SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
Annual Report pursuant to Section 13 or 15 (d) of the
Securities Exchange Act of 1934
For the Fiscal Year Ended October 31, 1998
Commission File Number 0-26168
CAREADVANTAGE, INC.
(Name of Business)
Delaware 52-1849794
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
485-C Route 1 South, Iselin, New Jersey 08830
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (732) 602-7000
Securities registered pursuant to Section 12 (b) of the Exchange Act of 1934:
Title of class Name of each exchange on which registered
None
- ---------------------------- ------------------------------------------
Securities registered pursuant to Section 12 (g) of the Act:
Common Stock $.001 par value
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding twelve months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days: Yes _X_ No ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-B is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [X]
The Registrant's revenues for its most recent fiscal year were $18,902,806
$869,380
Aggregate market value of the voting stock held by non-affiliates of the
registrant as of January 20, 1999 (assuming solely for purposes of this
calculation that all directors and executive officers of the Registrant are
affiliates).
82,189,883
Number of shares of common stock outstanding as of January 29, 1999
Transitional Small Business Disclosure Format Yes _X_ No ___
PORTIONS OF THE FOLLOWING DOCUMENTS HAVE BEEN INCORPORATED BY REFERENCE
INTO THIS ANNUAL REPORT ON FORM 10-KSB: NONE
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
Introduction and Background
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 several of the statewide Blue Cross/Blue Shield health service
organizations in the Northeastern United States.
CAI was incorporated in August 1994 as a wholly-owned subsidiary of
Primedex Health Systems, Inc., a publicly traded New York corporation ("PMDX").
During the fiscal year ended October 31, 1994, the Company recruited most of the
members of its former management team and began to put in place the
infrastructure necessary to execute its growth and acquisition strategies. No
revenues were realized from the Company's inception through October 31, 1994, as
its principal operating activities were those of a development stage company.
Effective November 1, 1994, the beginning of its 1995 fiscal year, the Company
commenced principal operations and began realizing revenues from certain interim
and long-term service agreements. In December 1993, the Company acquired CAHS
(under its prior corporate name, Advantage Health Systems, Inc.). On June 12,
1995, a stock dividend of all of the issued and outstanding shares of common
stock of the Company was declared effective by PMDX. As a result, the Company
commenced trading as a publicly-traded company on that date. Through October 31,
1998, the Company had a cumulative deficit of $18,607,000.
From its inception through October 31, 1995, CAI relied on PMDX to provide
the bulk of its working capital. In addition to providing $6,000,000 for the
acquisition of CAHS, PMDX made a total of $9,700,059 in working capital advances
to CAI (the last such advance being made in July 1995). Pursuant to a revised
separation agreement between CAI and PMDX dated April 20, 1995, PMDX agreed to
capitalize all such advances in connection with CAI's separation from PMDX.
The Company's executive offices are located at 485-C Route 1 South, Koll
Corporate Plaza, Iselin, New Jersey 08830 and its telephone number is (732)
602-7000.
Change in Control - On February 22, 1996, the Company completed a series of
transactions with CW Ventures II, L.P. ("CW Ventures") and with Horizon Blue
Cross and Blue Shield of New Jersey, Inc. ("Horizon BCBSNJ"). The transactions
included the sale to CW Ventures of 3,903,201 shares of the Company's common
stock, par value $.001 per share ("Common Stock") at a purchase price of $0.2562
per share (after adjustment for the "one (1) for six (6)" reverse stock split of
the Company's outstanding Common Stock as discussed below) for an aggregate of
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$1,000,000 and the issuance of an 8% Exchangeable Note in the original principal
amount of $2,000,000, maturing on June 30, 1998 (the "CW Note"). By its terms,
CW Ventures was required to exchange the CW Note on June 30, 1998 for shares of
the Company's Common Stock absent any events of default, as defined in the CW
Note. The CW Note, which was collateralized by substantially all of the assets
of the Company and its subsidiaries, was originally exchangeable into that
number of shares of the Company's Common Stock as would equal approximately 23
1/3% of the outstanding shares of the Company's Common Stock on a fully diluted
basis as of February 22, 1996. Accordingly, the 3,903,201 shares issued to CW
Ventures, together with the shares issuable upon the exchange of the CW Note,
would comprise 35% of the outstanding shares of the Company's Common Stock on a
fully diluted basis as of February 22, 1996 (such percentage was subsequently
adjusted as discussed below). In addition, in connection with a $150,000 bridge
financing by CW Ventures to the Company, the Company issued to CW Ventures for
nominal consideration five-year warrants (the "CW Warrants") to purchase 166,667
shares of the Company's Common Stock at an exercise price equal to $0.96 per
share (after adjustment for the "one (1) for six (6)" reverse stock split of the
Company's outstanding Common Stock).
Concurrently with the February 22, 1996 closing of the transaction with CW
Ventures, CAHS purchased all of the outstanding capital stock of CHCM from a
wholly-owned Horizon BCBSNJ subsidiary, Enterprise Holding Company, Inc.
("EHC"). Although this acquisition was consummated on February 22, 1996, results
of operations of CHCM have been reflected in the Company's financial statements
since April 30, 1995 pursuant to an Interim Services Agreement between the
Company and Horizon BCBSNJ (as amended from time to time, the "Services
Agreement") whereby the Company had effective control and responsibility of the
day-to-day operations of CHCM pending a sale of CHCM to the Company. The CHCM
stock was acquired in exchange for an 8% Exchangeable Note in the original
principal amount of $3,600,000, maturing on June 30, 1998 by CAHS in favor of
EHC, which was subsequently assigned to Horizon BCBSNJ (the "Horizon BCBSNJ
Note"). The Horizon BCBSNJ Note was collateralized by substantially all of the
assets of the Company and its subsidiaries. The Horizon BCBSNJ Note was
originally exchangeable into that number of shares of the Company's Common Stock
as would equal approximately 40% of the outstanding shares on a fully diluted
basis as of February 22, 1996. The transaction was accounted for as a purchase
of CHCM for an amount originally approximating $3,427,000 (the face amount of
the Horizon BCBSNJ Note less an original issue discount of approximately
$173,000), plus assumed liabilities of approximately $360,000 and purchase costs
of $64,000 and was subsequently adjusted. The excess of the purchase price over
the fair value of CHCM's tangible assets consisting of cash of approximately
$848,000 and fixed assets, with a fair value of approximately $27,000, was
allocated to the Services Agreement (see Note C [1] in the "Notes to the
Financial Statements" below).
Pursuant to the terms of the CW Note and the Horizon BCBSNJ Note, because
the Company failed to realize at least $15,000,000 in net revenues or specified
earnings before taxes for its fiscal year ended October 31, 1996, the Company
issued an aggregate of 50,156,559 additional shares of Common Stock to Horizon
BCBSNJ and CW Ventures on February 27, 1997.
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The Company, Horizon BCBSNJ and CW Ventures are parties to a Stockholders'
Agreement dated February 22, 1996 (the "Stockholders' Agreement") whereby each
of Horizon BCBSNJ and CW Ventures have agreed to vote their shares of Common
Stock with respect to the election of the Company's Board of Directors for: (i)
two designees of CW Ventures; (ii) two designees of Horizon BCBSNJ; (iii) two
members of the Company's management acceptable to CW Ventures and Horizon
BCBSNJ; and (iv) one non-employee outside director acceptable to CW Ventures and
Horizon BCBSNJ. There is currently one (1) vacancy on the Board of Directors,
which is one of the Company's management directorships. The Stockholders'
Agreement prevents the Company from taking certain material actions without the
consent of Horizon BCBSNJ and/or CW Ventures or their respective designated
directors.
Since the Company did not have a sufficient number of authorized but
unissued shares of Common Stock to permit the issuance of the required number of
shares upon exchange of the CW Note and the Horizon BCBSNJ Note, the
stockholders of the Company approved an amendment to the Company's Certificate
of Incorporation in August 1996, which decreased the authorized shares of Common
Stock to 90,000,000 shares, created a new class of "blank check" preferred
stock, $.10 par value, consisting of 10,000,000 shares and effected a "one (1)
for six (6)" reverse stock split of the Company's outstanding Common Stock. As a
result, and pursuant to the terms of the Horizon BCBSNJ Note, the Horizon BCBSNJ
Note was automatically exchanged on September 30, 1996 into 13,375,083 shares of
Common Stock of the Company.
Industry Overview: Health Care Reform, Expenditures and Managed Care
In recent years, there have been substantial efforts to reform national
health care due to the ever-increasing cost of medical care in the United
States. Employer groups, increasingly concerned about the effect on their
"bottom line" of the cost of providing health insurance to their employees, are
no longer content to remain with a traditional insurance company which is not
cost effective in its management of health care coverage. Employer groups are
seeking the implementation of managed care concepts to improve their
profitability, while at the same time providing to their employees the same or
improved quality and availability of care. The insurance companies' clients are
demanding that their insurance companies begin effecting strategies to reduce
costs such as enhanced case management, patient education, and wellness
programs. Accordingly, employees have become more assertive in evaluating and
selecting an insurer as well as monitoring such insurer's performance. This has
consequently created intense competition among traditional indemnity insurers.
This is a microcosm of a national trend where market driven forces are
causing insurance companies to align themselves with health care providers
efficient in patient management. The net result has been a phenomenon where the
medical industry has shifted to care management initiatives to decrease
unnecessary variations in patient care and physician practices.
In order to remain viable in this competitive marketplace and attract
employer groups, traditional indemnity insurance companies have begun to
re-engineer to a managed care approach with an outcome versus claims management
focus. They have done so by establishing cooperative relationships with
providers.
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Management believes that while some insurers will try to accomplish this
transition without outside assistance, a majority will seek assistance from
firms with "managed care expertise," such as the Company. With its proprietary
criteria and protocols and physician employees and advisors representing the
full range of subspecialty areas within the health care delivery system, as well
as key employees with backgrounds in health care cost containment, management
believes the Company provides state of the art knowledge and experience in
health care cost containment services.
Services and Products
The Company's comprehensive health care management programs provide health
care organizations with the systems, strategies, and mechanisms needed to manage
appropriate and cost effective health care services. These health care
management services adhere to Utilization Review Accreditation Commission, Inc.
("URAC") standards.
The cost containment services offered by the Company are comprehensive and
can be customized to meet the needs of its clients. These services may be
purchased separately or configured in a variety of resource sets designed to
interface with the client's systems. Management believes the resources necessary
for a successful health delivery system are clinical health care management,
information technologies and member or subscriber services. The Company
possesses substantial resources in these core areas and makes them available to
its clients in specific packages.
Management believes that its physician developed and driven criteria and
medical protocols ("critical pathways"), as well as its health care management
services, improve how attending physicians manage health care. The Company's
personnel work together on-site with clients and potential clients in order to
structure or re-engineer such clients' utilization review programs and to
implement various disease management strategies.
Utilization Review - Utilization review associates examine the
appropriateness of a particular medical event, such as a hospital admission, an
additional day of in-patient care, or a particular procedure. The Company
provides clinical and operational utilization review services employing its
physician driven proprietary criteria and protocols. The Company actively
disseminates its criteria and medical protocols to local physicians and holds
meetings with its specialty physician advisors to inform them of their
significant roles in the utilization management process.
In addition, while many utilization management firms rely on calls from
nurse reviewers as the principal form of communication with physicians, the
Company believes that clinical peers should discuss cases with attending
physicians. Accordingly, the Company uses nurse reviewers primarily to screen
cases. Staff medical directors and physician advisors of matched specialties
review questionable cases with attending physicians. The combination of academic
credentials, managed care experience, and on-site presence enables these
advisors to actively engage local specialists in a meaningful discussion of
medical management alternative practices, thereby having a greater impact on
cost containment.
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Overall, the Company transforms the client's utilization management
program from an administrative exercise to a program that uses review criteria
and highly credible physician advisors to actively engage attending physicians
in treatment decisions. Management believes that these strengthened utilization
management methods can enable its clients to achieve utilization performance
approaching that of well-managed health maintenance organizations.
Case Management - Large case management services provide an alternative
plan, which enhances or maintains the patient's quality of care, but reduces the
expected expenses for the patient's treatment. Early identification of patients
severely compromised by an acute injury or episode of illness is the key to
successful implementation of large case management services. Patient evaluation
through pre-admission and concurrent review provides the foundation for
effective discharge planning and continuity of care. The Company provides a
comprehensive case management program, which facilitates significant cost
containment and contributes to greater flexibility in the health care setting
for the patient.
Outpatient care coordination allows patients to access a variety of health
care services, such as home health care, rehabilitation and infusion therapy
services. The Company's outpatient care coordination services provide an
effective mechanism for cost containment while safeguarding the delivery of
quality health care services.
Case management also focuses on how the attending physician is managing
the care of patients with chronic diseases on an on-going basis. Health risk
assessment processes, designed and implemented by the Company, identify high
cost/high risk patients and enroll them in case management programs.
Disease Management - Management believes that specialists managing
patients with chronic diseases should follow credible patient management
protocols, or "critical pathways", that reflect expert consensus on the most
appropriate treatment alternatives for patients at different disease stages and
with complicating factors, and that decisions to deviate from such guidelines
should be reviewed by an independent peer specialist.
Implementation of a disease management program for a client begins with
disseminating care management "critical pathways" to, and then meeting with,
local specialists. The progress and treatment plans of a patient are reviewed by
the Company's specific disease specialists or advisors with the patient's
attending specialist. This case management ensures that any decisions made by
the attending physician to deviate from the critical pathway guidelines are
supported by sound clinical rationale.
Continuing Product Development - The Company's management recognizes that
the health care market is continually changing and expanding, due in part, to
changes in medical technology and new medical information, as well as
improvements in information technology and telecommunication systems. In
response to the market and to the specific needs of its clients, the Company
continues to refine, improve and expand its existing services and products, as
well as develop new services and products.
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Some of the Company's current initiatives include the expansion of its
chronic disease case management services, on-going refinement of its proprietary
criteria and protocols, and development of specialty provider networks. The
Company also continues to jointly develop with a systems subcontractor and
software developer a new generation of customer service, utilization review and
medical/surgical case management software. Furthermore, the Company's management
believes that member/subscriber advisory services, which focus on patient
knowledge and participation in their own health care, are products that will
contribute to a more efficient and cost effective use of the options available
in the health care system. With respect thereto, the Company hopes to develop
patient education and management programs.
Operations
The Company utilizes a multi-disciplinary team approach to ensure
effective cost medical management services. The Company, through its employees
and subcontracting physician advisors, reviews, evaluates and monitors the
medical necessity and appropriateness of the medical services prescribed for
members in its clients' health plans. Generally, the pre-admission review
process for elective and non-elective admission is initiated telephonically by
the member or provider. During this phase, clinical review staffs evaluate the
need for, and/or initiate when appropriate, pre-certification, second surgical
opinion, insurance verification, pre-admission testing, pre-operative education,
pre-operative anesthesia evaluation, and continuing care planning. Additionally,
pre-admission review determines if the service requested is medically necessary
by utilizing review criteria, appropriate alternatives for providing service,
length of stay and the need for case management intervention.
During the pre-admission and concurrent review processes, patients are
evaluated by nurse case managers and physician employees or advisors to identify
anticipated needs for discharge. Patients with high cost diagnoses or who
require interdisciplinary problem solving to expedite discharge are identified
as candidates for large case management services. The Company's clinical staff
also plans for and coordinates the outpatient health care services necessary for
a timely discharge, such as home health care, rehabilitation and infusion
therapy services, thereby insuring the delivery of quality care while containing
costs.
The Company currently maintains a contracted network of 112 independent,
multi-specialty physician advisors, most of whom are active in managed care
practices and some of whom are affiliated with major teaching hospitals. Several
of these physicians are currently spending one-to-two days per week on-site with
and on behalf of the Company's clients, discussing questionable cases with local
specialists and leading meetings with groups of local specialists to disseminate
and implement the care management "critical pathways" necessary for effective
case management. The Company also uses its nurse reviewers for telephonic review
as well as in hospitals to conduct more extensive on-site reviews of patients,
whenever possible. On-site review is performed for concurrent review and case
management activities. These on-site reviews also include collaboration with the
Company's local and national board certified physician employees and advisors.
By reviewing on-site, these nurses are in a better position to determine the
need for continued stay, and to make necessary arrangements for outpatient care.
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For its services, the Company is compensated either: (i) on a capitated
(fixed-fee) per subscriber basis; (ii) on a combination of both capitation and
performance-based fees; or (iii) on a fee-for-service basis. Accordingly, the
Company has adopted the following accounting policies for revenue recognition
under each contract category:
(a) Revenue under the fixed-fee arrangements is recognized as the services are
provided and the related costs of services are incurred. Although the
fixed fee arrangements are not subject to any fee adjustment based upon
the attainment of target utilization levels, such contracts may still
expose the Company to potential operating losses, particularly in the
inception stages thereof.
(b) Revenue under the partial fixed fee-incentive agreements is initially
recognized for the monthly fixed-fee component only as services are
provided and related costs of services are incurred. Incentives (or
reductions) based upon performance are recorded when such amounts can
reasonably be determined.
(c) Revenue under fee-for-service arrangements is recorded for special
projects or the review of cases assigned to the Company on a per case or
hourly basis.
Revenues from at-risk performance-based service contracts generally tend
to follow a pattern whereby significant revenues are generated during the
initial term of the contract, as savings opportunities are the greatest and then
decline thereafter as the opportunity for additional savings diminishes. As a
result, the Company's ability to increase revenues and gross margins is
dependent upon its ability to enter into additional contracts with new customers
and/or expand the services provided to existing customers.
Customers and Marketing
The Company currently provides its services to five Blue Cross and Blue
Shield ("BCBS") organizations in the states of Maine, Rhode Island, Vermont, New
York and New Jersey pursuant to one or a combination of the compensation
arrangements described above. The Company is dependent on at least two of such
customers including Horizon BCBSNJ, a 45% stockholder of the Company, for a
substantial portion of its revenues, gross margins and cash flows. The loss of
either of these two customers would have a material adverse impact on the
Company's cash flows and results of operations.
Effective January 1, 1998, the Company entered into a one-year services
agreement with New York Care Plus Insurance Company, Inc. ("NYCPIC"), which was
attached as Exhibit 10.20 to the Company's Form 10-KSB for the period ended
October 31, 1997 and is incorporated herein by reference. NYCPIC provides health
care coverage to New York residents through its Blue Cross and Blue Shield of
Western New York and Blue Shield of Northeastern New York divisions. Under the
terms of this Agreement, the Company, through one or more of its subsidiaries,
provided both medical management performance support and specialty care
management performance support services to NYCPIC for its approximately 650,000
indemnity and HMO subscribers. The Agreement expired by its terms on December
31, 1998, but has been replaced with a services agreement with an affiliate of
NYCPIC, HealthNow New York Inc. (See Item 6 - "Recent Developments of the
Business.")
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The Company intends to expand the scope of its market to other organized
health care delivery systems (such as preferred-provider and physician-hospital
organizations), self-insured employers, union trust funds, health care
management service organizations and administrative service organizations (such
as third-party insurance administrators).
Typically, the Company will enter into a service agreement with a client
pursuant to which the Company provides its utilization review and case
management services. The Company's services for an insurer generally cover all
insured under an indemnity insurance plan and/or members of a health maintenance
organization plan affiliated with the insurer. Typically, when the Company
contracts to provide its services to an insurer, the insurer's account
executives ordinarily plan to offer the Company's services to its group
policyholders and those groups covered under administrative-services-only
arrangements. The Company presently enters into these service agreements with
insurers with compensation based upon either a capitated rate per subscriber or
with fees and incentives based on the achievement of certain health care cost
and/or utilization targets. The latter fee arrangement provides the opportunity
for substantially increased earnings, but also carries the risk of loss of
revenues if the targets are not achieved.
Competition
The Company faces intense competition in a highly fragmented market of
managed care service firms. Several managed care service firms currently provide
and aggressively market services, which are in some respects similar to the
Company services. Management is aware of a significant number of independent
utilization review firms currently marketing utilization review services
directly to employers, small insurers, and third party administrators. In
addition to other utilization review and medical management companies, the
Company competes with insurance companies, third party health plan
administrators, health maintenance organizations and preferred provider
organizations that have developed in-house staffs to provide such services.
There are a variety of competitors offering component services such as physician
reviewers and demand management/patient advisory products. There are also a
number of organizations developing a variety of approaches to case and disease
management. Many of the Company's competitors have substantially greater
financial resources and employ substantially greater number of personnel.
The Company intends to compete on the basis of the quality of its clinical
staff and high degree of specialty-trained physician involvement, its ability to
leverage its products to achieve higher value at lower cost than companies
offering component services, its ability to develop tailored programs for large
clients, its willingness to accept risk in methods of compensation based on
results, its computer-based clinical decision making and information systems and
its current experience in developing outsourcing arrangements acceptable to Blue
Cross and Blue Shield Plans.
