SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended January 31, 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 ___
74,389,886
Number of shares of Common Stock outstanding as of March 17, 1998
Transitional Small Business Disclosure Format
Yes X No ___
This is Page 1 of 12 Pages.
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CAREADVANTAGE, INC
CONSOLIDATED BALANCE SHEETS
January 31,
1998 October 31,
(unaudited) 1997*
----------- ----------
ASSETS
Current assets:
Cash and cash equivalents $ 1,311,586 $ 1,038,190
Accounts receivable-stockholder 1,006,947 1,047,171
Accounts receivable-other 547,994 408,348
Other current assets 239,289 254,688
------------ ------------
Total current assets 3,105,816 2,748,397
Property and equipment, at cost less
accumulated depreciation 1,711,850 1,502,712
Intangible assets (net) 1,538,751 1,649,126
Other assets 96,551 80,984
------------ ------------
Total assets $ 6,452,968 $ 5,981,219
============ ============
LIABILITIES AND CAPITAL DEFICIENCY
Current liabilities:
Current portion of long-term debt $ 591,395 $ 574,778
Note payable-stockholder 2,000,000 2,000,000
Accounts payable-trade 640,315 350,893
Due to stockholder 354,820 88,705
Accrued salaries and employee benefits 449,940 562,994
Accrued expenses and other current
liabilities (Note E) 724,385 871,844
Deferred revenue, current (Note F) 1,229,961 786,007
------------ ------------
Total current liabilities 5,990,816 5,235,221
Capital lease obligations, less current
portion 267,584 421,813
Due to stockholder, less current portion 1,508,003 1,774,118
Deferred revenue and other long-term
liabilities 423,552 525,979
------------ ------------
Total liabilities 8,189,955 7,957,131
------------ ------------
Capital 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 74,389,886 and 74,389,886 74,390 74,390
Additional capital 19,640,587 19,640,091
Accumulated deficit (21,451,964) (21,690,393)
------------ ------------
Total capital deficiency (1,736,987) (1,975,912)
------------ ------------
Total liabilities and capital deficiency $ 6,452,968 $ 5,981,219
============ ============
*Reclassified to conform to current period classification.
The accompanying notes are an integral part of these statements.
2
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CAREADVANTAGE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
Three Months Ended
January 31,
------------------
1998 1997*
---- -----
Net revenues $ 4,002,429 $ 2,369,301
Costs of services 2,026,738 2,042,758
----------- ------------
Gross margin 1,975,691 326,543
----------- ------------
Operating expenses:
Selling, general and administration 1,536,571 1,482,772
Depreciation and amortization 127,618 118,018
----------- ------------
Total operating expenses 1,664,189 1,600,790
----------- ------------
Operating income (loss) 311,502 (1,274,247)
Interest 73,073 76,203
----------- ------------
Net income (loss) $ 238,429 ($ 1,350,450)
=========== ============
Basic and diluted income (loss)
per share of common stock $ .00 ($ .02)
=========== ============
Weighted average number of common
shares outstanding-basic and diluted
income (loss) per share 74,389,886 74,389,886
=========== ============
*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)
Three Months Ended
January 31,
------------------
1998 1997*
---- -----
Operating activities:
Net profit (loss) $ 238,429 ($1,350,450)
Adjustments to reconcile net profit
(loss) to net cash provided from (used by):
Operating activities:
Depreciation and amortization 262,190 256,565
Change in assets and liabilities:
Due to/from customers/stockholders (99,421) 374,360
Other assets (168) 42,848
Accounts payable 289,422 (177,029)
Accrued expenses and other liabilities (260,018) 208,970
Deferred revenue 341,527 0
----------- -----------
Cash provided from (used by)
operating activities 771,961 (644,736)
----------- -----------
Investing activities:
Capital expenditures (360,953) (23,526)
----------- -----------
Cash provided from (used by) investing
activities (360,953) (23,526)
----------- -----------
Financing activities:
Principal payments under long-term debt (137,612) (233,407)
----------- -----------
Cash provided from (used by) financing
activities (137,612) (233,407)
----------- -----------
Net increase (decrease) in cash 273,396 (901,669)
Cash - beginning of fiscal year 1,038,190 1,167,147
----------- -----------
Cash - end of period $ 1,311,586 $ 265,478
=========== ===========
*Reclassified to conform to current period classification.
The accompanying notes are an integral part of these statements.
4
<PAGE>
CAREADVANTAGE, INC.
NOTES TO FINANCIAL STATEMENTS-JANUARY 31, 1998
(UNAUDITED)
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, New Jersey, and in 1998 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 CAI and have not
been audited by the Company's independent auditors. The accompanying financial
statements include all adjustments (which include only normal recurring
adjustments) which in the opinion of management are necessary to present fairly
the financial position and January 31, 1998 results of operations and cash flows
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 January 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 period 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, 1996, 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 CW Venture's
investment in the Campany. 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.
