT dated March 17, 1997 (this "Agreement"), by and
between CAREADVANTAGE, INC., a Delaware corporation having offices at 485-C
Route 1 South, Iselin, New Jersey 08830-3037 (the "Company"), and RICHARD J.
STROBEL, an individual having a residence at 4 Diane Court, Woodcliff Lake, New
Jersey 07675 ("Strobel").
WHEREAS, each of the Company and Strobel have entered into an
employment agreement dated as of August 7, 1996 (the "Employment Agreement")
pursuant to which the Company has employed Strobel as a Vice President,
Treasurer, Secretary and Chief Financial Officer of the Company;
WHEREAS, Strobel, contemporaneous with the execution of this
Agreement and as a condition precedent to the effectiveness of this Agreement,
is tendering his written resignation as a Vice President, Treasurer, Secretary
and Chief Financial Officer of the Company and as a senior officer of all
Affiliates (as such term is defined in Section 6(a) hereof), which resignation
has the effect of terminating the Employment Agreement pursuant to Section 6(d)
of such Employment Agreement; and
WHEREAS, the Company desires, upon the effectiveness of such
resignations, to secure certain consultancy services of Strobel, and Strobel
desires to provide such services to the Company, all in accordance with the
terms and conditions hereinafter set forth.
NOW, THEREFORE, in consideration of the mutual representations,
warranties, covenants and undertakings of the parties hereto, and for other good
and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto, intending to be legally bound, do hereby agree
as follows:
1. Resignation from Positions as an Officer.
(a) Contemporaneous with the execution hereof, and as a
condition precedent to the effectiveness hereof, Strobel shall have tendered his
written resignations from any offices of the Company and from any offices of any
Affiliate, all in accordance with the bylaws of the Company or such Affiliates,
as applicable.
<PAGE> 2
(b) Each of the Company and Strobel agrees that the three (3)
month prior written notice required to be given by Strobel to the Company
pursuant to Section 6(d) of the Employment Agreement shall be waived by the
Company and each of the Company and Strobel agrees that Strobel's resignation as
required in Section 1(a) hereof shall be effective as of the date hereof.
2. Retention as Consultant.
(a) The Company hereby agrees to retain Strobel as a
consultant on the terms and conditions set forth herein, and Strobel hereby
accepts such retention, for a period commencing from the date hereof (the
"Effective Date") and terminating on October 31, 1997, subject to earlier
termination of such retention hereunder as provided for in this Agreement (the
"Term").
(b) Nothing under this Agreement shall be construed as
creating any partnership, joint venture, agency or employer-employee
relationship between Strobel and the Company or any Affiliate. Strobel shall act
solely as an independent contractor and, as such, is not authorized to bind the
Company (or any Affiliate) to third parties. During his retention by the Company
hereunder, Strobel shall, to the best of his abilities, complete the following
tasks on behalf of the Company: (i) preparation and filing with the Securities
and Exchange Commission (the "SEC") of the Company's 1997 first quarter report
on Form 10-Q; (ii) preparation and filing with the SEC of a Registration
Statement on Form S-3 for shares of the Company's common stock; (iii) the
mailing and solicitation of proxies in connection with the Company's annual
meeting; (iv) preparation and filing with the SEC of the Registration Statement
on Form S-8 for shares of the Company's stock reserved for, and issued pursuant
to, its Incentive and Non-Qualified Stock Option Plans; and (iv) preparation of
1997 budgets and financial statements for the Company (collectively, the
"Services"). In addition to the rendering of the Services, during the Term,
Strobel shall do any and all reasonable actions and make himself available
during normal business hours, as requested from time to time by the President
and Chief Executive Officer of the Company, so long as such requests do not
require Strobel to render more than ten (10) full working hours of services in
excess of those hours of work which Strobel will undertake in order to complete
the Services (the "Required Hours"). In the event that such services, separate
and apart from Strobel's requirement to render the Services, require Strobel to
work in excess of the Required Hours, the Company and Strobel agree to negotiate
and come to agreement as to an hourly rate to compensate Strobel for such
services in excess of the Services and the Required Hours.
(c) In connection with Strobel's provision of Services
hereunder, Strobel shall be allowed access to any office of the Company only
with the prior consent of the President and Chief Executive Officer of the
Company.