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Government Regulation
Health Care Regulation - Government regulation of health care cost
containment services, such as those provided by the Company, is a changing area
of law that varies from jurisdiction to jurisdiction and generally gives
responsible administrative agencies broad discretion. The Company is subject to
extensive and frequently changing federal, state and local laws and regulations
concerning company licensure, conduct of operations, acquisitions of businesses
operating within its industry, the employment of physicians and other licensed
professionals by business corporations and the reimbursement for services.
Regulatory compliance could have an adverse effect on the Company's present
business and future growth by restricting or limiting the manner in which it can
acquire businesses, market its services, and contract for services with other
health care providers by limiting or denying licensure or by limiting its
reimbursement for services provided.
It should be noted that in providing utilization review and case
management services, the Company makes recommendations regarding what is
considered appropriate medical care based upon professional judgments and
established protocols. However, the ultimate responsibility for all health care
decisions is with the health care provider. Furthermore, the Company is not an
insurer, and the ultimate responsibility for the payment of medical claims is
with the insurer. Although the Company is not a health care provider, it could
have potential liability for adverse medical consequences. The Company could
also become subject to claims based upon the denial of health care services and
claims such as malpractice arising from the acts or omissions of health care
professionals. (See "Legal Proceedings.")
In order to receive compensation, the Company's operations in a particular
state are typically subject to certification by the appropriate state agency.
The Company has received or has filed the necessary application for such
certification where required. In addition, various state and federal laws
regulate the relationships between providers of health care services and
physicians and other clinicians, including employment or service contracts,
investment relationships and referrals for certain designated health services.
These laws include the fraud and abuse provisions of the Medicare or Medicaid
statutes, which prohibit the solicitation, payment, receipt or offering of any
direct or indirect remuneration for the referral of Medicare or Medicaid
patients or for the ordering or providing of Medicare or Medicaid covered
services, items or equipment. Violations of these provisions may result in civil
or criminal penalties for individuals or entities including exclusion from
participation in the Medicare and Medicaid programs. Several states have adopted
similar laws that cover patients in private programs as well as government
programs. Because the anti-fraud and abuse laws have been broadly interpreted,
they may limit the manner in which the Company can acquire businesses and market
its services to, and contract for services with, other health care providers.
The Company's management believes that its present operations are in
compliance with all applicable laws and regulations and that it maintains
sufficient comprehensive general liability and professional liability insurance
coverage to mitigate claims to which the Company may be subject in the future.
The Company is unable to predict what, if any, government regulations affecting
its business may be enacted in the future or how existing or future regulations
may be interpreted. To maintain future compliance, it may be necessary for the
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Company to modify its services, products, structure or marketing methods. This
could increase the cost of compliance or otherwise adversely affect the
Company's operations, products, profitability or business prospects.
Proposed Health Care Reform - If proposed federal and state health care
reform initiatives are enacted, the payments for and the availability of health
care services will likely be affected. Aspects of certain of these proposals,
such as reductions in Medicare and Medicaid payments, could adversely affect the
Company. The Company is unable to predict what impact, if any, further enacted
health care reform legislation may have on its current and future business, and
no assurance can be given that any such reforms will not have an adverse impact
on its business operations or potential profitability.
Employees
In addition to its current network of 112 contracted physician advisors,
the Company employed 8 full-time physicians as of October 31, 1998. Two of these
physicians serve as officers of the Company or its subsidiaries and the
remaining physicians serve as on-site Medical Directors and Associate Medical
Directors in the states where the Company provides services.
At October 31, 1998, in addition to its physicians, the Company employed a
total of 142 full-time employees. Of this total, 112 employees are engaged in
clinical activities including on-site nurse reviewers and contract
administrators. The 30 remaining employees include executives, administrative
support, finance, marketing, training and education, information systems and
human resources personnel. None of the Company's employees are party to any
collective bargaining agreements.
ITEM 2. DESCRIPTION OF PROPERTY
The Company's executive offices and operations, comprising approximately
28,000 square feet of office space, are located in the Koll Corporate Plaza in
Iselin, New Jersey. The Company has executed a six-year lease for this facility
commencing June 15, 1995, which provides for an annual base rent of
approximately $445,000 with annual escalations based on increases in real estate
taxes and operating expenses. The Company believes that its facilities are
adequate for its current needs and that suitable additional space will be
available as required.
The Company also maintains a rent-free operations office in approximately
600 square feet of space in Providence, Rhode Island under an informal oral
arrangement with Blue Cross and Blue Shield of Rhode Island ("BCBSRI"), and
approximately 300 square feet of space in the Blue Cross and Blue Shield of
Maine Westbrook facility. Additionally, the Company maintains rent-free
operation offices in New York and Vermont pursuant to informal arrangements with
these customers.
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Substantially all of the equipment used in the Company's operations in New
Jersey is currently being leased under a capital lease agreement.
ITEM 3. LEGAL PROCEEDINGS
[1] Potential uninsured exposure to litigation:
a. On or about March 22, 1996, an action entitled Francis X. Bodino v.
Horizon BCBSNJ and CHCM (the "Bodino Action") was filed in the Law
Division of the Superior Court of New Jersey in Hudson County. The
complaint alleged misrepresentations with respect to the type and
amount of coverage afforded by Mr. Bodino's policy with Horizon
BCBSNJ, specifically with respect to coverage for heart
transplantation. The complaint also alleged that representations
made on behalf of Horizon BCBSNJ by an employee of CHCM led Mr.
Bodino's surgeon to believe that contractually excluded heart
transplant coverage was available. The complaint demanded a variety
of money damages, as well as punitive damages, against both
defendants. The complaint also contained a claim for treble damages
and counsel fees under the New Jersey Consumer Fraud Act.
On or about June 29, 1998, a Settlement and Release Agreement was
entered into among Horizon BCBSNJ, the Company, CAHS, CHCM,
Enterprise Holding Company, Inc. ("EHC"), a subsidiary of Horizon
BCBSNJ, and CW Ventures. Under this agreement, Horizon BCBSNJ has
agreed to indemnify 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.
b. The Company has been named as a party in an action entitled Robert
T. Caruso v. Care Advantage, Inc., John J. Petillo, Vincent M.
Achillare, Lawrence A. Whipple, and Horizon BCBSNJ et al., which was
filed in Superior Court of New Jersey on August 12, 1998. Messrs.
Petillo, Achillare and Whipple were officers of the Company and may
have claims for indemnification for expenses and for any judgments
against them in this case. 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 complaint seeks
compensation allegedly due under the consulting arrangement and
other general and, in one count, treble, damages. The Company
received notice from two of its insurance carriers denying coverage
on this matter, but the Company plans to vigorously contest these
coverage decisions. The Company received a written claim for
indemnification from Lawrence A. Whipple on September 10, 1998 and
is unaware of any written claims for indemnification by John J.
Petillo or Vincent M. Achillare. The Company is unable, at this
early stage of the proceeding, to evaluate the merits of this
action.
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[2] Termination of employment:
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 Superior Court of New Jersey. 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 Wire
tapping 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 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.
[3] Professional liability:
In providing utilization review and case management services, the Company
makes recommendations regarding benefit plan coverage based upon judgments
and established protocols as to the appropriateness of the proposed
medical treatment. Consequently, the Company could have potential
liability for adverse medical results. The Company could become subject to
claims based upon the denial of health care benefits and claims such as
malpractice arising from the acts or omissions of health care
professionals. Although the Company does not believe that it engages in
the practice of medicine or that it delivers medical services directly, no
assurance can be given that the Company will not be subject to litigation
or liability which may adversely affect its financial condition and
operations in a material manner. Although the Company maintains
comprehensive general liability and professional liability insurance
coverage, including coverage for liability in connection with the
performance of medical utilization review services and typically obtains
indemnification from its customers, no assurances can be given that such
coverage will be adequate in the event the Company becomes subject to any
of the above described claims.
[4] Settlement agreement:
A former Medical Director of CAHS asserted a claim against the Company.
The former Medical Director resigned in February 1996, allegedly due to a
change in control of the Company, and alleged, among other things, breach
of contract. As of October 31, 1997, the Company had accrued $150,000 for
this claim. In February 1998, the claim was settled for $110,000.
[5] Contractual dispute:
By a letter dated November 9, 1998, the Company received written notice
(the "Notice") from Allied Health Group, Inc. ("Allied") pursuant to which
Allied purportedly terminated without cause, effective December 9, 1998,
that certain Joint Services Agreement dated May 29, 1997 (the "Joint
Services Agreement") between Allied and the Company, which was attached as
Exhibit No. 10(c) to the Company's Form 10-QSB for the quarter ended April
30, 1997 and is incorporated by reference herein. By a response letter
dated November 16, 1998, counsel for the Company informed Allied that the
Notice was null and void and of no legal effect since the Joint Services
Agreement did not provide for termination without cause prior to the end
of the term of the Joint Services Agreement. The Company instituted
arbitration proceedings against Allied seeking declaratory relief that the
Joint Services Agreement is still in effect. The arbitration process has
commenced and the parties are currently selecting the arbitrator to hear
the matter.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's security holders
during the fourth quarter of the fiscal year ended October 31, 1998.
- --------------------------------------------------------------------------------
PART II
ITEM 5. MARKET PRICE FOR REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
(a) Market Information - Since the Company's effective registration date
of June 12, 1995, the Company's Common Stock has traded in the
over-the-counter market and is currently quoted on the Electronic
Bulletin Board under the symbol CADV. The following table shows the
range of closing bid prices for each quarter of the Company's two
most recent fiscal years. The prices reflect inter-dealer prices,
without retail mark-up, mark-down or commission, and may not
represent actual transactions.
1998 1997
--------------- ---------------
Quarter Ended High Low High Low
---- ---- ---- ----
January 31 $.26 $.23 $.47 $.31
April 30 $.24 $.21 $.56 $.31
July 31 $.27 $.21 $.38 $.31
October 31 $.22 $.05 $.34 $.25
(b) Holders - As of January 6, 1999, there were approximately 2,892
holders of record of the Company's Common Stock. No shares of the
Company's preferred stock have been issued.
(c) Dividends - During the two most recent fiscal years, the Company
paid no cash dividends on its Common Stock. The payment of future
dividends on its Common Stock is subject to the discretion of the
Board of Directors and is dependent on many factors, including the
Company's earnings and capital needs.
14
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Cautionary Statements
Certain statements in this Form 10-KSB may constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995 ("PSLRA"), 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.
The following discussion contains certain cautionary statements regarding
the Company's business that investors and others should consider. This
discussion is intended to take advantage of the "safe harbor" provisions of the
PSLRA. In making these cautionary statements, the Company is not committed to
addressing or updating each factor in future filings or communications regarding
the Company's business or results, or addressing how any of these factors may
have caused results to differ from discussions or information contained in
previous filings or communications. In addition, any of the matters discussed
below may have affected or may affect the Company's past, as well as current,
forward-looking statements about future results. The Company's actual results in
the future may differ materially from those expressed in prior communications.
INDUSTRY FACTORS. The managed care industry frequently receives
significant amounts of negative publicity. This publicity has contributed to
increased legislative activity, regulation and review of industry practices.
These factors may adversely affect the Company's ability to market its products
or services, may require the Company to change its products and services, and
may increase the regulatory burdens under which the Company operates, further
increasing the costs of doing business and adversely affecting profitability.
COMPETITION. In many of its geographic or product markets, the Company
competes with a number of other entities, some of which may have certain
characteristics or capabilities that give them an advantage in competing with
the Company. The Company believes that barriers to entry in these markets are
not substantial, so the addition of new competitors can occur relatively easily.
Certain Company customers may decide to perform functions or services internally
which were previously provided by the Company, thus decreasing Company revenues.
Certain Company providers may decide to market products and services to Company
customers in competition with the Company. In addition, significant merger and
acquisition activity has occurred in the industry in which the Company operates
as well as in industries that act as suppliers to the Company, such as the
hospital, physician, and pharmaceutical industries. This activity may create
stronger competitors or result in decreased opportunities. To the extent that
there is strong competition or that competition intensifies in any market, the
Company's ability to retain or increase customers, or
15
<PAGE>
maintain or increase its revenue growth, its pricing flexibility, its control
over medical cost trends and its marketing expenses may be adversely affected.
UTILIZATION REVIEW REGULATIONS. Many states have enacted laws and/or
adopted regulations governing utilization review activities, and these laws may
apply to some Company operations. Generally, these laws and regulations set
specific standards for delivery of services, confidentiality, staffing and
policies and procedures of private review entities, including the credentials
required of personnel. The enactment of any such law and/or regulations could
adversely affect the results of operations, profitability, and cash flows of the
Company.
LITIGATION AND INSURANCE. The Company may be a party to a variety of legal
actions that affect any business, such as employment and employment
discrimination-related suits, employee benefit claims, breach of contract
actions, tort claims, and shareholder suits, including securities fraud and
intellectual property related litigation. In addition, because of the nature of
its business, the Company is subject to a variety of legal actions relating to
its business operations. These could include claims relating to medical
malpractice or the denial of health care benefits. The Company currently has
insurance coverage for some of these potential liabilities. Other potential
liabilities may not be covered by insurance, insurers may dispute coverage, or
the amount of insurance may not cover the damages awarded. In addition, certain
types of damages, such as punitive damages, may not be covered by insurance, and
insurance coverage for all or certain forms of liability may become unavailable
or prohibitively expensive in the future.
INFORMATION SYSTEMS. The Company's business depends significantly on
effective information systems, and the Company has linked its computer systems
with that of their customers in order to conduct and deliver its products and
services. The Company's information systems require an ongoing commitment of
resources to maintain and enhance existing systems and develop new systems in
order to keep pace with continuing changes in information processing technology,
evolving industry standards, and changing customer preferences. Failure to
maintain effective and efficient information systems could cause loss of
existing customers, difficulty in attracting new customers, customer disputes,
regulatory problems, increases in administrative expenses or other adverse
consequences. In addition, the Company may from time to time obtain significant
portions of its systems-related or other services or facilities from independent
third parties, which may make the Company's operations vulnerable to such third
parties' failure to perform adequately.
THE YEAR 2000. The Company is in the process of modifying its computer
systems to accommodate the Year 2000. The Company expects to complete this
modification sufficiently in advance of the Year 2000 to avoid adverse impacts
on its operations. The Company is expensing the costs incurred to make these
modifications. If the Company is unable to complete its Year 2000 modifications
in a timely manner or other companies with which the Company does business fail
to timely complete their Year 2000 modifications, the Company's operations could
be adversely affected.
ADMINISTRATION AND MANAGEMENT. Efficient and cost-effective administration
of the Company's operations is essential to the Company's profitability and
competitive positioning.
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<PAGE>
While the Company attempts to effectively manage such expenses, staff-related
and other administrative expenses may rise from time to time due to business or
product start-ups or expansions, growth or changes in business, acquisitions,
regulatory requirements or other reasons. These expense increases are not
predictable and may adversely affect results. The market for management and
technical personnel, including information systems professionals, in the health
care industry is very competitive. Loss of certain managers or a number of such
managers could adversely affect the Company's ability to administer and manage
its business.
MARKETING. The Company markets its products and services through employed
salespeople. The departure of sales and or certain key employees could impair
the Company's ability to retain existing customers. In addition, certain of the
Company's customers or potential customers consider rating, accreditation or
certification of the Company by various private or governmental bodies or rating
agencies necessary or important. Certain of the Company's business units may not
have obtained or may not desire or be able to obtain or maintain such
accreditation or certification, which could adversely affect the Company's
ability to obtain or retain business with these customers.
DATA AND PROPRIETARY INFORMATION. Many of the products that are part of
the Company's knowledge and information-related business depend significantly on
the integrity of the data on which they are based. If the information contained
in the Company's databases were found or perceived to be inaccurate, or if such
information were generally perceived to be unreliable, commercial acceptance of
the Company's database-related products would be adversely and materially
affected. Furthermore, the Company's use of patient data is regulated at
federal, state and local levels. These laws and rules are changed frequently by
legislation or administrative interpretation. These restrictions could adversely
affect revenues from these products and, more generally, affect the Company's
business, financial condition and results of operations.
The success of the Company's knowledge and information-related business
also depends significantly on its ability to maintain proprietary rights to its
products. The Company relies on its agreements with customers, confidentiality
agreements with employees, trade secrets, trademarks and patents to protect its
proprietary rights. The Company cannot assure that these legal protections and
precautions will prevent misappropriation of the Company's proprietary
information. In addition, substantial litigation regarding intellectual property
rights exists in the software industry, and the Company expects software
products to be increasingly subject to third-party infringement claims as the
number of products and competitors in this industry segment grows. Such
litigation could have an adverse effect on the ability of the Company to market
and sell its products and on the Company's business, financial condition and
results of operations.
STOCK MARKET. The market prices of the securities of the Company and
certain of the publicly held companies in the industry in which the Company
operates have shown volatility and sensitivity in response to many factors,
including general market trends, public communications regarding managed care,
legislative or regulatory actions, health care cost trends, pricing trends,
competition, earnings or membership reports of particular industry participants,
and acquisition activity. The Company cannot assure the level or stability of
the Company's share price at any time or predict the impact the foregoing or any
other factors may have on the Company's share price.
CONTROL BY CERTAIN SHAREHOLDERS. The two largest stockholders of the
Company, Horizon BSBSNJ and CW Ventures, beneficially own an aggregate of 91.56%
of the outstanding shares of Common Stock of the Company. Pursuant to the
Stockholders Agreement, each of BCBSNJ and CW Ventures have agreed to vote their
shares in the Company with respect to the election of the Company's Board of
Directors for (i) two designees of CW Ventures; (ii) two designees of BCBSNJ;
(iii) two members of the Company's management acceptable to CW Ventures and
BCBSNJ; and (iv) one non-employee outside director acceptable to CW Ventures and
BCBSNJ. The Stockholders Agreement prevents the Company from taking certain
material actions without BCBSNJ's and/or CW Ventures' or their designated
directors' consent. Accordingly if Horizon BCBSNJ and CW Ventures were to vote
in the same manner on the election of members of the Board of Directors or on
any other matter requiring approval of a majority of the outstanding shares of
Common Stock, such matter would likely be approved or defeated, as the case may
be, depending on the vote of such stockholders.
HISTORY OF LOSSES. There can be no assurance that the Company will be
profitable in the future. For fiscal years prior to 1997, the Company
experienced significant operating losses on a consolidated basis. For fiscal
year 1998, the Company has a working capital surplus at October 31, 1998 of
approximately $1,077,000, a capital surplus of $3,484,000 and an accumulated
deficit of $18,607,000 compared to a working capital deficit of approximately
$2,487,000, a capital deficiency of $1,976,000 and an accumulated deficit of
$21,690,000 for fiscal year 1997.
MARKET ILLIQUIDITY. The Common Stock of the Company is traded in the
over-the-counter market in the so-called "pink sheets" or, if available the "OTC
Bulletin Board Service." As a result, an investor may find it more difficult to
dispose of, or to obtain accurate quotations as to the value of, the Company's
Common Stock. Because the Company's Common Stock is subject to the rules on
penny stock (See DISCLOSURE RELATING TO LOW PRICED STOCKS; POSSIBLY RESTRICTIONS
ON RESALES OF LOW PRICED STOCKS AND ON BROKER-DEALER SALES; POSSIBLE ADVERSE
EFFECT OF "PENNY STOCK" RULES ON LIQUIDITY FOR THE COMPANY'S COMMON STOCK), the
market liquidity for the Company's Common Stock is adversely affected. There is
limited public float in the Company's Common Stock as the result of the
ownership of 91.56% of the Common Stock by two stockholders.
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<PAGE>
DISCLOSURE RELATING TO LOW PRICED STOCKS; POSSIBLY RESTRICTIONS ON RESALES
OF LOW PRICED STOCKS AND ON BROKER-DEALER SALES; POSSIBLE ADVERSE EFFECT OF
"PENNY STOCK" RULES ON LIQUIDITY FOR THE COMPANY'S COMMON STOCK. The Company's
Common Stock could become subject to Rule 15g-9 under the Securities Exchange
Act of 1934, as amended, which imposes additional sales practice requirements on
broker-dealers which sell securities to persons other than established customers
and "accredited investors" (generally, individuals with net worths in excess of
$1,000,000 or annual incomes exceeding $200,000 or $300,000 together with their
spouses). For transactions covered by this Rule, a broker-dealer must make a
special suitability determination for the purchaser and have received the
purchaser's written consent to the transaction prior to sale. Consequently, such
Rule may affect the ability of broker-dealers to sell the Company's securities
and may affect the ability of the Company's shareholders to sell any of its
securities in the secondary market.
The SEC has adopted regulations that generally define a "penny stock" to
be any non-Nasdaq equity security that has a market price (as therein defined)
less than $5.00 per share or with an exercise price of less than $5.00 per
share, subject to certain exceptions. For any transaction by broker-dealers
involving a penny stock, unless exempt, the rules require delivery, prior to a
transaction in a penny stock, of a risk disclosure document relating to the
penny stock market. Disclosure is also required to be made about compensation
payable to both the broker-dealer and the registered representative and current
quotations for the securities. Finally, monthly statements are required to be
sent disclosing recent price information for the penny stock held in the account
and information on the limited market in penny stocks.
