SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
Annual Report pursuant to Section 13 or 15 (d) of the
Securities Exchange Act of 1934
For the Fiscal Year Ended October 31, 1997
Commission File Number 0-26168
CAREADVANTAGE, INC.
(Name of Business)
Delaware 52-1849794
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
485-C Route 1 South, Iselin, New Jersey 08830
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (732) 602-7000
Securities registered pursuant to Section 12 (b) of the Exchange Act of 1934:
Title of class Name of each exchange on which registered
None _________________________________________
Securities registered pursuant to Section 12 (g) of the Act:
Common Stock $.001 par value
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding twelve months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days: Yes _X_ No ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-B is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. |_|
The Registrant's revenues for its most recent fiscal year were $14,076,637
$1,738,761
Aggregate market value of the voting stock held by non-affiliates of the
registrant as of January 20, 1998 (assuming solely for purposes of this
calculation that all directors and executive officers of the Registrant are
affiliates).
74,389,886
Number of shares of common stock outstanding as of January 29, 1998
Transitional Small Business Disclosure Format Yes _X_ No ___
PORTIONS OF THE FOLLOWING DOCUMENTS HAVE BEEN INCORPORATED BY REFERENCE
INTO THIS ANNUAL REPORT ON FORM 10-KSB: NONE
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PART I
Item 1. Description of Business
General
CareAdvantage, Inc. ("CAI" or the "Company") is a holding company which,
through its direct and indirect subsidiaries, CareAdvantage Health Systems, Inc.
("CAHS") and Contemporary HealthCare Management, Inc. ("CHCM"), is in the
business of providing health care cost containment services designed to enable
health care insurers and other health service organizations to reduce the costs
of medical services provided to their subscribers. The services provided include
utilization review in medical/surgical cases where pre-authorization is required
for hospitalization and for certain in-patient and outpatient procedures, case
management and disease management. The Company's services have been principally
provided to the statewide Blue Cross/Blue Shield health service organizations of
Rhode Island, Maine, Vermont, Delaware, New Jersey, and in 1998 New York (a
division of New York Care Plus Insurance Company, Inc.); however, effective
March 1, 1997 Blue Cross and Blue Shield of Delaware canceled its consulting
agreement with the Company.
CAI was incorporated in August 1994 as a wholly-owned subsidiary of
Primedex Health Systems, Inc., a publicly traded New York corporation ("PMDX").
During the fiscal year ended October 31, 1994, the Company recruited most of the
members of its former management team and began to put in place the
infrastructure necessary to execute its growth and acquisition strategies. No
revenues were realized from the Company's inception through October 31, 1994, as
its principal operating activities were those of a development stage company.
Effective November 1, 1994, the beginning of its 1995 fiscal year, the Company
commenced principal operations and began realizing revenues from certain interim
and long-term service agreements. In December 1993, the Company acquired CAHS
(under its prior corporate name, Advantage Health Systems, Inc.). On June 12,
1995, a stock dividend of all of the issued and outstanding shares of common
stock of the Company was declared effective by PMDX. As a result, the Company
commenced trading as a publicly traded company on that date. Through October 31,
1997, the Company had a cumulative deficit of $21,690,393.
From its inception, through October 31, 1995, CAI relied on PMDX to
provide the bulk of its working capital. In addition to providing $6,000,000 for
the acquisition of CAHS, PMDX made a total of $9,700,059 in working capital
advances to CAI (the last such advance being made in July 1995). Pursuant to a
revised separation agreement between CAI and PMDX dated April 20, 1995, PMDX
agreed to capitalize all such advances in connection with CAI's separation from
PMDX.
The Company's executive offices are located at 485-C Route 1 South,
Metropolitan Corporate Plaza, Iselin, New Jersey 08830 and its telephone number
is (732) 602-7000.
Change in Control:
On February 22, 1996, the Company completed a series of transactions with
CW Ventures II, L.P. ("CW Ventures") and with Blue Cross and Blue Shield of New
Jersey, Inc. ("BCBSNJ"). The
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transactions included the sale to CW Ventures of 3,903,201 shares of the
Company's common stock at a purchase price of $0.2562 per share (after
adjustment for the "one (1) for six (6)" reverse stock split of the Company's
outstanding common stock as discussed below) for an aggregate of $1,000,000 and
the issuance of a $2,000,000 principal amount 8% Exchangeable Note maturing on
June 30, 1998 (the "CW Note"). On such date, CW Ventures is required to exchange
the CW Note for shares of the Company's common stock absent any events of
default, as defined in the CW Note. The CW Note, which is collateralized by
substantially all of the assets of the Company and its subsidiaries, was
originally exchangeable into that number of shares of the Company's common stock
as would equal approximately 23 1/3% of the outstanding shares of the Company's
common stock on a fully diluted basis as of February 22, 1996 so that the
3,903,201 shares issued to CW Ventures together with the shares issuable upon
the exchange of the CW Note would comprise 35% of the outstanding shares of the
Company's common stock on a fully diluted basis as of February 22, 1996 (such
percent was subsequently adjusted as discussed below). In addition, in
connection with a $150,000 bridge financing by CW Ventures to the Company, the
Company issued to CW Ventures for nominal consideration five-year warrants (the
"CW Warrants") to purchase 166,667 shares of the Company's common stock at an
exercise price equal to $0.96 per share (after adjustment for the "one (1) for
six (6)" reverse stock split of the Company's outstanding common stock).
Concurrently with the February 22, 1996 closing of the transaction with CW
Ventures, CAHS purchased all of the outstanding capital stock of CHCM from a
wholly-owned BCBSNJ subsidiary, Enterprise Holding Company, Inc.("EHC").
Although this acquisition was consummated on February 22, 1996, results of
operations of CHCM have been reflected in the Company's financial statements
since April 30, 1995 pursuant to an Interim Services Agreement between the
Company and BCBSNJ (as amended from time to time, the "Services Agreement")
whereby the Company had effective control and responsibility of the day-to-day
operations of CHCM pending a sale of CHCM to the Company. The CHCM stock was
acquired in exchange for CAHS' $3,600,000 principal amount 8% Exchangeable Note
maturing on June 30, 1998 in favor of EHC, which was subsequently assigned to
BCBSNJ (the "BCBSNJ Note") collateralized by substantially all of the assets of
the Company and its subsidiaries. The BCBSNJ Note was originally exchangeable
into that number of shares of the Company's common stock as would equal
approximately 40% of the outstanding shares on a fully diluted basis as of
February 22, 1996. The transaction was accounted for as a purchase of CHCM for
an amount originally approximating $3,427,000 (the face amount of the BCBSNJ
Note less an original issue discount of approximately $173,000), plus assumed
liabilities of approximately $360,000 and purchase costs of $64,000 and was
subsequently adjusted as discussed below. The excess of the purchase price over
the fair value of CHCM's tangible assets consisting of cash of approximately
$848,000 and fixed assets, with a fair value of approximately $27,000, was
allocated to the Services Agreement with BCBSNJ (see Note C[1] in the Notes to
the Financial Statements below).
Pursuant to the terms of the CW Note and the BCBSNJ Note, because the
Company failed to realize at least $15,000,000 in net revenues or specified
earnings before taxes for its fiscal year ended October 31, 1996, on February
27, 1997, the Company issued an aggregate 50,156,559 additional shares of common
stock to BCBSNJ and CW Ventures.
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The Company, BCBSNJ and CW Ventures are parties to a stockholders'
agreement dated February 22, 1996 (the "Stockholders' Agreement") whereby each
of BCBSNJ and CW Ventures have agreed to vote their shares in the Company with
respect to the election of the Company's Board of Directors for: (i) two
designees of CW Ventures; (ii) two designees of BCBSNJ; (iii) two members of the
Company's management acceptable to CW Ventures and BCBSNJ; and (iv) one
non-employee outside director acceptable to CW Ventures and BCBSNJ. There is
currently one (1) vacancy on the Board of Directors, which vacancy is one of the
Company's Management Directorships. The Stockholders' Agreement prevents the
Company from taking certain material actions without the consent of BCBSNJ
and/or CW Ventures or their respective designated directors.
Since the Company did not have a sufficient number of authorized but
unissued shares of common stock to permit the issuance of the required number of
shares upon exchange of the CW Note and the BCBSNJ Note, the stockholders of the
Company approved an amendment to the Company's Certificate of Incorporation
which decreased the authorized shares of common stock to 90,000,000 shares,
created a new class of 'blank check" preferred stock, $.10 par value, consisting
of 10,000,000 shares and effected a "one (1) for six (6)" reverse stock split of
the Company's outstanding common stock. As a result, and pursuant to the terms
of the BCBSNJ Note, the BCBSNJ Note was automatically exchanged on September 30,
1996 into 13,375,083 shares of common stock of the Company.
Industry Overview: Health Care Reform, Expenditures and Managed Care
In recent years, there have been substantial efforts to reform national
health care due to the ever-increasing cost of medical care in the United
States. Employer groups, increasingly concerned about the effect on their
"bottom line" of the cost of providing health insurance to their employees, are
no longer content to remain with a traditional insurance company which is not
cost effective in its management of health care coverage. Employer groups are
seeking the implementation of managed care concepts to improve their
profitability, while at the same time providing to their employees the same or
improved quality and availability of care. The insurance companies' clients are
demanding that their insurance companies begin effecting strategies to reduce
costs such as enhanced case management, patient education, and wellness
programs. Accordingly, employees have become more assertive in evaluating and
selecting an insurer as well as monitoring such insurer's performance. This has
consequently created intense competition among traditional indemnity insurers.
This is a microcosm of a national trend where market driven forces are
causing insurance companies to align themselves with health care providers
efficient in patient management. The net result has been a phenomenon where the
medical industry has shifted to care management initiatives to decrease
unnecessary variations in patient care and physician practices.
In order to remain viable in this competitive marketplace and attract
employer groups, traditional indemnity insurance companies have begun to
re-engineer to a managed care approach with an outcomes versus claims management
focus. They have done so by establishing cooperative relationships with
providers.
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Management believes that while some insurers will try to accomplish this
transition without outside assistance, a majority will seek assistance from
firms with "managed care expertise," such as the Company. With its proprietary
criteria and protocols and physician employees and advisors representing the
full range of subspecialty areas within the health care delivery system, as well
as key employees with backgrounds in health care cost containment, management
believes the Company provides state of the art knowledge and experience in
health care cost containment services.
Services and Products
The Company's comprehensive health care management programs provide health
care organizations with the systems, strategies, and mechanisms needed to manage
appropriate and cost effective health care services. These health care
management services adhere to Utilization Review Accreditation Commission, Inc.
("URAC") standards.
The cost containment services offered by the Company are comprehensive and
can be customized to meet the needs of its clients. These services may be
purchased separately or configured in a variety of resource sets designed to
interface with the client's systems. Management believes the resources necessary
for a successful health delivery system are clinical health care management,
information technologies and member or subscriber services. The Company
possesses substantial resources in these core areas and makes them available to
its clients in specific packages.
Management believes that its physician developed and driven criteria and
medical protocols ("critical pathways"), as well as its health care management
services, improve how attending physicians manage health care. The Company's
personnel work together on-site with clients and potential clients in order to
structure or re-engineer such clients' utilization review programs and to
implement various disease management strategies.
Utilization Review - Utilization review servicers examine the
appropriateness of a particular medical event, such as a hospital admission, an
additional day of in-patient care, or a particular procedure. The Company
provides clinical and operational utilization review services employing its
physician driven proprietary criteria and protocols. The Company actively
disseminates its criteria and medical protocols to local physicians and holds
meetings with its specialty physician advisors to inform them of their
significant roles in the utilization management process.
In addition, while many utilization management firms rely on calls from
nurse reviewers as the principal form of communication with physicians, the
Company believes that clinical peers should discuss cases with attending
physicians. Accordingly, the Company uses nurse reviewers primarily to screen
cases. Staff medical directors and physician advisors of matched specialties
review questionable cases with attending physicians. The combination of academic
credentials, managed care experience, and on-site presence enables these
advisors to actively engage local specialists in a meaningful discussion on
medical management alternative practices, thereby having a greater impact on
cost containment.
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Overall, the Company transforms the client's utilization management
program from an administrative exercise to a program that uses review criteria
and highly credible physician advisors to actively engage attending physicians
in treatment decisions. Management believes that these strengthened utilization
management methods can enable its clients to achieve utilization performance
approaching that of well managed health maintenance organizations.
Case Management - Major case management services provide an alternative
plan which enhances or maintains the patient's quality of care but reduces the
expected expenses for the patient's treatment. Early identification of patients
severely compromised by an acute injury or episode of illness is the key to
successful implementation of major case management services. Patient evaluation
through pre-admission and concurrent review provide the foundation for effective
discharge planning and continuity of care. The Company provides a comprehensive
case management program which facilitates significant cost containment and
contributes to greater flexibility in the health care setting for the patient.
Out-patient care coordination allows patients to access a variety of
health care services, such as home health care, rehabilitation and infusion
therapy services. The Company's out-patient care coordination services provide
an effective mechanism for cost containment while safeguarding the delivery of
quality health care services.
Case management also focuses on how the attending physician is managing
the care of patients with chronic diseases on an on-going basis. Health risk
assessment processes, designed and implemented by the Company, identify high
cost/high risk patients and enroll them in case management programs.
Disease Management - Management believes that specialists managing
patients with chronic disease should follow credible patient management
protocols, or "critical pathways", that reflect expert consensus on the most
appropriate treatment alternatives for patients at different disease stages and
with complicating factors, and that decisions to deviate from such guidelines
should be reviewed by an independent peer specialist.
Implementation of a disease management program for a client begins with
disseminating care management "critical pathways" to, and then meeting with,
local specialists. The Company provides chronic disease case management through
a review process whereby the progress and treatment plans of a patient are
reviewed by the Company's specific disease specialists or advisors with the
patient's attending specialist. This case management ensures that any decisions
made by the attending physician to deviate from the critical pathway guidelines
are supported by sound clinical rationale.
Continuing Product Development - The Company's management recognizes that
the health care market is continually changing and expanding, due in part, to
changes in medical technology and new medical information, as well as
improvements in information technology and telecommunication systems. In
response to the market and to the specific needs of its clients, the Company
continues to refine, improve and expand its existing services and products, as
well as to develop new services and products.
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Some of the Company's current initiatives include the expansion of its
chronic disease case management services, on-going refinement of its proprietary
criteria and protocols, and development of specialty provider networks. The
Company also continues to jointly develop with a systems subcontractor and
software developer a new generation of customer service, utilization review and
medical/surgical case management software. Furthermore, the Company's management
believes that member/subscriber advisory services, which focus on patient
knowledge and participation in their own health care, are products that will
contribute to a more efficient and cost effective use of the options available
in the health care system. With respect thereto, the Company hopes to develop
patient education and management programs.
Operations
The Company utilizes a multi-disciplinary team approach to ensure
effective medical cost management services. The Company, through its employees
and subcontracting physician advisors, reviews, evaluates and monitors the
medical necessity and appropriateness of the medical services prescribed for
members in its clients' health plans. Generally, the pre-admission review
process for elective and non-elective admission is initiated telephonically by
the member or provider. During this phase, clinical review staff evaluate the
need for, and/or initiate when appropriate, pre-certification, second surgical
opinion, insurance verification, pre-admission testing, pre-operative education,
pre-operative anesthesia evaluation, and continuing care planning. Additionally,
pre-admission review determines if the service requested is medically necessary
by utilizing review criteria, appropriate alternatives for providing service,
length of stay and the need for case management intervention.
During the pre-admission and concurrent review processes, patients are
evaluated by nurse case managers and physician employees or advisors to identify
anticipated needs for discharge. Patients with high cost diagnoses or who
require interdisciplinary problem solving to expedite discharge are identified
as candidates for major case management services. The Company's clinical staff
also plans for and coordinates the out-patient health care services necessary
for a timely discharge, such as home health care, rehabilitation and infusion
therapy services, thereby insuring the delivery of quality care while containing
costs.
The Company currently maintains a contracted network of 115 independent,
multi-specialty physicians advisors, most of whom are active in managed care
practices and some of whom are affiliated with major teaching hospitals. Several
of these physicians are currently spending one-to-two days per week on-site with
and on behalf of the Company's clients, discussing questionable cases with local
specialists and leading the meetings with groups of local specialists to
disseminate and implement the care management "critical pathways" necessary for
effective case management. The Company also deploys its nurse reviewers for
telephonic review as well as in hospitals to conduct more extensive on-site
reviews of patients, whenever possible. On-site review is performed for
concurrent review and case management activities. These on-site reviews also
include collaboration with the Company's local and national board certified
physician employees and advisors. By reviewing on-site, these nurses are in a
better position to determine the need for continued stay, and to make necessary
arrangements for out-patient care.
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For its services, the Company is compensated either: (i) on a capitated
(fixed-fee) per subscriber basis; (ii) on a performance-based method whereby the
Company shares in the realized cost savings per member as measured against
certain defined benchmark(s); (iii) on the basis of a combination of both
capitation and performance-based fees; and (iv) on a fee-for-service basis.
Accordingly, the Company has adopted the following accounting policies for
revenue recognition under each contract category:
(a) Revenue under the fixed-fee arrangements is recognized as the services are
provided and the related costs of services are incurred. Although the
fixed fee arrangements are not subject to any fee adjustment based upon
the attainment of target utilization levels, such contracts may still
expose the Company to potential operating losses, particularly in the
inception stages thereof.
(b) Revenue under the partial fixed fee/incentive agreements is initially
recognized for the monthly fixed fee component only as services are
provided and related costs of services are incurred. Incentives (or
reductions) based upon performance are recorded when such amounts can
reasonably be determined.
(c) Revenue under full risk compensation arrangements is recorded based upon
the periodic monthly or quarterly interim payments, adjusted on a periodic
basis to cost and utilization data supplied by the client to assess
performances against established targets. Incentive compensation based
upon performance, or reductions thereto, are recorded when such amounts
can reasonably be determined.
(d) Revenue under fee-for-service arrangements is recorded for special
projects or the review of cases assigned to the Company on a per case or
hourly basis.
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.
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Customers and Marketing
The Company currently provides its services to five statewide Blue Cross
and Blue Shield ("BCBS") organizations in the states of Maine, Rhode Island,
Vermont, New York (beginning in 1998) and New Jersey pursuant to one or a
combination of the compensation arrangements described above. The Company is
dependent on at least two of such customers including BCBSNJ, a 50% stockholder
of the Company, for a substantial portion of its revenues, gross margins and
cash flows. The loss of any one of these two customers would have a material
adverse impact on the company's cash flows and results of operations.
Effective March 1, 1997, a consulting contract with Blue Cross and Blue
Shield of Delaware ("BCBSDE") one of the Company's customers was terminated.
