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 April 30, 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 June 15, 1998
Transitional Small Business Disclosure Format
Yes X No__
This is Page 1 of 12 Pages.
1
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CAREADVANTAGE, INC
CONSOLIDATED BALANCE SHEETS
ASSETS April 30,
1998 October 31,
(unaudited) 1997*
----------- -----
Current assets:
Cash and cash equivalents $ 1,786,650 $ 1,038,190
Accounts receivable-stockholder 1,048,973 1,047,171
Accounts receivable-other 608,086 408,348
Other current assets 328,219 254,688
------------ ------------
Total current assets 3,771,928 2,748,397
Property and equipment, at cost less
Accumulated depreciation 1,727,356 1,502,712
Intangible assets (net) 1,438,507 1,649,126
Other assets 91,059 80,984
------------ ------------
Total assets $ 7,028,850 $ 5,981,219
============ ============
LIABILITIES AND CAPITAL DEFICIENCY
Current liabilities:
Current portion of long-term debt $ 608,493 $ 574,778
Note payable-stockholder 2,000,000 2,000,000
Accounts payable-trade 402,230 350,893
Due to stockholder 620,935 88,705
Accrued salaries and employee benefits 752,401 562,994
Accrued expenses and other current
liabilities (Note E) 588,728 871,844
Deferred revenue, current (Note F) 1,654,173 786,007
------------ ------------
Total current liabilities 6,626,960 5,235,221
Capital lease obligations, less current
portion 108,898 421,813
Due to stockholder, less current portion 1,241,888 1,774,118
Deferred revenue and other long-term
liabilities 321,621 525,979
------------ ------------
Total liabilities 8,299,367 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 19,640,586 19,640,091
Accumulated deficit (20,985,493) (21,690,393)
------------ ------------
Total capital deficiency (1,270,517) (1,975,912)
------------ ------------
Total liabilities and capital deficiency $ 7,028,850 $ 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)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
April 30, April 30,
1998 1997* 1998 1997*
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net revenues $ 4,194,640 $ 3,966,096 $ 8,197,069 $ 6,335,397
Costs of services 1,995,822 1,931,271 4,022,559 3,957,952
----------- ----------- ----------- ------------
Gross margin 2,198,818 2,034,825 4,174,510 2,377,445
Operating expenses:
Selling, general and administration 1,516,636 1,240,347 3,052,943 2,739,197
Depreciation and amortization 152,035 123,931 279,917 241,950
----------- ----------- ----------- ------------
Total operating expenses 1,668,671 1,364,278 3,332,860 2,981,147
----------- ----------- ----------- ------------
Operating income(loss) 530,147 670,547 841,650 (603,702)
Interest 63,677 65,730 136,750 141,932
----------- ----------- ----------- ------------
Net income (loss) $ 466,470 $ 604,817 $ 704,900 ($ 745,634)
=========== =========== =========== ============
Pro forma net income (loss)
per share of common stock-basic and diluted $ .01 $ .01 $ .01 ($ .01)
=========== =========== =========== ============
Pro forma weighted average number
of common shares outstanding 74,389,886 74,389,886 74,389,886 74,389,886
=========== =========== =========== ============
</TABLE>
*Reclassified to conform to current period classification.
The accompanying notes are an integral part of these statements.
3
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CAREADVANTAGE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six Months Ended
April 30,
--------------------
1998 1997*
---- -----
Cash flows from operating activities:
Net profit (loss) $ 704,900 ($ 745,634)
Adjustments to reconcile net profit
(loss) to net cash provided from (used by)
operating activities:
Depreciation and amortization 548,532 514,805
Change in assets and liabilities:
Due to/from customers/stockholders (201,539) (1,406,842)
Other assets (83,607) (62,511)
Accounts payable 51,337 (184,536)
Accrued expenses and other liabilities (234,557) 1,498,486
Deferred revenue 805,071 0
----------- -----------
Net cash provided from (used by)
operating activities 1,590,137 (386,232)
----------- -----------
Cash flows from investing activities:
Capital expenditures (562,476) (273,667)
----------- -----------
Net cash provided from (used by) investing
activities (562,476) (273,667)
----------- -----------
Cash flows from financing activities:
Principal payments under long-term debt (279,201) (359,741)
----------- -----------
Net cash provided from (used by) financing
activities (279,201) (359,741)
----------- -----------
Net increase (decrease) in cash 748,460 (1,019,640)
Cash - beginning of fiscal year 1,038,190 1,167,147
----------- -----------
Cash - end of period $ 1,786,650 $ 147,507
=========== ===========
*Reclassified to conform to current period classification.
