SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended July 31, 1998
COMMISSION FILE NUMBER 0-26168
CAREADVANTAGE, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 52-1849794
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification Number)
485-C Route 1 South, Iselin, New Jersey 08830
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (732) 602-7000
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes _X_ No ___
82,189,883
Number of shares of Common Stock outstanding as of September 14,1998
Transitional Small Business Disclosure Format
Yes _X_ No ___
This is Page 1 of 14 Pages.
<PAGE>
CAREADVANTAGE, INC
CONSOLIDATED BALANCE SHEETS
ASSETS July 31, October 31,
1998 1997*
Unaudited
----------- -----------
Current assets:
Cash and cash equivalents $ 3,586,122 $ 1,038,190
Accounts receivable-stockholder 1,048,973 1,047,171
Accounts receivable-other 792,575 408,348
Other current assets 296,106 254,688
Total current assets 5,723,776 2,748,397
Property and equipment, at cost less
Accumulated depreciation 1,789,435 1,502,712
Intangible assets (net) 1,342,108 1,649,126
Other assets 92,439 80,984
------------ ------------
Total assets $ 8,947,758 $ 5,981,219
============ ============
LIABILITIES AND CAPITAL SURPLUS/(DEFICIENCY)
Current liabilities:
Current portion of long-term debt $ 571,707 $ 574,778
Note payable-stockholder 0 2,000,000
Accounts payable-trade 531,145 350,893
Due to stockholder 887,050 88,705
Accrued salaries and employee benefits 747,676 562,994
Accrued expenses and other current
liabilities (Note E) 488,231 871,844
Deferred revenue, current (Note F) 2,924,031 786,007
------------ ------------
Total current liabilities 6,149,840 5,235,221
Capital lease obligations, less current portion 0 421,813
Due to stockholder, less current portion 975,773 1,774,118
Deferred revenue and other long-term liabilities 219,690 525,979
------------ ------------
Total liabilities 7,345,303 7,957,131
------------ ------------
Capital surplus/(deficiency):
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 82,189,883 and 74,389,886 82,190 74,390
Additional capital 21,899,453 19,640,091
Accumulated deficit (20,379,188) (21,690,393)
------------ ------------
Total capital surplus/(deficiency) 1,602,455 (1,975,912)
------------ ------------
Total liabilities and capital
surplus/(deficiency) $ 8,947,758 $ 5,981,219
============ ============
*Reclassified to conform to current period classification.
The accompanying notes are an integral part of these statements.
2
<PAGE>
CAREADVANTAGE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
July 31, July 31,
1998 1997* 1998 1997*
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net revenues $ 4,680,443 $ 4,088,791 $ 12,877,512 $ 10,424,189
Costs of services 2,031,637 2,041,175 6,220,463 6,080,539
------------ ------------ ------------ ------------
Gross margin 2,648,806 2,047,616 6,657,049 4,343,650
------------ ------------ ------------ ------------
Operating expenses:
Selling, general and administration 1,931,535 1,277,863 4,984,742 4,017,060
Depreciation and amortization 60,604 75,421 173,990 235,960
------------ ------------ ------------ ------------
Total operating expenses 1,992,139 1,353,284 5,158,732 4,253,020
------------ ------------ ------------ ------------
Operating income 656,667 694,332 1,498,317
90,630
Interest 50,362 101,190 187,112 243,122
------------ ------------ ------------ ------------
Net income (loss) $ 606,305 $ 593,142 $ 1,311,205 ($ 152,492)
============ ============ ============ ============
Pro forma net income (loss)
per share of common stock-basic and diluted $ .01 $ .01 $ .02 ($ .00)
============ ============ ============ ============
Pro forma weighted average number
of common shares outstanding 76,989,885 74,389,886 75,256,552 74,389,886
============ ============ ============ ============
</TABLE>
*Reclassified to conform to current period classification.
The accompanying notes are an integral part of these statements.
3
<PAGE>
CAREADVANTAGE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended
July 31,
--------
1998 1997*
---- -----
Cash flows from operating activities:
Net profit (loss) $ 1,311,205 $ (152,492)
Adjustments to reconcile
net profit (loss) to net
cash provided from (used by)
operating activities:
Depreciation and amortization 835,065 768,939
Change in assets and liabilities:
Due to/from customers/stockholders (386,029) (1,370,125)
Other assets (52,873) (99,000)
Accounts payable 180,252 161,722
Accrued expenses and other liabilities (72,616) 1,323,271
Deferred revenue 1,972,582 0
----------- -----------
Net cash provided from (used by)
operating activities 3,787,586 632,315
----------- -----------
Cash flows from investing activities:
Capital expenditures (814,770) (532,906)
----------- -----------
Net cash provided from (used by) investing
activities (814,770) (532,906)
----------- -----------
Cash flows from financing activities:
Principal payments under long-term debt (424,884) (489,728)
----------- -----------
Net cash provided from (used by) financing
Activities (424,884) (489,728)
----------- -----------
Net increase (decrease) in cash 2,547,932 (390,319)
Cash - beginning of fiscal year 1,038,190 1,167,147
----------- -----------
Cash - end of period $ 3,586,122 $ 776,828
=========== ===========
Non-cash financing activities:
Effective June 30, 1998, the $2,000,000 principal amount 8% exchangeable note
(plus $267,163 accrued interest) issued by the Company to CW Ventures II L.P.
was automatically converted and cancelled into 7,799,997 shares of the Company's
common stock.