Effective January 1, 1998 the Company has entered into a one year services
agreement with New York Care Plus Insurance Company, Inc. ("NYCPIC"), which is
attached hereto and incorporated herein by reference to exhibit 10.20. NYCPIC
provides health care coverage to New York residents through its Blue Cross and
Blue Shield of Western New York and Blue Shield of Northeastern New York
divisions. Under the terms of this agreement, the Company, through one or more
of its subsidiaries, will provide both medical management performance support
and specialty care management performance support services to New York Care Plus
for its approximately 650,000 indemnity and HMO subscribers. The service
agreement, the initial term of which expires on December 31, 1998, provides for
the payment of fixed compensation.
During 1997, the Company successfully re-negotiated contracts with two of
its major customers and executed several other agreements as discussed below in
Item 6 "Management's Discussion and Analysis of Financial Condition and Results
of Operations" under the caption "General Developments of the Business".
The Company intends to expand the scope of its market to other organized
health care delivery systems (such as preferred-provider and physician-hospital
organizations), self-insured employers, union trust funds, health care
management service organizations and administrative service organizations (such
as third-party insurance administrators).
Typically, the Company will enter into a service agreement with a client
pursuant to which the Company provides its utilization review and case
management services. The Company's services for an insurer generally cover all
insured under an indemnity insurance plan and/or members of a health maintenance
organization plan affiliated with the insurer. Typically, when the Company
contracts to provide its services to an insurer, the insurer's account
executives ordinarily plan to offer the Company's services to its group
policyholders and those groups covered under administrative-services-only (or
"ASO") arrangements. The Company presently enters into these service agreements
with insurers with compensation based upon either a capitated rate per
subscriber or with fees and incentives based on the achievement of certain
health care cost and/or utilization targets. The latter fee arrangement provides
the opportunity for substantially increased earnings, but also carries the risk
of loss of revenues if the targets are not achieved.
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Competition
The Company faces intense competition in a highly fragmented market of
managed care services firms. Several managed care service firms currently
provide and aggressively market services which are in some respects similar to
the Company services. Management is aware of a significant number of independent
utilization review firms currently marketing utilization review services
directly to employers, small insurers, and third party administrators. In
addition to other utilization review and medical management companies, the
Company competes with insurance companies, third party health plan
administrators, health maintenance organizations and preferred provider
organizations which have developed in-house staffs to provide such services.
There are a variety of competitors offering component services such as physician
reviewers and demand management/patient advisory products. There are also a
number of organizations developing a variety of approaches to case and disease
management. Many of the Company's competitors have substantially greater
financial resources and employ substantially greater number of personnel.
The Company intends to compete on the basis of the quality of its clinical
staff and high degree of specialty-trained physician involvement, its ability to
leverage its products to achieve higher value at lower cost than companies
offering component services, its ability to develop tailored programs for large
clients, its willingness to accept risk in methods of compensation based on
results, its computer-based clinical decision making and information systems and
its current experience in developing outsourcing arrangements acceptable to Blue
Cross and Blue Shield Plans.
Government Regulation
Health Care Regulation - Government regulation of health care cost
containment services, such as those provided by the Company, is a changing area
of law that varies from jurisdiction to jurisdiction and generally gives
responsible administrative agencies broad discretion. The Company is subject to
extensive and frequently changing federal, state and local laws and regulations
concerning company licensure, conduct of operations, acquisitions of businesses
operating within its industry, the employment of physicians and other licensed
professionals by business corporations and the reimbursement for services.
Regulatory compliance could have an adverse effect on the Company's present
business and future growth by restricting or limiting the manner in which it can
acquire businesses, market its services, and contract for services with other
health care providers by limiting or denying licensure or by limiting its
reimbursement for services provided.
It should be noted that in providing utilization review and case
management services, the Company makes recommendations regarding what is
considered appropriate medical care based upon professional judgments and
established protocols. However, the ultimate responsibility for all health care
decisions is with the health care provider. Furthermore, the Company is not an
insurer, and the ultimate responsibility for the payment of medical claims is
with the insurer. Although the Company is not a health care provider, it could
have potential liability for adverse medical consequences. The Company could
also become subject to claims based upon the denial of health care services and
claims such as malpractice arising from the acts or omissions of health care
professionals. (See "Legal Proceedings.")
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In order to receive compensation, the Company's operations in a particular
state are typically subject to certification by the appropriate state agency.
The Company has received or has filed the necessary application for such
certification where required. In addition, various state and federal laws
regulate the relationships between providers of health care services and
physicians and other clinicians, including employment or service contracts,
investment relationships and referrals for certain designated health services.
These laws include the fraud and abuse provisions of the Medicare or Medicaid
statutes, which prohibit the solicitation, payment, receipt or offering of any
direct or indirect remuneration for the referral of Medicare or Medicaid
patients or for the ordering or providing of Medicare or Medicaid covered
services, items or equipment. Violations of these provisions may result in civil
or criminal penalties for individuals or entities including exclusion from
participation in the Medicare and Medicaid programs. Several states have adopted
similar laws that cover patients in private programs as well as government
programs. Because the anti-fraud and abuse laws have been broadly interpreted,
they may limit the manner in which the Company can acquire businesses and market
its services to, and contract for services with, other health care providers.
The Company's management believes that its present operations are in
compliance with all applicable laws and regulations and that it maintains
sufficient comprehensive general liability and professional liability insurance
coverage to mitigate claims to which the Company may be subject in the future.
However, the Company has filed an application to be certified as a Utilization
Review Agent with the New York State Departments of Insurance and Health in
connection with the Company's Service Agreement with NYPIC. It has of yet not
received full certification from such departments. The Company is unable to
predict what, if any, government regulations affecting its business may be
enacted in the future or how existing or future regulations may be interpreted.
To maintain future compliance, it may be necessary for the Company to modify its
services, products, structure or marketing methods. This could increase the cost
of compliance or otherwise adversely affect the Company's operations, products,
profitability or business prospects.
Proposed Health Care Reform - If proposed federal and state health care
reform initiatives are enacted, the payments for and the availability of health
care services will likely be affected. Aspects of certain of these proposals,
such as reductions in Medicare and Medicaid payments, could adversely affect the
Company. Other aspects, such as universal health insurance coverage and coverage
of certain previously uncovered services, could have a positive impact on the
Company's business. The Company is unable to predict what impact, if any,
further enacted health care reform legislation may have on its current and
future business, and no assurance can be given that any such reforms will not
have an adverse impact on its business operations or potential profitability.
Employees
In addition to its current network of 115 contracted physician advisors,
the Company employed 8 full-time physicians as of October 31, 1997. Two of these
physicians serve as officers of the Company or its subsidiaries and the
remaining physicians serve as on-site Medical Directors and Associate Medical
Directors in the states where the Company provides services.
At October 31, 1997, in addition to its physicians, the Company employed a
total of 137 full-time employees. Of this total, one hundred and ten (110)
employees are engaged in clinical activities including on-site nurse reviewers
and contract administrators. The twenty-seven (27) remaining employees include
executives, administrative support, finance, marketing, training & education,
information systems and human resources personnel. The Company believes it has
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satisfactory relations with it employees.
Item 2. Description of Properties
The Company's executive offices and operations, comprising approximately
28,000 square feet of office space, are located in the Metropolitan Corporate
Plaza in Iselin, New Jersey. The Company has executed a six-year lease for this
facility commencing June 15, 1995, which provides for an annual base rent of
approximately $445,000 with annual escalations based on increases in real estate
taxes and operating expenses. The Company believes its present facilities will
be adequate for its short-term needs and moderate expansion.
The Company also maintains a rent-free operations office in approximately
600 square feet of space in Providence, Rhode Island under an informal oral
arrangement with Blue Cross and Blue Shield of Rhode Island ("BCBSRI"), and
approximately 300 square feet of space in the Blue Cross and Blue Shield of
Maine Westbrook facility. Additionally, the Company maintains rent-free
operation offices in New York and Vermont pursuant to informal arrangements with
such customers.
Substantially all of the equipment used in the Company's operations in New
Jersey is currently being leased under a capital lease agreement.
Item 3. Legal Proceedings
Potential Uninsured Exposure to Litigation:
On or about March 22, 1996, an action entitled Francis X. Bodino v. BCBSNJ
and CHCM (the "Bodino Action") was filed in the Law Division of the Superior
Court of New Jersey in Hudson County. The complaint alleges misrepresentations
with respect to the type and amount of coverage afforded by Mr. Bodino's policy
with BCBSNJ, specifically with respect to coverage for heart transplantation.
The complaint also alleges that representations made on behalf of BCBSNJ by an
employee of CHCM led Mr. Bodino's surgeon to believe that contractually excluded
heart transplant coverage was available. The complaint demands a variety of
money damages, as well as punitive damages, against both defendants. The
complaint also contains a claim for treble damages and counsel fees under the
New Jersey Consumer Fraud Act. BCBSNJ is presently defending the Bodino Action
on behalf of itself and CHCM, 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
12
<PAGE>
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.
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.
13
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Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of the Company's security holders
during the fourth quarter of the fiscal year ended October 31, 1997.
14
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PART II
Item 5. Market Price for Registrant's Common Equity and Related Stockholder
Matters
(a) Market Information: Since the Company's effective registration date of
June 12, 1995, the Company's Common Stock has traded in the
over-the-counter market and is currently quoted on the Electronic Bulletin
Board under the symbol CADV. The following table shows the range of
closing bid prices for each quarter of the Company's two most recent
fiscal years. Where applicable, prices have been adjusted to give effect
to a 1-for-6 reverse stock split which was effective September 30, 1996.
The prices reflect inter-dealer prices, without retail mark-up, mark-down
or commission, and may not represent actual transactions.
1997 1996
--------------- ---------------
Quarter Ended High Low High Low
---- --- ---- ---
January 31 $.47 $.31 $2.52 $0.96
April 30 $.56 $.31 $2.34 $1.14
July 31 $.38 $.31 $1.02 $0.06
October 31 $.34 $.25 $1.02 $0.38
(b) Holders: As of December 10, 1997, there were approximately 2,868 holders
of record of the Company's common stock. No shares of the Company's
preferred stock have been issued. The Company believes that, in addition,
there are a number of beneficial owners of the Company, whose shares are
held in "Street Name."
(c) Dividends: During the two most recent fiscal years, the Company paid no
cash dividends on its common stock. The payment of future dividends on its
common stock is subject to the discretion of the Board of Directors and is
dependent on many factors, including the Company's earnings and capital
needs.
15
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Item 6. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
Certain statements in this Form 10KSB may constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995, including those concerning management's plans, intentions and
expectations with respect to future financial performance and future events,
particularly relating to revenues from performance-based services and
re-negotiations 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. Although the Company
believes that its plans, intentions and expectations reflected in such forward
looking statements is reasonable, it can give no assurance that such plans,
intentions or expectations will be achieved. Certain risk factors exist, such as
the Company's inability to prevent its customers from terminating existing
contracts by invoking standard termination clauses, as well as other inherent
contractual risks, which are beyond the control of the Company.
For fiscal years prior to 1997, the Company has experienced significant
operating losses on a consolidated basis, and has a working capital deficit at
October 31, 1997 of approximately $2,487,000, a capital deficiency of $1,976,000
and an accumulated deficit of $21,690,000 since its inception. By continuing to
provide high quality health care cost containment services to its existing
customer base of four BCBS plans and pursuant to the Joint Services Agreement
with Allied Health Group, Inc. (see "General Developments of the Business"),
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.
The Company's working capital deficit as of October 31, 1997 decreased by
approximately $1,704,000 from the October 31, 1996 deficit amount, as a result
of the successful re-negotiation of two (2) of its contracts with BCBSNJ and
BCBSRI, as well as the execution of other agreements more fully explained below
under the caption of "General Developments of the Business". Further, the
Company realized net income of approximately $7,000 or $.00 per share on
revenues of approximately $14,077,000 for the year ended October 31, 1997
compared with a net loss of approximately ($5,335,000) or ($.08) per share on
revenues of approximately $11,792,000 for the ended October 31, 1996. Results
for October 31, 1996 included a charge to operations of approximately $1,173,000
for the write-down of the service agreement with BCBSNJ which arose in
connection with the acquisition of Contemporary Healthcare Management, Inc. in
February 1996 (See Notes to the Financial Statements "Change in Control"), and a
charge of approximately $213,000 relating to the write-off of certain software
development costs.
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Reorganization
As a result of the series of transactions consummated by the Company in
February 1996 which resulted in a change in control of the Company and the
acquisition of CHCM (see "Notes to Financial Statements-Change in Control"). The
Board of Directors and management have taken steps and expect to take certain
additional actions to increase revenues, reduce and re-deploy personnel and
other costs and ultimately increase shareholder value.
Management is of the opinion that it must continue to refine its current
service lines in order to continue to add value to existing and potential
customers. In addition, the Company intends to broaden its services offered with
unique and complementary cost-containment strategies. Management intends to
evaluate each service in light of anticipated changes in the health care
industry, the cost to enter each such service line as well as the availability
and timeliness of competent resources. To further expand its line of services,
the Company intends to pursue alternatives to its internal product and service
development efforts by entering into strategic alliances and joint ventures as
well as through acquisitions.
Recent Developments of the Business
New Contract With New York Care Plus Insurance Company, Inc:
Effective January 1, 1998 the Company entered into a one year services
agreement with New York Care Plus Insurance Company, Inc., which provides health
care coverage to New York residents through its Blue Cross and Blue Shield of
Western New York and Blue Shield of Northeastern New York divisions. Under the
terms of this agreement, which is attached hereto and incorporated herein by
reference to exhibit 10.20, the Company,through one or more of its subsidiaries,
will provide both medical management performance support and specialty care
management performance support services to New York Care Plus for its
approximately 650,000 indemnity and HMO subscribers. The Service Agreement, the
initial term of which expires on December 31, 1998, provides for the payment of
fixed compensation.
During 1997, the Company successfully renegotiated contracts with two of
its major customers and executed several other agreements as more fully
explained below.
General Developments of the Business during Fiscal Year 1997:
Blue Cross and Blue Shield of New Jersey, Inc.("BCBSNJ"):
The Company renegotiated its Services Agreement with BCBSNJ which was
attached as exhibit 10(b) to the Company's 10-QSB for the quarter ended April
30, 1997 and is incorporated by reference herein. Under the terms of the revised
agreement, the Company will continue to provide specialized cost containment
services on behalf of BCBSNJ's indemnity and PPO subscribers. In accordance with
the restated services agreement, which expires on June 30, 2000 and supersedes
the original Services
17
<PAGE>
Agreement entered into on February 22, 1996, the Company will receive a
combination of fixed and performance-based compensation, subject to the terms
of the agreement. Contemporaneously with the execution of this amended and
restated services agreement, the Company issued to BCBSNJ a promissory note in
the amount of $1,862,823 payable in equal monthly installments of principal and
interest commencing October 1, 1998 through June 30, 2000 representing repayment
of cash received in excess of revenues earned from BCBSNJ during 1996. BCBSNJ is
a principal shareholder of CareAdvantage, owning approximately 50% of the
outstanding capital stock of the Company.
Letter Agreement Between Medigroup of New Jersey, Inc., d/b/a HMO Blue, the
Company and Allied Health Group, Inc:
Effective March 1, 1997 the Company has executed a letter agreement among
itself, Medigroup of New Jersey, Inc. (d/b/a HMO Blue) and Allied Health Group,
Inc. ("Allied") for the provision of certain network management services to
Allied and HMO Blue which was attached as exhibit 10(e) to the Company's Form
10-QSB for the quarter ended April 30, 1997 and is incorporated by reference
herein. HMO Blue is a wholly-owned subsidiary of BCBSNJ. Under the terms of this
agreement, the Company will work with Allied to effect cost management
strategies directed toward specialist costs in the HMO. The term of this
agreement runs from March 1, 1997 through February 28, 2000 unless terminated
earlier pursuant to the terms of the agreement. Effective November 4,1997 the
Company consented to the assignment by Allied of all of its rights under this
letter agreement to CMSF, Inc.
Blue Cross and Blue Shield of Rhode Island ("BCBSRI"):
The Company completed renegotiating its services agreement with BCBSRI
which was attached as exhibit 10(a) to the Company's Form 10-QSB for the quarter
ended July 31, 1997 and is incorporated by reference herein. 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 with additional revenues
being recognized on a performance basis.
Consulting Agreement Between Coordinated Health Partners, Inc., d/b/a
"Blue Chip" and CareAdvantage Health Systems, Inc ("CAHS"):
CAHS entered into a consulting agreement with Coordinated Health Partners,
Inc. ("BlueCHiP"), a Rhode Island health maintenance organization which was
attached as exhibit 10(d) to the Company's Form 10-QSB for the quarter ended
April 30, 1997 and is incorporated by reference herein. CAHS has been engaged to
provide various utilization review services including prospective, concurrent,
and retrospective requests for covered services for purposes of determining
whether such services are medically appropriate. Additionally, the agreement
provides that CAHS will assist in the education and training of claims
administration and claims adjudication of BlueCHiP personnel.
18
<PAGE>
Joint Services Agreement among Allied Health Group, Inc., CareAdvantage Health
Systems, Inc., and the Company:
The Company executed a three-year agreement with Allied which was attached
as exhibit 10(c) to the Company's Form 10-QSB for the quarter ended April 30,
1997 and is incorporated by reference herein, for the joint delivery of
specialized health care cost containment services in the form of physician
management of specialty networks. The terms of the agreement provide for a close
working relationship between the two companies in the Blue Cross Blue Shield
marketplace, with the Company retaining rights to provide, in the second and
third year of the agreement, certain services currently being provided by Allied
Health Group to current and future Blue Cross Blue Shield customers. Currently,
the Company has not yet entered into any agreements with any such BCBS plan
under this agreement. However, the Company continues to explore possible
relationships with its existing and new BCBS customers. Effective November 4,
1997 the Company consented to the assignment by Allied, all of its rights under
this agreement to CMSF, Inc.
The Company Secures A Credit Facility In The Amount of $3 Million:
The Company has obtained a $3,000,000 credit facility with Summit Bank
pursuant to a Credit Agreement which was attached as
exhibits10(f),(f1),(f2),(f3),(f4) to the Company's Form 10-QSB for the quarter
ended April 30, 1997 and is incorporated by reference herein. This credit
facility is comprised of a $1,500,000 working capital line and a $1,500,000 term
loan. This credit facility is guaranteed by BCBSNJ and is collateralized by
pledged U.S. agency securities of BCBSNJ. BCBSNJ is a principal shareholder of
CareAdvantage, owning approximately 50% of the outstanding capital stock of the
Company at October 31, 1997. There is currently no outstanding balance under the
Summit Bank credit facility.