(d) Strobel shall perform the Services in accordance with all
applicable Federal, state, local and other laws, rules and regulations.
2
<PAGE> 3
3. Payments to Strobel.
(a) In consideration of the covenants and agreements made by
Strobel hereunder, including, without limitation, Section 6 hereof, and of the
Services to be rendered by Strobel pursuant to Section 2 hereof, subject to the
terms and conditions set forth herein, the Company shall make the following
payments to Strobel:
(i) From the Effective Date to April 30, 1997, Strobel
shall receive his Base Salary (as such term is defined in the Employment
Agreement) (subject to withholding of federal and state income taxes, FICA and
other applicable deductions as required by law).
(ii) On April 30, 1997, in addition to his last payment
of Base Salary, the Company shall pay to Strobel a payment equal to Twenty-Nine
Thousand One Hundred Sixty-Eight Dollars ($29,168.00) (subject to withholding of
federal and state income taxes, FICA and other applicable deductions as required
by law).
(iii) For the next two (2) consecutive months, on May
30th, 1997 and June 30th, 1997, the Company shall pay to Strobel a payment equal
to Twenty-Nine Thousand One Hundred Sixty-Six Dollars ($29,166.00) (subject to
withholding of federal and state income taxes, FICA and other applicable
deductions as required by law).
4. Expenditures.
(a) Subject to Section 4(b) hereof, the Company shall
reimburse Strobel for all reasonable, ordinary and necessary expenses directly
related to his performance under the Employment Agreement ("Expenses"), which
Expenses were incurred by Strobel prior to the Effective Date.
(b) In order to receive reimbursement with respect to any
Expenses in accordance with Section 4(a) hereof, Strobel must submit an itemized
account and appropriate documentation of such Expenses sufficient, inter alia,
to preserve any deductions for Federal income taxation purposes to which the
Company may be entitled, and which documentation must be acceptable in form and
substance satisfactory to the Company. Such account and documentation shall be
provided prior to any disbursement of funds by the Company to Strobel.
(c) In connection with the rendering of Services by Strobel
pursuant to Section 2 hereof, Strobel shall retain a computer previously
provided to him by the Company for his use at the residence identified in the
first paragraph of this Agreement.
(d) In consideration of the covenants and agreements made by
Strobel hereunder, including, without limitation, Section 6 hereof, and of the
Services to be rendered by Strobel pursuant to Section 2 hereof, subject to (i)
the terms and conditions set forth herein and (ii) Strobel's election, within
sixty (60) days of the Effective Date, the Company agrees to
3
<PAGE> 4
continue Strobel's medical and dental insurance benefits, at the Company's
expense, previously provided to him pursuant to the Employment Agreement, in
accordance with the Federal Consolidated Omnibus Budget Reconciliation Act of
1985, as amended ("COBRA"), for that period commencing upon the Effective Date
and terminating upon the earlier to occur of: (i) the expiration of the Term; or
(ii) that date upon which Strobel becomes covered by another group health
insurance plan. Strobel agrees promptly to notify the Company of his coverage by
such other group health insurance plan. After such date, Strobel shall have the
right to continue such medical and dental insurance benefits, at Strobel's
expense, in accordance with COBRA.
5. Termination of Retention.
The following provisions set forth the terms and conditions
pursuant to which the retention of Strobel as a consultant hereunder may be
terminated:
(a) The retention of Strobel hereunder shall be terminated
upon his death.
(b) The retention of Strobel hereunder may be terminated by
the Company in the event of the occurrence of any of the following conditions or
events on or after the Effective Date, which right of termination shall be
exercised by the Company in its reasonable discretion:
(i) commission by Strobel of any act that is materially
damaging or detrimental to, or that could be expected to be materially damaging
or detrimental to, the Company, an Affiliate or the reputation or business of
the Company or any Affiliate (whether such action is in performance of Services
hereunder or otherwise);
(ii) conviction of Strobel for the commission of a
felony;
(iii) material dishonesty or conflict of interest in
matters relating to the Company or an Affiliate;
(iv) commission by Strobel of any act of Moral Turpitude
(as hereinafter defined in this Section 5(b)) that materially adversely affects,
or that could reasonably be expected to materially adversely affect, the
Company, an Affiliate or the reputation or business of the Company or any
Affiliate; or
(v) any material breach of this Agreement by Strobel.