Overview
For fiscal years prior to 1997, the Company experienced significant
operating losses on a consolidated basis. For fiscal year 1998, the Company has
a working capital at October 31, 1998 of approximately $1,077,000 and a
stockholders equity of $3,484,000, which includes an accumulated deficit of
$18,607,000, compared to a working capital deficit of approximately $2,487,000,
a capital deficiency of $1,976,000 and an accumulated deficit of $21,690,000 for
fiscal year 1997. By continuing to provide high quality health care cost
containment services to its existing customer base of five BCBS plans and
pursuant to the Company's plan to aggressively market its products, services,
and reputation to other similar customers, management believes it can continue
to leverage its reputation to other similar customers. This strategy is
particularly significant given the current health care environment where large
third-party payers are merging in an effort to protect their respective
franchises and expand their market reach. The various BCBS plans throughout the
country are no exception to this phenomenon and the Company believes it can
leverage its core competencies to participate in this consolidating environment.
The Company's working capital as of October 31, 1998 increased by
approximately $3,564,000 from the October 31, 1997 deficit amount. This increase
is largely due to the conversion of the $2,000,000 CW Note for Common Stock, as
well as the realization of excess performance revenues from BCBSRI of
approximately $1,300,000, an increase in revenues from Allied Health Group, Inc.
("Allied") in the approximate amount of $900,000 and increased revenues of
approximately $2,300,000 from the re-negotiation of the Company's existing
contracts during the last fiscal year. Management estimates the revenue realized
from BCBSRI during the fiscal year ended October 31, 1999 will be approximately
$1,300,000 less than the amounts received for the fiscal year ended October 31,
1998, as well as a reduction of approximately $1,400,000 related to the
cancellation of the Allied Agreement as more fully explained below under the
caption of "General Developments of the Business During Fiscal Year 1998".
Further, the Company realized net income of approximately $3,083,000 or $.04 per
share on revenues of approximately $18,903,000 for the fiscal year ended October
31, 1998 compared with a net income of approximately $7,000 or $.00 per share on
revenues of approximately $14,077,000 for the year ended October 31, 1997.
Reorganization
The series of transactions consummated by the Company in February 1996
resulted in a change in control of the Company and the acquisition of CHCM (see
"Notes to Financial Statements-Introduction and Background"). The Board of
Directors and management have taken steps and expect to take certain additional
actions to increase revenues, reduce and re-deploy personnel and other costs and
ultimately increase shareholder value.
Management is of the opinion that it must continue to refine its current
service lines in order to continue to add value to existing and potential
customers. In addition, the Company intends to broaden the services offered with
unique and complementary cost-containment strategies. Management intends to
evaluate each service in light of anticipated changes in the health care
industry, the cost to enter each such service line as well as the availability
and timeliness of competent resources. To further expand its line of services,
the Company contemplates pursuing alternatives to its internal product and
service development efforts by entering into strategic alliances and joint
ventures as well as through acquisitions.
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<PAGE>
Recent Developments of the Business:
New Contract with HealthNow New York Inc.
Effective January 1, 1999 the Company entered into a six-month services
agreement with HealthNow New York Inc. ("HNNY"), which provides health care
coverage to New York residents through its Blue Cross and Blue Shield of Western
New York and Blue Shield of Northeastern New York divisions. Under the terms of
this agreement, which is attached hereto as Exhibit 10.35 and incorporated
herein by reference, the Company, through one or more of its subsidiaries, will
provide both medical management performance support and specialty care
management performance support services to HNNY for its approximately 650,000
indemnity and HMO subscribers. The services agreement, the initial term of which
expires on June 30, 1999, provides for the payment of fixed compensation. This
contract replaces a previous agreement between the Company and NYCPIC executed
on January 1, 1998, which was attached as Exhibit 10.20 to the Company's Form
10-KSB filed on January 29, 1998.
General Developments of the Business during Fiscal Year 1998:
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.
In August of 1998 the Company received notice from one of its customers,
Horizon Healthcare of New Jersey, Inc. ("Horizon Healthcare"), formerly known as
Medigroup of New Jersey, Inc. (d/b/a HMO Blue) that Horizon Healthcare had
decided to resume internal network management that it had been outsourcing to
Allied via an Administrative Service Agreement dated as of January 2, 1997 (the
"Administrative Service Agreement"). The Administrative Service Agreement was
terminated effective in December of 1998. Accordingly, the letter agreement
dated March 1, 1997 by and among the Company, Horizon Healthcare and Allied
which was attached as Exhibit No. 10(e) to the Company's Form 10-QSB for the
quarter ended April 30, 1997 and is incorporated by reference herein (the
"Horizon Healthcare Letter Agreement"), pursuant to which the Company provided
certain network management services to Allied and Horizon Healthcare, ended
simultaneously with the termination of the Administrative Service Agreement.
Revenues for the Company from the Horizon Healthcare Letter Agreement were
approximately $1,432,000 for the twelve-month period ended October 31, 1998.
Management of the Company estimates that its revenues and net income during the
next fiscal year will decrease by approximately $1,432,000 as a result of the
cancellation of the Horizon Healthcare Letter Agreement. The Management of the
Company plans to replace the loss of this contract with new customers. However,
there can be no assurance that the Company will be successful in obtaining such
new customers. In addition, the Company has deferred approximately $902,000 to
cover the repayment of performance penalties related to this agreement.
The Company and CAHS are parties to a Joint Services Agreement with Allied
(the "Joint Services Agreement"), which was attached as Exhibit No. 10(c) to the
Company's Form 10-QSB for the quarter ended April 30, 1997 and is incorporated
by reference herein. Under the
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Joint Services Agreement, the Company and CAHS deliver health care management
services in the form of management of medical specialty networks to various BCBS
plans throughout the United States. The Joint Services Agreement 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 prior to the end of any
three-year period. The Company did not receive any revenue under the Joint
Services Agreement through October 31, 1998. By a letter dated November 9, 1998,
the Company received written notice from Allied pursuant to which Allied
purportedly terminated the Joint Services Agreement without cause, effective
December 9, 1998. The Company is contesting this termination through
arbitration. (See "Item 3-Legal Proceedings-Contractual Dispute" for a more
detailed explanation of this matter).
Excess Performance Revenues from Blue Cross and Blue Shield of
Rhode Island ("BCBSRI")
The Company earned excess performance revenues from BCBSRI for BCBSRI's
calendar year ended December 31, 1997. The Company realized approximately
$1,300,000 in excess performance revenues during the fiscal year ended October
31, 1998 compared to approximately $210,000 for the last fiscal year ended
October 31, 1997. Management anticipates that this excess performance revenue
will not continue during fiscal year 1999. Additionally, the Company
re-negotiated the services agreement with BCBSRI, which was attached as Exhibit
10(a) to the Company's Form 10-QSB for the quarter ended July 31, 1997 and is
incorporated by reference herein. This agreement provides for fixed compensation
and a small amount of incentive revenues at stake for the Company. Management
estimates the revenue realized from this customer during the fiscal year to end
October 31, 1999 will be approximately $1,300,000 less than the aggregate
amounts of approximately $3,100,000 received for the fiscal year ended October
31, 1998. Management plans to replace this revenue by entering into more
contracts and expanding its customer base. However, there can be no assurances
that management will be successful in expanding its customer base and replacing
this non-recurring revenue stream during fiscal year 1999. (See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations-Cautionary Statements").
Results of Operations--1998 Compared to 1997
Revenues:
<TABLE>
<CAPTION>
Year Ended
-------------------------------------------------
1998 1997
---------------------- ----------------------
Amount Percent Amount Percent
----------- ------- ----------- -------
<S> <C> <C> <C> <C>
Revenues from fixed-fee arrangements $16,821,000 89% $12,970,000 92%
Revenues from performance-based arrangements 2,064,000 11% 834,000 6%
Consulting revenues 18,000 0% 273,000 2%
----------- --- ----------- ---
Total revenues $18,903,000 100% $14,077,000 100%
=========== === =========== ===
</TABLE>
20
<PAGE>
Total revenues for the fiscal years ended October 31, 1998 and October 31,
1997 were approximately $18,903,000 and $14,077,000, respectively. The increase
in the current year was primarily attributable to: (i) excess performance
revenues of approximately $1,300,000 from BCBSRI, (ii) increased revenues from
Allied of approximately $900,000, and (iii) increased fixed compensation revenue
of approximately $2,300,000 from the Company's core contracts as a result of the
re-negotiation efforts during fiscal year 1997.
These incremental revenues are largely offset by increased selling,
general and administrative expenses of approximately $1,500,000 as a result of
the Company's enhanced product development efforts as well as its increased
emphasis on marketing and sales during the fiscal year ended October 31, 1998.
Additionally, the Company has experienced a shift in its revenue mix as a result
of the re-negotiation of two major contracts during the prior fiscal year,
leading to increased fixed fees being recognized for the year ended October 31,
1998 of approximately $3,851,000 over the amount in the corresponding 1997
period.
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 twelve months
ended October 31, 1998 are accurate based upon the data available to management.
However, information received by the Company after the filing of this Form
10-KSB could result in an adjustment of its estimates of performance-based
revenues (which would be reflected in subsequent quarters, if necessary).
Revenues from at-risk performance-based service contracts generally tend
to follow a pattern whereby significant revenues are generated during the
initial term of the contract as savings opportunities are the greatest and then
decline thereafter as the opportunity for additional savings diminishes. As a
result, the Company's ability to increase revenues and gross margins is
dependent upon its ability to enter into additional contracts with new customers
and/or expand the services provided to existing customers.
Cost of services - Cost of services for the fiscal years ended October 31, 1998
and October 31, 1997 were approximately $7,903,000 and $7,937,000, respectively.
The decrease in the cost of services of approximately $34,000 is largely due to
increases in personnel costs of approximately $213,000, professional and
consulting costs of approximately $79,000, primarily offset by decreases in
information and communication costs of approximately $225,000, and a decrease of
approximately $89,000 in other costs.
Operating expenses
Selling, general and administrative:
Selling, general and administrative costs during the fiscal year ended
October 31, 1998
21
<PAGE>
were $6,842,000 compared to $5,278,000 in the prior fiscal year. The increase in
selling, general and administrative costs of approximately $1,564,000 is largely
due to increases in personnel costs of approximately $737,000 including
incentive compensation paid to executive management of approximately $275,000,
an increase in travel costs of approximately $94,000, and facility costs of
approximately $20,000, an increase in telephone costs of approximately $69,000
and an increase in professional and consulting costs of approximately $739,000
in connection with a proposed corporate transaction that was later abandoned.
The Company experienced increased marketing and sales costs during the period
ended October 31, 1998. This increase is attributable to the Company's increased
marketing and sales efforts, as well as, increased emphasis on new product
development.
While management has taken and intends to take additional steps to reduce
general and administrative costs, any future reductions in such costs may be
offset to some extent, by anticipated increases in selling, marketing and
service development costs. There is no assurance that management will be
successful in reducing general and administrative costs by any significant
amount. (See "Management's Discussion and Analysis of Financial Condition and
Results of Operations-Cautionary Statements")
Depreciation and amortization:
Depreciation and amortization for the fiscal year ended October 31, 1998
aggregated $1,143,000, of which $538,000 is included in cost of services,
compared to $1,033,000 for the fiscal year ended October 31, 1997, of which
$549,000 is included in cost of services. Depreciation and amortization for the
year ended October 31, 1998 includes amortization of intangible assets
attributed to the Services Agreement with Horizon BCBSNJ in connection with the
acquisition of CHCM of approximately $122,000 (See "Notes to Financial
Statements - Introduction and Background"), amortization of approximately
$337,000 relating to other intangible assets and depreciation of property and
equipment of approximately $683,000.
Interest expense:
Net interest expense during the fiscal year ended October 31, 1998 was
$305,000 compared with net interest expense of $371,000 for the year ended
October 31, 1997. The decrease in net interest expense of approximately $66,000
is largely due to decreased interest costs under the IBM master lease agreement
of approximately $62,000 and decreased interest costs related to the CW Note of
approximately $53,000 (for a more detailed explanation of the CW Note, see
"Notes to Financial Statements - Introduction and Background"). These decreases
were partially offset by increased interest costs under the Horizon BCBSNJ Note
of approximately $53,000 (for a more detailed explanation of the Horizon BCBSNJ
Note, see "Financial Condition-Liquidity and Capital Resources").
Financial Condition
Liquidity and Capital Resources:
At October 31, 1998, the Company had cash of $3,745,000 and a working
capital surplus of approximately $1,077,000. At October 31, 1997, the Company's
cash balance was $1,038,000
22
<PAGE>
and the working capital deficiency was approximately $2,487,000. The decrease in
working capital deficiency of approximately $3,564,000 is largely due to the
conversion of the $2,000,000 CW Note for Common Stock, increased BCBSRI
performance revenues of approximately $1,300,000, as well as increased revenues
from the Company's core contracts of approximately $2,300,000 and from Allied of
approximately $900,000.
Net cash provided from operating activities amounted to approximately
$4,415,000 and $1,117,000 for the fiscal years ended October 31, 1998 and 1997,
respectively. This improvement is largely due to the increased operating income
generated during the fiscal year ended October 31, 1998.
Net cash used by investing activities amounted to approximately $1,133,000
and $623,000 for the fiscal years ended October 31, 1998 and 1997, respectively.
This increase of approximately $490,000 is primarily due to increased capital
expenditures incurred in connection with Software Development during the current
fiscal year.
Net cash used by financing activities amounted to approximately $575,000
and $623,000 for the fiscal years ended October 31, 1998 and 1997, respectively.
This decrease of approximately $48,000 is primarily due to reduced payments
related to the IBM Master lease agreement during the fiscal year ended October
31, 1998.
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 its Credit Agreement with Summit Bank will provide adequate
capital resources to support the Company's anticipated cash needs for fiscal
year ending October 31, 1999.
Financing:
Amounts payable pursuant to long-term financing arrangements as of October
31, 1998 consisted of approximately $422,000 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 Master Lease expires in 1999, and bears
interest at 11.39% per annum. The Company's obligations under this Master Lease
arrangement are guaranteed by Horizon BCBSNJ.
Pursuant to the BCBSNJ Note, the Company owes $1,863,000 to Horizon BCBSNJ
due in equal monthly payments of principal and interest commencing on October 1,
1998 and ending on June 30, 2000, at which time such amount is payable and due
in full. The promissory note bears interest at a five-year U.S. treasury yield,
adjusted quarterly. While there can be no assurances that future operating
results will be sufficient to fund this obligation of the Company, management
expects such amounts to be funded through operations.
Effective June 30, 1998, the CW Note (plus $377,000 accrued interest)
issued by the Company to CW Ventures was automatically converted into 7,799,997
shares of the Company's Common Stock and the CW Note was then canceled.
23
<PAGE>
In connection with management's decision to more effectively streamline
its operations, 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 leasehold
improvement, software and computer hardware costs during the first and second
quarter of fiscal 1999 of approximately $500,000. Such costs are expected to be
financed with the Company's current cash reserves and future operating cash
flows.
The Company has a credit facility with a bank that provides for a
$1,500,000 working capital revolver to be used for general working capital
needs, which has been extended through September 3, 1999. In September of 1998,
the bank issued an irrecovable letter of credit in the amount of $250,000 for
the account of the Company in favor of a vendor as security for the Company's
obligation under a noncancelable operating lease. This letter of credit is
issued under the Company's credit facility and the availablity is thus reduced
by the face amount of the letter of credit. The remainder of the credit facility
is available to the Company.
Year 2000
In connection with Year 2000 compliance, 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.
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Financial Statements and supplementary data required by this item
appear under the caption "Index to Consolidated Financial Statements" and are
included elsewhere herein.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
24
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
The Company's directors, executive officers and control persons are as
follows:
Name Age Positions with the Company
---- --- --------------------------
William J. Marino (1) 55 Chairman of the Board of Directors
Robert J. Pures (2) 53 Director
Barry Weinberg (1) 60 Director
David McDonnell (1) (2) 56 Director
Walter Channing, Jr. (2) 58 Director
Thomas P. Riley(3) 41 Director, President and Chief
Executive Officer
Richard W. Freeman (4) 51 President and Chief Operating Officer
David Noone (5) 45 Director, Chief Executive Officer
Stephan D. Deutsch 55 Senior Vice President and National
Medical Director
Elaine del Rossi 51 Senior Vice President, Marketing
and Sales
David G. DeBoskey 33 Vice President, Finance and Accounting
- ----------
(1) Member of Compensation Committee
(2) Member of Audit Committee
(3) Resigned as President and Chief Executive Officer effective October 30,
1998. Resigned as director effective November 16, 1998.
(4) Appointed President and Chief Operating Officer effective October 30,
1998.
(5) Effective January 8, 1999.
There is no family relationship between any Director or Executive Officer
of the Company. At a meeting of the Company's Board of Directors held on January
14, 1997, a Compensation Committee and Audit Committee were formed.
All directors of the Company are elected by the stockholders of the
Company or, in the case of a vacancy, are elected by the directors then in
office to hold office until the next annual meeting of stockholders of the
Company and until their successors are elected and qualify or until their
earlier resignation or removal.
25
<PAGE>
The Company, Horizon BCBSNJ and CW Ventures are parties to the
Stockholders' Agreement, pursuant to which Horizon BCBSNJ and CW Ventures have
agreed that each of them shall be entitled to designate two members of the
Board; two members will be management of the Company acceptable to CW Ventures
and Horizon BCBSNJ, and there shall be one non-employee outside director who is
acceptable to CW Ventures and Horizon BCBSNJ (See "Description of Business -
Change in Control" above). CW Ventures has designated Barry Weinberg and Walter
Channing, Jr. as members of the Board. Horizon BCBSNJ has designated William J.
Marino and Robert J. Pures as members of the Board. There is currently one
vacancy on the Board, which vacancy is one of the Company's management
directorships.
The following sets forth certain information with respect to each Director
and Executive Officer of the Company:
William J. Marino--Since February 1996, a director of the Company. Since
December 1993, a director of Contemporary HealthCare Management Systems, Inc.
Since January 1994, President and Chief Executive Officer and director of
Horizon BCBSNJ. From January 1992 through December 1993, Senior Vice President
of Horizon BCBSNJ. Mr. Marino also currently serves as a director of Digital
Solutions, Inc.
Robert J. Pures--Since February 1996, a director of the Company. Since
1995, Senior Vice President Administration, Chief Financial Officer and
Treasurer of Horizon BCBSNJ. From October 1985 through July 1995, Vice President
- - Finance and Treasurer of Horizon BCBSNJ.
Barry Weinberg--Since May 1997, a director of the Company. Since 1981,
President of the CW Group, Inc., a company engaged in investing in the health
care field. Mr. Weinberg currently serves on the Board of Directors of
Autoimmune Inc., as well as a number of privately owned companies, and is a
general partner of CW Partners III, L.P. ("CW Partners").
Walter Channing, Jr.--Since May 1997, a director of the Company. Since
1981 Vice President of the CW Group, Inc., a company engaged in investing in the
health care field. Mr. Channing currently serves as a director for a number of
privately owned companies, and is a general partner of CW Partners.
Thomas P. Riley--From August 1996 through October 30, 1998, President and
Chief Executive Officer of the Company. From August 1996 through November 16,
1998, a director of the Company. From February 1995 through February 1996, Vice
President of Charter Medical, a company engaged in the health care services
business. From April 1988 through February 1995, President and Chief Executive
Officer of National Mentor, Inc., a company engaged in the mental health care
services business.
David J. McDonnell--Since January 1997, a director of the Company. Since
December 1993, a director of Value Health, Inc., a company engaged in the health
care service business. From September 1984 to December 1993, Chief Executive
Officer of Preferred Health Care, Inc., a company engaged in the mental health
care services business.
26
<PAGE>
Richard W. Freeman, M.D.--Since October 30, 1998 President and Chief
Operating Officer of the Company. From September 1997 through October 1998,
Executive Vice President of the Company. From April 1995 through September 1997,
Senior Vice President of CAHS. From 1994-1995, Vice President for Medical
Affairs, Johns Hopkins Bayview Medical Center, a 667 bed academic medical
center. From 1992-1994, Director, Office of Managed Care Programs and Physician
Support Services, Johns Hopkins Bayview Medical Center, The Johns Hopkins Health
System, Baltimore, Maryland.
David Noone -- Since January 8, 1999, a director of the Company. Since
January 8, 1999, Chief Executive Officer. Mr. Noone was most recently the
President and Chief Executive Officer of Value Health International where he was
responsible for the migration of Managed Health Care strategies to emerging
opportunity markets in Europe, Latin America and Asia. Previously, he served as
President and Chief Operating Officer of Preferred HealthCare, one of the
largest behavioral managed care organizations in the United States that was
acquired by Value Health, Inc. in 1993, upon which time he served as President
and Chief Executive Officer of Value Health, Insurance Services Group where he
was responsible for continued development of a diversified managed health care
company serving the property casualty, group health and auto liability sectors.
Stephan D. Deutsch, M.D. - Since July 1995, Senior Vice President and
National Medical Director of CAHS. Prior to 1995, Dr. Deutsch served as both the
President and Medical Director of a leading provider of outpatient services for
the prevention, treatment and management of work-related injuries and illnesses
in Rhode Island.