19
<PAGE>
Results of Operations
Revenues:
Year Ended
--------------------------------------------
1997 1996
--------------------- ------------------
Amount Percent Amount Percent
------ ------- ------ -------
Revenues from fixed
fee arrangements $12,969,797 92% $10,910,988 93%
Revenues from performance-
based arrangements 833,795 6% 355,169 3%
Consulting revenues 273,045 2% 526,000 4%
----------- --- ----------- ---
Total revenues $14,076,637 100% $11,792,157 100%
=========== === =========== ===
Total revenues for the fiscal years ended October 31, 1997 and October 31,
1996 were approximately $14,077,000 and $11,792,000, respectively. The increase
in the current year was primarily attributable to the re-negotiation of two (2)
key contracts with BCBSNJ and BCBSRI as well as the execution of a letter
agreement with Medigroup of New Jersey, Inc. d/b/a "HMO Blue", the Company and
Allied (see above "General Developments of the Business"). Additionally, the
current period was positively impacted by the fact that the Company earned
excess performance revenues from Blue Cross and Blue Shield of Vermont in the
approximate amount of $285,000 as a result of the Company's performance bonus
for the contract year ended March 31, 1997.
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 year ended October 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 year ended October 31, 1997 of approximately $2,000,000 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.
Cost of services:
Cost of services for the fiscal years ended October 31, 1997 and October
31, 1996 were approximately $7,937,000 and $9,585,000, respectively. The
decrease in the cost of services of
20
<PAGE>
approximately $1,648,000 is largely due to decreases in personnel costs of
approximately $557,000, professional and consulting costs of approximately
$269,000, information and communication costs of approximately $217,000, travel
costs of approximately $104,000 and approximately $297,000 in depreciation and
amortization allocations.
Operating expenses
Selling, general and administrative:
Selling, general and administrative costs during the fiscal year ended
October 31, 1997 were $5,278,000 compared to $4,487,000 in the prior fiscal
year. The increase in selling, general and administrative costs of approximately
$789,000 is largely due to increases in personnel costs of approximately
$569,000 including bonuses and severance costs paid to two senior officers in
the approximate amounts of $300,000 and $100,000, respectively, during the year
ended October 31, 1997, travel costs of approximately $60,000, and facility
costs of approximately $99,000. Selling and marketing costs during the periods
presented were minimal.
While management has taken and intends to take additional steps to reduce
general and administrative costs, any future reductions in costs may be offset
to some extent, by anticipated increases in selling, marketing and service
development costs. There is no assurance, however, that management will be
successful in reducing general and administrative costs by any significant
amount.
Depreciation and amortization:
Depreciation and amortization aggregated $1,033,000, of which $549,000 is
included in cost of services and $1,208,000 of which $846,000 is included in
cost of services for the fiscal years ended October 31, 1997 and 1996,
respectively. Depreciation and amortization for the year ended October 31, 1997
includes amortization of intangible assets other than the amount attributed to
the Services Agreement of approximately $327,000, amortization of the amount
attributed to the Services Agreement arising in connection with the acquisition
of CHCM of $122,000 ( See "Notes to Financial Statements - Change in Control")
and depreciation of property and equipment of approximately $584,000.
Interest expense:
Net interest expense during the fiscal year ended October 31, 1997 was
$371,000 compared with net interest expense of $582,000 for the year ended
October 31, 1996. The decrease in net interest expense of approximately $211,000
is related to the following decreased interest costs of: (i) IBM master lease
agreement of approximately $55,000 (ii) BCBSNJ Note of approximately $105,000
(iii) other interest costs of $3,000 (iv) a debt discount of $98,000 in the 1996
year for the value of the CW Warrants issued in connection with the bridge
financing by CW Ventures, offset by increased interest costs related to the
following: (i) CW Note of approximately $50,000 for a more detailed explanation
of the "CW Note", See "Notes to Financial Statements Change in Control".
21
<PAGE>
Pursuant to the terms of the CW Note issued in connection with the change
in control, interest expense related to the CW Note will cease and any accrued
interest be contributed to capital should such debt instrument be exchanged into
shares of common stock of the Company pursuant to the terms of the CW Note.
As of October 31, 1997 the Company has classified the CW Note as a current
liability as it matures on June 30, 1998. In the prior year, the CW Note was
classified as a current liability due to the fact that CHCM was in default of
the services agreement with BCBSNJ, and if BCBSNJ terminated this agreement, the
CW Note would have become payable upon demand.
Other costs:
Other costs of $724,000 for the fiscal year ended October 31, 1996
represent costs incurred in connection with the change in control and related
reorganization (see "Reorganization" above) that the Company does not deem as
recurring operating expenses, however, as discussed above, certain expenses
within this component of the statement of operations may continue to be incurred
in the future. Expenses reflected in "Other costs" include severance and
separation costs related to the change in control and reorganization of
approximately $367,000, professional fees and other costs related to the change
in control of approximately $227,000, and loss on disposal of assets of
$130,000.
Net Income 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. Further, based on the Company's re-negotiation of two (2) of its key
contracts and the execution of other agreements as are more fully explained
above under the caption "General Developments of the Business", management
anticipates that it will generate positive operating cash flows and results of
operations during fiscal year 1998.
Financial Condition
Liquidity and Capital Resources:
At October 31, 1997, the Company had cash of $1,038,000 and a working
capital deficiency of approximately $2,487,000. At October 31, 1996, the
Company's cash balance was $1,167,000 and the working capital deficiency was
approximately $4,191,000. The decrease in working capital deficiency of
approximately $1,704,000 is due to the Company's ability to generate cash flows
from operations during the fiscal year ending October 31, 1997, and the
reclassification of a note payable in the approximate amount of $1,863,000 as a
long-term liability, which was previously classified as a short-term obligation
in the prior year, offset by capital expenditures.
22
<PAGE>
Net cash (used)/provided from operating activities amounted to
approximately $1,117,000 and ($2,569,000) for the fiscal years ended October 31,
1997 and 1996, respectively. This improvement is partially due to the increased
operating income generated during the fiscal year ended October 31, 1997.
Net cash (used)/provided from investing activities amounted to
approximately ($623,000) and $706,000 for the fiscal years ended October 31,
1997 and 1996, respectively. This decrease of approximately ($1,329,000) is
primarily due to the cash received from the acquisition of CHCM of approximately
($784,000) during the fiscal year ended October 31, 1996 and increased capital
expenditures incurred during the current fiscal year of approximately
($545,000).
Net cash (used)/provided from financing activities amounted to
approximately ($623,000) and $2,493,000 for the fiscal years ended October 31,
1997 and 1996, respectively. This decrease of approximately ($3,116,000) is
primarily due to the proceeds received from the issuance of the CW Note in the
original principal amount of $2,000,000 and the issuance of common stock with a
value of approximately $925,000 during the fiscal year ended October 31, 1996.
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 fiscal year ending
October 31, 1998.
Financing:
Amounts payable pursuant to long-term financing arrangements as of October
31, 1997 were approximately $997,000 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.
The Company has provided for approximately $1,863,000 to be repaid to
BCBSNJ due in 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.
The Company has a $2,000,000 principal amount 8% Exchangeable Note
maturing on June 30, 1998 due to CW Ventures. On such date, CW Ventures is
required to exchange the note for shares of the Company's common stock absent
any events of default, as defined.
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 first and second
quarter of fiscal 1998 of approximately $750,000. 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 of which $1,500,000 was
available at October 31, 1997. The remaining
23
<PAGE>
balance under the Summit Bank credit facility is a $1,500,000 working capital
revolver to be used for general working capital needs, resulting in an aggregate
available facility of $3,000,000 as of October 31, 1997.
Item 7. Financial Statements and Supplementary Data
The Financial Statements and supplementary data required by this item
appear under the caption "Index to Consolidated Financial Statements" and are
included elsewhere herein.
Item 8. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure
None
24
<PAGE>
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons
The Company's directors, executive officers and control persons are as follows:
Name Age Positions with the Company
- ---- --- --------------------------
William J. Marino (1) 55 Chairman of the Board of Directors
Robert J. Pures (2) 53 Director
Barry Weinberg (1) 59 Director
David McDonnell (1) (2) 56 Director
Walter Channing, Jr. (2) 57 Director
Thomas P. Riley 40 Director, President and Chief Executive
Officer
Richard W. Freeman 50 Executive Vice President
Stephan D. Deutsch 54 Senior Vice President and National
Medical Director
David G. DeBoskey 32 Vice President, Finance and Accounting
- -------------------------------------------------------------------------------
(1) Member of Compensation Committee
(2) Member of Audit Committee
There is no family relationship between any Director or Executive Officer
of the Company. At a meeting of the Company's Board of Directors held on January
14, 1997, a Compensation Committee and Audit Committee was formed.
All directors of the Company are elected by the stockholders of the
Company or, in the case of a vacancy, are elected by the directors then in
office to hold office until the next annual meeting of stockholders of the
Company and until their successors are elected and qualify or until their
earlier resignation or removal.
The Company, BCBSNJ and CW Ventures are parties to the Stockholders'
Agreement, pursuant to which BCBSNJ and CW Ventures have agreed that each of
them shall be entitled to designate two members of the Board; two members will
be management of the Company acceptable to CW Ventures and BCBSNJ, and there
shall be one non-employee outside director who is acceptable to CW Ventures and
BCBSNJ. (See "Description of Business - Change in Control"
25
<PAGE>
above.) CW Ventures has designated Barry Weinberg and Walter Channing, Jr. as
members of the Board. BCBSNJ has designated William J. Marino and Robert J.
Pures as members of the Board.
The following sets forth certain information with respect to each Director
and Executive Officer of the Company:
William J. Marino--Since February 1996, a director of the Company. Since
December 1993, a director of Contemporary HealthCare Management Systems, Inc.
Since January 1994, President and Chief Executive Officer and director of Blue
Cross and Blue Shield of New Jersey, Inc. From January 1992 through December
1993, Senior Vice President of Blue Cross and Blue Shield of New Jersey, Inc.
Mr. Marino also currently serves as a director of Digital Solutions, Inc.
Robert J. Pures--Since February 1996, a director of the Company. Since
1995, Senior Vice President Administration, Chief Financial Officer and
Treasurer of Blue Cross and Blue Shield of New Jersey, Inc. From October 1985
through July 1995, Vice President - Finance and Treasurer of Blue Cross and Blue
Shield of New Jersey, Inc.
Barry Weinberg--Since May 1997, a director of the Company. Since 1981
President of the CW Group, Inc., a company engaged in investing in the health
care field. Mr. Weinberg currently serves on the Board of Directors of
Autoimmune Inc., as well as a number of privately owned companies, and is a
general partner of CW Partners III, L.P.("CW Partners").
Walter Channing, Jr.--Since May 1997, a director of the Company. Since
1981 Vice President of the CW Group, Inc., a company engaged in investing in the
health care field. Mr. Channing currently serves as a director for a number of
privately owned companies, and is a general partner of CW Partners.
Thomas P. Riley--Since August 1996, a director, President and Chief
Executive Officer of the Company. From February 1995 through February 1996, Vice
President of Charter Medical, a company engaged in the health care services
business. From April 1988 through February 1995, President and Chief Executive
Officer of National Mentor, Inc., a company engaged in the mental health care
services business.
David J. McDonnell--Since January 1997, a director of the Company. Since
December 1993, a director of Value Health, Inc., a company engaged in the health
care service business. From September, 1984 to December 1993, Chief Executive
Officer of Preferred Health Care, Inc., a company engaged in the mental health
care services business.
Richard W. Freeman, M.D.--Since September 1997, Executive Vice President
of the Company. From April 1995 through September 1997, Senior Vice President of
CAHS, Inc.(a wholly-owned subsidiary of the Company). From 1994-1995 Vice
President for Medical Affairs, Johns Hopkins Bayview Medical Center, a 667 bed
academic medical center. From 1992-1994, Director Office of Managed Care
Programs and Physician Support Services, Johns Hopkins Bayview Medical Center,
The Johns Hopkins Health System, Baltimore, Maryland.
Stephan D. Deutsch, M.D.--Since July 1995, Senior Vice President and
National Medical Director of CAHS. Prior to 1995, Dr. Deutsch served as both the
President and Medical Director of a leading provider of outpatient services for
the prevention, treatment and management of work-related injuries and illnesses
in Rhode Island.
26
<PAGE>
David DeBoskey, C.P.A.--Since November 1997, Vice President of Finance and
Accounting of the Company. From April 1996 through November 1997, Director of
Finance and Accounting of the Company. From August 1992 through April 1996,
Accounting Manager and Subsidiary Controller for two (2) New Jersey hospitals.
From March 1991 through August 1992, Accounting Manager for a Manufacturing
Company. Prior to 1991, served as a Staff Accountant for an international
accounting firm where he served a number of healthcare and manufacturing
clients.
Compliance with Section 16(a) of the Securities Exchange Act of 1934:
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
the Company's officers and directors, and persons who own more than 10% of a
registered class of the Company's equity securities, to file reports of
ownership and changes in ownership with the Securities and Exchange Commission
and NASDAQ, copies of which are required by regulation to be furnished to the
Company.
Based solely on review of the copies of such forms furnished to the
Company, the Company believes that during fiscal 1997 its officers, directors
and ten percent (10%) beneficial owners complied with all Section 16(a) filing
requirements.
Item 10. Executive Compensation
The following table sets forth information concerning the compensation
paid or accrued by the Company for each of the three fiscal years ended October
31, 1997, to the individual performing the function of Chief Executive Officer
during such periods and each of the next four most highly compensated executive
officers. None of the named individuals was employed by the Company prior to the
1995 fiscal year.
27
<PAGE>
Summary Compensation Table
<TABLE>
<CAPTION>
Annual Compensation Long-Term Compensation
--------------------------------------------------------------------------------------------
Other
Year Ended Annual Number of All Other
Name and Principal Position October 31 Salary Bonus Compensation (3) Options Compensation
- --------------------------- ---------- ------ ----- ---------------- ------- ------------
<S> <C> <C> <C> <C> <C> <C>
Thomas P. Riley 1997 $230,800 $300,000 $ 4,115(4)
President and Chief Executive 1996 $127,500
Officer
Richard W. Freeman, M.D. (1) 1997 $254,000 $ 35,000 $25,000 $ 5,881(4)
Executive Vice President 1996 $245,000 250,000 $ 2,498(4)
1995 $106,346 $100,000
Stephan D. Deutsch, M.D. (2) 1997 $284,615 $ 69,231
Senior Vice President and Chief 1996 $259,615 $ 23,000 250,000
Medical Director of CAHS 1995 $ 76,293 $ 38,461 16,667
</TABLE>
- -----------------------------------------------
(1) Dr. Freeman joined the Company on April 26, 1995 and is paid an annual
salary of $257,000 under the terms of his employment agreement
(2) Dr. Deutsch joined the Company on July 1, 1995 and is paid an annual
salary of $250,000 under the terms of his employment agreement.
(3) Other Annual Compensation includes taxable fringe benefits and unused
accrued vacation days that were paid.
(4) Represents Company matching contributions to a 401(k) profit
sharing/savings plan.
28
<PAGE>
Compensation Plans
Stock Option Plans:
On June 6, 1996 and July 24, 1996, the Board of Directors of the Company
adopted and amended (i) the 1996 Stock Option Plan (the "1996 Plan") and (ii)
the 1996 Director Stock Option Plan (the "Director Plan" and, together with the
1996 Plan, the "Stock Plans"). The Stock Plans were approved and ratified by the
majority stockholders of the Company pursuant to a written consent in lieu of a
meeting dated August 23, 1996. The key features of the Stock Plans are
summarized below.
A total of 1,933,334 options have been granted and 758,334 are outstanding
under the Stock Plans. Additional non-plan options aggregate 1,094,585
outstanding at October 31, 1997. The table below indicates grants of options
that have been granted, to the named persons.
Aggregated Option Exercises in Last Fiscal Year
and Fiscal Year-End Option Values
<TABLE>
<CAPTION>
Number of Value of
Shares Underlying Unexcerised
Unexercised In-the-Money
Options at Options at
Shares to be October 31, 1997 October 31, 1997
Acquired Value Exercisable/ Exercisable/
Name On Exercise(#) Realized Unexcerisable Unexercisable
- ---- -------------- -------- ------------- -------------
<S> <C> <C> <C> <C>
Thomas P. Riley 0 N/A N/A N/A
Stephan D. Deutsch (2) 250,000 $0 111,112/138,888 $0/$0
Richard Freeman, M.D. (1) 250,000 $0 111,112/138,888 $0/$0
</TABLE>
- ----------------------------------------------------------
Based upon the average Bid and Asked prices on the OTC Bulletin Board of the
Company's Common Stock on January 20, 1998.
(1) Effective July 24, 1996, Dr. Freeman was awarded options to purchase
250,000 shares of Common Stock at an exercise price of $0.78 per share.
(2) Effective July 24, 1996, Dr. Deutsch was awarded options to purchase
250,000 shares of Common Stock (replacing options to purchase 16,667
shares previously granted to Dr. Deutsch during fiscal 1995) at an
exercise price of $0.78 per share.
29
<PAGE>
Description of the Stock Plans:
The 1996 Plan is administered by a committee, which consists of two or more
disinterested directors of the Board of Directors of the Company (the
"Committee"). Pursuant to the terms of the 1996 Plan, the Committee, along with
the Board, will select persons to be granted options and will determine: (i)
whether the respective option is to be a non-statutory, non-qualified option or
an incentive option; (ii) the number of shares of the Company's common stock
purchasable under such option; (iii) the time or times when the option becomes
exercisable, except that no incentive or non-statutory, non-qualified option
shall be exercised and sold by the recipient prior to six (6) months from the
date of grant; (iv) the exercise price cannot be less than 100% of the fair
market value of the common stock on the date of grant (110% of such fair market
value for incentive options granted to a person who owns or who is considered to
own stock possessing more than 10% of the total combined voting power of all
classes of stock of the Company; and (v) the duration of the option, which
cannot exceed ten (10) years. Incentive Options may only be granted to employees
(including officers) of the Company and/or any of its subsidiaries.
Non-statutory, non-qualified Options may be granted to any employees (including
employees who have been granted Incentive Options) and other persons who the
Board or the Committee may select.
The Director Plan is administered by the Board of Directors. Pursuant to
the terms of the Director Plan, the Board may select non-employee individual
Directors to be granted options. Each such option grant shall be (i) in the
amount to purchase 166,667 shares of common stock; (ii) at an exercise price
which cannot be less than 100% of the fair market value of the common stock on
the date of grant; (iii) immediately exercisable, and (iv) for a duration not to
exceed ten (10) years from the date of grant. Options under the Director Plan
may be granted only to Directors of the Company.
All options granted under the 1996 Plan and the Director Plan are
exercisable during the option holder's lifetime only by the option holder (or
his or her legal representative) and only while such option holder is in the
Company's employ or is a Company director. With respect to both the 1996 Plan
and the Director Plan, in the event of termination of employment or of his or
her directorship, such person shall have three (3) months from such date to
exercise such option to the extent the option was exercisable as at the date of
termination, but in no event subsequent to the option's expiration date. With
respect to the 1996 Plan, in the event of termination of employment due to death
or disability of the option holder, such person shall have twelve (12) months
from such
30
<PAGE>
date to exercise such option to the extent the option was exercisable as at the
date of termination, but in no event subsequent to the option's expiration date.