Upon or after the date of occurrence of any of the events or conditions
described in this Section 5(b), the Company may deliver written notice to
Strobel of its election to terminate his retention hereunder and such retention
shall be terminated effective as of the date of such notice. For purposes
hereof, "Moral Turpitude" means (A) a breach or violation of any applicable law,
(B)
4
<PAGE> 5
civil fraud or deceit, (C) a material misstatement or omission of fact or (D)
intentional misconduct.
In the event that the retention of Strobel hereunder is terminated, the Company
shall be under no further obligation to pay Strobel for his Services except to
pay Strobel the payments to be made in accordance with the terms of Section 3
hereof, up to and including the date on which his retention is terminated.
6. Release and Discharge.
(a) For purposes of this Agreement, an "Affiliate" shall mean
any person, corporation, partnership, firm, association, trust or other entity,
directly or indirectly through one or more intermediaries, controlling,
controlled by or under common control with the Company or any such person.
(b) For and in consideration of, as a condition to, the
Company entering into this Agreement and the retention of Strobel by the Company
as a consultant hereunder, Strobel, for himself and each of his heirs,
executors, administrators, successors and assigns, hereby waives, releases,
discharges and holds harmless the Company and each of the Affiliates and the
officers, directors, shareholders, partners, employees, agents, attorneys and
representatives of each of the Company and each Affiliate, past, present and
future, and the heirs, executors, administrators, legal representatives,
successors and assigns of each of the foregoing, of and from any and all claims,
actions, causes of actions, suits, debts, demands, damages, judgments,
executions, costs, expenses and liabilities of any kind whatsoever, whether
known or unknown, whether in law or equity, that he may have now or in the
future, by reason of any matter or cause whatsoever, against the
above-referenced entities and individuals, which Strobel may have had against
the Company and/or any Affiliate, from the date Strobel commenced employment at,
or entered into any other association, relationship or dealing with, the Company
or any Affiliate, to the Effective Date, arising out of, or in any way connected
with, Strobel's employment and/or any other association, relationship or dealing
with the Company and/or any Affiliate, including, without limitation, any
claims, actions, causes of actions, or suits against the Company or any
Affiliate for violation of any federal, state or local fair employment practices
law, including, without limitation, Title VII of the Federal Civil Rights Act of
1964, as amended, the Federal Americans with Disabilities Act, as amended, the
Federal Rehabilitation Act, as amended, the Federal Family and Medical Leave
Act, as amended, the Federal Employee Retirement Income Security Act, as
amended, the Federal Age Discrimination in Employment Act of 1967, as amended,
the Federal Older Workers Benefit Protection Act of 1991, as amended, and/or the
New Jersey Law Against Discrimination, N.J.S.A. ss. 10:5-12 et seq., or any
other employee relations statute, rule, executive order, law or ordinance, tort,
express or implied contract, public policy or claim for emotional distress or
other obligations. Without limiting the generality of the foregoing, Strobel,
for himself and each of his heirs, executors, administrators, successors and
assigns, hereby specifically releases, discharges and holds harmless the
above-referenced entities and individuals from and against any and all duties,
obligations, matters, causes or things relating to this Agreement or the
respective
5
<PAGE> 6
communications and dealings between Strobel and any of the above-referenced
entities and individuals relating to this Agreement.
(c) The parties understand and agree that any payments or
other consideration provided by the Company to Strobel under the terms of this
Agreement do not constitute an admission by the Company that it had or has
violated any law or legal obligation. Strobel further understands and agrees
that he is not otherwise entitled to the payments set forth in Section 3 of this
Agreement except pursuant to the terms hereof.
(d) Strobel further acknowledges that he has had up to
twenty-one (21) days prior to the Effective Date to consider the terms of this
Agreement. During such period, Strobel acknowledges that he has been informed by
the Company to consult with an attorney and other professional persons unrelated
to the Company regarding the terms of this Agreement and that by Strobel's
execution of this Agreement, he is freely, knowingly and voluntarily entering
into this Agreement with the Company with a full understanding of the terms
hereof. The parties further understand and agree that the terms of this
Agreement cannot become effective or enforceable until seven (7) days following
the Effective Date, during which time Strobel may revoke this Agreement by
notifying the Company in accordance with Section 12 hereof.