Elaine del Rossi - Since April 1998, Senior Vice President of Marketing
and Sales of the Company. From 1997-1998, Senior Vice President of Marketing and
Sales for a leading provider of Preventive Health Programs. From 1980 to 1994,
Ms. del Rossi served as an executive in marketing and sales positions for two
large insurance companies where she was responsible for the introduction and
development of several new product lines, as well as, overseeing global business
and marketing plans for these organizations.
David G. DeBoskey, C.P.A.--Since November 1997, Vice President of Finance
and Accounting of the Company. From April 1996 through November 1997, Director
of Finance and Accounting of the Company. From August 1992 through April 1996,
Accounting Manager and Subsidiary Controller for two (2) New Jersey hospitals.
From March 1991 through August 1992, Accounting Manager for a Manufacturing
Company. Prior to 1991, Mr. DeBoskey served as a Staff Accountant for an
international accounting firm where he served a number of healthcare and
manufacturing clients.
Compliance with Section 16(a) of the Securities Exchange Act of 1934:
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
the Company's officers and directors, and persons who own more than 10% of a
registered class of the Company's equity securities, to file reports of
ownership and changes in ownership with the Securities and Exchange Commission
and NASDAQ, copies of which are required by regulation to be furnished to the
Company.
Based solely on review of the copies of such forms furnished to the
Company, the Company believes that during fiscal 1998 its officers, directors
and ten percent (10%) beneficial owners complied with all Section 16(a) filing
requirements, with the exception that the annual statement of beneficial
ownership (Form 5) was not filed by CW Ventures II, L.P. on a timely basis.
Appropriate corrective action is being taken by this entity.
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth information concerning the compensation
paid or accrued by the Company for each of the three fiscal years ended October
31, 1998, to the individual performing the function of Chief Executive Officer
and each of the next four most highly
27
<PAGE>
compensated executive officers during such periods. None of the named
individuals was employed by the Company prior to the 1995 fiscal year.
Summary Compensation Table
<TABLE>
<CAPTION>
Annual Compensation Long-Term Compensation
------------------------------------------ -------------------------
Securities
Other Underlying
Year Ended Annual Options/SARs All Other
Name and Principal Position October 31 Salary Bonus Compensation (3) (#s) Compensation
- --------------------------- ---------- ------ ----- ---------------- ------- ------------
<S> <C> <C> <C> <C> <C> <C>
Thomas P. Riley 1998 $275,000 $70,138 $ 4,313 (4)
President and CEO 1997 $230,800 $300,000 $ 4,115 (4)
1996 $127,500
Richard W. Freeman, M.D. (1) 1998 $266,698 $ 35,000 $ 4,917 (4)
President and COO 1997 $254,000 $ 35,000 $25,000 $ 5,881 (4)
1996 $245,000 250,000 $ 2,498 (4)
Stephan D. Deutsch, M.D. (2) 1998 $294,231 $ 31,538
Senior Vice President and 1997 $284,615 $ 69,231
National Medical Director of CAHS 1996 $259,615 $ 23,000 250,000
Elaine del Rossi(5) 1998 $ 80,000 $ 50,000
Senior Vice President
Marketing and Sales
</TABLE>
- ----------
(1) Dr. Freeman joined the Company on April 26, 1995 and is paid an annual
salary of $275,000 under the terms of his amended and restated employment
agreement dated September 29, 1998.
(2) Dr. Deutsch joined the Company on July 1, 1995 and is paid an annual
salary of $300,000 under the terms of his employment agreement.
(3) Other Annual Compensation includes taxable fringe benefits and unused
accrued vacation days that were paid.
(4) Represents Company matching contributions to a 401(k) profit
sharing/savings plan.
(5) Ms. del Rossi joined the Company on March 25, 1998 and is paid an annual
salary of $160,000 under the terms of her employment agreement. The salary
and bonus set forth above represents compensation for partial year only.
Compensation Plans
Stock Option Plans:
On June 6, 1996 and July 24, 1996, the Board of Directors of the Company
adopted and amended (i) the 1996 Stock Option Plan (the "1996 Plan") and (ii)
the 1996 Director Stock Option Plan (the "Director Plan" and, together with the
1996 Plan, the "Stock Plans"). The Stock Plans were approved and ratified by the
majority stockholders of the Company pursuant to a written consent in lieu of a
meeting dated August 23, 1996. The key features of the Stock Plans are
summarized below.
Options covering a total of 1,933,334 shares have been granted and options
covering 758,334 shares are outstanding under the Stock Plans. Additional
non-plan options 667,919 shares in the aggregate are outstanding at October 31,
1998.
28
<PAGE>
Aggregated Option Exercises in Last Fiscal Year
and Fiscal Year-End Option Values
Number of Value of
Shares Underlying Unexcerised
Unexercised In-the-Money
Options at Options at
October 31, 1998 October 31, 1998
Exercisable/ Exercisable/
Name Unexercisable Unexercisable
- ---- ------------- -------------
Thomas P. Riley N/A N/A
Stephan D. Deutsch, M.D. (2) 166,667/83,333 $0/$0
Richard W. Freeman, M.D. (1) 166,667/83,333 $0/$0
Elaine del Rossi N/A N/A
- ----------
Based upon the average Bid and Asked prices on the OTC Bulletin Board of the
Company's Common Stock on January 20, 1999.
(1) Effective July 24, 1996, Dr. Freeman was awarded options to purchase
250,000 shares of Common Stock of the Company at an exercise price of
$0.78 per share.
(2) Effective July 24, 1996, Dr. Deutsch was awarded options to purchase
250,000 shares of Common Stock of the Company (replacing options to
purchase 16,667 shares previously granted to Dr. Deutsch during fiscal
1995) at an exercise price of $.78 per share.
No options were granted to or exercised by the named executives during the
fiscal year ended October 31, 1998.
Description of the Stock Plans:
The 1996 Plan is administered by a committee, which consists of two or
more disinterested directors of the Board of Directors of the Company (the
"Compensation Committee"). Pursuant to the terms of the 1996 Plan, the
Committee, along with the Board, will select persons to be granted options and
will determine: (i) whether the respective option is to be a non-statutory,
non-qualified option or an incentive option; (ii) the number of shares of the
Company's Common Stock purchasable under such option; (iii) the time or times
when the option becomes exercisable, except that no incentive or non-statutory,
non-qualified option shall be exercised and sold by the recipient prior to six
(6) months from the date of grant; (iv) the exercise price cannot be less than
100% of the fair market value of the Common Stock on the date of grant (110% of
such fair market value for incentive options granted to a person who owns or who
is considered to own stock possessing more than 10% of the total combined voting
power of all classes of stock of the Company; and (v) the duration of the
option, which cannot exceed ten (10) years. Incentive Options may only be
granted to employees (including officers) of the Company and/or any of its
subsidiaries. Non-statutory, non-qualified Options may be granted to any
employees (including employees who have been granted Incentive Options) and
other persons who the Board or the Committee may select.
The Director Plan is administered by the Board of Directors. Pursuant to
the terms of the Director Plan, the Board may select non-employee individual
Directors to be granted options. Each such option grant shall be (i) in the
amount to purchase 166,667 shares of Common Stock; (ii) at an exercise price
which cannot be less than 100% of the fair market value of the Common
29
<PAGE>
Stock on the date of grant; (iii) immediately exercisable, and (iv) for a
duration not to exceed ten (10) years from the date of grant. Options under the
Director Plan may be granted only to Directors of the Company.
All options granted under the 1996 Plan and the Director Plan are
exercisable during the option holder's lifetime only by the option holder (or
his or her legal representative) and only while such option holder is in the
Company's employ or is a Company director. With respect to both the 1996 Plan
and the Director Plan, in the event of termination of employment or of his or
her directorship, such person shall have three (3) months from such date to
exercise such option to the extent the option was exercisable as at the date of
termination, but in no event subsequent to the option's expiration date. With
respect to the 1996 Plan, in the event of termination of employment due to death
or disability of the option holder, such beneficiary shall have twelve (12)
months from such date to exercise such option to the extent the option was
exercisable as at the date of termination, but in no event subsequent to the
option's expiration date. With respect to the Director Plan, in the event of
termination of the option holder's directorship due to death, such beneficiary
shall have twelve (12) months from such date to exercise such option to the
extent the option was exercisable as at the date of termination, but in no event
subsequent to the option's expiration date.
Both the 1996 Plan and the Director Plan contain customary anti-dilution
provisions which provide that, in the event of any change in the Company's
outstanding capital stock by reason of stock dividend, recapitalization, stock
split, combination, exchange of shares or merger or consolidation, the Board
shall adjust the aggregate number of shares of the Common Stock reserved for
issuance under both plans. In addition, the aggregate number of outstanding
options and the exercise price per share under both plans shall be
proportionately adjusted by the Board whose determination shall be conclusive.
The Board of Directors has the authority to terminate both the 1996 Plan
and the Director Plan as well as to make changes in and additions to such plans.
In addition, upon a merger of the Company, the 1996 Plan shall terminate, and
all options granted thereunder shall terminate, unless provision be made in
writing in connection with such merger for the continuance of the 1996 Plan or
for the assumption of options theretofore granted, or the substitution for such
options of options covering the stock of a successor employer corporation, or a
parent or a subsidiary thereof, with appropriate adjustments as to the number
and kind of shares and prices, in which event the 1996 Plan and options
theretofore granted shall continue in the manner and under the terms so
provided. However, with respect to the 1996 Plan, the Board may not, unless
approved by the stockholders of the Company, change the aggregate number of
shares subject to the 1996 Plan, terminate modify or amend such plan so as to
adversely affect the rights of option holders previously granted under such
plan, change the requirement of eligibility to such plan or materially increase
the benefits accruing to participants under such plan. With respect to the
Director Plan, the Board may not, unless the option holder thereof consents,
materially impair the rights of such option holder under such plan.
30
<PAGE>
Resignations, Employment Contracts and Board Appointments
Resignation of Chief Executive Officer, President and Directors
Pursuant to written letter to the Board of Directors dated September 29,
1998, Thomas P. Riley resigned as President and Chief Executive Officer of the
Company, effective October 30, 1998. Mr. Riley resigned as a director of the
Company effective November 16, 1998.
Noone Employment Agreement
Effective as of January 8, 1999 the Company entered into an Employment
Agreement and Confidentiality, Invention and Non-Compete Agreement of even date
therewith with David Noone, its current Chief Executive Officer (collectively,
the "Noone Agreements"), which are attached as Exhibit 10.32 and 10.33 hereto,
respectively and are incorporated by reference herein. The Noone Agreements
provide for a one-year term commencing January 8, 1999, with annual compensation
of $300,000 per annum. The Company will pay Mr. Noone a severance payment equal
to six-months salary if he is terminated upon a "Change of Control" (as defined
below). In addition, Mr. Noone is subject to a non-compete restriction during
the term of employment plus two years thereafter. The Noone Agreements further
provide for the issuance of stock options as of the commencement date providing
Mr. Noone with an option to purchase Common Stock in an amount equal to four per
cent (4%) of the Company's capitalization on such date, upon the terms and
conditions set forth therein. These options are subject to accelerated vesting,
if: (a) the Company's Common Stock reaches certain target levels or (b) either
of the Company's two largest shareholders, Horizon BCBSNJ and CW Ventures, sells
or transfers its shares of Common Stock to a non-affiliated party ("Change of
Control") for a price at least 300% higher than the average sales price of the
Company's Common Stock, during the thirty (30) days prior to his employment with
the company, as reported by Bloomberg Business Services. For this purpose,
Horizon BCBSNJ and CW shall not be considered affiliated with each other.
Pursuant to unanimous written consents of each of the Compensation
Committee of the Board of Directors and the Board of Directors of the Company,
dated January 8, 1999, David Noone was appointed a "management director" of the
Board of Directors effective as of January 8, 1999, filling a vacancy on the
Board.
Freeman Employment Agreement
The Company entered into an Amended and Restated Employment Agreement,
dated as of September 29, 1998, with Richard Freeman, M.D., the current
President and Chief Operating Officer of the Company and CAHS (the "Freeman
Employment Agreement"). The Freeman Employment Agreement is attached as Exhibit
10.36 hereto and is incorporated by reference herein. The term of the Freeman
Employment Agreement commenced on October 30, 1998 and continues for a two-year
period, with an additional one-year renewal. Dr. Freeman is entitled to an
annual salary of $275,000, plus other benefits set forth therein. The Freeman
Employment Agreement provides for a cash bonus in the amount of $95,000 in the
event of a "Change in Control of the Company" (as defined therein). The Freeman
Employment Agreement also contains a non-compete restriction during the term of
Dr. Freeman's employment plus two years thereafter.
del Rossi Employment Agreement
Effective as of March 25, 1998 the Company entered into an Employment
Agreement (the "del Rossi Employment Agreement") and Confidentiality, Invention
and Non-Compete Agreement (the "Confidentiality Agreement") of even date
therewith with Elaine del Rossi, the current Senior Vice President for Marketing
and Sales of the Company, which are attached as Exhibit 10.37 and 10.38 hereto,
respectively, and are incorporated by reference herein. The term of the del
Rossi Employment Agreement commenced on March 25, 1998 and continues for a
one-year period, with successive one-year renewal terms. Ms. del Rossi is
entitled to an annual salary of $160,000, plus other benefits set forth therein.
The del Rossi Employment Agreement provides for a cash bonus of $50,000 upon Ms.
del Rossi's commencement of employment with the Company. In addition, Ms. del
Rossi is entitled to commissions as additional compensation if certain sales
goals are met. The del Rossi Confidentiality Agreement contains a non-compete
restriction during the term of Ms. del Rossi's employment plus one year
thereafter.
Deutsch Employment Agreement
Effective as of April 28, 1998 the Company and CAHS entered into an
Employment Agreement with Stephan D. Deutsch, M.D. (the "Deutsch Employment
Agreement"), the current Senior Vice President of CAHS and National Medical
Director of CAHS, which is attached as Exhibit 10.39 hereto and is incorporated
by reference herein. The term of the Deutsch Employment Agreement commenced on
April 28, 1998 and continues for a two-year period, with a successive one-year
renewal term. Dr. Deutsch is entitled to an annual salary of $250,000, an annual
supplemental salary of $50,000 for his services as National Medical Director of
CAHS, plus other benefits set forth therein. Under the Deutsch Employment
Agreement, Dr. Deutsh is entitled to participate in any CAHS' Executive Annual
Bonus Incentive Plan as may be established by the Board. The Deutsch Employment
Agreement also contains solicitation and non-compete restrictions during the
term of Dr. Deutsch's employment plus one year thereafter.
31
<PAGE>
Compensation of Directors:
The Company executed a Consultation Agreement dated October 1, 1997, which
was attached as Exhibit 10.21 to the Company's Form 10-KSB for the period ended
October 31, 1997 and is incorporated by reference herein, with an independent
director of the Company, David McDonnell, providing for compensation of $25,000
per month for the last three months of calendar year 1997 (October 1997-December
1997) for an aggregate amount of $75,000. The Company paid $50,000 during the
fiscal year ended October 31, 1998 under the terms of this agreement.
All other members of the Board of Directors of the Company presently
receive no annual remuneration for acting in that capacity. The Company
anticipates that its non-employee directors will be paid reasonable
out-of-pocket expenses for each attended meeting of the Board or any committee
thereof. Certain members of the Board of Directors of the Company will also be
eligible for the grant of options under the Director Plan that currently
provides for each non-employee Director to receive an annual grant of options to
purchase 166,667 shares of the Company's Common Stock. None of the current
directors have been granted any options pursuant to the Director Plan. (See
"Compensation Plans - Description of Stock Plans" above.)
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the
beneficial ownership of the Common Stock by (i) all persons known to the Company
who own more than 5% of the outstanding Common Stock, (ii) each Director, (iii)
each executive officer named in the Summary Compensation Table, and (iv) all
executive officers and Directors as a group, in each case, as of December 23,
1998. Unless otherwise indicated, the persons named in the table below have sole
voting and investment power with respect to all shares of Common Stock shown as
beneficially owned by them.
Beneficial Ownership of Common Stock by
Certain Stockholders and Management
<TABLE>
<CAPTION>
Number of Shares Percent of
Name Beneficially Owned(1) Ownership(2)
- ---- --------------------- ------------
<S> <C> <C>
Horizon Blue Cross and Blue Shield of
New Jersey, Inc. (3)(4)(5).................................. 37,617,420 45.77
CW Ventures II, L.P.(5)(6)(7).................................. 37,784,087 45.79
William J. Marino(3)........................................... 334 *
Robert J. Pures(3)............................................. 0 n/a
David J. McDonnell(9).......................................... 0 n/a
Walter Channing, Jr.(5)(6)(7)(8)............................... 37,784,087 45.79
Charles Hartman(5)(6)(7)(8).................................... 37,784,087 45.79
Barry Weinberg(5)(6)(7)(8)..................................... 37,784,087 45.79
Thomas P. Riley(10) (11)....................................... 0 n/a
</TABLE>
32
<PAGE>
<TABLE>
<CAPTION>
Number of Shares Percent of
Name Beneficially Owned(1) Ownership(2)
- ---- --------------------- ------------
<S> <C>
Stephan Deutsch, M.D(1)(2)(12)................................. 166,667 *
Richard W. Freeman, M.D(1)(2)(12).............................. 166,667 *
Elaine del Rossi (12).......................................... 0 n/a
David Noone (12)............................................... 0 n/a
Current Directors and Executive Officers as
a Group (seven persons)........................................ 38,117,421 46.19
</TABLE>
- ----------
* Less than one percent.
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission, which generally attribute beneficial
ownership of securities to persons who possess sole or shared voting or
investment power with respect to those securities. Includes outstanding
shares and shares subject to options exercisable within 60 days.
(2) The percent beneficially owned by any person or group who held options
exercisable within 60 days of December 23, 1998 has been calculated
assuming all such options have been exercised in full and adding the
number of shares subject to such options to the total number of shares
issued and outstanding.
(3) The business address of such person or entity is 3 Penn Plaza East,
Newark, New Jersey 07105.
(4) Includes 24,242,337 shares of Common Stock issued by the Company on
February 27, 1997 for failure to meet certain revenue and income
thresholds. In the event that the Services Agreement is terminated by
BCBSNJ, CW Ventures will have the right to purchase BCBSNJ shares in
accordance with the terms of the Stockholders' Agreement.
(5) BCBSNJ may be deemed a member of a "group," as such term is used in
Section 13(d) of the Exchange Act, with CW Ventures, CW Partners III,
L.P., the general partner of CW Ventures ("CW Partners"), and Walter
Channing, Charles Hartman and Barry Weinberg, the general partners of CW
Partners. BCBSNJ on the one hand, and CW Ventures, CW Partners and Messrs.
Channing, Hartman and Weinberg, on the other, disclaim membership in a
group for the purpose of Section 13(d) of the Exchange Act or for any
other purpose.
(6) The business address of such person or entity is 1041 Third Avenue, New
York, New York 10021.
(7) Includes 7,799,997 shares of Common Stock issued upon conversion of the CW
Note, 25,914,222 shares of Common Stock issued by the Company on February
27, 1997 for failure to meet certain revenue and income thresholds and
166,667 shares of Common Stock issuable upon exercise of the CW Warrants.
CW Ventures has sole voting and disposition power over shares owned by it.
(8) Includes 37,617,420 shares directly owned by CW Ventures and 166,667
shares of Common Stock issuable upon exercise of the CW Warrants. Messrs.
Channing, Hartman and Weinberg are the general partners of CW Partners,
and as such may be deemed to beneficially own such shares and to have
shared voting and disposition power over such shares. Messrs. Channing,
Hartman and Weinberg disclaim beneficial ownership of such shares except
to the extent of their respective direct and indirect partnership
interests in CW Ventures.
(9) The business address of such person is 301 Aqua Court, Naples, Florida
34102.
(10) The business address of such person is 3 Long Ridge Lane, Ipswich,
Massachusetts 01938.
33
<PAGE>
(11) Effective October 30, 1998, Mr. Riley resigned his position as President
and Chief Executive Officer of the Company. Effective November 16, 1998
Mr. Riley resigned as a director of the Company.
(12) The business address of such person is 485-C Route 1 South, Iselin, New
Jersey 08830.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company has entered into a series of transactions with Horizon BCBSNJ.