*Reclassified to conform to current period classification.
The accompanying notes are an integral part of these statements.
4
<PAGE>
CAREADVANTAGE, INC.
NOTES TO THE FINANCIAL STATEMENTS
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 Blue Cross/Blue Shield health service organizations operating in
all or a portion of the following states: Rhode Island, Maine, Vermont, New
Jersey, and New York (a division of New York Care Plus Insurance Company, Inc).
Note A--Basis of preparation:
The consolidated financial statements have been prepared by the Company and have
not been audited by the Company's independent auditors. The accompanying
financial statements include all adjustments (which include only normal
recurring adjustments) which in the opinion of management are necessary to
present fairly the financial position, results of operations and cash flows at
July 31, 1998 and for all periods presented.
Certain information and note disclosures required to be included in the
financial statements prepared in accordance with generally accepted accounting
principles have been omitted. These consolidated financial statements should be
read in conjunction with the consolidated financial statements and notes thereto
included with the Company's October 31, 1997 Annual Report on Form 10-KSB filed
with the Securities and Exchange Commission on January 29, 1998. The results of
operations for the period ended July 31, 1998 are not necessarily indicative of
operating results to be expected for the full year.
Note B--Per share data:
Net income (loss) per share has been computed based on the weighted average
number of shares outstanding during the periods. Additional shares issued to
Horizon Blue Cross Blue shield of New Jersey, formerly known as Blue Cross and
Blue Shield of New Jersey, Inc. ("Horizon BCBSNJ") in February 1997 pursuant to
the terms of the promissory note by CAHS in favor of Horizon BCBSNJ (as assignee
of Enterprise Holding Co., Inc.) dated February 22, 1996 have been included as
if outstanding from November 1, 1996. The operations of the business of CHCM
purchased by the Company from Horizon BCBSNJ have been included in the Company's
financial statements since April 30, 1995. Additional shares issued to CW
Ventures II, L.P. ("CW Ventures") in February 1997 pursuant to the promissory
note by CAHS in favor of CW Ventures, dated February 22, 1996 (the "CW Note"),
have been included as if outstanding since February 22, 1996, the date of CW
Ventures' investment in the Company. 7,799,997 additional shares of common
stock, which were issued to CW Ventures upon exchange and cancellation of the CW
Note as of June 30, 1998, have been included from the date of the exchange.
Common stock equivalents have not been included since they are not dilutive.
The Company adopted SFAS No. 128 "Earnings Per Share" in the period ended
December 31, 1997 and has retroactively applied the effects thereof for all
periods presented. Accordingly, the presentation of per share information
includes calculations of basic and diluted income (loss) per share. The impact
on the per share amounts previously reported was not significant.
Note C--Contingencies:
1. On or about January 16, 1998, an action entitled Mary DeStefano v. CAI, Carol
Manzella, and Thomas P. Riley (the "DeStefano Action") was filed in the Law
Division of the Superior Court of New Jersey in Middlesex County. The complaint
alleges that (i) the plaintiff was terminated from her employment with the
Company in retaliation for her complaints regarding alleged violations of state
and federal labor laws and (ii) the Company violated the New Jersey Wiretapping
and Electronic Surveillance Control Act. The complaint did not demand an amount
of specific monetary damages. The defendants have denied liability in all
respects. On July 7, 1998 the Company was advised by its insurance carrier that
it will provide a defense to all defendants named in the complaint. However, the
Company's insurance carrier has also advised that it will not pay any judgment
adverse to the insured which establishes the act of deliberate dishonesty
committed by the insured with actual dishonest purpose and intent and material
to the cause of the action so adjudicated. Under the terms of the policy
"insured" includes the Company and its Officers and Directors. The Company has
retained separate counsel to represent it in the litigation for purposes of this
exclusion. Plaintiff has advised that her damages are believed to
5
<PAGE>
CAREADVANTAGE, INC.
NOTES TO THE FINANCIAL STATEMENTS
exceed $250,000 and she has also asserted a claim for punitive damages. The
Company is continuing to contest this lawsuit vigorously. The parties to this
litigation are currently taking discovery, and no trial date has been set. Until
discovery has been completed, the Company has insufficient information regarding
its potential exposure in this matter.
2. 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.
6
<PAGE>
CAREADVANTAGE, INC.
NOTES TO THE FINANCIAL STATEMENTS
3. The Company has been named as a party in an action entitled Robert T. Caruso
v. CareAdvantage, Inc., John J. Petillo, Vincent M. Achillare, Lawrence A.