7. Noncompetition.
For good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged by the parties hereto, during the
Term, Strobel agrees not to, directly or indirectly: (a) work for, consult with,
or provide any services to an entity or individual which provides utilization
review/utilization management and/or disease management services that are
similar to those services rendered by the Company or any Affiliate controlled by
the Company and/or the other services that may be provided by the Company or any
Affiliate controlled by the Company from time to time, in any geographic area
the Company or any Affiliate is providing or is contracted to provide such
services; (b) induce or attempt to induce any officers, employees,
representatives or agents of the Company or any Affiliate to terminate or modify
their relationship with the Company or any Affiliate or to violate any of the
provisions of their agreements with the Company or any Affiliate; or (c)
solicit, entice away, or otherwise interfere with the relationship of the
Company or any Affiliate with any customers, vendors, licensors, distributors or
suppliers of the Company or any Affiliate.
8. Confidential Information.
Strobel hereby agrees that he will not willfully, for the
period commencing as of the Effective Date and terminating one (1) year from the
Effective Date, unless specifically authorized in writing by the Company or
unless specifically compelled by a court of competent jurisdiction after first
giving notice to the Company and allowing the Company sufficient time to
challenge such court order to compel Strobel or to expressly waive such right to
challenge: (a) divulge, make available to others or use for his own or another's
benefit, any Confidential Information (as such term is hereinafter defined), or
(b) remove any Confidential Information
6
<PAGE> 7
from the premises of the Company or any of its Affiliates; provided, however,
that the foregoing shall not apply to any information (as distinct from
documents, lists and other tangible items) that has become known by and
generally available to the public or the industry (other than as a result of the
violation of this Section 8 by Strobel). Strobel further agrees that any
Confidential Information that is now or may hereafter be in his possession, and
all copies thereof, shall be promptly destroyed or returned to the Company upon
its request. The provisions of this Section 8 shall survive the termination or
expiration of this Agreement, irrespective of the reason therefor. For purposes
hereof, "Confidential Information" means (i) any and all (A) methods, processes,
manuals, trade secrets, know-how, inventions and other proprietary information
used by the Company or any Affiliate in rendering its services (or any other
services similar or ancillary to any of such services) regardless of where
provided, (B) software owned or used by the Company or any Affiliate and (C)
improvements, enhancements, modifications, updates and corrections with respect
to any of the foregoing, as and when same are released, (ii) any and all
information, data, forms, policies, procedures, manuals, customer lists,
documents, files, surveys and materials of any kind created, owned or provided
by the Company or any Affiliate in connection with, or with respect to, its
operations, (iii) any and all information or data relating to the business or
financial affairs of, or other information relating to, any customer or client
of the Company or any Affiliate (including, without limitation, any health care
information pertaining to subscribers of such customer or client), and (iv) any
derivative works based on the foregoing information, data or materials described
in subclauses (i) through (iii) above.
9. Equitable Relief.
Strobel acknowledges that a material violation of the
covenants made by Strobel in Section 7 and Section 8 hereof would cause
irreparable and continuing damage to the Company and the Affiliates for which
money damages alone would not adequately compensate. Accordingly, Strobel
consents and agrees that if he violates any of the material provisions of
Section 7 or Section 8 hereof the Company shall, in addition to any other rights
or remedies of the Company available at law, be entitled to equitable relief in
any court of competent jurisdiction, including, without limitation, temporary
injunction and permanent injunction (without the posting of any bond or
security) restraining any further violation of the material provisions of
Section 7 or Section 8 hereof. The provisions of this Section 9 shall survive
the termination or expiration of this Agreement, irrespective of the reason
therefor.
10. Enforceability.
It is the intention of the parties that the provisions of this
Agreement shall be enforced to the fullest extent permissible under the laws and
public policies of each state and jurisdiction in which such enforcement is
sought, but that the invalidity, illegality or unenforceability (or the
modification to conform with such laws or public policies) of any provisions
hereof, shall not render invalid, illegal, or unenforceable or impair the
remainder of this Agreement. Accordingly, if any provision of this Agreement
shall be determined to be invalid, illegal or unenforceable, either in whole or
in part, this Agreement shall be deemed
7
<PAGE> 8
amended to delete or modify, as necessary, the offending provisions and to alter
the balance of this Agreement in order to render the same valid, legal and
enforceable to the fullest extent permissible.