In February 1996, the Company issued the Horizon BCBSNJ Note, in the original
principal amount of $3,600,000, which provided for conversion into 13,375,083
shares of Common Stock and the issuance of an additional 24,242,337 shares of
Common Stock for failure of the Company to meet certain revenue and income
thresholds. Accordingly, in conjunction with this obligation the Company issued
to Horizon BCBSNJ 24,242,337 shares of Common Stock on February 27, 1997. For
further description of the BCBSNJ Note, see "Description of Business -
Introduction and Background." As of January 11, 1999, Horizon BCBSNJ is the
beneficial owner of 37,617,420 shares of Common Stock, constituting 45.77% of
the outstanding Common Stock at October 31, 1998. Effective June 13, 1997 the
Services Agreement with Horizon BCBSNJ was amended and restated, which amendment
was attached as Exhibit 10(a) to the Company's Form 10-QSB for the quarter ended
April 30, 1997 and is incorporated by reference herein. The First Amendment and
Restatement of the Services Agreement requires, among other things, Horizon
BCBSNJ to pay a monthly "interim payment" based on current enrollment data which
is adjusted every April and October. Currently, the Company is receiving
approximately $1,000,000 per month as a result of this agreement. However, due
to the enrollment adjustments called for in this agreement there can be no
assurances that the Company will record revenues at this level for the entire
1999 fiscal year. In addition, two (2) of BCBSNJ officers are directors of the
Horizon Company: Robert Pures, a director of the Company, is Senior Vice
President, Chief Financial Officer and Treasurer of Horizon BCBSNJ. William
Marino, a director of the Company and CHCM, is also a director, President and
Chief Executive Officer of Horizon BCBSNJ.
On or about March 22, 1996, an action entitled Francis X. Bodino v.
Horizon BCBSNJ and CHCM (the "Bodino Action") was filed in the Law Division of
the Superior Court of New Jersey in Hudson County. The complaint alleged
misrepresentations with respect to the type and amount of coverage afforded by
Mr. Bodino's policy with Horizon BCBSNJ, specifically with respect to coverage
for heart transplantation. The complaint also alleged that representations made
on behalf of Horizon BCBSNJ by an employee of CHCM led Mr. Bodino's surgeon to
believe that contractually excluded heart transplant coverage was available. The
complaint demanded a variety of money damages, as well as punitive damages,
against both defendants. The complaint also contained a claim for treble damages
and counsel fees under the New Jersey Consumer Fraud Act.
On or about June 29, 1998, a Settlement and Release Agreement was entered
into among Horizon BCBSNJ, the Company, CAHS, CHCM, Enterprise Holding Company,
Inc. ("EHC"), a subsidiary of Horizon BCBSNJ, and CW Ventures. Under this
agreement, Horizon BCBSNJ has agreed to indemnify 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.
The Company has also entered into a series of transactions with CW
Ventures. In February 1996, the Company issued the CW Note, in the original
principal amount of $2,000,000, which provided for exchange into 7,799,997
shares of Common Stock and the issuance of an additional 25,914,222 shares of
Common Stock failed to meet certain revenue and income thresholds. Accordingly,
the Company issued to CW Ventures 25,914,222 shares of Common Stock on February
27, 1997 for failure to meet such thresholds. For further description of the CW
Note, see "Description of Business - Change in Control." In February 1996 the
Company also issued to CW Ventures the CW Warrants. For further description of
the CW Warrants, see "Description of Business - Change in Control." Effective
June 30, 1998, the CW Note was automatically converted into 7,799,997 shares of
Common Stock. As of December 23, 1998, CW Ventures is the beneficial owner of
37,784,087 shares of Common Stock, constituting 45.79% of the outstanding Common
Stock, assuming the exercise of the CW Warrants only. Also, two of CW Venture
officers are directors of the Company: Barry Weinberg is a director of the
Company, CAHS and CHCM and is also a General Partner of CW Partners; Walter
Channing, Jr., a director of the Company and is also a General Partner of CW
Partners.
34
<PAGE>
Effective June 13, 1997, CW Ventures granted to Horizon BCBSNJ an option
to purchase from it 10,031,238 shares of Common Stock at $0.38 per share (the
"Horizon BCBSNJ Option"), as provided in the Option Agreement dated as of June
13, 1997, between CW Ventures and Horizon BCBSNJ (the "Option Agreement") which
was included as an Exhibit to the Company's Form 10-QSB for the Quarter ended
July 31, 1997 and is incorporated by reference herein. If the fair market value
per share of Common Stock is greater than the exercise price of the Horizon
BCBSNJ Option on the applicable date of calculation, Horizon BCBSNJ may elect to
pay such exercise price by surrendering for cancellation a portion of the
Horizon BCBSNJ Option and receiving a number of shares of Common Stock according
to a formula set forth in the Option Agreement. The Horizon BCBSNJ Option is
exercisable in the event the Company achieves certain goals for defined periods
through February 28, 2000, all as more fully set forth in the Option Agreement.
Because the Company did not achieve certain financial goals, 5,015,619 shares
subject to the Horizon BCBSNJ Option were non-exercisable as of October 31,
1998. The remaining shares subject to the Horizon BCBSNJ Option are exercisable
if the aggregate fees received by the Company under the Horizon Healthcare
Letter Agreement meet certain targets set forth in the Option Agreement for the
period through February 28, 2000. However, if the Administrative Service
Agreement or the Horizon Healthcare Letter Agreement are terminated at any time
after October 31, 1997 by Allied without cause, the target date is accelerated.
As of December 1998, at the termination of the Horizon Healthcare Letter
Agreement, the Company did not meet these revenue targets. The option was
granted by CW Ventures to Horizon BCBSNJ in consideration of Horizon BCBSNJ's
revision of its Services Agreement with the Company, entering into a joint
services agreement between Horizon BCBSNJ, the Company and an unrelated party
and the agreement to guaranty the Summit Bank Credit Agreement (see Note J in
the "Notes to the Financial Statements"). The Horizon BCBSNJ Option has been
valued at $15,000 which amount will be amortized over the three-year term of the
amended Services Agreement.
ITEM 13. EXHIBITS AND REPORTS ON FORM 10-KSB
(a) Exhibits
Exhibit No. Description of Exhibit
- ----------- ----------------------
2.1 Deposit Agreement dated October 31, 1994 among Midlantic Bank,
N.A., PMDX and the Registrant incorporated by reference to
exhibit 2.1 filed with the Company's Registration Statement on
Form S-1 (File No. 33-89176).
2.2 Certificate of Merger of Care Advantage Health Systems (f/k/a
Advantage Health Systems, Inc.), a Georgia corporation into
CareAdvantage Health Systems, Inc., a Delaware corporation
incorporated by reference to exhibit 2.2 filed with the Company's
Registration Statement on Form S-1 (File No. 33-89176).
3.1 Registrant's Certificate of Incorporation incorporated by
reference to exhibit 3.1 filed with the Company's Registration
Statement on Form S-1 (File No. 33-89176).
3.11 Amended and Restated Certificate of Incorporation incorporated by
reference to the Company's Information Statement dated September,
1996.
3.2 Registrant's By-Laws incorporated by reference to exhibit 3.2
filed with the Company's Registration Statement on Form S-1
(File No. 33-89176).
35
<PAGE>
10.1 Letter of intent dated September 30, 1994 between the Registrant
and New Jersey BCBS, amendments thereto of December 29, 1994,
February 27, 1995 and April 4, 1995 and Interim Services
Agreement as of April 1, 1995 between the Registrant and New
Jersey BCBS incorporated by reference to exhibit 10.12 filed with
the Company's Registration Statement on Form S-1 (File No.
33-89176).
10.1(a) December 22, 1995 Letter Agreement between the Registrant and New
Jersey BCBS extending the Letter of Intent and Interim Services
Agreement to March 31, 1996 incorporated by reference to exhibit
10.12(a) filed with the Company's Annual Report on Form 10-KSB
for the year ended October 31, 1996.
10.2 Lease Agreement dated April 14, 1995 between the Registrant and
Koll Life Insurance Company incorporated by reference to exhibit
10.13 filed with the Company's Registration Statement on Form S-1
(File No. 33-89176).
10.3 Letter of Intent dated January 2, 1996 between CW Ventures II,
L.P., the Registrant and its CareAdvantage Health Systems, Inc.
subsidiary incorporated by reference to exhibit 10.14 filed with
the Company's Annual Report on Form 10-KSB for the year ended
October 31, 1996.
10.4 Securities Purchase Agreement dated February 22, 1996 among CW
Ventures, CAHS and the Registrant incorporated by reference to
exhibit 10.15 filed with the Company's Annual Report on Form
10-KSB for the year ended October 31, 1996.
10.5 CW Exchangeable Note incorporated by reference to exhibit 10.16
filed with the Company's Annual Report on Form 10-KSB for the
year ended October 31, 1996.
10.6 Stock Acquisition Agreement dated February 22, 1996 among EHC,
CHCM, CAHS and the Registrant incorporated by reference to
exhibit 10.17 filed with the Company's Annual Report on Form
10-KSB for the year ended October 31, 1996.
10.7 EHC Exchangeable Note incorporated by reference to exhibit 10.18
filed with the Company's Annual Report on Form 10-KSB for the
year ended October 31, 1996.
10.8 Services Agreement dated February 22, 1996 among BCBSNJ, CHCM,
CAHS and the Registrant incorporated by reference to exhibit
10.19 filed with the Company's Annual Report on Form 10-KSB for
the year ended October 31, 1996.
10.9 Stockholders' Agreement dated February 22, 1996 among EHC, CW
Ventures and the Registrant incorporated by reference to exhibit
10.20 filed with the Company's Annual Report on Form 10-KSB for
the year ended October 31, 1996.
10.10 Joint Services Agreement, dated May 29, 1997, among Allied Health
Group, Inc., CAHS, Inc. and the Company incorporated by reference
to exhibit 10(c) filed with the Company's Form 10-QSB for the
quarter ended April 30, 1997.
36
<PAGE>
10.11 Agreement, dated as of January 1, 1997 between Blue Cross and
Blue Shield of Rhode Island ("BCBSRI") and CAHS, Inc.
incorporated by reference to exhibit 10(a) filed with the
Company's Form 10-QSB for the quarter ended July 31, 1997.
10.12 Consultant Agreement dated March 17, 1997, between Coordinated
Health Partners, Inc. d/b/a Blue Chip, and CAHS, Inc.
incorporated by reference to exhibit 10(d) filed with the
Company's Form 10-QSB for the quarter ended April 30, 1997.
10.13 Letter Agreement, dated as of March 1, 1997, between Medigroup of
New Jersey, Inc. d/b/a HMO Blue, the Company and Allied Health
Group, Inc. incorporated by reference to exhibit 10(e) filed with
the Company's Form 10-QSB for the quarter ended April 30, 1997.
10.14 First Amendment and Restatement of Services Agreement, dated as
of June 13, 1997, among CAHS, Inc., CHCM, the Company and BCBSNJ
incorporated by reference to exhibit 10(b) filed with the
Company's Form 10-QSB for the quarter ended April 30, 1997.
10.15 Credit Agreement among Summit Bank, the Company and BCBSNJ, dated
June 13, 1997 incorporated by reference to exhibit 10(f) filed
with the Company's Form 10-QSB for the quarter ended April 30,
1997.
10.16 Revolving Credit Note, dated June 13, 1997 by the Company in
favor of Summit Bank in the original principal amount of
$1,500,000 incorporated by reference to exhibit 10(f)(1) filed
with the Company's Form 10-QSB for the quarter ended April 30,
1997.
10.17 Term Note, dated June 13, 1997, by the Company in favor of Summit
Bank in the original principal amount of $1,500,000 incorporated
by reference to exhibit 10(f)(2) filed with the Company's Form
10-QSB for the quarter ended April 30, 1997.
10.18 Promissory Note and Security Agreement, dated April 1, 1997, by
CHCM in favor of BCBSNJ, in the original principal amount of
$1,862,823 incorporated by reference to exhibit 10(f)(3) filed
with the Company's Form 10-QSB for the quarter ended April 30,
1997.
10.19 Employment Agreement between the Company and Thomas Riley, dated
June 10, 1997, as supplemented by a side agreement with CW and
BCBSNJ, of even date therewith incorporated by reference to
exhibit 10(a) filed with the Company's Form 10-QSB for the
quarter ended April 30, 1997.
10.20 Services Agreement as of January 5, 1998, by and between New York
Care Plus Insurance Company, Inc. and the Company.
10.21 Consultation Agreement dated October 1, 1997 by and between the
Company and David McDonnell, an independent director of the
Company.
10.22 Mutual Release Agreement dated as of January 6, 1998 between the
Company and MEDecision, Inc.
37
<PAGE>
10.23 Separation Agreement dated April 20, 1995 between PMDX and the
Registrant incorporated by reference to exhibit 10.1 filed with
CAI's Registration Statement on Form S-1 (File No. 33-89176).
10.24 Agreement dated as of January 1, 1995, between Maine BCBS and
CAHS incorporated by reference to exhibit 10.2 filed with CAI's
Registration Statement on Form S-1 (File No. 33-89176).
10.25 Products and Services Agreement dated November 7, 1994 between
MEDecision, Inc. and CAHS incorporated by reference to exhibit
10.3 filed with CAI's Registration Statement on Form S-1 (File
No. 33-89176).
10.26 Registrant's 1995 Comprehensive Stock Incentive Plan incorporated
by reference to exhibit 4.2 filed with CAI's Registration
Statement on Form S-1 (File No. 33-89176).
10.27 Registrant's 1996 Stock Option Plan incorporated by reference to
CAI's Information Statement dated September 1996.
10.28 Registrant's 1996 Director Stock Option Plan incorporated by
reference to CAI's Information Statement dated September 1996.
10.29 Option Agreement between CW Ventures and BCBSNJ incorporated by
reference to exhibit 5 of Schedule 13(d) of BCBSNJ respecting
beneficial ownership of Common Stock of the Company dated June
1997.
10.30 Settlement and Release Agreement dated January 13, 1998 between
the Company and John Petillo incorporated by reference to Exhibit
10.30 filed with the Company's Form 10-KSB for the year ended
October 31, 1997.
10.31 Settlement and Release Agreement dated December 19, 1997 between
the Company and Vince Achilarre incorporated by reference to
Exhibit 10.31 filed with the Company's Form 10-KSB for the year
ended October 31, 1998.
10.32 Employment Agreement between the Company and David Noone, dated
as of January 8, 1999.
10.33 Confidentiality, Invention, and Non-Compete Agreement between the
Company and David Noone, dated as of January 8, 1999.
10.34 Settlement and Release Agreement entered into among Horizon
BCBSNJ, the Company, CAHS, and CHCM, Enterprise Holding Company,
Inc. ("EHC") and CW Ventures, incorporated by reference to
Exhibit 10(a) filed with CAI's Form 10-QSB for the quarter ended
July 31, 1998.
38
<PAGE>
10.35 Services Agreement dated as of January 1, 1999, by and between
HealthNow New York, Inc. ("HNNY") and the Company.
10.36 Amended and Restated Employment Agreement, dated as of September
29, 1998, with Richard W. Freeman, M.D., CAHS and the Company
(the "Freeman Employment Agreement").
10.37 Employment Agreement, dated as of March 25, 1997, by and between
the Company and Elaine del Rossi.
10.38 Confidentiality, Invention and Non-Compete Agreement dated as
March 25, 1998 between the Company and Elaine del Rossi.
10.39 Employment Agreement, effective as of April 28, 1998, by and
among Stephan D. Deutsch, M.D., the Company and CAHS.
16 Letter regarding change in accountants, incorporated by reference
to exhibit 16.1 filed on CAI's Form 8-K dated June 6, 1996.
27 Financial Data Schedule
--------------------------------------------
39
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
CareAdvantage, Inc.
(Registrant)
Date: January 29, 1999 By: /s/ David Noone
---------------- ------------------------
David Noone, Chief Executive Officer,
Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
Date: January 29, 1999 By: /s/ David Noone
---------------- ------------------------
David Noone, Chief Executive Officer,
Director
(Principal Executive Officer)
Date: January 29, 1999 By: /s/ David G. DeBoskey
---------------- ------------------------
David G. DeBoskey, Vice President Finance
(Principal Financial and Accounting
Officer)
Date: January 29, 1999 By: /s/ William J. Marino
---------------- ------------------------
William J. Marino, Director
Date: January 29, 1999 By: /s/ Robert J. Pures
---------------- ------------------------
Robert J. Pures, Director
Date: January 29, 1999 By: /s/ Barry Weinberg
---------------- ------------------------
Barry Weinberg, Director
Date: January 29, 1999 By /s/ Walter Channing, Jr.
---------------- ------------------------
Walter Channing, Jr., Director
Date: January 29, 1999 By: /s/ David McDonnell
---------------- ------------------------
David McDonnell, Director
40
<PAGE>
CAREADVANTAGE, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE
FILED WITH THE ANNUAL REPORT OF THE COMPANY ON FORM 10-KSB
For the Fiscal Year Ended October 31, 1998
Page
----
Included in Part II:
Report of Independent Public Accountants F-2
Consolidated Balance Sheets as of October 31, 1998 and October 31, 1997 F-3
Consolidated Statements of Operations for the years ended
October 31, 1998, and October 31, 1997 F-4
Consolidated Statements of Changes in Stockholders Equity
(Capital Deficiency) for the Years ended October 31, 1998
and October 31, 1997 F-5
Consolidated Statements of Cash Flows for the years ended
October 31, 1998 and October 31, 1997 F-6
Notes to Consolidated Financial Statements F-7 through F-18
--------------------------------------
Other financial statement schedules are omitted because the conditions requiring
their filing do not exist or the information required thereby is included in the
financial statements filed, including the notes thereto.
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Stockholders and Board of Directors of
CareAdvantage, Inc.
New York, New York
We have audited the accompanying consolidated balance sheets of CareAdvantage,
Inc. and subsidiaries as at October 31, 1998 and 1997 and the related
consolidated statements of operations, stockholders' equity (capital deficiency)
and cash flows for the years then ended. These consolidated financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements enumerated above present
fairly, in all material respects, the consolidated financial position of
CareAdvantage, Inc. and subsidiaries as at October 31, 1998 and 1997, and the
consolidated results of their operations and their cash flows for the years then
ended, in conformity with generally accepted accounting principles.
/s/ Richard A. Eisner & Company, LLP
New York, New York
November 25, 1998
With respect to Note N
January 26, 1999
F-2
<PAGE>
CAREADVANTAGE, INC.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
October 31,
1998 1997
------------ ------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 3,745,000 $ 1,038,000
Accounts receivable for services:
Stockholder 1,080,000 1,047,000
Other 667,000 408,000
Other current assets 75,000 255,000
------------ ------------
Total current assets 5,567,000 2,748,000
Property and equipment, at cost less accumulated depreciation 1,374,000 1,468,000
Intangible assets 1,768,000 1,684,000
Other assets 91,000 81,000
------------ ------------
$ 8,800,000 $ 5,981,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (CAPITAL DEFICIENCY)
Current liabilities:
Current portion of capital lease obligation $ 422,000 $ 575,000
Note payable-stockholder 2,000,000
Accounts payable 163,000 351,000
Due to stockholder 1,153,000 89,000
Due to customer 902,000
Accrued payroll and related benefits 1,211,000 563,000
Accrued expenses and other current liabilities 455,000 1,012,000
Deferred revenue, current 184,000 645,000
------------ ------------
Total current liabilities 4,490,000 5,235,000
Capital lease obligations, less current portion 422,000
Due to stockholder, less current portion 710,000 1,774,000
Deferred revenue and other liabilities, less current portion 116,000 526,000
------------ ------------
5,316,000 7,957,000
------------ ------------
Commitments and contingencies
Stockholders' equity (capital deficiency):
Preferred stock - par value $.10 per share;
authorized 10,000,000 shares; none issued
Common stock - par value $.01 per share, authorized
90,000,000 shares; issued and outstanding
82,189,883 and 74,389,886 82,000 74,000
Additional capital 22,009,000 19,640,000
Accumulated deficit (18,607,000) (21,690,000)
------------ ------------
3,484,000 (1,976,000)
------------ ------------
$ 8,800,000 $ 5,981,000
============ ============
</TABLE>
See notes to financial statements F-3
<PAGE>
CAREADVANTAGE, INC.
Consolidated Statements of Operations
Year Ended October 31,
--------------------------
1998 1997
----------- -----------
Net revenues $18,903,000 $14,077,000
Cost of services 7,903,000 7,937,000
----------- -----------
Gross profit 11,000,000 6,140,000
----------- -----------
Operating expenses:
Selling general and administrative 6,842,000 5,278,000
Depreciation and amortization 605,000 484,000
----------- -----------
Total operating expenses 7,447,000 5,762,000
----------- -----------
Operating income 3,553,000 378,000
Interest expense 305,000 371,000
----------- -----------
Income before provision for income tax 3,248,000 7,000
Provision for income taxes 165,000
----------- -----------
Net income $ 3,083,000 $ 7,000
=========== ===========
Net income per share of common stock - basic
and diluted $ .04 $ .00
=========== ===========
Weighted average number of common shares
outstanding - basic and diluted 76,990,000 74,390,000
=========== ===========
See notes to financial statements F-4
<PAGE>
CAREADVANTAGE, INC.