Whipple, BCBSNJ et al., which was filed in Superior Court of New Jersey, Law
Division, Morris County Docket no. MRS-L-2487-98. Mssrs. Petillo, Achillare and
Whipple were officers of the Company and may have claims for indemnification for
expenses and for any judgments against them. Mr. Caruso was a consultant to the
Company. The complaint alleges breach of contract, fraud, conspiracy, promissory
estoppel and negligent misrepresentation in connection with, among other things,
the termination of Mr. Caruso's consulting arrangement with the Company. The
Company is unable, at this early stage of the proceeding, to evaluate the merits
of this action, but has notified its insurance carrier of such claim and awaits
the carrier's determination of coverage. The Company is unaware of any written
claims for indemnification by John J. Petillo, Vincent M. Achillare, or Lawrence
A. Whipple.
Note D: --Supplemental Cash Flow Information
Below is supplemental cash flow information related to the nine- months ended
July 31, 1998 and 1997:
July 31,
1998 1997
---- ----
Income Taxes Paid 13,000 0
Interest Paid, IBM capital lease obligations 71,000 117,000
Note E--Accrued expenses and other current liabilities:
Accrued expenses and other current liabilities consist of the following at July
31, 1998 and October 31, 1997:
July 31, 1998 October 31, 1997
------------- ----------------
Accrued Interest 249,426 329,626
Accrued Professional Fees 119,098 125,000
Other accrued expenses 119,707 417,218
------ -------
Total 488,231 871,844
======= =======
Note F-- Deferred Revenue:
As of July 31, 1998 revenue received in connection with the re-negotiation of
two of the Company's contracts during the fiscal year ended October 31,1997 has
been deferred over the term of the respective contracts. Additionally, the
Company has deferred a portion of fees advanced in connection with a joint
service agreement (see Note G). The agreement provides for additional
compensation based on exceeding a certain level of performance. The Company will
recognize these fees when earned.
Note G-- Subsequent Events:
Effective August 27, 1998 the Company received notice from one of its customers,
Horizon Healthcare of New Jersey, Inc., formerly known as Medigroup of New
Jersey, Inc. (d/b/a HMO Blue) that HMO Blue has decided to resume internal
network management that it has been outsourcing to Allied Health Group, Inc.
("Allied") via an Administrative Service Agreement dated as of January 2, 1997.
The term of the Administrative Service Agreement will end effective on December
24, 1998 or such earlier date as the parties may agree. Accordingly, the letter
agreement dated March 1, 1997 which was attached as Exhibit No. 10(e) to the
Company's Form 10QSB for the quarter ended April 30, 1997 and is incorporated by
reference herein, by and among the Company, HMO Blue and Allied, pursuant to
which the Company provides certain network management services to Allied and HMO
Blue, will end with the termination of the Administrative Service Agreement.
Revenues for the Company from this contract were approximately $370,000 and
$962,000 for the three-month and nine-month periods ended July 31, 1998,
respectively. Management of the Company estimates that if this letter agreement
had terminated prior to the nine month period ended July 31, 1998, the Company's
net income for that period would have been reduced by approximately $344,000 and
$934,000 for the three and nine month periods, respectively.
7
<PAGE>
CAREADVANTAGE, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Forward Looking Statements:
Certain statements in this Form 10QSB 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 and
the outcome of pending litigation, 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 are 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, could cause actual results and outcomes to differ
materially from those expressed herein.
For fiscal years prior to 1997, the Company experienced significant operating
losses on a consolidated basis. At July 31, 1998, the Company had a working
capital deficit of approximately $426,000, a capital surplus of approximately
$1,602,000 and an accumulated deficit of approximately $20,379,000 since its
inception. By continuing to provide high quality care cost containment services
to its existing customer base of five Horizon BCBSNJ plans, management believes
it can continue to market 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 BCBSNJ plans
throughout the country are no exception to this phenomenon and the Company
believes it can leverage its core competencies to participate in this
consolidating environment.
Management is of the opinion that it must continue to refine its current service
lines in order to continue to add value to existing and potential customers.
Additionally, the Company intends to broaden its services offered with unique
and complementary cost-containment strategies. Management will evaluate each
service with regard to anticipated changes in the health care industry, the cost
to enter any such line of service as well as the availability of competent
resources. To further expand its line of services, the Company intends to pursue
alternatives to its
8
<PAGE>
CAREADVANTAGE, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
internal products and service development efforts by entering into strategic
alliances and joint ventures as well as through acquisitions.
Net revenues:
Nine Months Ended
-----------------
July 31, 1998 July 31, 1997*
------------- --------------
Amount Percent Amount Percent
------ ------- ------ -------
Revenues from fixed fee
arrangements $11,902,652 93% $ 9,538,650 92%
Revenues from performance-
based arrangements 958,765 7% 861,540 8%
Other revenues 16,095 0% 23,299 0%
----------- --- ----------- ---
Total revenues $12,877,512 100% $10,424,189 100%
=========== === =========== ===
*Reclassified to conform to current period classification.
Contracts that provide for performance-based revenues require claims data that
is supplied by the Company's customers to calculate the achievement of goals for
each period. Because compilation of claims data typically lags the Company's
actual performance by several months, it is difficult to ensure complete
accuracy when recording performance-based revenues. Management is working
closely with its customers to secure more timely and accurate data to improve
the accuracy of reporting its revenues, including, in some cases, the
re-negotiation of the contract itself. Management believes its estimated
performance-based revenues contained in reported revenues for the nine months
ended July 31, 1998 are accurate based upon the data available to management.