With respect to the Director Plan, in the event of termination of the option
holder's directorship due to death, such person shall have twelve (12) months
from such date to exercise such option to the extent the option was exercisable
as at the date of termination, but in no event subsequent to the option's
expiration date.
Both the 1996 Plan and the Director Plan contain customary anti-dilution
provisions which provide that, in the event of any change in the Company's
outstanding capital stock by reason of stock dividend, recapitalization, stock
split, combination, exchange of shares or merger or consolidation, the Board
shall adjust the aggregate number of shares of the Common Stock reserved for
issuance under both plans. In addition, the aggregate number of outstanding
options and the exercise price per share under both plans shall be
proportionately adjusted by the Board whose determination shall be conclusive.
The Board of Directors has the authority to terminate both the 1996 Plan
and the Director Plan as well as to make changes in and additions to such plans.
In addition, upon a merger of the Company, the 1996 Plan shall terminate, and
all options granted thereunder shall terminate, unless provision be made in
writing in connection with such merger for the continuance of the 1996 Plan or
for the assumption of options theretofore granted, or the substitution for such
options of options covering the stock of a successor employer corporation, or a
parent or a subsidiary thereof, with appropriate adjustments as to the number
and kind of shares and prices, in which event the 1996 Plan and options
theretofore granted shall continue in the manner and under the terms so
provided. However, with respect to the 1996 Plan, the Board may not, unless
approved by the stockholders of the Company, change the aggregate number of
shares subject to the 1996 Plan, terminate modify or amend such plan so as to
adversely affect the rights of option holders previously granted under such
plan, change the requirement of eligibility to such plan or materially increase
the benefits accruing to participants under such plan. With respect to the
Director Plan, the Board may not, unless the option holder thereof consents,
materially impair the rights of such option holder under such plan.
Employment Contracts and Termination of Employment, and Change-in-Control
Arrangements
Effective as of June 11, 1997 the Company entered into an Employment
Agreement, as supplemented by a side agreement with CW and BCBSNJ of even date
therewith with Thomas P. Riley, its current President and Chief Executive
Officer (the "Riley Employment Agreement"), which was attached as exhibit 10(a)
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
provided for 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 year ended October 31, 1997.
In addition, the Riley Employment Agreement provides for a payment to Mr. Riley
in the event that on or prior to July 1, 1999, (i) either BCBSNJ or CW Ventures
shall sell or otherwise dispose of 30% or more of the number of shares of common
stock of the Company beneficially owned by it, or (ii) BCBSNJ and CW Ventures
shall sell or otherwise dispose of 50% or more of the aggregate number of shares
of common stock of the Company beneficially owned by them, providing in either
case that such shares are sold or disposed of at a price of $.15 or greater per
share. The amount of such payment is dependent upon the price at which the
shares are sold or disposed of with a range of $150,000 if the shares are sold
or disposed of at $.15 per share up to a maximum aggregate payment of $550,000
if the shares are sold or disposed of at a price of $.25 or more.
Compensation of Directors:
The Company executed a consultation agreement dated October 1, 1997, which
is attached hereto and incorporated herein by reference to exhibit 10.21 with an
independent director of the Company providing for compensation of $25,000 per
month for the last three months of calendar year 1997 (October 1997-December
1997) for an aggregate amount of $75,000. The Company has made one payment under
this agreement as of October 31, 1997.
31
<PAGE>
All other members of the Board of Directors of the Company presently
receive no annual remuneration for acting in that capacity. The Company
anticipates that its non-employee directors will be paid reasonable
out-of-pocket expenses for each attended meeting of the Board or any committee
thereof. Certain members of the Board of Directors of the Company will also be
eligible for the grant of options under the Director Plan that currently
provides for each non-employee Director to receive an annual grant of options to
purchase 166,667 shares of the Company's Common Stock. None of the current
directors have been granted any options pursuant to the Director Plan. (See
"Compensation Plans - Description of Stock Plans" above.)
Item 11. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information regarding the
beneficial ownership of the Common Stock by (i) all persons known to the Company
who own more than 5% of the outstanding Common Stock, (ii) each Director, (iii)
each executive officer named in the Summary Compensation Table, and (iv) all
executive officers, and Directors as a group, in each case, as of December 23,
1997. Unless otherwise indicated, the persons named in the table below have sole
voting and investment power with respect to all shares of Common Stock shown as
beneficially owned by them.
32
<PAGE>
Beneficial Ownership of Common Stock by
Certain Stockholders and Management
Number of Shares Percent of
Name Beneficially Owned(1) Ownership(2)
- ---- --------------------- ------------
Blue Cross and Blue Shield of
New Jersey, Inc. (3)(4)(5)............ 37,617,420 50.57
CW Ventures II, L.P.(5)(6)(7)............ 37,784,087 45.88
William J. Marino(3)..................... 334 *
Robert J. Pures(3).......................
David J. McDonnell(9) ...................
Walter Channing,Jr.(5)(6)(7)(8).......... 37,784,087 45.88
Charles Hartman(5)(6)(7)(8).............. 37,784,087 45.88
Barry Weinberg(5)(6)(7)(8)............... 37,784,087 45.88
Thomas P. Riley(10)......................
Stephen Deutsch, M.D.(1)(2)(10) ......... 112,345 *
Richard Freeman, M.D.(1)(2)(10) ......... 111,786 *
Current Directors and Executive Officers
as a Group (seven persons)............... 38,008,552 46.15
- -------------------------------------------------------------
* Less than one percent.
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission, which generally attribute beneficial
ownership of securities to persons who possess sole or shared voting or
investment power with respect to those securities. Includes outstanding
shares and shares subject to options exercisable within 60 days. Unless
otherwise indicated, the options for shares of Common Stock indicated as
owned by the persons named above are exercisable within 60 days.
(2) The percent beneficially owned by any person or group who held options
exercisable within 60 days of December 23, 1997 has been calculated
assuming all such options have been exercised in full and adding the
number of shares subject to such options to the total number of shares
issued and outstanding.
(3) The business address of such person or entity is 3 Penn Plaza East,
Newark, New Jersey 07105.
(4) Includes 24,242,337 shares of Common Stock issued by the Company on
February 27, 1997 for failure to meet certain revenue and income
thresholds. In the event that the Services Agreement is terminated by
BCBSNJ, CW Ventures will have the right to purchase BCBSNJ shares in
accordance with the terms of the Stockholders' Agreement.
(5) BCBSNJ may be deemed a member of a "group," as such term is used in
Section 13(d) of the Exchange Act, with CW Ventures, CW Partners III,
L.P., the general partner of CW Ventures ("CW Partners"), and Walter
Channing, Charles Hartman and Barry Weinberg, the general partners of CW
Partners. BCBSNJ on the one hand, and CW Ventures, CW Partners and Messrs.
Channing, Hartman and Weinberg, on the other, disclaim membership in a
group for the purpose of Section 13(d) of the Exchange Act or for any
other purpose.
33
<PAGE>
(6) The business address of such person or entity is 1041 Third Avenue, New
York, New York 10021.
(7) Includes 7,799,997 shares of Common Stock issuable upon conversion of
certain outstanding convertible notes, 25,914,222 shares of Common Stock
issued by the Company on February 27, 1997 for failure to meet certain
revenue and income thresholds and 166,667 shares of Common Stock issuable
upon exercise of the CW Warrants. CW Ventures, II L.P. has sole voting and
disposition power over shares owned by it.
(8) Includes 29,817,423 shares directly owned by CW Ventures and 7,799,997 and
166,667 shares of Common Stock issuable upon exercise of the CW Note and
the CW Warrants, respectively. Messrs. Channing, Hartman and Weinberg are
the general partners of CW Partners, and as such may be deemed to
beneficially own such shares and to have shared voting and disposition
power over such shares. Messrs. Channing, Hartman and Weinberg disclaim
beneficial ownership of such shares except to the extent of their
respective direct and indirect partnership interests in CW Ventures.
(9) The business address of such person is 301 Aqua Court, Naples, Florida
34102.
(10) The business address of such person is 485-C Route 1 South, Iselin, New
Jersey, 08830
34
<PAGE>
Item 12. Certain Relationships and Related Transactions
The Company has entered into a series of transactions with BCBSNJ. In
February, 1996, the Company issued the BCBSNJ Note, in the original principal
amount of $3,600,000, which provided for conversion into 13,375,083 shares of
common stock and the issuance of an additional 24,242,337 shares of common stock
for failure of the Company to meet certain revenue and income thresholds.
Accordingly, in conjunction with this obligation the Company issued to BCBSNJ
24,242,337 shares of common stock on February 27, 1997. For further description
of the BCBSNJ Note, see "Description of Business - Change in Control." Effective
June 13, 1997 the Services Agreement was amended and restated which was attached
as exhibit 10(a) to the Company's Form 10-QSB for the quarter ended April 30,
1997 and is incorporated by reference herein. The First Amendment and
Restatement of the Services Agreement requires, among other things, BCBSNJ to
pay a monthly "interim payment" based on current enrollment data which is
adjusted every April and October. Currently, the Company is receiving
approximately $1,000,000 per month as a result of this agreement. However, due
to the enrollment adjustments called for in this agreement there can be no
assurances that the Company will record revenues at this level for the entire
1998 fiscal year. As of December 23, 1997, BCBSNJ is the beneficial owner of
37,617,420 shares of Common Stock, constituting 50.57% of the outstanding common
stock at October 31, 1997. In addition, two of BCBSNJ officers are directors of
the Company: Robert Pures, a director of the Company, is Senior Vice President,
Chief Financial Officer and Treasurer of BCBSNJ; William Marino, a director of
the Company and CHCM, is also a director, President and Chief Executive Officer
of BCBSNJ.
The Company has also entered into a series of transactions with CW
Ventures. In February, 1996, the Company issued the CW Note, in the original
principal amount of $2,000,000, which provides for exchange into 7,799,997
shares of common stock and the issuance of an additional 25,914,222 shares of
common stock for failure to meet certain revenue and income thresholds.
Accordingly, in conjunction with this obligation the Company issued to CW
Ventures 25,914,222 shares of common stock on February 27, 1997 for failure to
meet such thresholds. For further description of the CW Note, see "Description
of Business - Change in Control." In February, 1996 the Company also issued to
CW Ventures the CW Warrants. For further description of the CW Warrants, see
"Description of Business - Change in Control." As of December 23, 1997, CW
Ventures is the beneficial owner of 37,784,087 shares of common stock,
constituting 45.88% of the outstanding common stock, assuming conversion of the
CW Note and exercise of the CW Warrants only. Also, two of CW Venture officers
are directors of the Company: Barry Weinberg is a director of the Company, CAHS
and CHCM and is also a General Partner of "CW Partners"; Walter Channing, Jr., a
director of the Company is also a General Partner of "CW Partners".
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") which was included as an
exhibit to the Company's Form 10QSB for the Quarter ended July 31, 1997 and is
incorporated by reference herein. 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
35
<PAGE>
in the Option Agreement. Because the Company did not achieve certain financial
goals, 5,015,619 shares of the BCBSNJ Option are non-exercisable as of October
31, 1997. 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
revision of its Services Agreement with the Company, entering into a joint
services agreement between BCBSNJ, the Company and an unrelated party and the
agreement to guaranty the Summit Bank Credit Agreement (see Note K in the "Notes
to the Financial Statements"). The option has been valued at $15,000 which
amount will be amortized over the three-year term of the amended Services
Agreement.
36
<PAGE>
Item 13. Exhibits and Reports on Form 10-KSB
(a) Exhibits
Exhibit No. Description of Exhibit
2.1 Deposit Agreement dated October 31, 1994 among Midlantic Bank, N.A.,
PMDX and the Registrant incorporated by reference to exhibit 2.1 filed
with CAI's Registration Statement on Form S-1 (File No. 33-89176).
2.2 Certificate of Merger of Care Advantage Health Systems (f/k/a
Advantage Health Systems, Inc.), a Georgia corporation into
CareAdvantage Health Systems, Inc., a Delaware corporation
incorporated by reference to exhibit 2.2 filed with CAI's Registration
Statement on Form S-1 (File No. 33-89176).
3.1 Registrant's Certificate of Incorporation incorporated by reference to
exhibit 3.1 filed with CAI's Registration Statement on Form S-1 (File
No. 33-89176).
3.11 Amended and Restated Certificate of Incorporation incorporated by
reference to CAI's Registration Statement dated September, 1996.
3.2 Registrant's By-Laws incorporated by reference to exhibit 3.2 filed
with CAI's Registration Statement on Form S-1 (File No. 33-89176).
10.1 Letter of Intent dated September 30, 1994 between the Registrant and
New Jersey BCBS, amendments thereto of December 29, 1994, February 27,
1995 and April 4, 1995 and Interim Services Agreement as of April 1,
1995 between the Registrant and New Jersey BCBS incorporated by
reference to exhibit 10.12 filed with CAI's Registration Statement on
Form S-1 (File No. 33-89176).
10.1(a) December 22, 1995 Letter Agreement between the Registrant and New
Jersey BCBS extending the Letter of Intent and Interim Services
Agreement to March 31, 1996 incorporated by reference to exhibit
10.12(a) filed with CAI's Annual Report on Form 10-KSB for the year
ended October 31, 1995.
10.2 Lease Agreement dated April 14, 1995 between the Registrant and
Metropolitan Life Insurance Company incorporated by reference to
exhibit 10.13 filed with CAI's Registration Statement on Form S-1
(File No. 33-89176).
10.3 Letter of Intent dated January 2, 1996 between CW Ventures II, L.P.,
the Registrant and its CareAdvantage Health Systems, Inc. subsidiary
incorporated by reference to exhibit 10.14 filed with CAI's Annual
Report on Form 10-KSB for the year ended October 31, 1995.
10.4 Securities Purchase Agreement dated February 22, 1996 among CW
Ventures, CAHS and the Registrant incorporated by reference to exhibit
10.15 filed with CAI's Annual Report on Form 10-KSB for the year ended
October 31, 1996.
10.5 CW Exchangeable Note incorporated by reference to exhibit 10.16 filed
with CAI's Annual Report on Form 10-KSB for the year ended October 31,
1996.
37
<PAGE>
10.6 Stock Acquisition Agreement dated February 22, 1996 among EHC, CHCM,
CAHS and the Registrant incorporated by reference to exhibit 10.17
filed with CAI's Annual Report on Form 10-KSB for the year ended
October 31, 1996.
10.7 EHC Exchangeable Note incorporated by reference to exhibit 10.18 filed
with CAI's Annual Report on Form 10-KSB for the year ended October 31,
1996.
10.8 Services Agreement dated February 22, 1996 among BCBSNJ, CHCM, CAHS
and the Registrant incorporated by reference to exhibit 10.19 filed
with CAI's Annual Report on Form 10-KSB for the year ended October 31,
1996.
10.9 Stockholders' Agreement dated February 22, 1996 among, EHC, CW
Ventures and the Registrant incorporated by reference to exhibit 10.20
filed with CAI's Annual Report on Form 10-KSB for the year ended
October 31, 1996.
10.10 Joint Services Agreement, dated May 29, 1997, among Allied Health
Group, Inc., CAHS, Inc. and the Company incorporated by reference to
exhibit 10(c) filed with CAI's Form 10-QSB for the quarter ended April
30, 1997.
10.11 Agreement, dated as of January 1, 1997 between Blue Cross and Blue
Shield of Rhode Island ("BCBSRI") and CAHS, Inc. incorporated by
reference to exhibit 10(a) filed with CAI's Form 10-QSB for the
quarter ended July 31, 1997.
10.12 Consultant Agreement dated March 17, 1997, between Coordinated Health
Partners, Inc., d/b/a Blue Chip, and CAHS, Inc. incorporated by
reference to exhibit 10(d) filed with CAI's Form 10-QSB for the
quarter ended April 30, 1997.
10.13 Letter Agreement, dated as of March 1, 1997, between Medigroup of New
Jersey, Inc. d/b/a HMO Blue, the Company and Allied Health Group, Inc.
incorporated by reference to exhibit 10(e) filed with CAI's Form
10-QSB for the quarter ended April 30, 1997.
10.14 First Amendment and Restatement of Services Agreement, dated as of
June 13, 1997, among CAHS, Inc., CHCM, the Company and BCBSNJ
incorporated by reference to exhibit 10(b) filed with CAI's Form
10-QSB for the quarter ended April 30, 1997.
10.15 Credit Agreement among Summit Bank, the Company and BCBSNJ, dated June
13, 1997 incorporated by reference to exhibit 10(f) filed with CAI's
Form 10-QSB for the quarter ended April 30, 1997.
10.16 Revolving Credit Note, dated June 13, 1997, by the Company in favor of
Summit Bank in the original principal amount of $1,500,000
incorporated by reference to exhibit 10(f)(1) filed with CAI's Form
10-QSB for the quarter ended April 30, 1997.
10.17 Term Note, dated June 13, 1997, by the Company in favor of Summit Bank
in the original principal amount of $1,500,000 incorporated by
reference to exhibit 10(f)(2) filed with CAI's Form 10-QSB for the
quarter ended April 30, 1997.
38
<PAGE>
10.18 Promissory Note and Security Agreement, dated April 1, 1997, by CHCM
in favor of BCBSNJ, in the original principal amount of $1,862,823
incorporated by reference to exhibit 10(f)(3) filed with CAI's Form
10-QSB for the quarter ended April 30, 1997.
10.19 Employment Agreement between the Company and Thomas Riley, dated June
10, 1997, as supplemented by a side agreement with CW and BCBSNJ, of
even date therewith incorporated by reference to exhibit 10(a) filed
with CAI's Form 10-QSB for the quarter ended April 30, 1997.
10.20 Services Agreement as of January 5, 1998, by and between New York Care
Plus Insurance Company, Inc. and the Company.
10.21 Consultation Agreement dated October 1, 1997 by and between the
Company and David McDonnell an independent director of the Company.
10.22 Mutual Release Agreement dated as of January 6, 1998, between the
Company and MEDecision, Inc.
10.23 Separation Agreement dated April 20, 1995 between PMDX and the
Registrant incorporated by reference to exhibit 10.1 filed with CAI's
Registration Statement on Form S-1 (File No. 33-89176).
10.24 Agreement dated as of January 1, 1995 between Maine BCBS and CAHS
incorporated by reference to exhibit 10.2 filed with CAI's
Registration Statement on Form S-1 (File No. 33-89176).
10.25 Products and Services Agreement dated November 7, 1994 between
MEDecision, Inc. and CAHS incorporated by reference to exhibit 10.3
filed with CAI's Registration Statement on Form S-1 (File No.
33-89176).
10.26 Registrant's 1995 Comprehensive Stock Incentive Plan incorporated by
reference to exhibit 4.2 filed with CAI's Registration Statement on
Form S-1 (File No. 33-89176).
10.27 Registrant's 1996 Stock Option Plan incorporated by reference to CAI's
Information Statement dated September, 1996.
10.28 Registrant's 1996 Director Stock Option Plan incorporated by reference
to CAI's Information Statement dated September, 1996.