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 as diluted income per share. The impact on the
per share amounts previously reported was not significant.
Note C--Contingencies:
Termination of employment:
A former Medical Director of CAHS had 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 contended that he was 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 based 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 contested 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 alleged claims of breach of contract
and promissory estoppel. 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. Effective February 9, 1998, the Company
entered into a settlement agreement with this former employee. Under the terms
of this settlement agreement the Company has paid a sum of $110,000 ("the
Settlement Amount") subject to deductions for payroll taxes as required by
federal law and the State of Connecticut.
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.
5
<PAGE>
CAREADVANTAGE, INC.
NOTES TO FINANCIAL STATEMENTS-JANUARY 31, 1998
(UNAUDITED)
Potential uninsured exposure to litigation:
On or about March 22, 1996, an action entitled Francis X. Bodino v. BCBSNJ and
CHCM (the "Bodino Action") was filed in the Law Division of the Superior Court
of New Jersey in Hudson County. The complaint alleges misrepresentations with
respect to the type and amount of coverage afforded by Mr. Bodino's policy with
BCBSNJ, specifically with respect to coverage for heart transplantation. The
complaint also alleges that representations made on behalf of BCBSNJ by an
employee of CHCM led Mr. Bodino's surgeon to believe that contractually excluded
heart transplant coverage was available. The complaint demands a variety of
money damages, as well as punitive damages, against both defendants. The
complaint also contains a claim for treble damages and counsel fees under the
New Jersey Consumer Fraud Act. BCBSNJ is presently defending the Bodino Action
on behalf of itself and CHCM, and has denied liability in all respects and has
specifically denied that the policy purchased by Mr. Bodino covered heart
transplantation or that any misrepresentations or fraud occurred. BCBSNJ and
CHCM have filed a motion for summary judgment, which remains pending as to all
claims and is subject to further discovery. The Company, based upon the advice
of its counsel, has insufficient information, at present, to evaluate CHCM's
potential exposure, if any, in this litigation.
At the time of the events underlying the Bodino Action, CHCM was a subsidiary of
BCBSNJ and had been engaged by the Company, through CAHS, to provide certain
staff and assistance to CAHS in support of CAHS's obligation to provide
specified services for BCBSNJ, all in accordance with the terms of an Interim
Services Agreement dated as of April 1, 1995 by and among BCBSNJ, CHCM, the
Company and CAHS (the "Interim Services Agreement"). By letter dated February
15, 1996, counsel for Mr. Bodino gave written notice to CHCM contesting the
denial of coverage and threatening litigation against CHCM and BCBSNJ. The
Company and CAHS purchased CHCM on February 22, 1996. The Company did not
maintain insurance coverage that would cover claims against BCBSNJ or CHCM
arising from events occurring prior to February 22, 1996, which might constitute
a breach under the Interim Services Agreement. The Company has been informed by
BCBSNJ that BCBSNJ has notified its carrier of the claim and the carrier has
advised BCBSNJ that certain policy exclusions may be applicable to preclude
coverage for the claimed damages, either in whole or in part. BCBSNJ has further
asserted that it does not believe any such exclusions are applicable and that it
has furnished additional information to the carrier in support of its position.
The Company, based upon the advice of counsel, is not presently able to
determine whether the Bodino Action might result in any loss to the Company or
CHCM and, if so, whether any such loss would be material.
On or about January 16, 1998, an action entitled Mary DeStefano v.
CareAdvantage, Inc., 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 (i) that 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) that 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. The Company, based upon advice of its
counsel, has insufficient information, at present, to evaluate its potential
exposure, if any, in this, litigation.
Note D:--Supplemental Cash Flow Information
Below is supplemental cash flow information related to the three months
ended January 31, 1998 and 1997:
January 31,
----------------------
1998 1997
---- ----
Income Taxes Paid 0 0
Interest Paid, IBM capital lease obligations 26,888 40,770
6
<PAGE>
CAREADVANTAGE, INC.
NOTES TO FINANCIAL STATEMENTS-JANUARY 31, 1998
(UNAUDITED)
Note E--Accrued expenses and other current liabilities:
Accrued expenses and other current liabilities consist of the following at
January 31, 1998 and October 31, 1997:
January 31, 1998 October 31, 1997
---------------- ----------------
Accrued Interest 391,566 329,626
Accrued Professional Fees 33,766 125,000
Other accrued expenses 299,053 417,218
------- -------
Total 724,385 871,844
======= =======
Note F-- Deferred Revenue:
As of January 31, 1998 revenue received in connection with the
renegotiating of two of the Company's contracts during the prior 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. The agreement provides for additional
compensation based on exceeding a certain level of performance. The Company will
recognize these fees when earned.