However, information received by the Company after the filing of this Form
10-QSB could result in an adjustment of its estimates of performance-based
revenues (which would be reflected in subsequent quarters, if necessary).
Revenues:
Net revenue for the three and nine month periods ended July 31, 1998 were
approximately $4,680,000 and $12,878,000, respectively, compared to net revenues
in the corresponding periods of the prior fiscal year of approximately
$4,089,000 and $10,424,000. This represents increases of approximately $591,000
and $2,454,000 for the three and nine month periods ended July 31, 1998,
respectively. This increase is due largely to increased revenue from one of the
Company's major customer-stockholders as a result of its re-negotiation of the
contract on terms more favorable to the Company.
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. Revenues
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 three and nine month periods ended July 31, 1998 were
approximately $2,032,000 and $6,220,000, respectively, compared to approximately
$2,041,000 and $6,081,000 in the corresponding periods of the prior fiscal year.
This represents an decrease/(increase) of approximately $9,000 and ($139,000)
for the three and nine month periods ended July 31, 1998, respectively. This
increase in the cost of services for nine month period ended July 31, 1998 was
due to personnel costs of approximately $134,000 and computer costs of
approximately $84,000, which were partially offset by decreases in professional
and consulting costs of approximately $10,000,
9
<PAGE>
CAREADVANTAGE, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
information and communication costs of approximately $3,000, travel costs of
approximately $45,000, and depreciation and amortization allocations of
approximately $21,000.
Operating expenses:
Selling, general and administrative:
Selling, general, and administrative costs for the three and nine month periods
ended July 31, 1998 were approximately $1,932,000 and $4,985,000, respectively,
compared to approximately $1,278,000 and $4,017,000 in the corresponding periods
of the prior fiscal year. This represents increases of approximately $654,000
and $968,000 for the three and nine month periods ended July 31, 1998,
respectively. The increases for the three and nine month periods ended July 31,
1998 are due to (increases)/decreases in personnel costs of approximately
$311,000 and $368,000, facility costs of approximately $24,000 and $9,000,
travel costs of approximately $16,000 and $33,000, information and communication
costs of approximately $57,000 and $119,000, professional and consulting costs
of approximately $236,000 and $411,000, and general and administrative costs of
approximately $10,000 and $28,000.
While management intends to take steps in the future to reduce general and
administrative costs, such reduction in costs may be offset to some extent, by
anticipated increases in selling, marketing and service development costs. There
is no assurance, however, that the Company will be successful in reducing
general and administrative costs.
Depreciation and amortization:
Depreciation and amortization costs for the three and nine month periods ended
July 31, 1998 were approximately $61,000 and $174,000 respectively, compared to
$75,000 and $236,000 in the corresponding period of the prior fiscal year.
Approximately $226,000 and $661,000 and $134,000 and $273,000, respectively,
were included in the cost of services for such periods.
Interest expense:
Net interest expense for the three and nine month periods ended July 31, 1998
was approximately $50,000 and $187,000 compared to $101,000 and $243,000 in the
corresponding period of the prior fiscal year. This decrease is due to a
reduction in interest related to the Company's master lease agreement with IBM
Credit Corporation, which is offset by interest accruing under a promissory note
between a customer/stockholder and the Company.
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 affect the operations of the
Company. Further, during fiscal year 1997, the Company re-negotiated two of its
key contracts as well as entered into an additional agreement with New York Care
Plus Insurance Company, Inc.
Financial condition:
Liquidity and capital resources:
At July 31, 1998, the Company had cash of approximately $3,586,000 and a working
capital deficiency of approximately $426,000. At October 31, 1997, the Company
had cash of approximately $1,038,000 and a working capital deficiency of
approximately $2,487,000. The decrease in working capital deficiency of
approximately $2,061,000 is due to the Company's ability to generate cash flows
from operations and the conversion of the CW Note during the nine-month period
ended July 31, 1998. These cash flows are offset by (i) the current portion of a
note payable in the approximate amount of $799,000, and (ii) an increase in
deferred revenue of approximately $2,138,000 related to a letter agreement with
a customer, whereby additional revenue is earned for meeting certain performance
targets, accordingly such performance revenue will be recognized when earned.
10
<PAGE>
CAREADVANTAGE, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Net cash provided/(used) from operating activities amounted to approximately
$3,788,000 and $632,000 for the nine month periods ended July 31, 1998 and 1997,
respectively. This improvement is primarily due to the receipt of deferred
revenue and increased operating income generated during the nine month period
ended July 31,1998.
Net cash used in investing activities amounted to approximately ($815,000) and
($533,000) for the nine month periods ended July 31, 1998 and 1997,
respectively. The increase in cash (used) of approximately ($282,000) is due to
increased capital outlays for computer related equipment incurred during the
current fiscal year.
Net cash used in financing activities amounted to approximately ($425,000) and
($490,000) for the nine month periods ended July 31, 1998 and 1997,
respectively. The decrease in cash (used) of approximately ($65,000) is due to
the decreased principal payments related to the master lease agreement with IBM
Credit Corporation of approximately ($65,000).