10.29 Option Agreement between CW Ventures and BCBSNJ incorporated by
reference to exhibit 5 of Schedule 13(d) of BCBSNJ respecting
beneficial ownership of Common Stock of the Company dated June 1997.
10.30 Settlement and Release Agreement dated January 13, 1998 between the
Company and John Petillo.
10.31 Settlement and Release Agreement dated December 19, 1997 between the
Company and Vince Achilarre.
16 Letter regarding change in accountants, incorporated by reference to
exhibit 16.1 filed on CAI's Form 8-k dated June 6, 1996.
39
<PAGE>
27 Financial Data Schedule
40
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
CareAdvantage, Inc.
(Registrant)
Date: January 29, 1998 By: /s/Thomas Riley
-----------------------------
Thomas Riley, President and Chief
Executive Officer, Director
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
Date: January 29, 1998 By: /s/Thomas Riley
-----------------------------
Thomas Riley, President and Chief
Executive Officer, Director
(Principal Executive Officer)
Date: January 29, 1998 By: /s/David G. DeBoskey
-----------------------------
David G. DeBoskey, Vice President
Finance (Principal Financial and
Accounting Officer)
Date: January 29, 1998 By: /s/William J. Marino
-----------------------------
William J. Marino, Director
Date: January 29, 1998 By: /s/Robert J. Pures
-----------------------------
Robert J. Pures, Director
Date: January 29, 1998 By: /s/Barry Weinberg
-----------------------------
Barry Weinberg, Director
Date: January 29, 1998 By: /s/Walter Channing, Jr.
-----------------------------
Walter Channing, Jr., Director
Date: January 29, 1998 By: /s/David McDonnell
-----------------------------
David McDonnell, Director
41
<PAGE>
CAREADVANTAGE, INC.
PART II
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE
FILED WITH THE ANNUAL REPORT OF THE COMPANY ON FORM 10-KSB
For the Fiscal Year Ended October 31, 1997
Page
Included in Part II:
Report of Independent Public Accountants F-2
Consolidated Balance Sheets at October 31, 1997 and October 31, 1996 F-3
Consolidated Statements of Operations for the years ended October 31, 1997
and October 31, 1996 F-4
Consolidated Statements of Changes in Capital Deficiency for the
years ended October 31, 1997 and October 31, 1996 F-5
Consolidated Statements of Cash Flows for the years ended October 31, 1997
and October 31, 1996 F-6
Notes to Consolidated Financial Statements F-7 through F-18
--------------------------------------
Other financial statement schedules are omitted because the conditions requiring
their filing do not exist or the information required thereby is included in the
financial statements filed, including the notes thereto.
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Stockholders and Board of Directors of
CareAdvantage, Inc.
New York, New York
We have audited the accompanying consolidated balance sheets of CareAdvantage,
Inc. and subsidiaries as at October 31, 1997 and 1996 and the related
consolidated statements of operations, capital deficiency and cash flows for the
years then ended. These consolidated financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements enumerated above present
fairly, in all material respects, the consolidated financial position of
CareAdvantage, Inc. and subsidiaries as at October 31, 1997 and 1996, and the
consolidated results of their operations and their cash flows for the years then
ended, in conformity with generally accepted accounting principles.
/s/ Richard A. Eisner & Company, LLP
- ---------------------------------------
Richard A. Eisner & Company, LLP
New York, New York
November 21, 1997
F-2
<PAGE>
CAREADVANTAGE, INC.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
October 31,
---------------------------
1997 1996
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and equivalents $ 1,038,190 $ 1,167,147
Accounts receivable-stockholder 1,047,171 833,333
Accounts receivable-other 408,348 90,000
Other current assets 254,688 129,829
------------ ------------
Total current assets 2,748,397 2,220,309
Property and equipment, at cost less accumulated
depreciation (Note D) 1,502,712 1,480,746
Intangible assets (Note C) 1,649,126 2,080,769
Other assets 80,984 79,184
------------ ------------
$ 5,981,219 $ 5,861,008
============ ============
LIABILITIES AND CAPITAL DEFICIENCY
Current liabilities:
Current portion of long-term debt (Note E) $ 574,778 $ 623,472
Note payable-stockholder (Note A) 2,000,000 2,000,000
Accounts payable 350,893 569,346
Due to customer 485,594
Due to stockholder (Note F) 88,705 1,525,694
Accrued payroll and related benefits 562,994 512,505
Accrued expenses and other current liabilities 1,012,691 694,996
Deferred revenue, current (Note B[2]) 645,160
------------ ------------
Total current liabilities 5,235,221 6,411,607
Capital lease obligations, less current portion (Note H) 421,813 996,591
Due to stockholder, less current portion (Note F) 1,774,118 435,912
Deferred revenue and other liabilities, less current
portion (Note B[2]) 525,979
------------ ------------
Total liabilities 7,957,131 7,844,110
------------ ------------
Capital deficiency (Note H)
Preferred stock - par value $.10 per share;
authorized 10,000,000 shares; none issued
and outstanding
Common stock - par value $.01 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 (21,690,393) (21,697,583)
------------ ------------
Total capital deficiency (1,975,912) (1,983,102)
------------ ------------
$ 5,981,219 $ 5,861,008
============ ============
</TABLE>
See notes to financial statements
F-3
<PAGE>
CAREADVANTAGE, INC.
Consolidated Statements of Operations
Year Ended October 31,
---------------------------
1997 1996
----------- ------------
Net revenues $14,076,637 $ 11,792,157
Cost of services 7,936,704 9,584,991
----------- ------------
Gross profit 6,139,933 2,207,166
----------- ------------
Operating expenses:
Selling general and administrative 5,277,848 4,487,496
Depreciation and amortization 483,620 362,289
Write-down of intangible assets (Note C) 1,386,451
Other costs 724,032
----------- ------------
Total operating expenses 5,761,468 6,960,268
----------- ------------
Interest 371,275 581,808
----------- ------------
Net income (loss) $ 7,190 $ (5,334,910)
=========== ============
Net income (loss) per share of common stock
(Note B[4]) $ -- $ (0.08)
=========== ============
Weighted average number of common
shares outstanding (Note B[4]) 74,389,886 65,076,602
=========== ============
See notes to financial statements
F-4
<PAGE>
CAREADVANTAGE, INC.
Consolidated Statements of Capital Deficiency
<TABLE>
<CAPTION>
Common Stock
-------------------------
Number of Par Value Additional Accumulated Capital
Shares Amount Capital (Deficit) Deficiency
------ ------ ------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balance as of November 1, 1995 41,726,510 $ 41,726 $15,658,333 $(16,362,673) $ (662,614)
One-for-six reverse stock split (34,772,092) (34,772) 34,772
---------- -------- ----------- ------------ ------------
6,954,418 6,954 15,693,105 (662,614)
Issuance of common stock and warrants in
connection with financing transactions
(Note A) 3,903,201 3,903 1,019,093 1,022,996
Issuance of common stock to employee 625 1 (1)
Exchange of BCBSNJ Note for common
stock (Note A) 13,375,083 13,375 2,978,051 2,991,426
Net (loss) for the year ended October 31,
1996 (5,334,910) (5,334,910)
---------- -------- ----------- ------------ ------------
Balance as of October 31, 1996 24,233,327 24,233 19,690,248 (21,697,583) (1,983,102)
Issuance of common stock to BCBSNJ
and CW Ventures (Notes A and G[1]) 50,156,559 50,157 (50,157)
Net income for the year ended October 31,
1997 7,190 7,190
---------- -------- ----------- ------------ ------------
Balance as of October 31, 1997 74,389,886 $ 74,390 $19,640,091 $(21,690,393) $ (1,975,912)
=========== ======== =========== ============ ============
</TABLE>
See notes to financial statements
F-5
<PAGE>
CAREADVANTAGE, INC.
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Year Ended October 31,
---------------------------
1997 1996
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 7,190 $(5,334,910)
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization 1,033,001 1,208,215
Write-down of intangible assets 1,386,451
Expense associated with issuance of warrants and other 241,539
Changes in:
Due to/from customers/stockholders (1,116,563) 1,610,446
Other assets (126,658) (52,873)
Accounts payable (218,453) (695,873)
Accrued expenses and other liabilities 417,307 (932,046)
Deferred revenue 1,121,521
----------- -----------
Net cash provided by (used in) operating activities 1,117,345 (2,569,051)
----------- -----------
Cash flows from investing activities:
Capital expenditures (622,830) (77,275)
Acquisition of CHCM (cash proceeds-net of transaction costs) 783,527
----------- -----------
Net cash provided by (used in) investing activities (622,830) 706,252
----------- -----------
Cash flows from financing activities:
Principal payments under long-term debt (623,472) (431,525)
Proceeds from issuance of note payable and CW warrants 2,000,000
Net proceeds from issuance of common stock 925,000
----------- -----------
Net cash provided by (used in) financing activities (623,472) 2,493,475
----------- -----------
Net increase (decrease) in cash (128,957) 630,676
Cash and equivalents - beginning of year 1,167,147 536,471
----------- -----------
Cash and equivalents - end of year $ 1,038,190 $ 1,167,147
=========== ===========
Supplemental disclosure of cash flow information:
Interest paid $ 151,740 $ 280,518
</TABLE>
See notes to financial statements.
F-6
<PAGE>
CAREADVANTAGE, INC.
Notes to Consolidated Financial Statements
October 31, 1997 and 1996
NOTE A - CHANGE IN CONTROL
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 service organizations to reduce the costs of medical services
provided to their subscribers.
On February 22, 1996, the Company completed a series of transactions with CW
Ventures II, L.P. ("CW Ventures") and with Blue Cross and Blue Shield of New
Jersey, Inc. ("BCBSNJ"). The transactions included the sale to CW Ventures of
(i) 3,903,201 shares of the Company's common stock at a purchase price of
$0.2562 per share for an aggregate of $1,000,000; and (ii) a $2,000,000
principal amount 8% Exchangeable Note maturing on June 30, 1998 (the "CW Note").
On such date, CW Ventures is required to exchange the note for shares of the
Company's common stock absent any events of default, as defined. The CW Note,
which is collateralized by substantially all of the assets of the Company and
its subsidiaries, was originally exchangeable into that number of shares of the
Company's common stock as would equal approximately 23 1/3% of the outstanding
shares of the Company's common stock on a fully diluted basis as of February 22,
1996 so that the 3,903,201 shares issued to CW Ventures together with the shares
issuable upon the exchange of the CW Note would comprise 35% of the outstanding
shares of the Company's common stock on a fully diluted basis as of February 22,
1996 (such percent was subsequently adjusted as discussed below). In addition,
in connection with a $150,000 bridge financing, the Company issued to CW
Ventures for nominal consideration five-year warrants to purchase 166,667 shares
of the Company's common stock at an exercise price equal to $0.96 per share
(after adjustment for the "one (1) for six (6)" reverse stock split of the
Company's outstanding common stock).
Concurrently with the February 22, 1996 closing of the transaction with CW
Ventures, CAHS purchased all of the outstanding capital stock of CHCM from a
wholly-owned BCBSNJ subsidiary. Although this acquisition was consummated on
February 22, 1996, results of operations of CHCM have been reflected in the
Company's financial statements since April 30, 1995 pursuant to an Interim
Services Agreement between the Company and BCBSNJ whereby the Company had
effective control and responsibility of the day-to-day operations of CHCM
pending a sale of CHCM to the Company. The CHCM stock was acquired in exchange
for CAHS' $3,600,000 principal amount 8% Exchangeable Note maturing on June 30,
1998 (the "BCBSNJ Note") collateralized by substantially all of the assets of
the Company and its subsidiaries. The BCBSNJ Note was originally exchangeable
into that number of shares of the Company's common stock as would equal
approximately 40% of the outstanding shares on a fully diluted basis as of
February 22, 1996. The transaction was accounted for as a purchase of CHCM for
an amount originally approximating $3,427,000 (the face amount of the BCBSNJ
Note less an original issue discount of approximately $173,000), plus assumed
liabilities of approximately $360,000 and purchase costs of $64,000 and was
subsequently adjusted as discussed below. The excess of the purchase price over
the fair value of CHCM's tangible assets consisting of cash of approximately
$848,000 and fixed assets, with a fair value of approximately $27,000 was
allocated to the service contract with BCBSNJ (see Note C[1]).
Pursuant to the terms of the CW Note and the BCBSNJ Note, because the Company
failed to realize at least $15 million in net revenues or specified earnings
before taxes for its fiscal year ended October 31, 1996, on February 27, 1997,
the Company issued 50,156,559 additional shares of common stock resulting in an
increase of both BCBSNJ and CW Ventures equity to 45% on a fully diluted basis.
As a result, as of October 31, 1996, the Company adjusted the carrying amount of
the CHCM purchase of $3,000,000, equal to the consideration received from CW
Ventures for its 45% interest in the Company.
The Company, BCBSNJ and CW Ventures are parties to a stockholders' agreement
dated February 22, 1996 (the "Stockholders' Agreement") whereby each of BCBSNJ
and CW Ventures have agreed to vote their shares in the Company with respect to
the election of the Company's Board of Directors for: (i) two designees of CW
Ventures; (ii) two designees of BCBSNJ; (iii) two members of the Company's
management acceptable to CW Ventures and BCBSNJ; and (iv) one non-employee
outside director acceptable to CW Ventures and BCBSNJ. The Stockholders'
Agreement prevents the Company from taking certain material actions without
BCBSNJ's and/or CW Ventures' or their designated directors' consent.
F-7
<PAGE>
CAREADVANTAGE, INC.
Notes to Consolidated Financial Statements
October 31, 1997 and 1996
NOTE A - CHANGE IN CONTROL (CONTINUED)
Since the Company did not have a sufficient number of authorized but unissued
shares of common stock to permit the issuance of the required number of shares
upon exchange of the CW Note and the BCBSNJ Note, the stockholders of the
Company approved an amendment to the Company Certificate of Incorporation which
decreased the authorized shares of common stock to 90,000,000 shares, created a
new class of "blank check" preferred stock, $.10 par value, consisting of
10,000,000 shares and effected a "one (1) for six (6)" reverse stock split of
the Company's outstanding common stock. As a result, and pursuant to the terms
of the BCBSNJ Note, the BCBSNJ Note was automatically exchanged on September 30,
1996 into 13,375,083 shares of common stock of the Company.
The following unaudited pro forma statement of operations for the year ended
October 31, 1996, gives effect to the purchase of CHCM as though such purchase
occurred at November 1, 1995, the beginning of the fiscal year.
The pro forma adjustments principally include adjustments to reflect revenue,
amortization of the cost of the service agreement, interest expense on the
BCBSNJ Note and other expenses assuming that the Company's current agreement
with BCBSNJ was effective as of November 1, 1995.
Year Ended
October 31,
1996
-----------
Net revenues $11,668,000
Net loss (5,342,000)
Net loss per share of common stock $(.08)
Weighted average number of common shares outstanding 65,076,602
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
[1] Principles of consolidation:
The consolidated financial statements include the accounts of CAI, and its
wholly-owned subsidiary, CAHS and CAHS's wholly-owned subsidiary, CHCM.
Significant intercompany accounts and transactions have been eliminated in
consolidation. References herein to the "Company" refer to CAI, CAHS and
CHCM, collectively.
[2] Revenue recognition:
For its services, the Company is compensated either (i) on a capitated
(fixed-fee) per subscriber basis; (ii) on a performance-based method
whereby the Company shares in the realized cost savings per member as
measured against certain defined benchmarks; (iii) on the basis of a
combination of both capitation and performance-based fees; and (iv) on a
fee-for-service and consulting fee basis. Accordingly, the Company has
adopted the following accounting policies for revenue recognition under
each contract category:
(a) Revenue under the fixed-fee arrangements is recognized as the
services are provided and the related costs of services are incurred.
Although the fixed fee arrangements are not subject to any fee
adjustment based upon the attainment of target utilization levels,
such contracts may still expose the Company to potential operating
losses, particularly in the inception stages thereof.
(b) Revenue under the partial fixed fee/incentive agreements is initially
recognized for the monthly fixed fee component only as services are
provided and related costs of services are incurred. Incentives (or
reductions) based upon performance are recorded when such amounts can
reasonably be determined.
F-8
<PAGE>
CAREADVANTAGE, INC.
Notes to Consolidated Financial Statements
October 31, 1997 and 1996
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
[2] Revenue recognition: (continued)
(c) Revenue under full risk compensation arrangements is recorded based
upon the periodic monthly or quarterly interim payments, adjusted on
a quarterly basis to cost and utilization data supplied by the client
to assess performance against established targets. Incentives (or
reductions) based upon performance are recorded when such amounts can
reasonably be determined.
(d) Revenue under fee-for-service arrangements is recorded for special
projects or the review of cases assigned to the Company on a per case
or hourly basis.
As of October 31, 1997 revenue received in connection with the
renegotiating of two to the Company's contracts during the year then ended
has been deferred over the term of the respective contracts. Additionally,
the Company has deferred a portion of fees advanced in connection with a
side letter agreement dated March 1, 1997. The agreement provides for
additional compensation based on exceeding a certain level of performance.
The Company will recognize these fees when earned.
[3] Depreciation and amortization:
Depreciation is computed by the straight-line method and is based on the
estimated useful lives of the various assets. Estimated useful lives of
depreciable assets range from 3 to 7 years. Leasehold improvements are
amortized using the straight-line method over the six year term of the
related lease. Intangible assets are amortized over their expected useful
lives of 5 to 7 years on the straight-line method. Depreciation and
amortization included in cost of services amounted to $549,381 and
$845,926 for the years ended October 31, 1997 and 1996, respectively.
[4] Per share data:
Net income (loss) per share has been computed based on the weighted
average number of shares outstanding during the year adjusted for the 1
for 6 reverse stock split effected in September 1996. Additional shares
issued to BCBSNJ in February 1997, pursuant to the terms of the BCBSNJ
Note have been included as if outstanding from November 1, 1995, as CHCM's
results of operations have been included in the Company's financial
statements since April 30, 1995. Additional shares issued to CW Ventures
in February 1997 pursuant to the CW Note have been included as if
outstanding since February 22, 1996, the date of CW Venture's investment
in the Company. Accordingly, net loss per share for the year ended October
31, 1996 has been retroactively restated from the amount previously
reported. Common stock equivalents and approximately 7,800,000 shares
issuable upon exchange of the CW Venture's convertible note have not been
included since they are not dilutive.
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128 ("SFAS 128"),
"Earnings per Share". This new standard requires dual presentation of
basic and diluted earnings per share ("EPS") on the face of the statement
of income and requires reconciliation of the numerators and the
denominators of the basic and diluted EPS calculations. This statement
will be effective for the first quarter of the Company's 1998 fiscal year.
The adoption of SFAS 128 will not have any effect on the computation of
net income (loss) per share of common stock.
F-9
<PAGE>
CAREADVANTAGE, INC.