Consolidated Statements of Stockholders' Equity (Capital Deficiency)
<TABLE>
<CAPTION>
Common Stock
----------------------
Number Par Stockholders'
of Value Additional Accumulated Equity (Capital
Shares Amount Capital Deficit Deficiency)
------------ -------- ------------ ------------- ---------------
<S> <C> <C> <C> <C> <C>
Balance as of November 1, 1996 24,233,327 $ 24,000 $ 19,690,000 $ (21,697,000) $(1,983,000)
Issuance of common stock to Horizon BCBSNJ
and CW Ventures 50,156,559 50,000 (50,000) 0
Net income for the year ended October 31, 7,000 7,000
1997
------------ -------- ------------ ------------- -------------
Balance as of October 31, 1997 74,389,886 74,000 19,640,000 (21,690,000) (1,976,000)
Exchange of CW Ventures note for common
stock 7,799,997 8,000 2,369,000 2,377,000
Net income for the year ended October 31,
1998 3,083,000 3,083,000
------------ -------- ------------ ------------- -------------
Balance as of October 31, 1998 82,189,883 $ 82,000 $ 22,009,000 $ (18,607,000) $ 3,484,000
============ ======== ============ ============= =============
</TABLE>
See notes to financial statements F-5
<PAGE>
CAREADVANTAGE, INC.
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Year Ended October 31,
--------------------------
1998 1997
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 3,083,000 $ 7,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 1,143,000 1,033,000
Changes in:
Due to/from stockholder (33,000) (1,117,000)
Due to/from customers (259,000)
Other assets 170,000 (127,000)
Accounts payable (188,000) (218,000)
Accrued expenses and other liabilities 468,000 417,000
Deferred revenue 31,000 1,122,000
----------- -----------
Net cash provided by operating activities 4,415,000 1,117,000
Cash flows from investing activities:
Capital expenditures (1,133,000) (623,000)
Cash flows from financing activities:
Principal payments under long-term debt (575,000) (623,000)
----------- -----------
Net increase (decrease) in cash and cash equivalents 2,707,000 (129,000)
Cash and equivalents - beginning of year 1,038,000 1,167,000
----------- -----------
Cash and equivalents - end of year $ 3,745,000 $ 1,038,000
=========== ===========
Noncash operating activity:
Reclassification of deferred revenue due to customer as a result
of cancellation of contract $ 902,000
Noncash financing activities:
Effective June 30, 1998, the $2,000,000 principal amount
8% exchangeable note (plus $377,000 accrued interest)
issued by the Company to CW Ventures II L.P. was
automatically cancelled and converted into 7,799,997
shares of the Company's common stock
Supplemental disclosures of cash flow information:
Interest paid $ 85,000 $ 152,000
Income taxes paid $ 115,000
</TABLE>
See notes to financial statements F-6
<PAGE>
CAREADVANTAGE, INC.
Notes to Financial Statements
October 31, 1998 and 1997
NOTE A - INTRODUCTION AND BACKGROUND
CareAdvantage, Inc. ("CAI" or the "Company"), is a holding company which,
through its subsidiaries, CareAdvantage Health Systems, Inc. ("CAHS") and
Contemporary HealthCare Management, Inc. ("CHCM"), operates in one business
segment, providing health care cost containment services to health care insurers
and other health service organizations to reduce the costs of medical services
provided to their subscribers.
On February 22, 1996, the Company completed a series of transactions with CW
Ventures II, L.P. ("CW Ventures") and with Horizon Blue Cross and Blue Shield of
New Jersey (formerly Blue Cross and Blue Shield of New Jersey, Inc.) ("Horizon
BCBSNJ"). The transactions included the sale to CW Ventures of (i) 3,903,201
shares of the Company's common stock at a purchase price of $0.2562 per share
for an aggregate of $1,000,000; and (ii) a $2,000,000 principal amount 8%
Exchangeable Note which matured on June 30, 1998 (the "CW Note") and was then
converted into 7,799,997 shares of the Company's common stock.
Concurrently with the February 22, 1996 closing of the transaction with CW
Ventures, CAHS purchased all of the outstanding capital stock of CHCM from a
wholly owned Horizon BCBSNJ subsidiary. The CHCM stock was acquired in exchange
for CAHS's $3,600,000 principal amount 8% Exchangeable Note (the "Horizon BCBSNJ
Note") which, in turn, was exchanged on September 30, 1996 for 13,375,000 shares
of the Company's common stock.
Pursuant to the terms of the CW Note and the Horizon BCBSNJ Note, because the
Company failed to realize at least $15 million in net revenues or specified
earnings before taxes for its fiscal year ended October 31, 1996, on February
27, 1997, the Company issued an aggregate of 50,156,559 additional shares of
common stock to these stockholders, which increased the beneficial ownership
percentage of each of Horizon BCBSNJ and CW Ventures to approximately 45% on a
fully diluted basis.
The Company, Horizon BCBSNJ and CW Ventures are parties to a stockholders'
agreement dated February 22, 1996 (the "Stockholders' Agreement") whereby each
of Horizon BCBSNJ and CW Ventures have agreed to vote their shares in the
Company with respect to the election of the Company's Board of Directors for:
(i) two designees of CW Ventures; (ii) two designees of Horizon BCBSNJ; (iii)
two members of the Company's management acceptable to CW Ventures and Horizon
BCBSNJ; and (iv) one non-employee outside director acceptable to CW Ventures and
Horizon BCBSNJ. The Stockholders' Agreement prevents the Company from taking
certain material actions without Horizon BCBSNJ's and/or CW Ventures' or their
designated directors' consent.
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
[1] Principles of consolidation:
The consolidated financial statements include the accounts of CAI, and its
wholly owned subsidiary, CAHS and CAHS' wholly owned subsidiary, CHCM.
Significant intercompany accounts and transactions have been eliminated in
consolidation.
F-7
<PAGE>
CAREADVANTAGE, INC.
Notes to Financial Statements
October 31, 1998 and 1997
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
[2] Revenue recognition:
For its services, the Company is compensated either (i) on a capitated
(fixed-fee) per subscriber basis; (ii) on a performance-based method
whereby the Company shares in the realized cost savings per member as
measured against certain defined benchmarks; (iii) on the basis of a
combination of both capitation and performance-based fees; and (iv) on a
fee-for-service and consulting fee basis. Accordingly, the Company has
adopted the following accounting policies for revenue recognition under
each contract category:
(a) Revenue under the fixed-fee arrangements is recognized as the
services are provided and the related costs of services are
incurred. Although the fixed fee arrangements are not subject to any
fee adjustment based upon the attainment of target utilization
levels, such contracts may still expose the Company to potential
operating losses, particularly in the inception stages thereof.
(b) Revenue under the partial fixed fee/incentive agreements is
initially recognized for the monthly fixed fee component only as
services are provided and related costs of services are incurred.
Incentives (or reductions) based upon performance are recorded when
such amounts can reasonably be determined.
(c) Revenue under fee-for-service arrangements is recorded for special
projects or the review of cases assigned to the Company on a per
case or hourly basis.
In August of 1998 the Company received notice from one of its customers, that it
had decided to resume internal network management that it had been outsourcing
indirectly to the Company. Accordingly, a letter agreement between the Company
and this customer was terminated effective in December 1998. Revenues for the
Company from this contract were approximately $1,432,000 for the twelve-month
period ended October 31, 1998. The Company has deferred approximately $902,000
to cover the re-payment of performance penalties related to this contract.
[3] Depreciation and amortization:
Depreciation is computed by the straight-line method and is based on the
estimated useful lives of the various assets. Estimated useful lives of
depreciable assets range from three to seven years. Leasehold improvements are
amortized using the straight-line method over the remaining term of the related
lease. Intangible assets are amortized over their expected useful lives of five
to seven years on the straight-line method. Depreciation and amortization
included in cost of services amounted to $538,000 and $549,000 for the years
ended October 31, 1998 and 1997, respectively.
F-8
<PAGE>
CAREADVANTAGE, INC.
Notes to Financial Statements
October 31, 1998 and 1997
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
[4] Per share data:
Net income per share has been computed based on the weighted average
number of shares outstanding during the periods. Additional shares issued
to Horizon BCBSNJ in February 1997 pursuant to the terms of the Horizon
BCBSNJ Note have been included as if outstanding from November 1, 1996.
Additional shares issued to CW Ventures in February 1997 pursuant to the
CW Note, have been included as if outstanding since February 22, 1996, the
date of CW 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.
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128 ("SFAS 128"),
"Earnings per Share". This new standard requires dual presentation of
basic and diluted earnings per share ("EPS") on the face of the statement
of income and requires reconciliation of the numerators and the
denominators of the basic and diluted EPS calculations. This statement
became effective for the first quarter of the Company's 1998 fiscal year.
The adoption of SFAS 128 did not have any effect on the computation of
income (loss) on the Company's per share of common stock.
[5] Cash equivalents:
For purposes of the statement of cash flows, the Company considers all
highly liquid money market instruments with original maturity of three
months or less to be cash equivalents.
[6] Concentration of credit risk:
Financial instruments that potentially subject the Company to credit risk
consist of accounts receivable. The Company currently markets its services to
Blue Cross and Blue Shield companies. Collateral is not required.
[7] Estimates:
Preparation of these financial statements in conformity with generally accepted
accounting principles require the use of management's estimates. Actual results
could differ from such estimates.
The values of intangible assets are based on management's best estimates of
future revenues and cash flows to be derived from such assets.
[8] Fair value of financial instruments:
The fair value of financial instruments approximates their carrying amount.
[9] Major customers:
Two of the Company's customers accounted for approximately 67% (Horizon BCBSNJ)
and 17% of net revenues in 1998 and approximately 77% (Horizon BCBSNJ) and 11%
of net revenues in 1997. The loss of any one of these customers would have a
material adverse impact on the Company's business.
F-9
<PAGE>
CAREADVANTAGE, INC.
Notes to Financial Statements
October 31, 1998 and 1997
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
[10] Stock-based compensation:
The Financial Accounting Standard Board's Statement of Financial Accounting
Standards No. 123 ("SFAS 123"), "Accounting for Stock-Based Compensation"
encourages, but does not require, companies to record compensation cost for
stock-based employee compensation plans at fair value. The Company has elected
to continue to account for its stock-based compensation plans using the
intrinsic value method prescribed by Accounting Principles Board Opinion No. 25
("APB No. 25"), "Accounting for Stock Issued to Employees" and disclose the pro
forma effects on net income and earnings per share had the fair value of options
been expensed. Under the provisions of APB No. 25, compensation cost for stock
options is measured as the excess, if any, of the quoted market price of the
Company's common stock at the date of the grant over the amount an employee must
pay to acquire the stock. (See Note G).
NOTE C - INTANGIBLE ASSETS
Intangible assets net of accumulated amortization consist of the following:
October 31,
------------------------------
1998 1997
------------ -------------
Service agreement $ 855,000 $ 978,000
License fees 200,000 400,000
Software development cost 713,000 306,000
------------ -------------
$ 1,768,000 $ 1,684,000
============ =============
[1] Service agreement:
This amount represents the Company's service agreement with Horizon
BCBSNJ, which was recorded upon the acquisition of CHCM.
[2] License agreement:
The Company signed a five (5) year agreement commencing November 1, 1994 for
products and services (the "License Agreement") with a software development
company. Pursuant to the License Agreement, the Company was granted a perpetual
license for 100 users under a non-exclusive five year license for the use of
certain existing software, as well as, a non-exclusive five year license for use
of a new generation of customer service, utilization review and medical/surgical
case management software to be developed with CAHS's assistance.
The License Agreement required an advance payment by CAHS of $1,000,000
constituting a prepayment of all license fees for the 100 user perpetual license
and all maintenance fees for the initial five year term of the License Agreement
commencing November 1, 1994.
[3] Software development costs:
Software development costs are capitalized when project technological
feasibility is established and concluding when the product is ready for release.
Research and development costs related to software development are expensed as
incurred. Amortization of software development costs amounted to $135,000 and
$127,000 for the years ended October 31, 1998 and 1997, respectively.
F-10
<PAGE>
CAREADVANTAGE, INC.
Notes to Financial Statements
October 31, 1998 and 1997
NOTE D - PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
October 31,
--------------------------
1998 1997
----------- -----------
Computer equipment $ 1,284,000 $ 707,000
Furniture and fixtures 466,000 459,000
Office machines and telephone equipment 231,000 227,000
Leasehold improvements 106,000 105,000
Equipment under capital lease, consisting of:
Computer equipment 860,000 860,000
Telephone equipment 156,000 156,000
Leasehold improvements 309,000 309,000
----------- -----------
3,412,000 2,823,000
Less accumulated depreciation and amortization (2,038,000) (1,355,000)
----------- -----------
$ 1,374,000 $ 1,468,000
=========== ===========
Amortization in connection with equipment under capital leases amounted to
$321,000 and $326,000 during 1998 and 1997, respectively.
NOTE E - CAPITAL LEASE OBLIGATION
The following is a schedule of the present value of minimum lease payments under
capital leases as of October 31, 1998, all of which are due in the ensuing year:
Fiscal year ending October 31, 1999 $ 440,000
Less amount representing interest 18,000
---------
Present value of future minimum lease payments $ 422,000
=========
The Company's obligations under the lease agreement are guaranteed by Horizon
BCBSNJ.
NOTE F - DUE TO STOCKHOLDER
The amount due to stockholder represents cash advanced under the original
service agreement with Horizon BCBSNJ in excess of revenues earned. This
liability was subsequently restructured as a promissory note in the approximate
amount of $1,863,000 to Horizon BCBSNJ with interest accruing beginning in April
1997 and equal monthly payments of principal and interest commencing on October
1, 1998. The promissory note bears interest at the five-year U.S. treasury
yield, adjusted quarterly, and matures on June 30, 2000.
F-11
<PAGE>
CAREADVANTAGE, INC.
Notes to Financial Statements
October 31, 1998 and 1997
NOTE G - STOCKHOLDERS' EQUITY (CAPITAL DEFICIENCY)
[1] Issuance of common stock:
On June 30, 1998, the Company became contractually obligated to issue and
did issue approximately 7,800,000 shares of common stock to CW Ventures
pursuant to the terms of the CW Note. The offer and sale of these shares
were not registered under the Securities Act of 1933, as amended.
[2] Preferred stock:
The Preferred Stock is issuable in such series and with such designations,
preferences, conversion rights, cumulative, relative, participating, optional or
other rights, including voting rights, qualifications, limitations or
restrictions thereof as determined by the Board of Directors of the Company. As
such, the Board of Directors of the Company will be entitled to authorize the
creation and issuance of 10,000,000 shares of preferred stock in one or more
series with such limitations and restrictions as may be determined in the
Board's sole discretion, with no further authorization by stockholders required
for the creation and issuance thereof.
[3] Stock option plans:
The 1996 Stock Option Plan is administered by the Board of Directors of the
Company. Pursuant to the terms of the 1996 Stock Option Plan, the Board will
select persons to be granted options and will determine the terms of the
options, which must have an exercise price of not less than 100% of the fair
market value of the common stock on the date of grant and must have a duration
not to exceed ten (10) years. Under the 1996 Stock Option Plan, an aggregate of
10% of the Company's authorized number of shares of common stock or 9,000,000
shares has been reserved for issuance.
The 1996 Director Stock Option Plan is also administered by the Board of
Directors of the Company. Pursuant to the terms of the 1996 Director Stock
Option Plan, the Board may select non-employee individual Directors to be
granted options. Each such option grant shall be (i) in the amount to purchase
167,000 shares of common stock; (ii) at an exercise price which cannot be less
than 100% of the fair market value of the common stock on the date of grant;
(iii) immediately exercisable, and (iv) for a duration of ten (10) years from
the date of grant. An aggregate of 1,800,000 shares has been reserved for
issuance pursuant to the 1996 Director Stock Option Plan.
No current member of the Board of Directors has been granted any options under
the 1996 Director Stock Option Plan. When such options are granted, the Company
will incur a charge to operations equal to their fair value.
F-12
<PAGE>
CAREADVANTAGE, INC.
Notes to Financial Statements
October 31, 1998 and 1997
NOTE G - STOCKHOLDERS' EQUITY (CAPITAL DEFICIENCY) - (CONTINUED)
[3] Stock option plans: (continued)
The following is a summary of stock option activity during the years ended
October 31, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
------------------------- ----------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
------------ ----- --------- -----
<S> <C> <C> <C> <C>
Outstanding at beginning of period 1,853,000 $1.50 3,028,000 $1.35
===== =====
Cancelled (433,000) $1.67 (1,175,000) $1.13
------------ ===== --------- =====
Outstanding at end of period 1,420,000 $1.44 1,853,000 $1.50
============ ===== ========= =====
Exercisable at end of period 1,170,000 $1.58 1,433,000 $1.74
============ ===== ========= =====
</TABLE>
The fair value of options at date of grant was estimated using the
Black-Scholes Option Pricing model utilizing the following assumptions:
dividend yield of 0%, volatility of 67.67%, risk-free interest rates
ranging from 6.8% to 6.95% and expected life of 10 years.
Had the Company elected to recognize compensation cost based on the fair
value of the options at the date of grant as prescribed by SFAS 123, pro
forma net income (loss) for the years ended October 31, 1998 and 1997
would have been approximately $3,070,000 and ($6,000) or $.04 and $0 per
share, respectively.
[4] Warrants:
In addition to 166,667 warrants issued to CW Ventures in connection with a
bridge financing in a prior year, the Company issued to one of its vendors
warrants to purchase 50,000 shares of the Company's common stock at a per share
price equal to eighty percent of the average closing sales price of the stock
for the sixty consecutive business days preceding the date of exercise. The
warrants expire upon the earlier of the termination of the Agreement for
Products and Services between the Company and the vendor or October 31, 1999. In
January 1998, the Company cancelled the 50,000 warrants in exchange for the
vendor cancelling the Company's warrant to purchase shares of the vendor's
stock.
F-13
<PAGE>
CAREADVANTAGE, INC.
Notes to Financial Statements
October 31, 1998 and 1997
NOTE H - INCOME TAX
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities are as follows:
October 31,
--------------------------
1998 1997
----------- -----------
Deferred tax assets:
Net operating loss carryforwards $ 3,984,000 $ 4,801,000
Accrued liabilities 56,000 63,000
Deferred revenue 115,000 398,000
Alternative minimum tax credit 50,000
----------- -----------
4,205,000 5,262,000
Deferred tax liabilities:
Excess of book over tax cost basis of fixed
assets and software costs 490,000 524,000
----------- -----------
Net deferred tax asset 3,715,000 4,738,000
Valuation allowance (3,715,000) (4,738,000)
----------- -----------
$ 0 $ 0
=========== ===========
The Company's deferred tax asset has been fully reserved as its future
realization cannot be determined. The Company has net operating loss
carryforwards of approximately $11,718,000 at October 31, 1998, expiring through
2012. Pursuant to Section 382 of the Internal Revenue Code, the carryforwards
are subject to limitations on annual utilization based upon an ownership change
that took place during 1996. It is reasonably possible that the amount of the
carryforward and its annual utilization may be reduced upon examination by the
Internal Revenue Service. The valuation allowance on the Company's deferred tax
asset decreased approximately $1,023,000 and $265,000 for the years ended
October 31, 1998 and 1997, respectively.
The difference between the federal statutory rate and the Company's effective
tax rate is as follows:
October 31,
------------------------
1998 1997
----------- -----------
Income taxes at federal statutory rate $ 1,104,000 $ 2,000
Net operating loss carryforward benefit (913,000) (2,000)
State income tax, net of federal income
tax benefit 110,000
Alternative minimum tax 55,000
Change in valuation reserve (191,000)
----------- -----------
$ 165,000 $ 0
=========== ===========
F-14
<PAGE>
CAREADVANTAGE, INC.
Notes to Financial Statements
October 31, 1998 and 1997
NOTE I - COMMITMENTS, CONTINGENCIES AND OTHER MATTERS
[1] Potential uninsured exposure to litigation:
a) On or about March 22, 1996, an action entitled Francis X. Bodino v.
Horizon 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 Horizon
BCBSNJ, specifically with respect to coverage for heart
transplantation. The complaint also alleges that representations
made on behalf of Horizon BCBSNJ by an employee of CHCM led Mr.
Bodino's surgeon to believe that contractually excluded heart
transplant coverage was available. The complaint demanded a variety
of money damages, as well as punitive damages, against both
defendants. The complaint also contained a claim for treble damages
and counsel fees under the New Jersey Consumer Fraud Act.
On or about June 29, 1998, a Settlement and Release Agreement, was
entered into among Horizon BCBSNJ, the Company, CAHS, CHCM,
Enterprise Holding Company, Inc. ("EHC"), a subsidiary of Horizon
BCBSNJ 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.
b) The Company has been named as a party in an action entitled Robert
T. Caruso v. Care Advantage, Inc., John J. Petillo, Vincent M.
Achillare, Lawrence A. Whipple, Horizon BCBSNJ et al., which was
filed in Superior Court of New Jersey on August 12, 1998. Messrs.
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 complaint seeks compensation allegedly due
under the consulting arrangement and other general and, in one
count, treble, damages. On September 15, 1998 and October 30, 1998,
the Company received notice from two of its insurance carriers
denying coverage on this matter, but the Company plans to vigorously
contest these coverage decisions. The Company received a written
claim for indemnification from Lawrence A. Whipple on September 10,
1998 and is unaware of any written claims for indemnification by
John J. Petillo, or Vincent M. Achillare. The Company is unable, at
this early stage of the proceeding, to evaluate the merits of this
action.