While there can be no assurances, management believes that its cash on hand,
projected future cash flows from operations and the Company's borrowing capacity
under the Summit Bank Credit Agreement will provide adequate capital resources
to support the Company's anticipated cash needs for the balance of the fiscal
year which ends on October 31, 1998. This projection assumes that the Company's
operations and revenues will continue at their current levels. The Company has
assessed its various information and technology systems and does not believe
that it will be required to incur and significant costs to correct any year 2000
deficiencies.
Financing:
Amounts payable pursuant to long-term financing arrangements as of July 31, 1998
were approximately $572,000, 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. Horizon Blue Cross Blue Shield of
New Jersey, formerly known as Blue Cross and Blue Shield of New Jersey, Inc.
("Horizon BCBSNJ") guarantees the Company's obligations under this lease
arrangement.
In connection with the re-negotiation of the amended and restated services
agreement with Horizon BCBSNJ, which was completed in June 1997, the Company
issued a promissory note to Horizon BCBSNJ in the approximate amount of
$1,863,000 with interest accruing beginning in April 1997 and equal monthly
payments of principal and interest commencing on October 1, 1998. For the
nine-month period ended July 31, 1998, approximately $887,000 has been
classified as a current liability. 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. Management expects such
amounts be funded through operations and no outside financing is anticipated for
this obligation.
Effective June 30, 1998, the $2,000,000 principal amount 8% exchangeable note
(plus $267,163 accrued interest) issued by the Company to CW Ventures II L.P.
was automatically converted and cancelled into 7,799,997 shares of the Company's
common stock.
The Company's credit facility with Summit Bank expired on June 12, 1998. The
term loan availability under this credit agreement expired on or about March 12,
1998. The Company is in the process of negotiating an extension of its credit
facility with Summit Bank. However, there can be no assurance that the Company
will be successful in renegotiating an extension of this credit facility. If the
Company is not successful, it will attempt to obtain financing from another
source. Management of the Company does not believe, based on current projections
that this availability is necessary for working capital purposes.
Future financing needs:
In connection with management's decision to adopt and implement a new and more
comprehensive clinical software product, as well as increased emphasis on
developing in-house data management capabilities and training and educational
programs for its clinical staff and customers, the Company expects to incur
additional software and computer hardware costs of approximately $200,000 during
the fourth quarter of fiscal 1998.
Subsequent Events:
Cancellation of Letter Agreement dated as of March 1, 1997 with Horizon
Healthcare of New Jersey, Inc., formerly known as Medigroup Of New Jersey, Inc
(d/b/a/ HMO Blue) and Allied Health Group, Inc.
Effective August 27, 1998 the Company received notice from one of its customers,
Horizon Healthcare of New Jersey, Inc., formerly known as Medigroup of New
Jersey, Inc. (d/b/a HMO Blue) that HMO Blue has decided to resume internal
network management that it has been outsourcing to Allied Health Group, Inc.
("Allied") via an Administrative Service Agreement dated as of January 2, 1997.
The term of the Administrative Service Agreement will end effective on December
24, 1998 or such earlier date as the parties may agree. Accordingly, the letter
agreement dated March 1, 1997 which was attached as Exhibit No. 10(e) to the
Company's Form 10QSB for the quarter ended April 30, 1997 and is incorporated by
reference herein, by and among the Company, Medigroup of New Jersey, Inc (d/b/a
HMO Blue) and Allied, pursuant to which the Company provides certain network
management services to Allied and HMO Blue, will end with the termination of the
Administrative Service Agreement. Revenues for the Company from the contract
were approximately $370,000 and $962,000 for the three-month and nine-month
periods ended July 31, 1998, respectively. Management of the Company estimates
that if this letter agreement had terminated prior to the period ended July 31,
1998 the Company's net income for that period would have been reduced by
$344,000 and $934,000 for the three and nine month periods, respectively.
Previously, the Company and CAHS had announced a Joint Services Agreement with
Allied, which was attached as Exhibit No. 10(c) to the Company's Form 10QSB for
the quarter ended April 30, 1997 and is incorporated by reference herein, to
deliver health care management services in the form of management of medical
specialty networks to various Horizon BCBSNJ plans throughout the United States.
This agreement, which continues in effect, provides for a three-year term
through March 29, 2000 with an automatic three-year renewal clause, unless
either Allied or the Company gives notice to the other of its intent not to
renew the agreement at least 90 days before the end of any three-year period.
The Company has not received any revenue under this agreement through July 31,
1998.