The accompanying notes are an integral part of these statements.
4
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CAREADVANTAGE, INC.
NOTES TO FINANCIAL STATEMENTS (UANUDITED)
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 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 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
April 30, 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 April 30, 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
Blue Cross and Blue Shield of New Jersey, Inc. ("BCBSNJ") in February 1997
pursuant to the terms of the promissory note by CAHS in favor of 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 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. Common stock equivalents and approximately
7,800,000 shares issuable upon exchange of the CW 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 and diluted income (loss) 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.
5
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CAREADVANTAGE, INC.
NOTES TO FINANCIAL STATEMENTS(UNAUDITED)
Under the terms of this settlement agreement the Company has paid a sum of
$110,000 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.
Potential uninsured exposure to litigation:
1. On or about March 22, 1996, an action entitled Francis X. Bodino v.
BCBSNJ and CHCM (the "Bodino Action") was filed in the Law Division of the
Superior Court of New Jersey in Hudson County. The complaint alleges
misrepresentations with respect to the type and amount of coverage
afforded by Mr. Bodino's policy with BCBSNJ, specifically with respect to
coverage for heart transplantation. The complaint also alleges that
representations made on behalf of BCBSNJ by an employee of CHCM led Mr.
Bodino's surgeon to believe that contractually excluded heart transplant
coverage was available. The complaint demands a variety of money damages,
as well as punitive damages, against both defendants. The complaint also
contains a claim for treble damages and counsel fees under the New Jersey
Consumer Fraud Act. BCBSNJ is presently defending the Bodino Action on
behalf of itself and CHCM, has filed a third party lawsuit against Mr.
Bodino's surgeon and the admitting hospital, 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
as to all claims. Mr. Bodino, the surgeon and the admitting hospital have
filed cross-motions for summary judgment against BCBSNJ and CHCM as to all
claims. Presently, all motions for summary judgment are returnable for
hearing on June 26, 1998. 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 and 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.
There have been discussions among the parties as to their respective
responsibilities if BCBSNJ or CHCM are found liable in or choose to settle
the Bodino Action. These discussions resulted in a settlement offer by
BCBSNJ to the Company and CAHS, whereby BCBSNJ would accept responsibility
for any liability of BCBSNJ and CHCM, except for retention of an
amount not to exceed $50,000. The Company and CAHS are willing to accept
this offer, subject to preparation of documents acceptable to all parties.
6
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CAREADVANTAGE, INC.
NOTES TO FINANCIAL STATEMENTS(UNAUDITED)
However, there can be no assurances that such documents will be acceptable
and that any settlement among the parties will be reached.
2. 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 (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
is in the process of requesting director and officer insurance coverage
for Mr. Riley's alleged actions. It does not appear that the Company
maintained insurance to cover the Company or the other defendants in this
matter. 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 six- months ended
April 30, 1998 and 1997:
April 30,
-------------------------
1998 1997
---- ----
Income Taxes Paid 0 0
Interest Paid, IBM capital lease obligations 50,145 79,282
Note E--Accrued expenses and other current liabilities:
Accrued expenses and other current liabilities consist of the following at
April 30, 1998 and October 31, 1997:
April 30, 1998 October 31, 1997
-------------- ----------------
Accrued Interest 452,248 329,626
Accrued Professional Fees 69,099 125,000
Other accrued expenses 67,381 417,218
--------- -------
Total 588,728 871,844
======= =======
Note F-- Deferred Revenue:
As of April 30, 1998 revenue received in connection with the renegotiation 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 DISUSSION 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 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.