11. Indemnity.
Strobel shall indemnify, defend and hold harmless the Company,
its Affiliates and the respective shareholders, directors, partners, officers,
employees and agents of the Company and its Affiliates, from and against any and
all claims, actions, losses (whether joint or several), liabilities, damages,
costs and expenses (including, without limitation, attorneys' fees and expenses)
arising out of or relating to any breach, failure or violation by him of any of
his covenants and undertakings set forth in this Agreement.
12. Notices.
Any notice or other communication under or relating to this
Agreement shall be in writing and shall either be personally delivered
(including delivery by express couriers such as Federal Express) or be sent by
prepaid registered or certified mail, return receipt requested, addressed to the
respective parties at the address first set forth above. Any such notice or
other communication shall be deemed given upon receipt at the address provided
for above. Either of the above addresses may be changed at any time by notice
given as above provided.
13. Further Assurances.
Strobel agrees to execute and deliver such further instruments
and documents and to take such further action as may be requested by the Company
from time to time in order to more fully discharge, perform and carry out his
obligations hereunder and to more fully effectuate the intent and purposes of
this Agreement.
14. Governing Law.
This Agreement shall be governed by and construed in
accordance with the laws of the State of New Jersey applicable to contracts made
and to be performed therein.
15. Jurisdiction.
Except as otherwise set forth herein, the courts of the State
of New Jersey in Essex County and the United States District Court for the
District of New Jersey shall have jurisdiction over the parties with respect to
any dispute or controversy among them arising under or in connection with this
Agreement and, by execution and delivery of this Agreement, each of the parties
to this Agreement submits to the jurisdiction of those courts.
8
<PAGE> 9
16. Assignment.
This Agreement is personal in nature and neither of the
parties hereto shall, without the consent of the other, assign or transfer this
Agreement or any rights or obligations hereunder; provided, however, that the
Company may freely assign this Agreement to any party who shall acquire (whether
by sale, merger, consolidation, or otherwise) all or substantially all of its
assets. This Agreement and all of the provisions hereof shall be binding upon,
and inure to the benefit of, the parties hereto, and their successors (including
by merger, consolidation or transfer of all or substantially all of the assets
of the Company), permitted assigns, executors, administrators, personal
representatives, heirs and distributees.
17. Entire Agreement; Amendment; Waiver.
This Agreement sets forth the entire understanding of the
parties hereto and all other previous or contemporaneous understandings or
agreements, including, without limitation, the Employment Agreement, whether
written or oral, are hereby superseded. None of the terms or provisions hereof
shall be modified or waived, and this Agreement may not be amended, except by a
written instrument signed by the party against which modification, waiver or
amendment is to be enforced. No waiver of any one provision shall be construed
as a waiver of any other provision and the fact that an obligation is waived for
a period of time shall not be considered to be a continuous waiver.
9
<PAGE> 10
18. Counterparts.
This Agreement may be executed in any number of counterparts,
each of which shall be deemed an original, but all of which together shall
constitute one and the same instrument.
IN WITNESS WHEREOF, Strobel has signed this Agreement, and the
Company has caused this Agreement to be signed by a duly authorized officer, as
of the day and year first above written.
CAREADVANTAGE, INC.
By:/s/Thomas P. Riley
--------------------------------------------
Print Name: Thomas P. Riley
Title: President and Chief Executive Officer
/s/Richard J. Strobel
--------------------------------------------
Richard J. Strobel
10
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-START> NOV-01-1996
<PERIOD-END> JAN-31-1997
<CASH> 265,478
<SECURITIES> 0
<RECEIVABLES> 819,168
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,167,193
<PP&E> 1,359,993
<DEPRECIATION> 0
<TOTAL-ASSETS> 4,579,287
<CURRENT-LIABILITIES> 6,943,136
<BONDS> 969,703
0
0
<COMMON> 74,390
<OTHER-SE> (3,407,942)
<TOTAL-LIABILITY-AND-EQUITY> 4,579,287
<SALES> 0
<TOTAL-REVENUES> 2,369,301
<CGS> 0
<TOTAL-COSTS> 1,904,211
<OTHER-EXPENSES> 1,739,337
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 76,203
<INCOME-PRETAX> (1,350,450)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,350,450)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,350,450)
<EPS-PRIMARY> (0.02)
<EPS-DILUTED> (0.02)
</TABLE>