Part II
Item 1. Legal proceedings
(a) On or about January 16, 1998, an action entitled Mary DeStefano v. CAI,
Carol Manzella, and Thomas P. Riley (the "DeStefano Action") was filed in the
Law Division of the Superior Court of New Jersey in Middlesex County. The
complaint alleges that (i) the plaintiff was terminated from her employment with
the Company in retaliation
11
<PAGE>
CAREADVANTAGE, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
for her complaints regarding alleged violations of state and federal labor laws
and (ii) the Company violated the New Jersey Wiretapping and Electronic
Surveillance Control Act. The complaint did not demand an amount of specific
monetary damages. The defendants have denied liability in all respects. On July
7, 1998 the Company was advised by its insurance carrier that it will provide a
defense to all defendants named in the complaint. Under the terms of the policy,
"insured" includes the Company and its officers and directors. However, the
Company's insurance carrier has also advised that it will not pay any judgement
adverse to the insured which establishes the act of deliberate dishonesty
committed by the insured with actual dishonest purpose and intent and material
to the cause of the action so adjudicated. The Company has retained separate
counsel to represent it in the litigation for purposes of this exclusion.
Plaintiff has advised that her damages are believed to exceed $250,000 and she
has also asserted a claim for punitive damages. The Company is continuing to
contest this lawsuit vigorously. The parties to this litigation are currently
taking discovery, and no trial date has been set. Until discovery has been
completed, the Company has insufficient information regarding potential exposure
in this matter.
(b) 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.
(c) An action entitled Francis X. Bodino v. BCBSNJ and CHCM (the "Bodino
Action") is described in Item 3 of the Company's Form 10-KSB for the fiscal year
ended October 31, 1997, which is incorporated by reference herein.
On or about June 29, 1998, a Settlement and Release Agreement, which is attached
as Exhibit 10(a) hereto and is incorporated by reference herein, was entered
into among Horizon BCBSNJ, the Company, CAHS, CHCM, Enterprise Holding Company,
Inc. ("EHC") and CW Ventures. Under this agreement, Horizon BCBSNJ indemnifies
the Company, CAHS and CHCM from any losses or obligations in connection with the
claims, facts and circumstances which are the subject of the Bodino Action
except for an amount not to exceed $50,000. In addition, Horizon BCBSNJ and EHC,
on the one hand, and the Company, CAHS and CHCM, on the other hand, granted
mutual releases with respect to the claims, facts and circumstances, which are
the subject of the Bodino Action.
(d) The Company has been named as a party in an action entitled Robert T. Caruso
v. CareAdvantage, Inc., John J. Petillo, Vincent M. Achillare, Lawrence A.
Whipple, BCBSNJ et al., which was filed in Superior Court of New Jersey, Law
Division, Morris County Docket no. MRS-L-2487-98. Mssrs. Petillo, Achillare and
Whipple were officers of the Company and may have claims for indemnification for
expenses and for any judgements against them. Mr. Caruso was a consultant to the
Company. The complaint alleges breach of contract, fraud, conspiracy, promissory
estoppel and negligent misrepresentation in connection with, among other things,
the termination of Mr. Caruso's consulting arrangement with the Company. The
Company is unable, at this early stage of the proceeding, to evaluate the merits
of this action but has notified its insurance carrier of such claim and awaits
the carrier's determination of coverage. The Company is unaware of any written
claims for indemnification by John J. Petillo, Vincent M, Achillare, or Lawrence
A. Whipple.
12
<PAGE>
CAREADVANTAGE, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Item 2. Changes in Securities and Use of Proceeds
Effective June 30, 1998, the $2,000,000 principal amount 8% exchangeable note
(plus $267,163 accrued interest) issued by the Company to CW Ventures II L.P.
was automatically converted and cancelled into 7,799,997 shares of the Company's
common stock.
Item 6. Exhibits and reports on Form 8-K
Exhibit 10(a)--Settlement and Release Agreement
Exhibit 27--Financial Data Schedule
Reports on Form 8-K--None
13
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CareAdvantage, Inc
September 14, 1998 /s/ Thomas P. Riley
-----------------------------
Thomas P. Riley
President and Chief Executive Officer
September 14, 1998 /s/ David G. DeBoskey
-----------------------------
David G. DeBoskey
Principal Financial and Accounting Officer
14
Exhibit 10(a)
SETTLEMENT AND RELEASE AGREEMENT
THIS SETTLEMENT AND RELEASE AGREEMENT is made and entered into effective
as of June __, 1998, by and among CAREADVANTAGE, INC., a Delaware corporation,
located at 485-C Route 1 South, Iselin, New Jersey 08830 ("CAI"), CAREADVANTAGE
HEALTH SYSTEMS, INC., a Delaware corporation, located at 485-C Route 1 South,
Iselin, New Jersey 08830 ("CAHS"), CONTEMPORARY HEALTHCARE MANAGEMENT, INC., a
New Jersey corporation, located at 485-C Route 1 South, Iselin, New Jersey 08830
("CHCM"), BLUE CROSS AND BLUE SHIELD OF NEW JERSEY, INC., a New Jersey health
service corporation, located at 3 Penn Plaza East, Newark, New Jersey 07105
("BCBSNJ"), ENTERPRISE HOLDING COMPANY, INC., a New Jersey corporation, located
at 3 Penn Plaza East, Newark, New Jersey 07105 ("EHC"), and CW VENTURES II,
L.P., a New York limited partnership, located at 1041 Third Avenue, New York,
New York 10021 ("CW") (with respect to Section 10 only).