7
<PAGE>
CAREADVANTAGE, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
General developments of business:
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,
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
January 31, 1998 of approximately $2,885,000, a capital deficiency of
approximately $1,737,000 and an accumulated deficit of approximately $21,452,000
since its inception. By continuing to provide high quality care cost containment
services to its existing customer base of BCBS plans and pursuant to the joint
service agreement with Allied Health Group, Inc., 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.
Management is of the opinion that it must continue to refine its current service
lines in order to continue to add value to existing and potential customers.
Additionally, the Company intends to broaden its services offered with unique
and complementary cost-containment strategies. Management intends to evaluate
each service with regard to anticipated changes in the health care industry, the
cost to enter any such line of service as well as the availability of competent
resources. To further expand its line of services, the Company intends to pursue
alternatives to its internal product and service development efforts by entering
into strategic alliances and joint ventures as well as through acquisitions.
Three Months Ended
------------------
January 31, 1998 January 31, 1997
---------------- ----------------
Amount Percent Amount Percent
------ ------- ------ -------
Net revenues:
Revenues from fixed fee
arrangements $3,802,814 95% $2,289,301 97%
Revenues from performance -
based arrangements 195,855 5% 80,000 3%
Other revenues 3,760 0% 0 0%
---------- --- ---------- ---
Total revenues $4,002,429 100% $2,369,301 100%
========== === ========== ===
Contracts that provide for performance-based revenues require claims data that
is supplied by the Company's customers to calculate the achievement of goals for
each period. Because compilation of claims data typically lags the Company's
actual performance by several months, it is difficult to ensure complete
accuracy when recording performance-based revenues. Management is working
closely with its customers to secure more timely and accurate data to improve
the accuracy of reporting its revenues, including, in some cases, the
re-negotiation of the contract itself. While management believes its estimated
performance-based revenues contained in reported revenues for the three months
ended January 31, 1998 are accurate based upon the data available to management.
8
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CAREADVANTAGE, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Information received by the Company after the filing of this Form 10-QSB could
result in an adjustment of its estimates of performance-based revenues (which
would be reflected in subsequent quarters, if necessary).
Revenues:
Net revenues for the three months ended January 31, 1998 and 1997 were
approximately $4,002,000 and $2,369,000, respectively, representing an increase
of approximately $1,633,000. This increase is largely due to increased revenue
from one of the Company's major customers/(stockholders) as a result of its
re-negotiation of the contract on terms more favorable to the Company of
approximately $1,300,000. Additionally, the Company has entered into a joint
services agreement with Allied Health Group, Inc., which has contributed
approximately $245,000 to the Company's improved revenue position for the three
months ended January 31, 1998.
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 three months ended January 31, 1998 and 1997 were
approximately $2,027,000 and $2,043,000, respectively, representing a decrease
of approximately $16,000. This decrease in the cost of services was due to
decreases/(increases) in personnel costs of approximately $27,000, professional
and consulting costs of approximately ($51,000), information and communication
costs of approximately $39,000, travel costs of approximately ($19,000),
depreciation and amortization allocations of approximately $4,000 and other
costs of approximately $16,000 for the three month periods ended January 31,
1998 compared with the three months ended January 31, 1997.
Operating expenses:
Selling, general and administrative:
Selling, general and administrative costs for the three months ended January 31,
1998 and 1997 were approximately $1,537,000 and $1,483,000, respectively,
representing an increase of approximately $54,000. This increase is due to
(increases)/decreases in personnel costs of approximately $128,000, facility
costs of approximately $17,000, travel costs of approximately ($3,000),
information and communication costs of approximately ($19,000), professional and
consulting costs of approximately ($134,000) and general and administrative
costs of approximately ($44,000) for the three month period ended January 31,
1998 compared with the three months ended January 31, 1997.
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 months ended January 31, 1998
and 1997 were approximately $262,190, and 257,000, respectively, of which
approximately $135,000 and $139,000 were included in cost of services,
respectively.
Interest expense:
Net interest expense for the three months ended January 31, 1998 and 1997 was
approximately $73,000 and $76,000, respectively, representing a decrease of
approximately $3,000. This decrease is due to a reduction in interest related to
the Company's master lease agreement with IBM Credit Corporation, mostly offset
9
<PAGE>
CAREADVANTAGE, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
by increased interest related to a promissory note between a
customer/stockholder and the Company, calling for equal payments of principal
and interest commencing in October 1998.
Net incme 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, during fiscal year 1997, the Company re-negotiated two (2) of
its key contracts and executed a joint service agreement with Allied Health
Group, Inc., and an additional agreement with New York Care Plus Insurance
Company, Inc., all of which management anticipates will generate positive
operating cash flows and results of operations during fiscal year 1998.