Notes to Consolidated Financial Statements
October 31, 1997 and 1996
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
[5] Cash equivalents:
For purposes of the statement of cash flows, the Company considers all
highly liquid money market instruments with original maturity of three
months or less to be cash equivalents.
[6] Concentration of credit risk:
Financial instruments that potentially subject the Company to credit risk
consist of trade receivables. The Company currently markets its services
to Blue Cross and Blue Shield companies. The risk associated with this
concentration is believed by the Company to be limited due to management's
understanding that such entities are well capitalized. Collateral is not
required.
[7] Estimates:
Preparation of these financial statements in conformity with generally
accepted accounting principles require the use of management's estimates.
Actual results could differ from such estimates.
The values of intangible assets are based on management's best estimates
of future revenues and cash flows to be derived from such assets.
[8] Fair value of financial instruments:
The fair value of financial instruments approximates their carrying
amount.
[9] Major customers:
Three of the Company's customers accounted for approximately 77% (BCBSNJ),
11% and 6% of net revenues in 1997 and 66% (BCBSNJ), 14% and 12% of net
revenues in 1996. The loss of any one of these customers would have a
material adverse impact on the Company's business.
[10] Stock-based compensation:
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting for
Stock-Based Compensation". SFAS 123 encourages, but does not require,
companies to record compensation cost for stock-based employee
compensation plans at fair value. The Company has elected to continue to
account for its stock-based compensation plans using the intrinsic value
method prescribed by Accounting Principles Board Opinion No. 25 ("APB No.
25"), "Accounting for Stock Issued to Employees" and disclose the pro
forma effects on net income and earnings per share had the fair value of
options been expensed. Under the provisions of APB No. 25, compensation
cost for stock options is measured as the excess, if any, of the quoted
market price of the Company's common stock at the date of the grant over
the amount an employee must pay to acquire the stock. (See Note G).
F-10
<PAGE>
CAREADVANTAGE, INC.
Notes to Consolidated Financial Statements
October 31, 1997 and 1996
NOTE C - INTANGIBLE ASSETS
Intangible assets net of accumulated amortization consist of the following:
October 31,
-----------------------------
1997 1996
----------- ----------
Service agreement $ 977,780 $1,100,000
License fees 400,000 600,000
Software development cost 271,346 380,769
---------- ----------
$1,649,126 $2,080,769
========== ==========
[1] Service agreement:
This amount represents the Company's service agreement with BCBSNJ which
was recorded upon the acquisition of CHCM (Note A).
As a result of management's determination that the Company's obligations
under the original Service Agreement between CHCM and BCBSNJ could not be
performed on a profitable basis, the Company took a charge of
approximately $1,173,000 during the year ended October 31, 1996 for the
write-down of the Service Agreement with BCBSNJ based on the present value
of estimated future net cash flows. The agreement was amended effective
March 1997.
[2] License agreement:
The Company signed a five (5) year agreement commencing November 1, 1994
for products and services (the "License Agreement") with a software
development company. Pursuant to the License Agreement, the Company was
granted a perpetual license for 100 users under a non-exclusive five year
license for the use of certain existing software, as well as, a
non-exclusive five year license for use of a new generation of customer
service, utilization review and medical/surgical case management software
to be developed with CAHS's assistance.
The License Agreement required an advance payment by CAHS of $1,000,000
constituting a prepayment of all license fees for the 100 user perpetual
license and all maintenance fees for the initial five year term of the
License Agreement commencing November 1, 1994.
[3] Software development costs:
Software development costs are capitalized when project technological
feasibility is established and concluding when the product is ready for
release. Research and development costs related to software development
are expensed as incurred. Amortization of software development costs
amounted to $126,923 and $236,816 for the years ended October 31, 1997 and
1996, respectively.
Both the service agreement write-down and the software development cost
write-off charges are reflected in "Write-down of intangible assets" on
the consolidated statements of operations for the year ended October 31,
1996.
F-11
<PAGE>
CAREADVANTAGE, INC.
Notes to Consolidated Financial Statements
October 31, 1997 and 1996
NOTE D - PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
October 31,
--------------------------
1997 1996
----------- -----------
Computer equipment $ 706,886 $ 360,776
Furniture and fixtures 458,815 458,815
Office machines and telephone equipment 227,284 5,791
Construction in progress 34,906
Leasehold improvements 104,449 101,631
Equipment under capital lease, consisting of:
Computer equipment 860,042 860,042
Telephone equipment 156,385 156,384
Leasehold improvements 308,953 308,953
----------- -----------
2,857,720 2,252,392
Less accumulated depreciation and amortization (1,355,008) (771,646)
----------- -----------
$ 1,502,712 $ 1,480,746
=========== ===========
Amortization in connection with equipment under capital leases amounted to
$326,119 and $361,185 during 1997 and 1996, respectively.
NOTE E - CAPITAL LEASE OBLIGATION
The following is a schedule by years of future minimum lease payments under
capital leases together with the present value of the net minimum lease payments
as of October 31, 1997:
Fiscal Year Ending
October 31,
------------------
1998 $ 659,388
1999 440,163
------------
Total minimum lease payments 1,099,551
Less amount representing interest 102,960
------------
Present value of future net minimum lease payments 996,591
Less current portion of obligations under capital lease 574,778
------------
Capital lease obligations, net of current portion $ 421,813
===========
The Company's obligations under the Agreement are guaranteed by BCBSNJ.
F-12
<PAGE>
CAREADVANTAGE, INC.
Notes to Consolidated Financial Statements
October 31, 1997 and 1996
NOTE F - DUE TO STOCKHOLDER
Amount due to stockholders represents cash advanced under the original service
agreement with BCBSNJ in excess of revenues earned. This liability was
classified as primarily short term as of October 31, 1996 based on the terms of
the Company's original services agreement with 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 for the
remaining amount due 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.
NOTE G - CAPITAL DEFICIENCY
[1] Issuance of common stock:
On January 5, 1997, the Company became contractually obligated to issue 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. Such shares were issued by the Company to CW Ventures and
BCBSNJ on February 27, 1997. The offer and sale of these shares were not
registered under the Securities Act of 1933, as amended.
[2] Preferred stock:
The Preferred Stock is issuable in such series and with such designations,
preferences, conversion rights, cumulative, relative, participating,
optional or other rights, including voting rights, qualifications,
limitations or restrictions thereof as determined by the Board of
Directors of the Company. As such, the Board of Directors of the Company
will be entitled to authorize the creation and issuance of 10,000,000
shares of Preferred Stock in one or more series with such limitations and
restrictions as may be determined in the Board's sole discretion, with no
further authorization by stockholders required for the creation and
issuance thereof.
[3] Stock option plans:
The 1996 Stock Option Plan is administered by the Board of Directors of
the Company. Pursuant to the terms of the 1996 Stock Option Plan, the
Board will select persons to be granted options and will determine the
terms of the options, which must have an exercise price of not less than
100% of the fair market value of the common stock on the date of grant and
must have a duration not to exceed ten (10) years. Under the 1996 Stock
Option Plan, an aggregate of 10% of the Company's authorized number of
shares of common stock or 9,000,000 shares has been reserved for issuance.
The 1996 Director Stock Option Plan is also administered by the Board of
Directors of the Company. Pursuant to the terms of the 1996 Director Stock
Option Plan, the Board may select non-employee individual Directors to be
granted options. Each such option grant shall be (i) in the amount to
purchase 166,667 shares of common stock; (ii) at an exercise price which
cannot be less than 100% of the fair market value of the common stock on
the date of grant; (iii) immediately exercisable, and (iv) for a duration
not to exceed ten (10) years from the date of grant. An aggregate of
1,800,000 shares has been reserved for issuance pursuant to the 1996
Director Stock Option Plan.
No current member of the Board of Directors has been granted any options
under the 1996 Director Stock Option Plan.
Prior to October 1995, the Company granted options to acquire 1,187,725
shares of common stock to officers, employees, directors and consultants
under various stock option agreements. Options granted under these
agreements are exercisable for a period of up to (10) ten years from date
of grant at an exercise price as stated in the agreements.
F-13
<PAGE>
CAREADVANTAGE, INC.
Notes to Consolidated Financial Statements
October 31, 1997 and 1996
NOTE G - CAPITAL DEFICIENCY (CONTINUED)
[3] Stock option plans: (continued)
The following is a summary of stock option activity during the years ended
October 31, 1997 and October 31, 1996:
<TABLE>
<CAPTION>
1997 1996
------------------------- -------------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
------ ----- ------ -----
<S> <C> <C> <C> <C>
Outstanding at beginning of period 3,027,919 $1.35 1,187,725 $2.47
Granted 2,366,668 1.12
Cancelled (1,175,000) 1.13 (526,474) 3.74
--------- ----- --------- -----
Outstanding at end of period 1,852,919 $1.50 3,027,919 $1.35
========= ===== ========= =====
Exercisable at end of period 1,433,476 $1.74 1,539,032 $1.66
========= ===== ========= =====
</TABLE>
The weighted-average fair value at the date of grant for options granted
during the year ended October 31, 1996 was $.33 per option. The fair value
of options at date of grant was estimated using the Black-Scholes Option
Pricing model utilizing the following assumptions: dividend yield of 0%,
volatility of 67.67%, risk-free interest rates ranging from 6.8% to 6.95%
and expected life of 10 years.
Had the Company elected to recognize compensation cost based on the fair
value of the options at the date of grant as prescribed by SFAS 123, pro
forma net loss for the years ended October 31, 1997 and 1996 would have
been approximately ($6,000) and ($5,967,000) or $ - and ($.09) per share,
respectively.
In January 1998, the Company cancelled 433,334 options in exchange for
$.02 for each option held.
[4] Warrants:
The Company issued 166,667 warrants issued to CW Ventures in connection
with the change in control, in the year ended October 31, 1995.
Additionally, the Company issued warrants to purchase 50,000 shares of the
Company's common stock at the per share price equal to eighty percent of
the average closing sales price of the stock for the sixty consecutive
business days preceding the date of exercise to one of its vendors. In
January 1998, the Company cancelled the 50,000 warrants in exchange for
the vendor cancelling the Company's warrant to purchase shares of the
vendor's stock.
F-14
<PAGE>
CAREADVANTAGE, INC.
Notes to Consolidated Financial Statements
October 31, 1997 and 1996
NOTE H - INCOME TAX
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities are as follows:
October 31,
--------------------------
1997 1996
----------- -----------
Deferred tax assets:
Net operating loss carryforwards $ 4,801,000 $ 5,000,000
Settlements accrued but not paid 63,000 97,000
Deferred revenue 398,000
----------- -----------
$ 5,262,000 $ 5,097,000
=========== ===========
Deferred tax liabilities:
Excess of book over tax cost basis of fixed
assets and software costs $ 524,000 $ 94,000
=========== ===========
Net deferred tax asset $ 4,738,000 $ 5,003,000
Valuation allowance (4,738,000) (5,003,000)
----------- -----------
$ 0 $ 0
=========== ===========
The Company's deferred tax asset has been fully reserved as its future
realization cannot be determined. The Company has net operating loss
carryforwards of approximately $14,122,000 at October 31, 1997, expiring through
2012. Pursuant to Section 382 of the Internal Revenue Code, the carryforwards
are subject to limitations on annual utilization based upon an ownership change
that took place during 1996. It is reasonably possible that the amount of the
carryforward and its annual utilization may be reduced upon examination by the
Internal Revenue Service. The valuation allowance on the Company's deferred tax
asset decreased approximately $265,000 for the year ended October 31, 1997 and
increased by approximately $1,603,000 for the year ended October 31, 1996,
respectively.
The difference between the federal statutory rate of 34% and the Company's
effective tax rate of 0% is due to utilization of the net operating loss
carryforward for the year ended October 31, 1997 and no recognition of future
tax benefit related to the operating loss for the year ended October 31, 1996.
NOTE I - COMMITMENTS, CONTINGENCIES AND OTHER MATTERS
[1] 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.
F-15
<PAGE>
CAREADVANTAGE, INC.
Notes to Consolidated Financial Statements
October 31, 1997 and 1996
NOTE I - COMMITMENTS, CONTINGENCIES AND OTHER MATTERS (CONTINUED)
[1] Potential uninsured exposure to litigation: (continued)
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.
[2] 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.
[3] 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.
F-16
<PAGE>
CAREADVANTAGE, INC.
Notes to Consolidated Financial Statements
October 31, 1997 and 1996
NOTE I - COMMITMENTS, CONTINGENCIES AND OTHER MATTERS (CONTINUED)
[4] Operating leases:
The Company leases facilities and equipment under operating leases.
On April 14, 1995, the Company entered into a noncancelable operating
lease for approximately 28,000 square feet of office space commencing on
June 15, 1995. The term of the lease is for six years and provides for
annual base rent in the amount of $445,408 with annual escalation based on
increase in real estate taxes and operating expenses.
Rent expense for the years ended October 31, 1997, and 1996 was $434,324
and $475,316, respectively.
[5] Employee benefit plans:
Effective January 1, 1995, the Company adopted a profit-sharing/savings
plan pursuant to Section 401(k) of the Internal Revenue Code, whereby
eligible employees may contribute on a tax deferred basis a percentage of
compensation, but not in excess of the maximum allowable by tax law. The
plan provides for a matching contribution by the Company up to a maximum
level which in no case exceeds 3% of the employees' compensation. Company
contributions are fully vested after three years of continuous service and
employees' contributions are fully vested immediately.
The Company's matching contribution was $92,283 and $55,836 in fiscal
years 1997 and 1996, respectively.
At a special meeting of the Board of Directors on December 19, 1995, the
directors approved the full vesting in the Company's 401(k)
profit-sharing/savings plan for all employees of the Company as of closing
date of the bridge financing of CW Ventures.
Effective October 29, 1997 the Company established under Internal Revenue
Section 125 a cafeteria plan whereby employees may choose between cash and
qualified benefits. Additionally, this plan allows employees to pay all or
a portion of their premiums with pre-tax dollars. The Company offers a
wide variety of health and welfare benefits which the employee can
purchase using flexible benefit credits.
[6] Settlement agreement:
Effective April 4, 1996, a settlement agreement was reached between an
employee and CAHS and was guaranteed by the Company. The employee
voluntarily resigned from his employment effective April 11, 1996. In
connection therewith, CAHS and the Company agreed to payments settling all
claims aggregating $592,500. The charge was included in other costs for
the year ended October 31, 1995. The Company paid all payments required
under the settlement agreement on October 29, 1996.
NOTE J - 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
F-17
<PAGE>
CAREADVANTAGE, INC.
Notes to Consolidated Financial Statements
October 31, 1997 and 1996
NOTE J - SHAREHOLDER OPTION AGREEMENT (CONTINUED)
to BCBSNJ in consideration of BCBSNJ's revision of its Services Agreement with
the Company, entering into a joint services agreement between BCBSNJ, the
Company and an unrelated party and the agreement to guaranty the Summit Bank
Credit Agreement (see Note K). The option has been valued at $15,000 which
amount will be amortized over the three-year term of the amended Services
Agreement.
NOTE K - ESTABLISHMENT OF CREDIT FACILITY
In June 1997, the Company entered into an agreement (the "Credit Agreement")
with Summit Bank, and BCBSNJ, as guarantor. The Credit Agreement provides for a
working capital facility in the amount of $1,500,000 and a term loan in the
amount of $1,500,000. The Company's obligations under the Credit Agreement are
guaranteed by BCBSNJ, a principal stockholder of the Company, according to the
Guaranty Agreement and are secured by pledged U.S. agency securities of BCBSNJ
according to the Pledge Agreement. The working capital and term loan facilities
bear interest at a 30, 60, or 90-day Libo rate, plus 45 and 50 basis points,
respectively, with an option to convert to a base/prime rate. The term loan
matures on June 30, 2000 and the working capital facility matures in 360 days
(one year). As of October 31, 1997 there were no amounts due under this
agreement.
F-18
SERVICE AGREEMENT
THIS SERVICE AGREEMENT ("Agreement") is made as of the 5th day of January,
1998 (the "Effective Date") by and between New York Care Plus Insurance Company,
Inc. ("NYCP"), with its principal place of business at 1901 Main Street,
Buffalo, New York 14240, and CareAdvantage, Inc. ("CAI") with its principal
place of business at 485-C Route One South, Iselin, New Jersey 08830.
WHEREAS, CAI is engaged in the business of providing managed care services,
including medical management services;
WHEREAS, NYCP, which provides health insurance coverage and managed care
coverage desires to retain CAI to provide certain services;
NOW, THEREFORE, in consideration of the mutual promises and agreements
contained herein, the parties agree as follows:
1. Services.
1.1 Generally. CAI will provide the services described in Sections 1.2,
1.3, 1.4, and 1.5 ("Services") to NYCP's Buffalo Division. To the extent NYCP's
Buffalo Division is sharing resources with its Albany Division, CAI will also
provide Services to the Albany Division. CAI and NYCP shall consult regularly
regarding the allocation of CAI's resources between NYCP's Buffalo and Albany
Divisions.
1.2 Clinical Support.
a. CAI will provide experienced physician reviewers, equivalent to one
(1) FTE, to support NYCP's medical directors and the utilization management
staff. Their services will include case review and policy development. These
services will be provided through a combination of an on-site presence,
telephone access, and if desired by NYCP, an internet connection. CAI will
ensure that physician reviewers are available at the same days and times that
NYCP is available to health care providers to conduct utilization review. CAI
further agrees that access to physician reviewers shall be provided on-site at
NYCP no less than sixty percent (60%) of such NYCP Utilization Management
Department operating hours. The physician reviewers shall be subject to NYCP's
approval, which shall not be unreasonably withheld.
<PAGE>
b. CAI will provide NYCP with matched specialty review through access
to CAI's Specialty Advisor Panel on an as-needed basis. The parties contemplate
that emphasis will be on pediatric, oncology, and cardiology cases.
c. CAI shall maintain any licensure required in connection with its
activities. The parties acknowledge and agree that NYCP and/or self-insurers, as
applicable, shall have final decision-making authority with regard to
utilization management decisions, subject to the right of covered persons to
appeal such determinations subject to NYCP's and/or the self-insurer's, as
applicable, grievance procedure.
1.3 Skill Development for Nurse and Physician Reviews.
a. CAI will provide on-site training programs for NYCP's nurse and
physician reviewers to build skills in the following areas:
i. Communication skills;
ii. Negotiation and review techniques;
iii. Anticipating the progression of care; and
iv. Triaging to case management.
CAI shall provide the training in the areas set forth in clauses i and ii above
not later than sixty (60) days after the Effective Date. In advance of training,
CAI will undertake an inter-reviewer reliability evaluation, the results of
which will be used to focus the training, as well as to serve as a benchmark for
the post-training assessment. CAI will train department supervisors as to CAI's
training activities regarding reviewers. CAI will conduct regularly scheduled
chart audits, the sample design and schedule to be agreed upon by the parties,
during and after completion of training to identify further opportunities to
improve the effectiveness of nurse and physician reviewers.
b. CAI, through its medical directors, will provide on-site clinical
training sessions for identified problem areas. These are expected to include
cardiology, oncology, orthopedics, and pediatric care. CAI will develop
additional sessions on an as-needed basis.