RECITALS:
WHEREAS, BCBSNJ and CW beneficially own, in the aggregate, approximately
__% of the issued and outstanding shares of capital stock of CAI;
WHEREAS, on or about March 22, 1996, an action entitled Francis X. Bodino
v. BCBSNJ and CHCM was filed in the Law Division of the Superior Court, Hudson
County, New Jersey, Docket No. HUD-L-2540-96 (the "Bodino Action");
WHEREAS, the complaint in the Bodino Action alleged, inter alia, 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;
WHEREAS, at the time of the events underlying the Bodino Action, CHCM was
wholly-owned by EHC, and was an indirect subsidiary of BCBSNJ;
WHEREAS, at the time of the events underlying the Bodino Action, CHCM was
engaged by CAI and CAHS to provide certain staff and assistance to CAHS in
support of CAHS' obligation, guaranteed by CAI, to provide services to BCBSNJ
under the terms of an Interim Services Agreement, dated as of April 1, 1995 (the
"Interim Services Agreement") among BCBSNJ, CHCM, CAI and CAHS;
WHEREAS, by letter dated February 15, 1996, counsel for Mr. Bodino gave
written notice to CHCM contesting the denial of coverage for the heart
transplant and threatening litigation against CHCM and BCBSNJ;
WHEREAS, on February 22, 1996 (the "Acquisition Date"), CAHS purchased all
of the issued and outstanding stock of CHCM from EHC pursuant to the Stock
Acquisition Agreement, dated February 22, 1996 (the "Acquisition Agreement");
WHEREAS, neither CAI nor CAHS maintained insurance to cover claims against
BCBSNJ or CHCM arising from events occurring prior to the Acquisition Date;
WHEREAS, counsel for BCBSNJ is presently defending the Bodino Action on
behalf of BCBSNJ and CHCM;
WHEREAS, BCBSNJ has filed a third party lawsuit against Mr. Bodino's
surgeon and the admitting hospital and has denied liability in all respects;
WHEREAS, BCBSNJ and CHCM have filed a motion for summary judgment as to
all claims, and Mr. Bodino, the surgeon and the admitting hospital have filed
cross-motions for summary judgment against BCBSNJ and CHCM as to all claims;
1
<PAGE>
WHEREAS, all motions for summary judgment are returnable for hearing on
July 24, 1998;
WHEREAS, by letter to CAI dated April 23, 1996, BCBSNJ agreed to the
representation of CHCM and placed CAI on notice of a potential claim by BCBSNJ
for indemnification against CAI and CAHS under the Interim Services Agreement;
WHEREAS, by letter to EHC dated February 20, 1997, CAI, on behalf of
itself and CAHS, requested indemnification pursuant to the Acquisition Agreement
for damages sustained by CAI and CAHS as a result of the Bodino Action;
WHEREAS, by letter to CAI dated February 26, 1997, BCBSNJ, on behalf of
itself and EHC, denied liability for indemnification of CAI and CAHS;
WHEREAS, by letter to BCBSNJ dated March 6, 1997, CAI agreed to BCBSNJ's
continued representation of CHCM, subject to a reservation of rights under the
Interim Services Agreement;
WHEREAS, in a letter to CAI and CAHS dated May 28, 1998, BCBSNJ provided
formal notice of a claim for indemnification by CAI and CAHS pursuant to the
Interim Services Agreement for damages arising in connection with the Bodino
Action;
WHEREAS, on June 2, 1998, counsel to CAI responded to BCBSNJ's letter,
whereby CAI denied that BCBSNJ is entitled to indemnification by CAI and CAHS
under the Interim Services Agreement and reasserted its own claim to
indemnification by EHC pursuant to the Acquisition Agreement;
WHEREAS, by letter to CAI's counsel dated June 15, 1998, BCBSNJ again
denied liability for indemnification of CAI and CAHS and proposed a settlement
of the dispute regarding alleged indemnification claims among the parties; and
WHEREAS, the parties hereto wish to allocate the potential liability of
each party with respect to the Bodino Action and to otherwise agree to the
mutual release of all claims and damages relating to the Bodino Action.
NOW, THEREFORE, the undersigned parties, intending to be legally bound,
hereby agree as follows:
1. SETTLEMENT OF INDEMNIFICATION CLAIMS.
(a) BCBSNJ hereby agrees to indemnify and hold harmless CAI, CAHS and CHCM
from and against any and all losses, liabilities or obligations, payments or
other disbursements, suits, claims, awards, demands, settlement payments, costs
and expenses which may be imposed on, incurred by or asserted against any of
CAI, CAHS and CHCM in connection with the claims, facts and circumstances which
are the subject of the Bodino Action, other than internal costs, attorneys' fees
and other expenses incurred in connection with the Bodino Action or this
Agreement; provided, however, that BCBSNJ shall not be responsible for, and
shall not indemnify CAI, CAHS and CHCM pursuant to this Section 1(a) for, an
amount equal to the lesser of (i) five percent (5%) of any amount as to which
BCBSNJ, CAI, CAHS and CHCM are or may be individually or collectively held
liable in the Bodino Action (whether by judgment, settlement or otherwise), or
(ii) $50,000.