[2] Termination of employment:
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 Superior Court of New Jersey. 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 Wire
tapping 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
F-15
<PAGE>
CAREADVANTAGE, INC.
Notes to Financial Statements
October 31, 1998 and 1997
NOTE I - COMMITMENTS, CONTINGENCIES AND OTHER MATTERS - (CONTINUED)
[2] Termination of employment: (continued)
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 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.
[3] Professional liability:
In providing utilization review and case management services, the Company
makes recommendations regarding benefit plan coverage based upon judgments
and established protocols as to the appropriateness of the proposed
medical treatment. Consequently, the Company could have potential
liability for adverse medical results. The Company could become subject to
claims based upon the denial of health care benefits and claims such as
malpractice arising from the acts or omissions of health care
professionals. Although the Company does not believe that it engages in
the practice of medicine or that it delivers medical services directly, no
assurance can be given that the Company will not be subject to litigation
or liability which may adversely affect its financial condition and
operations in a material manner. Although the Company maintains
comprehensive general liability and professional liability insurance
coverage, including coverage for liability in connection with the
performance of medical utilization review services and typically obtains
indemnification from its customers, no assurances can be given that such
coverage will be adequate in the event the Company becomes subject to any
of the above described claims.
[4] Settlement agreement:
A former Medical Director of CAHS asserted a claim against the Company.
The former Medical Director resigned in February 1996, allegedly due to a
change in control of the Company, and alleged, among other things, breach
of contract. As of October 31, 1997, the Company had accrued $150,000 for
this claim. In February 1998, the claim was settled for $110,000.
[5] Contractual dispute:
By a letter dated November 9, 1998, the Company received written notice
(the "Notice") from Allied Health Group, Inc. ("Allied") pursuant to which
Allied purportedly terminated without cause, effective December 9, 1998,
that certain Joint Services Agreement dated May 29, 1997 (the "Joint
Services Agreement") between Allied and the Company, which was attached as
Exhibit No. 10(c) to the Company's Form 10-QSB for the quarter ended April
30, 1997 and is incorporated by reference herein. By a response letter
dated November 16, 1998, counsel for the Company informed Allied that the
Notice was null and void and of no legal effect since the Joint Services
Agreement did not provide for termination without cause prior to the end
of the term of the Joint Services Agreement. The Company instituted
arbitration proceedings against Allied seeking declaratory relief that the
Joint Services Agreement was still in effect. The arbitration process has
commenced and the parties are currently selecting the arbitrator to hear
this matter.
F-16
<PAGE>
CAREADVANTAGE, INC.
Notes to Financial Statements
October 31, 1998 and 1997
NOTE I - COMMITMENTS, CONTINGENCIES AND OTHER MATTERS - (CONTINUED)
[6] Operating leases:
The Company leases facilities and equipment under operating leases.
On April 14, 1995, the Company entered into a noncancelable operating lease for
approximately 28,000 square feet of office space commencing on June 15, 1995.
The term of the lease is for six years and provides for annual base rent in the
amount of $445,000 with annual escalation based on increase in real estate taxes
and operating expenses.
On October 1, 1998, the Company entered into a noncancelable operating lease for
various computer equipment. The term of the lease is for two years and provides
for annual base rent in the approximate amount of $192,000.
Rent expense for the years ended October 31, 1998, and 1997 was $463,000 and
$434,000, respectively.
[7] Employee benefit plans:
Effective January 1, 1995, the Company adopted a profit-sharing/savings plan
pursuant to Section 401(k) of the Internal Revenue Code, whereby eligible
employees may contribute on a tax deferred basis a percentage of compensation,
but not in excess of the maximum allowable by tax law. The plan provides for a
matching contribution by the Company up to a maximum level, which in no case
exceeds 3% of the employees' compensation.Company contributions are fully vested
immediately.
The Company's matching contribution was $163,000 and $148,000 in fiscal years
1998 and 1997, respectively.
Effective October 29, 1997 the Company established under Internal Revenue
Section 125 a cafeteria plan whereby employees may choose between cash and
qualified benefits. Additionally, this plan allows employees to pay all or a
portion of their premiums with pre-tax dollars.
NOTE J - CREDIT FACILITY
The Company has a working capital facility with a bank in the amount of
$1,500,000, which bears interest at a 30, 60, or 90-day LIBO rate, plus 45 basis
points with an option to convert to a base prime rate. As of October 31, 1998,
there were no amounts outstanding under the working capital facility, other than
the reserve for the letter of credit discussed in Note K.
NOTE K - STAND BY LETTER OF CREDIT
In September 1998, a bank issued an irrevocable letter of credit for the account
of the Company in favor of a vendor as security for the Company's obligations
under a noncancelable operating lease dated October 1, 1998 in the amount of
$250,000. Accordingly, such letter of credit is issued under the Company's
credit facility with Summit Bank. (See Note J)
NOTE L - SHAREHOLDER OPTION AGREEMENT
In June 1997, CW Ventures granted to Horizon BCBSNJ an option to purchase from
it 10,031,238 shares of common stock at $0.38 per share (the " Horizon BCBSNJ
Option"). If the fair market value per share of common stock is greater than the
exercise price of the Horizon BCBSNJ Option on the applicable date of
calculation, Horizon BCBSNJ may elect to pay such exercise price by surrendering
for cancellation a portion of the Horizon BCBSNJ Option and receiving a number
of shares of common stock according to a formula set forth in the Option
Agreement. The Horizon BCBSNJ Option is exercisable in the event the Company
achieves certain goals for defined periods through February 28, 2000. The
remaining shares subject to the Horizon BCBSNJ Option are exercisable if the
aggregate fees received by the Company under the Horizon Healthcare Letter
Agreement meet certain targets set forth in the Option Agreement for the period
through February 28, 2000. However, if the Administrative Service Agreement or
the Horizon Healthcare Letter Agreement are terminated at any time after October
31, 1997 by Allied without cause, the target date is accelerated. As of
December 1998, at the termination of the Horizon Healthcare Letter Agreement,
the Company did not meet these revenue targets.
F-17
<PAGE>
CAREADVANTAGE, INC.
Notes to Financial Statements
October 31, 1998 and 1997
NOTE L - SHAREHOLDER OPTION AGREEMENT - (CONTINUED)
The Horizon BCBSNJ Option was granted by CW Ventures to Horizon BCBSNJ in
consideration of Horizon BCBSNJ revision of its Services Agreement with the
Company, entering into a joint services agreement between Horizon BCBSNJ, the
Company and an unrelated party and the agreement to guaranty the Summit Bank
Credit Agreement.
NOTE M - RELATED PARTY TRANSACTION
Consulting fees of approximately $50,000 were paid to a member of the Board of
Directors for the year ended October 31, 1998.
NOTE N - SUBSEQUENT EVENT
On January 8, 1999, the Board of Directors of the Company granted stock
options for 3,600,000 shares of Common Stock of the Company to its new Chief
Executive Officer ("CEO") in connection with the CEO's employment agreement. All
of the options have an exercise price of $.03 per share, a term of 10 years and
vest, subject to the terms therein, over a period of 3 years.
On January 26, 1999, the Board of Directors of the Company granted stock
options, subject to shareholder approval, constituting an aggregate of
10,556,000 shares of Common Stock of the Company, to various employees, a
director and a former employee of the Company. The options have an exercise
price of $.08 per share and a term of 10 years subject to earlier termination
upon certain events. A portion of the options vest immediately and the remainder
vest over 3 years.
F-18
EXHIBIT 10.32
EMPLOYMENT AGREEMENT
AGREEMENT dated as of January 8, 1999 ("Commencement Date") by and between
CareAdvantage, Inc. ("Company") and David Noone ("Executive").
1. Employment. Company agrees to employ Executive, and Executive agrees to be so
employed, in the capacity of Chief Executive Officer, and shall have the duties
customary to such office and such other duties as the Board of Directors
("Board") shall reasonably determine.
2. Time and Efforts. The Executive shall: (a) render services as the Chief
Executive Officer of the Company, (b) perform duties consistent with such title
and such other related duties, not inconsistent with such title, as the Board of
Directors of the Company shall reasonably request, (c) not engage in any other
business activity and (d) devote all the Executive's business time, attention,
skill and best efforts exclusively to the Company's duties hereunder and the
business and affairs of the Company, which duties shall include having the
Executive present in the Company's offices at Iselin, New Jersey for
approximately three (3) days per week. The Company shall have the power to
direct, control and supervise the duties to be performed hereunder, the means
and the manner of performing said duties, and the terms and time for performing
said duties.
3. Compensation.
3.1 Salary. Commencing upon the Commencement Date, the Company shall pay
Executive salary for his services at an annual rate of $300,000. This
amount shall be paid in accordance with the Company's normal payroll
practices. The Company shall deduct and withhold from any and all payments
required to be made to the Executive under this Agreement any and all
Federal, state, local and other taxes that the Company determines are
required to be withheld in accordance with the Internal Revenue Code of
1986, as amended from time to time (or any corresponding provisions of
succeeding law), together with the rules and regulations promulgated
thereunder, and any other applicable statutes and regulations from time to
time in effect (including, without limitation, applicable Federal and
state income taxes, unemployment taxes and FICA contributions) and shall
pay over such amounts to the Federal, state or local government, as
applicable.
3.2. Stock Options. The Company shall provide the Executive with stock
options in accordance with Attachment A.
3.3 Benefits. The Company shall provide the Executive with the benefits as
described in Attachment B.
3.4 Expense Reimbursement. The Company shall reimburse Executive for all
reasonable and customary out-of-pocket expenses incurred in carrying out
his duties under this Agreement, including, but not limited to, reasonable
out-of-pocket living expenses incurred
<PAGE>
while Executive is residing in the Iselin, New Jersey area and costs for
commuting between his home in Redding, Connecticut (or such other location
as then constitutes Executive's permanent residence) and Iselin, New
Jersey. Executive shall present to the Company from time to time an
itemized account of such expenses in any form required by the Company.
3.5 Severance. In the event the Company terminates this Agreement in
accordance with Section 6 after a Change of Control as defined in Section
2.2 of Attachment A, then Executive shall receive salary in accordance
with Section 3.1 for six (6) months after the date of termination.
4. Term. Except as otherwise provided, including without limitation Section 6
hereof, this Agreement shall be for a one (1) year term and shall be renewed
thereafter for successive one-year terms upon the mutual agreement of the
Company and the Executive. For purposes of this Agreement, "Term" shall mean the
period commencing on the Commencement Date and ending on the date this Agreement
terminates.
5. Indemnification; Insurance; Litigation.
5.1 Indemnification. The Company will indemnify Executive to the fullest
extent permitted by law (or the certificate of incorporation or by-laws of
the Company, whichever affords the greatest protection to Executive)
against all costs, charges and expenses whatsoever incurred or sustained
by him or his legal representatives in connection with any action, suit or
proceeding to which he may be made a party by reason of his being or
having been at any time (before, during or after the Term) a director,
officer, employee or agent of the Company, or a consultant or advisor to
the Company, or by reason of any action at any time taken by him on behalf
of the Company.
5.2 Advancement of Expenses. Expenses and costs (including a reasonable
retainer and advance against disbursements) incurred by Executive in
connection with any matter with respect to which he is entitled to
indemnification shall be paid by the Company in advance of the final
disposition of such action, suit or proceeding upon receipt of an
undertaking by or on behalf of Executive to repay such amount if it shall
ultimately be determined that he is not entitled to be indemnified by the
Company as authorized by this Section 5.
5.3 Indemnification Not Exclusive. The provisions of this Section 5 shall
not limit or restrict in any way the power of the Company to indemnify or
advance expenses and costs to Executive in any other way permitted by law
or be deemed exclusive of, or invalidate, any right to which Executive may
be entitled under any law, provisions of the Company's certificate of
incorporation or by-laws, agreement, vote of stockholders or disinterested
directors or otherwise, both as to action in Executive's capacity as an
officer, director, consultant, advisor, employee or agent of the Company
and as to action in any other capacity while holding any such position.
5.4 Accrual of Claims; Successors. The indemnification provided or
permitted under this Section 5 shall apply in respect of any expense,
cost, judgment, fine, penalty or amount paid
2
<PAGE>
in settlement, whether or not the claim or cause of action in respect
thereof accrued or arose before or after the effective date of this
Section 5. Executive's indemnification under this Section 5 shall continue
after he shall have ceased to be a director, officer, consultant, advisor,
employee or agent and shall inure to the benefit of his heirs,
distributees, executors, administrators and other legal representatives.
5.5 Insurance. The Company shall maintain, during the Term and for six
years thereafter, directors' and officers' liability insurance covering
Executive with respect to acts and omissions occurring during the period
of time commencing on the Commencement Date and ending upon the conclusion
of the Term ("D&O Insurance"), on terms no less favorable to Executive
than the most favorable terms of such insurance (in terms of coverage)
maintained in effect by the Company at any time during the Term. The
amount of the D&O Insurance during the Term and for six years thereafter
shall be equal to (i) at least $3 million (the amount of coverage on the
date of this Agreement) or (ii) if the Company increases the amount of D&O
Insurance during the Term, the amount to which the D&O Insurance is so
increased. The Company shall use commercially reasonable efforts to
obtain, as soon as practicable after the date hereof, D&O Insurance with
increased limits of liability and lower deductibles than those in effect
on the date hereof.
5.6 Litigation. In the event of any litigation or other proceeding between
the Company and Executive with respect to the subject matter of, or the
enforcement of rights under, this Agreement, the Company shall reimburse
Executive for all costs and expenses related to such litigation or
proceeding, including reasonable attorneys' fees and expenses, provided
that the litigation or proceeding results in either a settlement requiring
the Company to make a payment to the Executive or a judgment in favor of
Executive.
6. Termination Without Cause. Either party may without cause terminate this
Agreement at any time by notifying the other not less than sixty (60) days prior
to the date such termination is to become effective. Upon the Company's notice
or receipt of the Executive's Termination Without Cause, the Company agrees to
pay the Executive his salary payable in accordance with Section 3.1 at his
residence set forth in Section 9.1 up until the date of the effectiveness of
such termination. The Executive agrees that he will, upon his notice of
termination, or receipt thereof, immediately vacate all offices of the Company
at Iselin, New Jersey and elsewhere.
7. Termination with Cause. The Company may, for cause, terminate this Agreement
immediately at any time by notifying the Executive of such termination and the
cause therefor. For this purpose, "cause" shall include each of the following:
(a) death or prolonged disability as defined by the Company's disability
insurance policy;
(b) the Executive's refusal or other failure to perform any of the
Executive's duties hereunder after written notice thereof from the Company and
the Executive's failure to cure such non-performance within ten (10) days of
receipt thereof;
3
<PAGE>
(c) the Executive's breach of this Agreement and failure to cure such
breach within ten (10) days of receipt of written notice thereof from the
Company;
(d) the Executive's commission of any act of dishonesty, fraud,
intentional material misrepresentation or moral turpitude in connection with
this employment, including, but not limited to, misappropriation or embezzlement
of any funds of the Company;
(e) the Executive's commission of any willful or intentional act having
the effect of injuring, in any material respect, the reputation, business or
business relationships of the Company;
(f) entering by the Executive of a plea of guilty or nolo contendere to,
or the conviction of the Executive for, a crime (other than a routine traffic
offense) which carries a potential penalty of imprisonment for more than ninety
(90) days and/or a fine in excess of Ten Thousand Dollars ($10,000);
(g) the Executive's habitual abuse of alcohol, prescription drugs, or
controlled substances;
(h) the Executive's commission of any material and repeated act of
misconduct or material act of insubordination in connection with his employment
(it being acknowledged that mere disagreement between the Company and the
Executive, without more, shall not constitute insubordination); or
(i) the repetition of any act or failure under subsections referenced
above, where such prior act or failure has previously been cured, it being
acknowledged and agreed by the Executive that upon the occurrence of any such
repetition, the Executive shall not have a right to further notice and shall not
have an opportunity to cure.
8. Confidentiality, Invention and Non-Compete Agreement. Simultaneously with the
execution of this Agreement, the parties shall execute the agreement entitled
"Confidentiality, Invention and Non-Compete Agreement."
9. Notices. All notices required or permitted to be given under this Agreement
shall be given by certified mail, return receipt requested, to the parties at
the following addresses or to such other addresses as either may designate in
writing to the other party.
If to Company:
Chairman of the Board of Directors
CareAdvantage, Inc.
485-C Route 1 South
Iselin, New Jersey 08830
4
<PAGE>
with a copy to:
Epstein, Becker & Green, P.C.
250 Park Avenue
New York, New York 10017
Attention: Paul D. Squire, Esq.
If to Executive:
34 Sunset Hill Road
Redding, Connecticut 06896
10. Governing Law. This Agreement shall be construed and enforced in accordance
with the laws of the state of New Jersey.
11. Amendments. This Agreement may be amended only in writing, signed by both
parties.
12. Non-Waiver. A delay or failure by either party to exercise a right under
this Agreement, or a partial or single exercise of that right, shall not
constitute a waiver of that or any other right.
13. Binding Effect. The provisions of this Agreement shall be binding upon and
inure to the benefit of both parties and their respective successors and
assigns.
14. Counterparts. This Agreement may be executed in one or more counterparts
each of which shall be deemed an original for all purposes.
IN WITNESS WHEREOF, the Company has by its appropriate officers, signed
and affixed its seal and Executive has signed and sealed this Agreement as of
this 8th day of January, 1999.
CAREADVANTAGE, INC. DAVID NOONE
By: ___________________________ ________________________
William J. Marino
Chairman of the Board of Directors
5
<PAGE>
ATTACHMENT A
STOCK OPTIONS
1. Generally. As of the Commencement Date, the Executive shall have the
option to purchase common stock in an amount equal to four (4%) of the Company's
capitalization on the Commencement Date, upon the terms and conditions set forth
herein. Options for half of such total shares (i.e., options to purchase common
stock in an amount equal to two (2%) of the Company's capitalization) shall
become exercisable in accordance with Section 2.1 of this Attachment
("Time-Based Options"), and options for the remaining half of such total shares
(i.e., options to purchase common stock in an amount equal to two (2%) of the
Company's capitalization) shall become exercisable in accordance with Section
2.2 of this Attachment ("Performance Options"). Such options shall be issued
from the Company's 1996 Incentive and Non-Incentive Stock Option Plan, as
amended ("Plan"). To the maximum extent permissible under the Internal Revenue
Code of 1986, as amended (the "Code"), the Time-Based Options shall constitute
Incentive Stock Options under the Code. To the extent that any provisions of
this Attachment are inconsistent with such Plan (except to the extent required
by the Code to permit the Time-Based Options to qualify as Incentive Stock
Options under the Code), the Company agrees to use its best efforts to amend
such Plan so as to make such Plan consistent with such provisions.
2. Vesting. The options shall become exercisable over three years as
follows:
2.1 Time-Based Options. Options to purchase common stock in an
amount equal to two (2%) of the Company's capitalization shall become
exercisable in accordance with the following schedule:
(a) options to purchase 1/3 of such shares shall become exercisable
on December 31, 1999; and
(b) options to purchase the remaining 2/3 of such shares shall
become exercisable in equal monthly amounts over the period January
1, 2000, to December 31, 2001.
2.2 Performance Options. Options to purchase common stock in an
amount equal to two (2%) of the Company's capitalization shall become
exercisable in accordance with the following schedule at each Trigger
Point if the Vesting Conditions for that Trigger Point have been
satisfied:
- --------------------------------------------------------------------------------
Vesting Amount Trigger Point Vesting Conditions
- --------------------------------------------------------------------------------
options to purchase 1/3 January 8, 2000 Average price of the
of such shares Company's common stock
for 20 days prior to first
Trigger Point is at least
50% higher than price of
the common stock on the
Commencement Date
- --------------------------------------------------------------------------------
6
<PAGE>
- --------------------------------------------------------------------------------
options to purchase 1/3 January 8, 2001 Average price of the
of such shares Company's common stock
for 20 days prior to
second Trigger Point is at
least 50% higher than
price of the common stock
on the first Trigger Point
- --------------------------------------------------------------------------------
options to purchase 1/3 January 8, 2002 Average price of the
of such shares Company's common stock for
20 days prior to third
Trigger Point is at least
50% higher than price of
the common stock on the
second Trigger Point
- --------------------------------------------------------------------------------
Notwithstanding the foregoing schedule, options to purchase 100% of
such shares shall become fully exercisable (a) if the average price
of the Company's common stock for 20 days prior to third Trigger
Point is at least 300% higher than the average sales price of the
Company's common stock during the thirty (30) days prior to the
Commencement Date, as reported by Bloomberg Business Services; or
(b) if either of the Company's two largest shareholders, Horizon
Blue Cross Blue Shield of New Jersey ("Horizon") and CW Ventures II,
L.P. ("CW"), sells or transfers its shares to a non-affiliated party
("Change of Control") for a price at least 300% higher than the
average sales price of the Company's common stock, during the thirty
(30) days prior to the Commencement Date, as reported by Bloomberg
Business Services. For this purpose, Horizon and CW shall not be
considered affiliated with each other.