Financial condition:
Liquidity and Capital Resources:
At January 31, 1998, the Company had cash of approximately $1,312,000 and a
working capital deficiency of approximately $2,885,000. At October 31, 1997, the
Company had cash of approximately $1,038,000 and a working capital deficiency of
approximately $2,487,000. The increase in working capital deficiency of
approximately $398,000 is due to the Company's ability to generate cash flows
from operations during the three month period ended January 31, 1998, offset by
the reclassification of notes payable in the approximate amount of $266,000 as a
current liability, as well as an increase in deferred revenue of approximately
$444,000 related to a joint service agreement with a customer; whereby
additional revenue is earned for meeting certain performance targets, and
accordingly such performance revenue will be recognized when earned.
Net cash provided/(used) from operating activities amounted to approximately
$772,000 and (645,000) for the three month periods ended January 31, 1998 and
1997, respectively. This improvement is primarily due to the increased operating
income generated during the first quarter of fiscal year 1998.
Net cash used in investing activities amounted to approximately ($361,000) and
($24,000) for the three month periods ended January 31, 1998 and 1997,
respectively. The increase in cash (used) of approximately ($337,000) is due to
increased capital outlays for computer related equipment incurred during the
current fiscal year of approximately ($337,000).
Net cash used in financing activities amounted to approximately ($138,000) and
($233,000) for the three month periods ended January 31, 1998 and 1997,
respectively. The decrease in cash (used) of approximately ($95,000) is largely
due to decreased principal payments related to a note payable issued to one of
the Company's vendors of approximately ($126,000) which was retired during the
prior fiscal year, offset in part by increased principal payments related to the
master lease agreement with IBM Credit Corporation of approximately $15,000.
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.
Financing:
Amounts payable pursuant to long-term financing arrangements as of January 31,
1998 were approximately $859,000, 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. Blue Cross and Blue
Shield of New New Jersey, Inc. ("BCBSNJ"), guarantee the Company's obligations
under this Master Lease arrangement
In connection with the re-negotiation of the amended and restated service
agreement with BCBSNJ, which was completed in June 1997, the Company issued a
promissory note in the approximate amount of $1,863,000 to BCBSNJ with interest
accruing beginning in April 1997 and equal monthly payments of principal and
10
<PAGE>
CAREADVANTAGE, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
interest commencing on October 1, 1998. The promissory note bears interest at a
five-year U.S. treasury yield, adjusted quarterly, and matures on June 30, 2000.
While there can be no assurances that future operating results will be
sufficient to fund this obligation of the Company, such amounts are expected by
management to be funded through operations and no outside financing is
anticipated for this obligation.
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 CW Note for shares of the Company's common stock absent of any
events of default, as defined.
As of January 31, 1998, the Company had $3.0 million of available credit under
the Summit Revolving Credit Agreement.
Future financing needs:
In connection with management's decision to adopt and implement a new and more
comprehensive clinical software product, as well as increased emphasis on
developing in-house data management capabilities and training and educational
programs for its clinical staff and customers, the Company expects to incur
additional software and computer hardware costs during the second, third, and
fourth quarter of fiscal 1998 of approximately $500,000. Such costs are expected
to be financed with the future operating cash flows of the Company. However, the
Company may draw down the term loan from Summit Bank (which was discussed in the
Company's 10-QSB for the quarter ended April 30, 1997 and included as Exhibit
No. 10(f) thereto and is incorporated by reference herein), of which 1.5 million
was available at January 31, 1998. The remaining balance under the Summit Bank
credit facility is $1.5 million, which is available as a revolving credit line
and is to be used for general working capital needs, resulting in an aggregate
facility amount of $3.0 million.
Item 1. Legal proceedings
Termination of employment:
A former Medical Director of CAHS has asserted a claim against the Company,
which was discussed in the Company's Form 10-KSB for the year, ended October 31,
1997. Effective February 9, 1998, the Company entered into a settlement
agreement with this former employee. Under the terms of this settlement
agreement the Company has paid a sum of $110,000 ("the Settlement Amount")
subject to deductions for payroll taxes as required by federal law and the State
of Connecticut.
Potential uninsured exposure to litigation:
On or about January 16, 1998, an action entitled Mary DeStefano v.
CareAdvantage, Inc., 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 (i) that 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) that 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. The Company, based upon advice of its
counsel, has insufficient information, at present, to evaluate its potential
exposure, if any, in this, litigation.
Item 6. Exhibits and Reports on Form 8-K
Exhibit 27--Financial Data Schedule
Reports on Form 8-K--None
11
<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
March 17, 1998 /s/ Thomas P. Riley
------------------------------------------
Thomas P. Riley
President and Chief Executive Officer
March 17, 1998 /s/ David G. DeBoskey
------------------------------------------
David G. DeBoskey
Principal Financial and Accounting Officer
12
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