For fiscal years prior to 1997, the Company has experienced significant
operating losses on a consolidated basis. At April 30, 1998, the Company had a
working capital deficit of approximately $2,855,000, a capital deficiency of
approximately $1,271,000 and an accumulated deficit of approximately $20,985,000
since its inception. By continuing to provide high quality care cost containment
services to its existing customer base of five BCBS plans and pursuant to the
joint service agreement with Allied Health Group, Inc., 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 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 complimentary 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 internal products and service development efforts by
entering into strategic alliances and joint ventures as well as through
acquisitions.
Net revenues:
Six Months Ended
----------------------------------------
April 30, 1998 April 30, 1997*
------------------ ------------------
Amount Percent Amount Percent
------ ------- ------ -------
Revenues from fixed fee
arrangements $7,795,000 95% $5,999,000 95%
Revenues from performance-
based arrangements 396,000 5% 314,000 5%
Other revenues 6,000 0% 22,000 0%
---------- --- ---------- ---
Total revenues $8,197,000 100% $6,335,000 100%
========== === ========== ===
*Reclassified to conform to current period classification.
8
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CAREADVANTAGE, INC.
MANAGEMENT'S DISUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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 of 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 three months
ended April 30, 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 six month periods ended April 30, 1998 was
approximately $4,195,000 and $8,197,000, respectively, compared to net revenues
in the corresponding periods of the prior fiscal year of approximately
$3,966,000 and $6,335,000. This represents increases of approximately $229,000
and $1,862,000 for the three and six month periods ended April 30, 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. Additionally, the Company has
entered into a joint services agreement with Allied Health Group, Inc., which
has contributed approximately $591,000 to the Company's improved revenue
position for the six months ended April 30, 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. 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 six month periods ended April 30, 1998 was
approximately $1,996,000 and $4,023,000, respectively, compared to $1,931,000
and $3,958,000 in the corresponding periods of the prior fiscal year. This
represents an increase of approximately $65,000 and $65,000 for the three and
six month periods ended April 30, 1998, respectively. This increase in the cost
of services for six month period ended April 30, 1998 was due to
(increases)/decreases in personnel costs of approximately ($95,000),
professional and consulting costs of approximately ($29,000), information and
communication costs of approximately $36,000, travel costs of approximately
$19,000, and depreciation and amortization allocations of approximately $4,000
for the six month period ended April 30, 1998 compared with the six months
ended April 30, 1997.
Operating expenses:
Selling, general and administrative:
Selling, general, and administrative costs for the three and six month periods
ended April 30, 1998 were approximately $1,517,000 and $3,053,000, respectively,
compared to $1,240,000 and $2,739,000 in the corresponding periods of the prior
fiscal year. This represents increases of approximately $277,000 and $314,000
for the three and six month periods ended April 30, 1998, respectively. This
increase for the six month period ended April 30, 1998 is due to
(increases)/decreases in personnel costs of approximately ($57,000), facility
costs of approximately $15,000, travel costs of approximately ($17,000),
information and communication costs of approximately ($59,000), professional and
consulting costs of approximately ($178,000), and general and administrative
costs of approximately ($18,000) for the six month period ended April 30, 1998
compared with the six months ended April 30, 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.
9
<PAGE>
CAREADVANTAGE, INC.
MANAGEMENT'S DISUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Depreciation and amortization:
Depreciation and amortization costs for the three and six month periods ended
April 30, 1998 were approximately $286,000 and $549,000 respectively, compared
to $258,000 and $515,000 in the corresponding period of the prior fiscal year.
Approximately $134,000 and $269,000 and $134,000 and $273,000, respectively,
were included in cost of services for such periods.
Interest expense:
Net interest expense for the three and six month periods ended April 30, 1998
was approximately $64,000 and $137,000 compared to $66,000 and $142,000 in the
corresponding period of the prior fiscal year representing a decrease of
approximately $5,000 for the six month period ended April 30, 1998. 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, calling
equal payments of principal and interest commencing in October 1998.
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 selling 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 (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.