1.4 Operations Review.
a. CAI will conduct a comprehensive review of NYCP's utilization and
case management operation. Such review will address those functions that impact
results and productivity, including but not limited to program focus and scope,
application of review criteria, physician review support, current staff training
program, timeliness of notification and review, the on-site review process,
denials, penalties and appeals, and adequacy of systems support.
b. CAI will conduct an audit of completed cases to identify process,
training, and performance issues. Measures will include application of criteria,
decision making, facilitation of on-going care, and case documentation.
<PAGE>
c. CAI will prepare a report summarizing the operations review and
making recommendations for improvement or change.
d. CAI will work with NYCP management team to identify opportunities
for achieving improved productivity.
1.5 Reports. CAI will provide NYCP with activity reports, bi-weekly during
the first quarter, and monthly thereafter. The content and format of the
activity reports shall be subject to the approval of NYCP, which shall not be
unreasonably withheld.
2. Compensation & Expenses
2.1 Base Compensation. CAI's annual compensation for the Services provided
pursuant to this Agreement shall be Six Hundred Thousand ($600,000) Dollars,
payable in monthly installments of Fifty Thousand ($50,000) Dollars. NYCP shall
pay CAI the monthly installment due on account of a month within thirty (30)
days after the last day of such month.
2.2 Certain Special Advisory Panel Fees. In addition to the fees provided
by Section 2.1, NYCP shall pay CAI one hundred ($100) dollars for each case
reviewed by CAI's Special Advisory Panel in excess of 2000 cases. NYCP shall pay
CAI within thirty (30) days of its receipt of CAI's invoice for such services.
2.3 Expenses. NYCP shall reimburse CAI for CAI's reasonable out-of-pocket
expenses incurred in connection with this Agreement, including expenses for
travel, lodging and meals. NYCP shall pay CAI within thirty (30) days of its
receipt of CAI's invoice for such expenses.
3. Confidentiality
3.1 Generally. Each party hereto hereby agrees that, during the term of
this Agreement and after its termination, it shall (a) not, directly or
indirectly, use (other than for the purposes contemplated hereby during the
term), (b) keep secret and retain in strictest confidence, and (c) not disclose
to any third party, Confidential Information as defined herein. Notwithstanding
the foregoing, a party may disclose Confidential Information: (i) when compelled
to do so by applicable law, provided that to the extent feasible it gives the
other party advance notice of its intent to make the disclosure, and (ii) to
those of such party's officers, directors, partners, employees and agents who
have a "need to know." In addition, each party will obtain a confidentiality
agreement from any independent contractor to which it discloses the other
party's Confidential Information.
3.2 Definition. "Confidential Information" shall mean (a) any forms,
policies, procedures, manuals and materials of any kind created, owned or
provided by a party in connection
<PAGE>
with, or with respect to, the Services, (b) any information or data relating to
the Services or this Agreement that is made available by a party to the other
party and (i) is marked confidential, or at the time of its being made
available, is otherwise indicated to be confidential, or (ii) within thirty (30)
days after such information or data is first made available, is indicated in
writing to be confidential, (c) any derivative works based on the materials,
information or data described in subclauses (a) and (b) above, and (d) with
respect to the confidentiality obligations hereunder of CAI only, (i) patient
information, and (ii) any and all information or data (whether patient specific,
account specific, aggregates thereof or otherwise) relating to the cost or
utilization of health care services provided to, or received by an individual
covered by any NYCP health care benefit plan; provided, however, Confidential
Information shall not mean information or data that (A) was previously known to
the receiving party at the time of disclosure, provided that such information
was acquired through no fault of the receiving party nor was received from a
person that did not have the legal right to make such information available, (B)
is publicly known through no act or omission by the receiving party, or (C) is
disclosed to the receiving party by a third party having the legal right to make
such disclosure.
4. Term.
4.1 Generally. The Effective Date of this Agreement is January 1, 1998 and
CAI will commence providing services to NYCP including, but not limited to,
Clinical Support Services referenced in Section 1.2, above, no later than
January 5, 1998. This Agreement shall be for a one (1) year term beginning on
the Effective Date, and shall renew automatically for successive one (1) year
terms, unless either party provides the other with notice of non-renewal not
less than sixty (60) days prior to the end of the scheduled term.
4.2 Termination for Cause. This Agreement shall be terminable by either
party for its material breach upon not less than thirty (30) days' prior written
notice to the other party, setting forth in detail the material breach, and
providing that the Agreement is to be terminated upon the expiration of thirty
(30) days or such longer period which may be set forth in the notice, unless the
material breach is cured within that time period.
4.3 Right to Early Termination. Notwithstanding the foregoing, NYCP shall
have the right to terminate this Agreement on the first six-month anniversary of
the Effective Date in the event that it determines in its sole and
non-reviewable discretion that it is dissatisfied with CAI's performance;
provided, however, that in such event NYCP shall give CAI thirty (30) days'
prior written notice of its intent to terminate this AGREEMENT.
<PAGE>
5. Insurance; Indemnification; Defense of Litigation
5.1 Insurance. CAI shall maintain in full force and effect during the term
of this Agreement errors and omissions/utilization review and utilization
management insurance in per occurrence and aggregate face amounts of at least $5
million and $10 million, respectively, naming NYCP as an additional insured,
such policy or policies not to be cancelable upon less than thirty (30) days'
prior notice, and providing that NYCP shall receive copies of any notice of
cancellation.
5.2 Indemnification. Each party hereto (as such, an "Indemnifying Party")
agrees to indemnify, defend and hold harmless (collectively, "Indemnify") the
other party and such other party's officers, directors, employees or agents
(collectively, "Indemnified Parties") from and against any and all claims or
portions thereof, suits, costs and expenses, including without limitation, costs
of investigation and defense, incurred by such Indemnified Parties as a result
of any willful misconduct or any negligent act or omission by the Indemnifying
Party in connection with this Agreement. This provision is not intended to
obligate CAI to Indemnify NYCP for claims, or portions thereof, under the terms
of NYCP's health insurance policies or HMO agreements which NYCP would have been
obligated to pay regardless of the misconduct or act or omission of CAI.
5.3 Defense of Litigation. Except as provided in Section 5.2, each party
shall be responsible at its own expense for defending itself in any litigation
brought against it, whether or not the other party is also a defendant, arising
out of any aspect of activities undertaken in connection with this Agreement.
Each party agrees to provide the other party information in its possession which
is necessary to the other party's defense in such litigation.
6. Additional Requirements
6.1 Independent Contractors. The relationship of the parties under this
Agreement shall be that of independent contractors. Neither shall have any claim
under this Agreement or otherwise against the other party as a joint venturer or
partner.
6.2 Proprietary Rights. Neither party shall use the name, logos,
trademarks, or servicemarks of the other without the other's prior written
consent, except that CAI may include NYCP in its listing of clients.
6.3 Nonsolicitation of Employees. During the term of this Agreement and for
an additional period of two (2) years after the termination of this Agreement,
neither CAI nor NYCP shall solicit for employment or hire any employee or
consultant of the other without the other's prior written consent.
<PAGE>
6.4 No Guarantee of Medical Results. Neither the execution of this
Agreement nor the performance of any of its obligations constitutes an
undertaking by CAI to guarantee the results of health care provider services or
that such services will be rendered in accordance with generally accepted
medical standards or procedures. The parties agree that CAI is not and shall not
be deemed a health care provider as a result of the Services provided pursuant
to this Agreement, and that all decisions concerning the rendering of health
care services are determined by the patient's physician, hospital or other
health care provider and the patient. The parties acknowledge and agree that
neither CAI nor NYCP shall intervene in the provision of medical services, it
being understood and agreed that the traditional relationship between provider
and patient will be maintained. Thus, a benefit determination by NYCP and/or a
utilization management recommendation by CAI, that a particular course of
treatment is not medically necessary and/or is inconsistent with the utilization
management protocols and, thus not a covered service under the covered person's
benefit plan, shall not be deemed to be a medical determination or intervention
in the provision of medical services.
7. Miscellaneous
7.1 Compliance With Laws and Certain Regulatory Requirements. Each party
shall, throughout the term of this Agreement, be in continuous compliance with
all applicable laws. In addition CAI shall be in continuous compliance with
applicable requirements of the American Accreditation Healthcare Commission/URAC
and the National Committee on Quality Assurance.
7.2 Notice. All notices and other communications hereunder shall be in
writing and shall be deemed to have been given upon receipt, and shall be
addressed as follows:
If to NYCP: New York Care Plus Insurance Company.
1901 Main Street
Buffalo, New York 14240
Attn: John G. Anderson,
Senior Vice President & Chief Operating Officer
If to CAI: CareAdvantage, Inc.
Metropolitan Corporate Center 485-C
Route 1 South
Iselin, New Jersey 08830
Attn: Richard Freeman, M.D.,
Executive Vice President
or to such other address as any party hereto shall have designated to the other
parties in accordance with the provisions of this Agreement.
<PAGE>
7.3 Parties in Interest. This Agreement is made for the exclusive benefit
of the parties hereto, their successors and permitted assigns, and no person or
entity other than CAI, NYCP, their successors or permitted assigns shall acquire
or have any rights under or by virtue of this Agreement.
7.4 Impossibility of Performance. No party shall be deemed to be in
violation of this Agreement if prevented from performing any obligation
hereunder due to matters that are beyond its control, including without
limitation war, fire, strikes, riots, floods, storms, earthquakes, other
elements or acts of God or the public enemy.
7.5 Binding Agreement; Assignability. This Agreement shall be binding upon
and shall inure to the benefit of the parties hereto and their respective
successors and permitted assigns and subcontractors. No party hereto shall sell,
assign, transfer, convey, subcontract or otherwise dispose of its rights or
obligations under, title to, or interest in, this Agreement, in whole or in
part, to a third party other than a wholly-owned subsidiary without the prior
written consent of the other party, which consent shall not be unreasonably
withheld.
7.6 Entire Agreement; Amendment. This Agreement and Attachment A embody the
entire agreement and understanding among the parties hereto with respect to the
subject matter hereof. This Agreement may not be amended except by a writing
executed by each of the parties hereto.
7.7 Disputes. In the event of any dispute between the parties hereto
arising out of or concerning this Agreement, the parties agree to use their
reasonable best efforts to resolve any such dispute amicably, in good faith, and
expeditiously prior to resorting to litigation.
7.8 Injunctive Relief. The parties acknowledge that in the event of the
breach of certain provisions of this Agreement, including Sections 3, 6.2 and
6.3, CAI or NYCP, as the case may be, may not have an adequate remedy at law and
will suffer irreparable damage and injury. Therefore, in addition to any other
remedy available, CAI and NYCP each agree that if it violates any of the
provisions of Section 3, 6.2 or 6.3, the non-breaching party shall be entitled
to injunctive relief, without bond, from a court of competent jurisdiction.
7.9 Governing Law. This Agreement shall be construed in accordance with and
governed by the laws of the State of New York without giving effect to the
principles of conflicts of laws.
7.10 Severability. If any term of this Agreement or application thereof
shall be invalid or unenforceable, the remainder of this Agreement shall remain
in full force and effect.
<PAGE>
7.11 Counterparts. This Agreement may be executed in several
counterparts, each of which is an original but all of which shall constitute one
and the same instrument.
IN WITNESS WHEREOF, the parties hereto have hereunto set their hands
and seals as of the date written above.
CAREADVANTAGE, INC. NEW YORK CARE PLUS
INSURANCE COMPANY, INC.
BY: /s/ Richard W. Freeman BY: /s/ John G. Anderson
--------------------------- -----------------------
Richard W. Freeman John G. Anderson
TITLE: Executive Vice President TITLE:Senior Vice President
Exhibit 10.21
CONSULTATION AGREEMENT
AGREEMENT dated as of the 1st day of October, 1997 by and between Care
Advantage, Inc., a Delaware corporation (the "Company"), and David McDonnell,
731 Eagle Farm Road, Villanova, Pennsylvania 19085 ("Consultant");
WHEREAS, the Company is engaged in the healthcare management business; and
WHEREAS, Consultant is a person with experience in one or more aspects of
this business; and
WHEREAS, the Company desires to retain Consultant and Consultant is
desirous of and wishes to enter into such a consultation arrangement, on the
terms and conditions hereinafter set forth;
NOW, THEREFORE, it is agreed as follows:
1. DEFINITIONS
As used in this Agreement, the following terms shall have the meanings set
forth below:
1.1 "Basic Fee" shall have the meaning assigned to it in Section 5 of this
Agreement.
1.2 "Board" shall mean the Board of Directors of the Company as duly
constituted from time to time.
1.3 "the Business" shall mean the business to be conducted by the Company
or any Subsidiary, directly or indirectly, including, but not limited to,
healthcare management.
1.4 "Cause" shall mean:
(a) The conviction of Consultant for a felony based upon actions committed
after the date hereof or the willful commission after the date hereof by
Consultant of a criminal or other act in the course of carrying out his duties
under this Agreement that in either case in the judgment of the Board causes or
is likely to cause substantial economic damage to the Company or a Subsidiary on
a consolidated bases or substantial injury to the business reputation of the
Company or a Subsidiary;
(b) The commission by Consultant of an act of fraud in the performance of
such Consultant's duties on behalf of the Company or a Subsidiary;
(c) The continuing willful failure of Consultant to perform the duties of
such Consultant to the Company or a Subsidiary (other than any such failure
resulting from
<PAGE>
Consultant's incapacity due to physical or mental illness) after written notice
thereof (specifying the particulars thereof in reasonable detail) and a
reasonable opportunity to be heard and cure such failure are given to Consultant
by the Board; or
(d) The order of a federal or state regulatory agency or a court of
competent jurisdiction requiring the termination of this Agreement.
For purposes of this subparagraph, no act, or failure to act, on
Consultant's part shall be considered "willful" unless done, or omitted to be
done, by him not in good faith and without reasonable belief that his action or
omission was in the best interests of the Company or a Subsidiary.
1.5 "Date of Termination" shall have the meaning assigned to it in Section
6.5.
1.6 "Disability" shall mean the inability of Consultant to perform
Consultant's duties of consultation for the Company, if retained by the Company
or a Subsidiary, pursuant to the terms of this Agreement and by-laws of the
Company as hereinafter provided, because of physical or mental disability, where
such disability shall have existed for a period of more than 20 consecutive
days. The fact of whether or not a Disability exists hereunder shall be
determined by appropriate medical experts selected by the Board. The existence
of a Disability means that, Consultant's mental and/or physical condition
substantially interferes with Consultant's performance of his duties for the
Company, and/or its Subsidiaries as specified in this Agreement.
1.7 "Dispute" shall mean in the case of termination of retention of
Consultant by the Company or a Subsidiary by the Company or a Subsidiary for
Disability or Cause, that Consultant challenges the existence of Disability or
Cause.
1.8 "Notice of Termination" shall have the meaning assigned to that term in
Section 6.4.
1.9 "Person" shall mean any individual, sole proprietorship, partnership,
joint venture, trust, unincorporated organization, association, corporation,
institution, public benefit corporation, entity or government (whether Federal,
state, county, city, municipal or otherwise, including, without limitation, any
instrumentality, division, agency, body or department thereof).
Wherever from the context it appears appropriate, each word or phrase
stated in either the singular or the plural shall include the singular and the
plural, and each pronoun stated in the masculine, feminine or neuter gender
shall include the masculine, feminine and neuter.
2. CONSULTATION DUTIES OF CONSULTANT
2.1 Consultation Duties. The Company hereby retains Consultant, and
Consultant hereby accepts appointment as Consultant to the Company. The
principal duty of Consultant
2
<PAGE>
shall be to perform those services identified to him by the Board and to render
services as are necessary and desirable to protect and advance the best
interests of the Company and its Subsidiaries, acting, in all instances, under
the supervision of and in accordance with the policies set by the Board.
2.2 Performance of Duties. Consultant shall be available to provide
consultation services hereunder during the Term; provided, however, the Company
recognizes Consultant has other duties for other Persons, and the Company will
not demand services hereunder which interfere with Consultant's responsibilities
to such other Persons.
3. TERM OF RETENTION
The retention of Consultant pursuant to this Agreement shall commence as of
the Commencement Date and end December 31, 1997, unless sooner terminated
pursuant to Section 6 of this Agreement.
4. COMPENSATION AND BENEFITS
The Company and/or its Subsidiaries shall pay Consultant as compensation
for all of the services to be rendered by him hereunder during the Term, and in
consideration of the various restrictions imposed upon Consultant during the
Term, and otherwise under this Agreement, the Basic Fee and other benefits as
provided for and determined pursuant to Section 5 of this Agreement.
5. BASIC FEE/EXPENSES
5.1 Basic Fee. The Company agrees to pay Consultant a fee of $25,000 per
month (the "Basic Fee") during the Term ($75,000 in the aggregate) in addition
to fees payable to him as a director of the Company of $1,000 per meeting of the
Board attended by Consultant and $1,000 per meeting of any committee of the
Board attended by Consultant. The Basic Fee will be payable on the last day of
each month during the Term.
5.2 Reimbursement for Expenses. The Company shall pay or reimburse
Consultant for all reasonable expenses actually incurred or paid by him during
the Term in the performance of his services under this Agreement, upon
presentation of such bills, expense statements, vouchers or such other
supporting information as the Board may reasonably require. In the event the
Company requires Consultant to travel on business during the Term, Consultant
shall be reimbursed for any travel expenses in accordance with this Section 5.2.
6. TERMINATION OF CONSULTATION RETENTION
6.1 Death. If Consultant dies during the Term, on the date of his death
this Agreement shall terminate.
3
<PAGE>
6.2 Disability. If, during the Term, Consultant has a Disability, the
Company may, at any time after Consultant has a Disability, terminate
Consultant's retention hereunder by written notice to him.
6.3 Termination Without Cause. If the Company shall terminate this
Agreement without Cause, it shall pay Consultant a one time fee equal to the
difference between $75,000 and amounts paid under Section 5.1 hereof in lieu of
any further payments. If Consultant terminates this Agreement, all payments
hereunder to him shall cease except pursuant to Section 5.2.
6.4 Notice of Termination. Any purported termination of retention of
Consultant by the Company or a Subsidiary by reason of Consultant's Disability
or for Cause, shall be communicated by written Notice of Termination to the
other party hereto. For purposes of this Agreement, a "Notice of Termination"
shall mean a notice given by Consultant or the Company, as the case may be,
which shall indicate the specific basis for termination and shall set forth in
reasonable detail the facts and circumstances claimed to provide a basis for
termination.
6.5 Date of Termination. For purposes of this Agreement, "Date of
Termination" shall mean the date of termination of retention of Consultant
specified in the Notice of Termination, which shall not be more than ten (10)
days after such Notice of Termination is given
6.6 Termination by Death or Disability. In the event of the termination of
Consultant's retention by Death or Disability, Consultant or his estate or
beneficiary, as the case may be, shall receive his Basic Fee through the Date of
Termination to the extent then unpaid. Consultant shall also be reimbursed for
expenses in accordance with Section 5.2 properly incurred prior to the Date of
Termination and then remaining unpaid by the Company.