(b) BCBSNJ shall be entitled to collect and retain all insurance proceeds,
if any, in connection with the Bodino Action.
2. PARTICIPATION IN DEFENSE. CAI, CAHS and CHCM shall be entitled to
participate in the defense of the Bodino Action; provided, however, that (i) all
substantive and procedural activities undertaken on behalf of CAI, CAHS and CHCM
in connection with such defense (including but not limited to a determination of
whether to settle or adjudicate such action and the amount of any potential
2
<PAGE>
settlement) shall be subject to prior approval by BCBSNJ in its sole discretion,
which shall not be unreasonably withheld; and (ii) prior to such time, CAI, CAHS
and CHCM shall enter into a joint defense agreement with BCBSNJ reasonably
acceptable to BCBSNJ and its counsel.
3. COOPERATION. CAI, CAHS and CHCM agree to fully and completely cooperate
and assist counsel for BCBSNJ in the defense of the Bodino Action. Such
cooperation shall include furnishing documentation, participating in
depositions, testifying at trial and making current employees reasonably
available to counsel for BCBSNJ for purposes of defending against the Bodino
Action, at all times seeking to minimize business disruption to CAI, CAHS and
CHCM.
4. PAYMENTS. All payments required to be made by or on behalf of CAI, CAHS
or CHCM pursuant to this Agreement shall be made within thirty (30) days of
notice from BCBSNJ that the Bodino Action has been resolved, whether by
judgment, settlement or otherwise.
5. RELEASE BY BCBSNJ AND EHC. For and in consideration of the obligations
recited herein, BCBSNJ and EHC, jointly and severally, hereby release CAI, CAHS
and CHCM from any and all debts, obligations, covenants, agreements, contracts,
suits, actions, causes of action, damages, claims or demands with respect to the
claims, facts and circumstances which are the subject of the Bodino Action, now
known or hereafter discovered, asserted or unasserted, contingent or otherwise,
which either of BCBSNJ or EHC ever had, now has or may now or hereafter claim to
have. Notwithstanding the foregoing, CAI, CAHS and CHCM shall not be released
from any obligation to BCBSNJ under this Agreement.
6. RELEASE BY CAI, CAHS AND CHCM. For and in consideration of the
obligations recited herein, CAI, CAHS and CHCM, jointly and severally, hereby
release BCBSNJ and EHC from any and all debts, obligations, covenants,
agreements, contracts, suits, actions, causes of action, damages, claims or
demands with respect to the claims, facts and circumstances which are the
subject of the Bodino Action, now known or hereafter discovered, asserted or
unasserted, contingent or otherwise, which any of CAI, CAHS and CHCM ever had,
now has or may now or hereafter claim to have. Notwithstanding the foregoing,
BCBSNJ shall not be released from any obligation to CAI, CAHS and/or CHCM under
this Agreement.
7. BINDING NATURE. This Agreement, including the releases set forth
herein, shall be binding upon, and inure to the benefit of each released party's
successors, assigns, officers, directors, agents, employees, heirs, executors
and/or administrators of any such assigns, officers, directors, agents or
employees.
8. NO ADMISSION OF LIABILITY. The parties recognize and acknowledge that
the execution of this Agreement is not an admission of liability by any party to
any other party and that this Agreement is executed solely in the interest of
settling disputed matters.
9. ENTIRE AGREEMENT. This Agreement constitutes the entire agreement among
the parties hereto, and there are no other written or oral understandings or
agreements connected with it that are not incorporated herein.
10. GOVERNING LAW. This Agreement is to be construed in accordance with
the laws of the State of New Jersey. Any action to enforce this Agreement shall
be brought before a state court of competent jurisdiction, within the State of
New Jersey.
11. CONSENT OF CW. Pursuant to Section 1.3 of the Stockholders' Agreement,
dated as of February 22, 1996, among EHC (as predecessor to BCBSNJ), CW and CAI,
CW hereby acknowledges and consents to the terms of this Agreement and the
transactions contemplated hereby.
3
<PAGE>
IN WITNESS WHEREOF, the parties have hereunto set their hands and seals on
the date set forth above, intending to be legally bound:
CAREADVANTAGE, INC.
By: /s/ Thomas P. Riley
------------------------
Name: Thomas P. Riley
Title: President/CEO
CAREADVANTAGE HEALTH
SYSTEMS, INC.
By: /s/ Thomas P. Riley
------------------------
Name: Thomas P. Riley
Title: President/CEO
CONTEMPORARY HEALTHCARE
MANAGEMENT, INC.
By: /s/ Thomas P. Riley
------------------------
Name: Thomas P. Riley
Title: President/CEO
BLUE CROSS AND BLUE SHIELD OF
NEW JERSEY, INC.
By: /s/ Susan Scholle Connor
------------------------
Name: Susan Scholle Connor
Title: Vice President
ENTERPRISE HOLDING COMPANY, INC.
By: /s/ Susan Scholle Connor
------------------------
Name: Susan Scholle Connor
Title: Secretary
CW VENTURES II, L.P.
By: /s/ Barry Weinberg
-------------------------
Name: Barry Weinberg
Title: General Partner
4
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