Financial condition:
Liquidity and capital resources:
At April 30, 1998, the Company had cash of approximately $1,787,000 and a
working capital deficiency of approximately $2,855,000. At October 31, 1997, the
Company had cash of approximately $1,038,000 and a working capital deficiency of
approximately $2,487,000. There was an increase in working capital deficiency of
approximately $368,000 despite the Company's ability to generate cash flows from
operations during the six-month period ended April 30, 1998. These cash flows
are offset (i) by the reclassification of a promissory note to BCBSNJ in the
approximate amount of $532,000 as a current liability, (ii) an increase in
deferred revenue of approximately $632,000 associated with two of the Company's
customers; whereby additional revenue is earned for meeting certain performance
targets, from such customers and accordingly such performance revenue will be
recognized when earned.
Net cash provided/(used) from operating activities amounted to approximately
$1,590,000 and ($386,000) for the six month periods ended April 30, 1998 and
1997, respectively. This improvement is primarily due to the increased operating
income generated during the second quarter of fiscal year 1998.
Net cash used in investing activities amounted to approximately ($562,000) and
($274,000) for the six month periods ended April 30, 1998 and 1997,
respectively. The increase in cash (used) of approximately ($288,000) 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 ($279,000) and
($360,000) for the six month periods ended April 30, 1998 and 1997,
respectively. The decrease in cash (used) of approximately ($81,000) is largely
due to decreased principal payments of approximately ($111,000) related to a
note payable issued to a vendor 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 $30,000.
While there can be no assurances, management believes that its cash on hand and
projected future cash flows from operations 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 any significant costs to correct any
Year 2000 deficiencies.
10
<PAGE>
CAREADVANTAGE, INC.
MANAGEMENT'S DISUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Financing:
Amounts payable pursuant to long-term financing arrangements as of April 30,
1998 were approximately $717,000, 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 Jersey, Inc. ("BCBSNJ") guarantees the Company's obligations under
this lease arrangement.
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 to 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 six-month period ended April 30,
1998, approximately $621,000 has been reclassified 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.
The Company has an 8% Exchangeable Note (the "CW Note") in the original
principal of $2,000,000 in favor of CW Ventures II, LP ("CW Ventures") maturing
on June 30, 1998. 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 set
forth therein.
As of April 30, 1998, the Company had $1.5 million of available credit under the
Summit Bank Credit Agreement, which expired on June 12, 1998. The term loan
availability under the 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.
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 $400,000 during
the third and fourth quarter of fiscal 1998. Such costs are expected to be
financed with the future operating cash flows of the Company.
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.
The Company is involved in an action entitled Francis X. Bodino v. BCBSNJ and
CHCM (the "Bodino Action"), which was discussed in the Company's Form 10-KSB for
the fiscal year ended October 31, 1997. BCBSNJ is presently defending the Bodino
Action on behalf of itself and CHCM, has filed a third party lawsuit against Mr.
Bodino's surgeon and the admitting hospital, 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 as to all claims. Mr.
Bodino, the surgeon and the admitting hospital have filed cross-motions for
summary judgment against BCBSNJ and CHCM as to all claims. Presently, all
motions for summary judgment are returnable for hearing on June 26, 1998.
11
<PAGE>
There have been discussions among the parties as to their respective
responsisbilities if BCBSNJ or CHCM are found liable in or choose to settle the
Bodino Action. These discussions resulted in a settlement offer by BCBSNJ to the
Company and CAHS, whereby BCBSNJ would accept responsibility for any liability
of BCBSNJ and CHCM, except for retention of an amount not to exceed $50,000. The
Company and CAHS are willing to accept this offer, subject to preparation of
documents acceptable to all parties. However, there can be no assurances that
such documents will be acceptable and that any settlement among the parties will
be reached.
Item 6. Exhibits and reports on Form 8-K
Exhibit 27--Financial Data Schedule
Reports on Form 8-K--None
12
<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
June 15, 1998 /s/ Thomas P. Riley
-------------------------------
Thomas P. Riley
President and Chief Executive Officer
June 15, 1998 /s/ David G. DeBoskey
---------------------
David G. DeBoskey
Principal Financial and Accounting Officer
13
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