7. REPRESENTATION AND WARRANTY BY CONSULTANT
Consultant hereby represents and warrants to the Company, the same being
part of the essence of this Agreement that, as of the Commencement Date, he is
not a party to any agreement, contract or understanding, and that no facts or
circumstances exist which would in any way restrict or prohibit him in any
material way from undertaking or performing any of his obligations under this
Agreement. The foregoing representation and warranty shall remain in effect
throughout the Term.
4
<PAGE>
8. SEVERABILITY
The invalidity or unenforceability of any provision of this Agreement shall
in no way affect the validity or enforceability of any other provisions hereof.
9. NOTICES
All notices, demands and requests required or permitted to be given under
the provisions of this Agreement shall be deemed duly given if made in writing
and delivered personally or by courier or mailed by postage prepaid certified or
registered mail, return receipt requested, accompanied by a second copy sent by
ordinary mail, which notices shall be addressed as follows:
If to the Company:
CareAdvantage, Inc.
485-C Route 1 South
Iselin, New Jersey 08830
with copies to:
Crummy, Del Deo, Dolan, Griffinger & Vecchione
One Riverfront Plaza
Newark, New Jersey 07102
Attn: Frank E. Lawatsch, Jr.
If to Consultant:
David McDonnell
731 Eagle Farm Road
Villanova, Pennsylvania 19088
By notifying the other parties in writing, given as aforesaid, any party
may from time-to-time change its address or the name of any person to whose
attention notice is to be given, or may add another person, to whose attention
notice is to be given, in connection with notice to any party.
10. ASSIGNMENT AND SUCCESSORS
Neither this Agreement nor any of his rights or duties hereunder may be
assigned or delegated by Consultant. This Agreement is not assignable by the
Company except to any successor in interest which takes over all or
substantially all of the business of the
5
<PAGE>
Company, as it is conducted at the time of such assignment. Any corporation into
or with which the Company is merged or consolidated or which takes over all or
substantially all of the business of the Company shall be deemed to be a
successor of the Company for purposes hereof. This Agreement shall be binding
upon and, except as aforesaid, shall inure to the benefit of the parties and
their respective successors and permitted assigns. The Company will require any
successor (whether direct or indirect, by purchase, merger, consolidation or
otherwise) to all or substantially all of the business and/or assets of the
Company, by written agreement in form and substance satisfactory to Consultant,
to expressly assume and agree to perform this Agreement in the same manner and
to the same extent that the Company would be required to perform it if no such
succession had taken place.
11. ENTIRE AGREEMENT, WAIVER AND OTHER
11.1 Integration. This Agreement contains the entire agreement of the
parties hereto on its subject matter and supersedes all previous agreements
between the parties hereto, written or oral, express or implied, covering the
subject matter hereof. No representations, inducements, promises or agreements,
oral or otherwise, not embodied herein, shall be of any force or effect.
11.2 No Waiver. No waiver or modification of any of the provisions of this
Agreement shall be valid unless in writing and signed by or on behalf of the
party granting such waiver or modification. No waiver by any party of any breach
or default hereunder shall be deemed a waiver of any repetition of such breach
or default or shall be deemed a waiver of any other breach or default, nor shall
it in any way affect any of the other terms or conditions of this Agreement or
the enforceability thereof. No failure of the Company to exercise any power
given it hereunder or to insist upon strict compliance by Consultant with any
obligation hereunder, and no custom or practice at variance with the terms
hereof, shall constitute a waiver of the right of the Company to demand strict
compliance with the terms hereof.
Consultant shall not have the right to sign any waiver or modification of
any provisions of this Agreement on behalf of the Company, nor shall any action
taken by Consultant reduce his obligations under this Agreement.
This Agreement may not be supplemented or rescinded except by instrument in
writing signed by all of the parties hereto after the Commencement Date. Neither
this Agreement nor any of the rights of any of the parties hereunder may be
terminated except as provided herein.
11.3 Obligations of Company. The Company's obligation to pay Consultant the
compensation and to make the arrangements provided herein shall be absolute and
unconditional and shall not be affected by any circumstance, including, without
limitation, any setoff, counterclaim, recoupment, defense or other right which
the Company may have against Consultant or anyone else. All amounts payable by
the Company hereunder shall be paid without notice or demand. Except as
expressly provided herein, the Company waives all rights which it may now have
or may hereafter have conferred upon it, by statute or otherwise, to terminate,
cancel or rescind this Agreement in whole or in part. Each and every payment
made hereunder by the Company shall be final and the Company will not seek to
recover for any reason all or any part of such payment from Consultant or any
person entitled thereto. Consultant shall not be
6
<PAGE>
required to mitigate the amount of any payment or other benefit provided for in
this Agreement by seeking other employment or otherwise.
12. GOVERNING LAW
This Agreement shall be governed by and construed, and the rights and
obligations of the parties hereto enforced, in accordance with the laws of the
State of New Jersey.
13. HEADINGS
The Section and Subsection headings contained herein are for reference
purposes only and shall not in any way affect the meaning or interpretation of
this Agreement.
14. INDEPENDENT CONTRACTOR STATUS
Consultant shall for all purposes hereunder be an independent contractor
with respect to the Company. This Agreement shall not constitute Consultant as a
joint venturer, employee, officer or partner of the Company.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first written above, which shall be deemed to be the Commencement Date.
CAREADVANTAGE, INC.
By: /s/ Thomas P. Riley
------------------------
Thomas P. Riley
/s/ David J. McDonnell
------------------------
David J. McDonnell
Consultant
EXHIBIT 10.22
MUTUAL RELEASE
This MUTUAL RELEASE is made and entered into as of this 6th day of January
1998 by and between CAREADVANTAGE, INC., a Delaware corporation ("CAI"): and
MEDECISION, INC., a Delaware corporation ("MDI").
W I T N E S S E T H:
WHEREAS, pursuant to a common stock purchase warrant dated October 31, 1994
(the "CAI Warrant") made by CAI in favor of MDI, CAI granted to MDI the right to
purchase Three Hundred Thousand (300,000) shares of CAI's common stock at a
price per share as set forth and determined therein prior to October 31, 1999;
WHEREAS, pursuant to a common stock purchase warrant dated October 31, 1994
(the "MDI Warrant") made by MDI in favor of CAI, MDI granted to CAI the right to
purchase Three Hundred Thousand (300,000) shares of MDI's common stock at a
price per share as set forth and determined therein prior to October 31, 1999;
and
WHEREAS, each of CAI and MDI hereby desire, as of the date hereof, to
cancel with no further force and effect: (i) the CAI Warrant and the MDI
Warrant; (ii) any preemptive rights, antidilution rights or rights of first
refusal with respect to the other company's securities; and (iii) any other
grant or purported grant of options or other interest to purchase the other
company's securities.
NOW, THEREFORE, in consideration of the foregoing and for other good and
valuable consideration. the receipt and sufficiency of which are hereby
acknowledged, the parties hereto hereby agree as follows:
1. Release by MDI. MDI, for itself, and each of its predecessors,
successors and assigns and any person or entity claiming by, through or under
it, including, without limitation, any officer or director, employee,
consultant, assignee, agent, affiliate, representative, attorney, successor or
predecessor not a party hereto (collectively, the "MDI Releasors"), hereby
waives, releases, discharges and holds harmless CAI and each of its affiliates
and subsidiaries, which, directly or indirectly, is controlling of, is
controlled by, or under common control with, CAI or any such person (the "CAI
Affiliates") as well as any officers, directors, shareholders, partners,
employees, agents, attorneys, advisors, representatives and trustees of each of
CAI and each CAI Affiliate, past, present and future, and the heirs, executors,
administrators, legal representatives, predecessors, successors and assigns of
each of the foregoing (collectively, the "CAI Releasees"), of and from any and
all claims, actions, causes of actions, suits, debts, demands, damages,
judgments, executions, costs, expenses, liabilities, duties, sums of money,
bills, accounts, reckonings, bonds,
<PAGE>
securities, rights, indemnities, exonerations, covenants, contracts,
controversies, agreements, promises, doings, omissions, losses, exposures and
obligations of any kind whatsoever, whether known or unknown, whether in law or
equity (collectively, the "MDI Claims"), that the MDI Releasors have had, may
have now, or may have in the future, by reason of any matter or cause
whatsoever, against the CAI Releasees, which the MDI Releasors have had, may
have now or may have against the CAI Releasees, which in any way relate to or
arise out of any warrants issued by CAI or any grant or purported grant of
options or other interests in CAI's securities by the CAI Releasees, including,
without limitation, any MDI Claims the MDI Releasors had, now have or may have
against the CAI Releasees which arise out of, including, without limitation, any
amendments thereto, the CAI Warrant.
MDI acknowledges that it has had the opportunity to ask questions of, and
receive answers from, officers of CAI regarding CAI and has had access to any
and all materials and information pertaining to CAI and the CAI Affiliates.
2. Release by CAI. CAI, for itself, and each of its predecessors,
successors and assigns and any person or entity claiming by, through or under
it, including, without limitation, any officer or director, employee,
consultant, assignee, agent, affiliate, representative, attorney, successor or
predecessor not a party hereto (collectively, the "CAI Releasors"), hereby
waives, releases, discharges and holds harmless MDI and each of its affiliates
and subsidiaries, which, directly or indirectly, is controlling of, is
controlled by, or under common control with, MDI or any such person (the "MDI
Affiliates") as well as any officers, directors, shareholders, partners,
employees, agents, attorneys, advisors, representatives and trustees of each of
MDI and each MDI Affiliate, past, present and future, and the heirs, executors,
administrators, legal representatives, predecessors, successors and assigns of
each of the foregoing (collectively, the "MDI Releasees"), of and from any and
all claims, actions, causes of actions, suits, debts, demands, damages,
judgments, executions, costs, expenses, liabilities, duties, sums of money,
bills, accounts, reckonings, bonds, securities, rights, indemnities,
exonerations, covenants, contracts, controversies, agreements, promises, doings,
omissions, losses, exposures and obligations of any kind whatsoever, whether
known or unknown, whether in law or equity (collectively, the "CAI Claims"),
that the CAI Releasors have had, may have now, or may have in the future, by
reason of any matter or cause whatsoever, against the MDI Releasees, which the
CAI Releasors have had, may have now or may have against the MDI Releasees,
which in any way relate to or arise out of any warrants issued by MDI or any
grant or purported grant of options or other interests in MDI's securities by
the MDI Releasees, including, without limitation, any CAI Claims the CAI
Releasors had, now have or may have against the MDI Releasees which arise out
of, including, without limitation, any amendments thereto, the MDI Warrant.
CAI acknowledges that it has had the opportunity to ask questions of, and
receive answers from, officers of MDI regarding CAI and has had access to any
and all materials and information pertaining to MDI and the MDI Affiliates.
2
<PAGE>
3. Successors and Assigns. This Mutual Release shall inure to the benefit
of, and be binding upon, the respective successors and assigns of the parties
hereto.
4. Governing Law. This Mutual Release shall be governed by the laws of the
State of Delaware, without giving effect to the principles of conflicts of law
thereof.
5. Counterparts. This Mutual Release may be executed in one or more
counterparts, each of which shall for all purposes be deemed to be an original
and all of which shall constitute the same instrument.
IN WITNESS WHEREOF, each of the parties hereto has executed this Mutual
Release, or caused this Mutual Release to be executed on its behalf, as of the
date first above written.
CAREADVANTAGE, INC.
By: /s/Thomas P. Riley
------------------------------
Name: Thomas P. Riley
Title: President and Chief
Executive Officer
MEDECISION, INC.
By: /s/David St. Clair
------------------------------
Name: David St. Clair
Title: Chief Executive Officer
3
EXHIBIT 10.30
SETTLEMENT AND RELEASE
SETTLEMENT AND RELEASE dated January 13, 1998 made by JOHN J. PETILLO in
favor of CAREADVANTAGE, INC., a Delaware corporation (the "Company"), and each
of its affiliates and subsidiaries, which, directly or indirectly, is
controlling of, is controlled by, or under common control with, the Company or
any such person (the "Affiliates") as well as the Releasees (as such term is
hereinafter defined).
FOR GOOD AND VALUABLE CONSIDERATION, the receipt and sufficiency of which
are hereby acknowledged, Petillo, for himself and each of his heirs, executors,
administrators, successors and assigns (collectively, the "Releasors"), hereby
waives, releases, discharges and holds harmless the Company and each of the
Affiliates and any officers, directors, shareholders, partners, employees,
agents, attorneys, advisors, representatives and trustees of each of the Company
and each Affiliate, past, present and future, and the heirs, executors,
administrators, legal representatives, predecessors, successors and assigns of
each of the foregoing (collectively, the "Releasees"), of and from any and all
claims, actions, causes of actions, suits, debts, demands, damages, judgments,
executions, costs, expenses, liabilities, duties, sums of money, bills,
accounts, reckonings, bonds, securities, rights, indemnities, exonerations,
covenants, contracts, controversies, agreements, promises, doings, omissions,
losses, exposures and obligations of any kind whatsoever, whether known or
unknown, whether in law or equity (collectively, the "Claims"), that the
Releasors have had, may have now, or may have in the future, by reason of any
matter or cause whatsoever, against the Releasees, which the Releasors have had,
may have now or may have against the Releasees, which in any way relate to any
agreement or contract entered into by any of the Releasors with any of the
Releasees or in which in any way relate from the date Petillo commenced
employment at the Company, or entered into any other association, relationship
or dealing with, the Releasors, to the date hereof, or which relate to or arise
out of any grant or purported grant of options or other interests in the
Company's securities by the Releasees, including, without limitation, any Claims
the Releasors had, now have or may have against the Releasees which arise out
of, including, without limitation, any amendments thereto: (i) resolutions
adopted by the Board of Directors of the Company by unanimous written consent
dated January 5, 1995; (ii) the Nonqualified Stock Option Agreement dated
December 14, 1994 by and between the Company and Petillo; and (iii) the
Registration Rights Agreement dated as of December 14, 1994 by and between the
Company and Petillo.
Petillo acknowledges that he has had the opportunity to ask questions of
and receive answers from officers of the Company regarding the Company and has
had access to any and all materials and information pertaining to the Company.
IN WITNESS WHEREOF, Petillo has signed this Settlement and Release as of
the date first above written.
/s/ John J. Petillo
-------------------------------
John J. Petillo
<PAGE>
ACKNOWLEDGEMENT
State of New Jersey )
)
County of Essex )
On this13th day of January, 1998 personally appeared before me, a Notary
Public, in and for the above-mentioned county, John J. Petillo, to me known and
to me to be the person who executed the foregoing document and who acknowledged
to me that he executed the same on behalf of himself.
/s/ Catherine E. Hall
-------------------------------
Notary Public
EXHIBIT 10.31
SETTLEMENT AND RELEASE
SETTLEMENT AND RELEASE dated December 19, 1997 made by VINCENT M.
ACHILARRE ("Achilarre") in favor of CAREADVANTAGE, INC., a Delaware corporation
(the "Company"), and each of its affiliates and subsidiaries, which, directly or
indirectly, is controlling of, is controlled by, or under common control with,
the Company or any such person (the "Affiliates") as well as the Releasees (as
such term is hereinafter defined).
FOR GOOD AND VALUABLE CONSIDERATION, the receipt and sufficiency of which
are hereby acknowledged, Achilarre, for himself and each of his heirs,
executors, administrators, successors and assigns (collectively, the
"Releasors"), hereby waives, releases, discharges and holds harmless the Company
and each of the Affiliates and any officers, directors, shareholders, partners,
employees, agents, attorneys, advisors, representatives and trustees of each of
the Company and each Affiliate, past, present and future, and the heirs,
executors, administrators, legal representatives, predecessors, successors and
assigns of each of the foregoing (collectively, the "Releasees"), of and from
any and all claims, actions, causes of actions, suits, debts, demands, damages,
judgments, executions, costs, expenses, liabilities, duties, sums of money,
bills, accounts, reckonings, bonds, securities, rights, indemnities,
exonerations, covenants, contracts, controversies, agreements, promises, doings,
omissions, losses, exposures and obligations of any kind whatsoever, whether
known or unknown, whether in law or equity (collectively, the "Claims"), that
the Releasors have had, may have now, or may have in the future, by reason of
any matter or cause whatsoever, against the Releasees, which the Releasors have
had, may have now or may have against the Releasees, which in any way relate to
any agreement or contract entered into by any of the Releasors with any of the
Releasees or in which in any way relate from the date Achilarre commenced
employment at the Company, or entered into any other association, relationship
or dealing with, the Releasors, to the date hereof, or which relate to or arise
out of any grant or purported grant of options or other interests in the
Company's securities by the Releasees, including, without limitation, any Claims
the Releasors had, now have or may have against the Releasees which arise out
of, including, without limitation, any amendments thereto: (i) resolutions
adopted at a special meeting of the Board of Directors of the Company held on
September 7, 1995; and (ii) the Nonqualified Stock Option Agreement dated
September 7, 1995 by and between the Company and Achilarre.
Achilarre acknowledges that he has had the opportunity to ask questions
of, and receive answers from, officers of the Company regarding the Company and
has had access to any and all materials and information pertaining to the
Company.
IN WITNESS WHEREOF, Vincent M. Achilarre has signed this Settlement and
Release as of the date first above written.
/s/ Vincent M. Achilarre
-------------------------------
Vincent M. Achilarre
<PAGE>
ACKNOWLEDGEMENT
State of New York )
)
County of New York )
On this 19th day of December, 1997 personally appeared before me, a Notary
Public, in and for the above-mentioned county, Vincent M. Achilarre, to me known
and to me to be the person who executed the foregoing document and who
acknowledged to me that he executed the same on behalf of himself.
/s/ Lorraine T. Sclafini
-------------------------------
Notary Public
EXHIBIT 21
SUBSIDIARIES OF REGISTRANT
STATE OR OTHER NAME UNDER
JURISDICTION OF WHICH BUSINESS
NAME INCORPORATION IS CONDUCTED
---- ------------- ------------
CareAdvantage Health Delaware CareAdvantage Health
Systems, Inc. Systems, Inc.
Contemporary HealthCare
Management, Inc. New Jersey Contemporary HealthCare
Management, Inc.
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<S> <C>
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<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-START> NOV-01-1996
<PERIOD-END> OCT-31-1997
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<SECURITIES> 0
<RECEIVABLES> 1,455,519
<ALLOWANCES> 0
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<PP&E> 1,502,712
<DEPRECIATION> 0
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<CURRENT-LIABILITIES> 5,235,221
<BONDS> 0
0
0
<COMMON> 74,390
<OTHER-SE> (2,050,302)
<TOTAL-LIABILITY-AND-EQUITY> 5,981,219
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