3. Exercise Price. The exercise price for the portion of the Time-Based
Options that constitutes Incentive Stock Options under the Code shall be the
fair market value of the Company's common stock as of the Commencement Date; the
exercise price of the remaining options shall be the average sales price of the
Company's common stock during the thirty (30) days prior to the Commencement
Date, as reported by Bloomberg Business Services; provided, however, if with
respect to the Time-Based Options not constituting Incentive Stock Options under
the Code the Company's independent public accountants determine in good faith
that a charge to earnings would result on account of the use of such exercise
price, then the exercise price for such Time-Based Options shall also be the
fair market value of the Company's common stock as of the Commencement Date.
4. Duration. The options shall expire January 7, 2009.
5. Effect of Termination of Agreement. Upon the termination of this
Agreement (regardless of whether on account of Executive's death or disability),
as of the effective date of such termination the Executive shall have no further
rights in those options or portions thereof, if any which are not exercisable as
of such date; provided, however, that notwithstanding any provision in the Plan
to the contrary, the termination of this Agreement shall have no effect and
shall in no way accelerate the termination of the those options or portions
thereof, if any, that have become exercisable as of such date.
7
<PAGE>
6. Partial Exercise. Any number of shares which Executive is entitled to
purchase pursuant to Section 2 of this Attachment but which are not then
purchased may be purchased at any time thereafter prior to the termination of
the option.
7. Stockholder Approval of Plan; Registration. No later than six months
from the Commencement Date, the Company will have submitted the Plan, as amended
to conform with this Attachment, to the Company's shareholders for their
approval; and no later than one year from the Commencement Date will have caused
the shares underlying the options to be registered under the appropriate federal
and state securities laws.
8
<PAGE>
ATTACHMENT B
FRINGE BENEFITS
The Executive shall be entitled to the following fringe benefits:
1. vacation leave in the amount of 30 days per year, accruing at the rate
of 2.5 days per month;
2. other leave (sick leave, personal time, and holidays) in the amount and
on the same terms and conditions as provided to the senior management of the
Company;
3. medical insurance, life insurance, and participation in the Company's
401(k) plan on the same terms and conditions as these benefits are provided to
the senior management of the Company; and
4. disability insurance (long- and short-term) on the same terms and
conditions as provided to senior management of the Company; and
5. such other benefits as may be made available generally to the senior
management of the Company.
9
EXHIBIT 10.33
CAREADVANTAGE, INC.
CONFIDENTIALITY, INVENTION AND NON-COMPETE AGREEMENT
I, David Noone, as partial consideration for my employment by
CareAdvantage, Inc. or its subsidiaries and affiliates (including without
limitation CareAdvantage Health Systems, Inc. and Contemporary HealthCare
Management, Inc.) or successors in business (hereinafter individually and
collectively the "Company"), and for the compensation to be paid to me during
the continuance of such employment, enter into this Confidentiality, Invention
and Non-Compete Agreement (hereinafter "Agreement") as follows:
1. Non-Interference With Third-Party Rights
1.1 I understand that my employment with the Company is based on (a) my
representation that I am free to undertake employment with the Company and the
duties and obligations imposed under this Agreement without breach of any other
agreement (whether written or oral) or duty to another party, and (b) my
acknowledgment that the Company is entitled to the benefit of my work. I further
understand that the Company has no interest in using any person's patents,
copyrights, trade secrets or trademarks in an unlawful manner. As such, I shall
not misapply proprietary rights that the Company has no rights to use.
2. Confidentiality of Trade Secrets and Business Information
2.1 I acknowledge that during the course of my employment, I may develop
and obtain access to trade secrets and confidential business information of the
Company. Under the law a "trade secret" is a type of intangible property, and
its theft is a crime in most states. A trade secret generally consists of
valuable, secret information or ideas that the Company collects or uses in order
to keep its competitive edge. Examples of trade secrets are system designs,
computer programs and software, proprietary clinical protocols, operating
processes, and any other proprietary technology. "Confidential business
information," which the Company also treats as proprietary, consists of all
other competitively sensitive information kept in confidence by the Company.
Examples of confidential business information are selling and pricing
information and procedures, business and marketing plans, and internal financial
statements.
2.2 I agree not to use or disclose any trade secrets to which I am exposed
or have access to in the course of my employment with the Company, whether such
trade secrets belong to the Company (including trade secrets embodied or
contained in any Employee Developments as defined in Section 4.1) or to third
parties, during my employment and for so long afterward as the pertinent
information or data remain trade secrets, whether or not the trade secrets are
in written or tangible form, except as required and authorized during the
performance of my duties. I further agree not to use or disclose any
confidential business information to which I am exposed or have access to in the
course of my employment with the Company, whether such information belongs to
the Company (including confidential business information embodied or contained
in any Employee Developments as defined in Section 4.1) or to third parties,
during my employment and for so long afterward as the
<PAGE>
pertinent information or data remain confidential business information, whether
or not the confidential business information is in written or tangible form,
except as required and authorized during the performance of my duties.
3. Return of Company Property
3.1 At the request of the Company, and in any event, at the time of
termination of my employment, I will return all records, materials and other
physical objects that pertain to the Company's business or to my employment,
including but not limited to all memoranda, notes, records, drawings, manuals,
documents, papers, computer software and passwords or other identification
materials (including all copies thereof). The foregoing obligation applies to
all materials relating to the affairs of the Company or to any of its customers,
clients, vendors or agents which may be in may possession or control. I will
also leave the Company all materials involving any trade secrets or confidential
business information of the Company.
4. Ownership of Employee Developments
4.1 The Company shall be entitled to own and to control all care
management, medical, technological, operating, and training ideas, processes and
materials that are developed or conceived by me, solely or jointly with others,
at any time during my employment to the extent that they relate to the Company's
then present business or interest (collectively known as "Employee
Developments"). Accordingly, I will promptly disclose and make available to the
Company all work papers, models or other tangible embodiments of such Employee
Developments. Further, I will deliver and assign to the Company all copyrights,
inventions, discoveries, improvements and trade secrets (whether or not
patentable), including all interests in computer programs, arising in connection
with my employment, and I will take whatever steps may be needed to give the
Company the full and exclusive benefit of them. To the fullest extent permitted
by applicable law, all such inventions and developments shall be considered work
made for hire under applicable law, and I shall assign to the Company all other
rights that I may have in any such inventions and developments.
5. Non-Competition
5.1 Commencing on the date hereof and terminating on the second
anniversary of the date when I cease to be employed by the Company (the
"Non-Competition Period"), I agree that I will not in any way, directly or
indirectly, manage, operate, control or accept employment or a consulting
position with or otherwise be connected with, or own, or have any other interest
in or right with respect to (other than through ownership of not more than five
(5%) percent of the outstanding shares of a corporation's stock which is
publicly traded or listed on a national securities exchange) a Care Management
Company (as hereinafter defined) which competes (or is deemed to compete by
fulfilling the conditions stated in the following sentence) with either the
Company or any subsidiary or affiliate thereof in the Care Management Business
(as hereinafter defined).
For purposes hereof, (i) a "Care Management Business" means, and is
limited to, utilization review of inpatient and outpatient care and managed care
or disease management services for other
2
<PAGE>
entities such as insurance companies and other payers; and (ii) a "Care
Management Company" means an entity substantially all of the business of which
consists of the Care Management Business.
The foregoing restriction on competition shall be limited to competition
in any State, including the District of Columbia, in which either the Company or
any of its affiliates or subsidiaries conducts its Care Management Business.
For purposes of this Section 5.1, an enterprise shall be deemed to be
competing with the Company or its affiliates' or subsidiaries' business
notwithstanding the fact that it does not within the Non-Competition Period
actually compete with the Company or any of its affiliates or subsidiaries
thereof if (i) during such period the enterprise is actively developing the
capability to compete with such entities; (ii) I have knowledge of such efforts
and (iii) within six (6) months of developing such capability but in no event
later than six (6) months following the end of the Non-Competition Period the
enterprise actively competes with such entities.
5.2 I acknowledge that I have been employed for my special talents and
that my leaving the employ of the Company would seriously hamper the business of
the Company. I further acknowledge that my training, experience and technical
skills are of such breadth that they can be employed to advantage in areas other
than the Company's business during the Non-Competition Period, and consequently
the foregoing obligations will not unreasonably impair my ability to engage in
business activity after the termination of my employment.
5.3 I agree that I will not, during the Non-Competition Period (i) employ
any person who shall have been an employee of the Company within the six months
of the cessation or termination of my employment by the Company, or induce, or
attempt to induce, any employee of the Company to leave such employ, or to
accept any other position or employment or assist any other person or entity in
hiring such employee, (ii) solicit, or attempt to solicit, any persons who or
which are clients or customers of the Company as of the cessation or termination
of my employment by the Company, (iii) otherwise disrupt or interfere with, or
attempt to disrupt or interfere with, the relations of the Company with any
actual or potential client, or customer, or any other material relationship of
the Company, or (iv) publicly or privately disparage, criticize or otherwise
refer to the Company or any director, officer or employee thereof in an adverse
or unflattering fashion, whether orally or in writing.
Section 6. Other Terms
6.1 This Agreement shall inure to the benefit of, and shall be binding
upon, the Company and its subsidiaries and affiliates, together with their
successors and assigns, and me, together with my executor, administrator,
personal representative, heirs and legatees.
6.2 This Agreement merges with and supersedes all prior and
contemporaneous agreements and understandings (except the Employment Agreement
between the parties executed contemporaneously herewith), whether written or
oral, express or implied, to the extent they contradict or conflict with the
provisions hereof.
3
<PAGE>
6.3 If any term of this Agreement is found to be unlawful or unenforceable
in any respect, the courts shall enforce such term, in whole or in part, and all
other terms of this Agreement to the fullest extent possible.
6.4 Irreparable harm should be presumed if this Agreement is breached in
any way. Damages would be impossible to ascertain, and the faithful observance
of all terms of this Agreement is an essential condition of employment with the
Company. Furthermore, this Agreement is intended to protect the proprietary
rights of the Company in important ways, and even the threat of any misuse of
any proprietary information disclosed to or developed by me under this Agreement
would be extremely harmful because of the importance and value of such material.
In light of these considerations, I agree that a court of competent jurisdiction
should immediately enjoin any breach of this Agreement, upon the Company's
request, and the Company is released from the requirement to post any bond in
connection with a grant of a temporary or interlocutory relief, to the extent
permitted by law.
6.5 My obligations under this Agreement shall remain unaffected by the
termination of my employment with the Company.
6.6 This Agreement shall be governed by and enforced in accordance with
the laws of the State of New Jersey.
6.7 This Agreement may be executed in one or more counterparts each of
which shall be deemed an original for all purposes.
IN WITNESS WHEREOF, the Company has by its appropriate officers,
signed and affixed its seal and David Noone has signed and sealed this Agreement
as of this 8th day of January, 1999.
CAREADVANTAGE, INC. DAVID NOONE
By: ________________________ _____________________________
William J. Marino
Chairman of the Board of Directors
4
Exhibit 10.35
SERVICE AGREEMENT
THIS SERVICE AGREEMENT ("Agreement") is made as of the 1st day of January,
1999 (the "Effective Date"), by and between HealthNow New York Inc. ("HNNY"),
with its principal place of business at 1901 Main Street, Buffalo, New York
14240, and CareAdvantage, Inc. ("CAI") with its principal place of business at
485-C Route One South, Iselin, New Jersey 08830.
WHEREAS, CAI and HNNY have entered into an agreement dated as of January
5, 1998 ("Prior Agreement"), which agreement expires December 31, 1998;
WHEREAS, the parties desire to provide to set forth the terms and
conditions pursuant to which CAI will provide certain services to HNNY on or
after January 1, 1999;
NOW, THEREFORE, in consideration of the mutual promises and agreements
contained herein, the parties agree as follows:
1. Services.
1.1 Generally. CAI will provide the services described in Sections 1.2,
1.3, and 1.4 ("Services") to HNNY. HNNY acknowledges that, to the extent that
the Services set forth in Sections 1.2, 1.3 and 1.4, below, require on-site
presence at HNNY's offices, such Services will be performed at its Albany
Division. CAI and HNNY shall consult regularly regarding the allocation of CAI's
resources among HNNY's Albany, Buffalo and Central New York Divisions.
1.2 Clinical Support.
a. CAI will provide experienced physician reviewers, equivalent to one (1)
FTE, to support HNNY's medical directors and the utilization management staff.
Their services will include case review and policy development. These services
will be provided through a combination of an on-site presence and telephone
access. CAI will ensure that physician reviewers are available at the same days
and times that HNNY is available to health care providers to conduct utilization
review. CAI further agrees that access to physician reviewers shall be provided
on-site at HNNY no less than sixty (60%) per cent of such HNNY Utilization
Management Department operating hours. The physician reviewers shall be subject
to HNNY's approval, which shall not be unreasonably withheld.
b. CAI will provide HNNY with matched specialty review through access to
CAI's Specialty Advisor Panel on an as-needed basis. All reviews must be
coordinated through CAI's physician reviewers.
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c. CAI shall maintain any licensure required in connection with its
activities. The parties acknowledge and agree that HNNY and/or self-insurers, as
applicable, shall have final decision-making authority with regard to
utilization management decisions, subject to the right of covered persons to
appeal such determinations subject to HNNY's and/or the self-insurer's, as
applicable, grievance procedure.
1.3 Staff Performance Audit and Skill Development Program
a. Staff Performance Audit. CAI will conduct for the Albany Division a
baseline staff performance audit to support the customization of the training
materials and to select the additional modules most needed for the success of
the Plan's programs and initiatives. The staff performance audit findings
reports will show strengths and weaknesses in the current review staff's
knowledge and skill level as well as quantify the missed opportunities for
proactive and aggressive level and progression of care management.
b. Skill Development Program.
i. CAI will provide a comprehensive training program to HNNY's
clinical care management staff. This training program is designed to
provide such staff with a thorough understanding of the care management
process and help them develop the skills necessary to facilitate high
quality, cost-effective care. The training will be conducted by healthcare
educators and care management professionals, including an experienced CAI
medical director for those program modules with clinical content. An
outline of the training program is set forth in Attachment A.
ii. CAI will train approximately 20 clinical staff, 6-8 case
managers and 2-3 administrative support staff. Training will be scheduled
for mutually agreeable times so as to optimize the learning experience and
minimize the disruption to HNNY's review process.
iii. Upon completion of the training, CAI will measure the impact of
the training through a participant evaluation and through a post training
review audit, and will summarize and provide the results to HNNY.
1.4 Reports. CAI will provide HNNY with monthly review activity reports.
The format and content of these reports will be in accordance with those
furnished pursuant to the Prior Agreement or as the parties may mutually agree.
2. Compensation & Expenses
2.1 Base Compensation. CAI's compensation for the Services provided
pursuant to this Agreement shall be Two Hundred Fifty Three Thousand Five
Hundred Seventy-Eight ($253,578) Dollars, payable in monthly installments of
Forty Two Thousand Two Hundred Sixty Three
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($42,263) Dollars. HNNY shall pay CAI the monthly installment due on account of
a month within thirty (30) days after the last day of such month.
2.2 Certain Special Advisory Panel Fees. In addition to the fees provided
by Section 2.1, HNNY shall pay CAI one hundred ($100) dollars for each case
reviewed by CAI's Special Advisory Panel to the extent in excess of 500 cases.
HNNY shall pay CAI within thirty (30) days of its receipt of CAI's invoice for
such services.
2.3 Expenses. HNNY shall reimburse CAI for CAI's reasonable out-of-pocket
expenses incurred in connection with this Agreement, including expenses for
travel, lodging and meals. HNNY shall pay CAI within thirty (30) days of its
receipt of CAI's invoice for such expenses.
3. Confidentiality
3.1 Generally. Each party hereto hereby agrees that, during the term of
this Agreement and after its termination, it shall (a) not, directly or
indirectly, use (other than for the purposes contemplated hereby during the
term), (b) keep secret and retain in strictest confidence, and (c) not disclose
to any third party, Confidential Information as defined herein. Notwithstanding
the foregoing, a party may disclose Confidential Information: (i) when compelled
to do so by applicable law, provided that to the extent feasible it gives the
other party advance notice of its intent to make the disclosure, and (ii) to
those of such party's officers, directors, partners, employees and agents who
have a "need to know." In addition, each party will obtain a confidentiality
agreement from any independent contractor to which it discloses the other
party's Confidential Information.
3.2 Definition. "Confidential Information" shall mean (a) any forms,
policies, procedures, manuals and materials of any kind created, owned or
provided by a party in connection with, or with respect to, the Services, (b)
any information or data relating to the Services or this Agreement that is made
available by a party to the other party and (i) is marked confidential, or at
the time of its being made available, is otherwise indicated to be confidential,
or (ii) within thirty (30) days after such information or data is first made
available, is indicated in writing to be confidential, (c) any derivative works
based on the materials, information or data described in subclauses (a) and (b)
above, and (d) with respect to the confidentiality obligations hereunder of CAI
only, (i) patient information, and (ii) any and all information or data (whether
patient specific, account specific, aggregates thereof or otherwise) relating to
the cost or utilization of health care services provided to, or received by an
individual covered by any HNNY health care benefit plan; provided, however,
Confidential Information shall not mean information or data that (A) was
previously known to the receiving party at the time of disclosure, provided that
such information was acquired through no fault of the receiving party nor was
received from a person that did not have the legal right to make such
information available, (B) is publicly known through no act or omission by the
receiving party, or (C) is disclosed to the receiving party by a third party
having the legal right to make such disclosure.
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4. Term.
4.1 Generally. This Agreement shall be for a six (6) month term beginning
on the Effective Date. Notwithstanding the preceding sentence, HNNY and CAI
agree that CAI's obligations with respect to Section 1.2(b) and 1.3, above,
shall survive the termination of the Agreement with respect to any services
covered by those subsections (i.e., matched specialty review, staff development
audit and skill development programs) that are in progress but not completed as
of the effective date of termination.
4.2 Termination for Cause. This Agreement shall be terminable by either
party for its material breach upon not less than thirty (30) days' prior written
notice to the other party, setting forth in detail the material breach, and
providing that the Agreement is to be terminated upon the expiration of thirty
(30) days or such longer period which may be set forth in the notice, unless the
material breach is cured within that time period.
5. Insurance; Indemnification; Defense of Litigation
5.1 Insurance. CAI shall maintain in full force and effect during the term
of this Agreement errors and omissions/utilization review and utilization
management insurance in per occurrence and aggregate face amounts of at least $5
million and $10 million, respectively, naming HNNY as an additional insured,
such policy or policies not to be cancelable upon less than thirty (30) days'
prior notice, and providing that HNNY shall receive copies of any notice of
cancellation.
5.2 Indemnification. Each party hereto (as such, an "Indemnifying Party")
agrees to indemnify, defend and hold harmless (collectively, "Indemnify") the
other party and such other party's officers, directors, employees or agents
(collectively, "Indemnified Parties") from and against any and all claims or
portions thereof, suits, costs and expenses, including without limitation, costs
of investigation and defense, incurred by such Indemnified Parties as a result
of any willful misconduct or any negligent act or omission by the Indemnifying
Party in connection with this Agreement. This provision is not intended to
obligate CAI to Indemnify HNNY for claims, or portions thereof, under the terms
of HNNY's health insurance policies or HMO agreements which HNNY would have been
obligated to pay regardless of the misconduct or act or omission of CAI.
5.3 Defense of Litigation. Except as provided in Section 5.2, each party
shall be responsible at its own expense for defending itself in any litigation
brought against it, whether or not the other party is also a defendant, arising
out of any aspect of activities undertaken in connection with this Agreement.
Each party agrees to provide the other party information in its possession which
is necessary to the other party's defense in such litigation.
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6. Additional Requirements
6.1 Independent Contractors. The relationship of the parties under this
Agreement shall be that of independent contractors. Neither shall have any claim
under this Agreement or otherwise against the other party as a joint venturer or
partner.
6.2 Proprietary Rights. Neither party shall use the name, logos,
trademarks, or servicemarks of the other without the other's prior written
consent, except that CAI may include HNNY in its listing of clients.
6.3 Nonsolicitation of Employees. During the term of this Agreement and
for an additional period of two (2) years after the termination of this
Agreement, neither CAI nor HNNY shall solicit for employment or hire any
employee or consultant of the other without the other's prior written consent.
6.4 No Guarantee of Medical Results. Neither the execution of this
Agreement nor the performance of any of its obligations constitutes an
undertaking by CAI to guarantee the results of health care provider services or
that such services will be rendered in accordance with generally accepted
medical standards or procedures. The parties agree that CAI is not and shall not
be deemed a health care provider as a result of the Services provided pursuant
to this Agreement, and that all decisions concerning the rendering of health
care services are determined by the patient's physician, hospital or other
health care provider and the patient. The parties acknowledge and agree that
neither CAI nor HNNY shall intervene in the provision of medical services, it
being understood and agreed that the traditional relationship between provider
and patient will be maintained. Thus, a benefit determination by HNNY and/or a
utilization management recommendation by CAI, that a particular course of
treatment is not medically necessary and/or is inconsistent with the utilization
management protocols and, thus not a covered service under the covered person's
benefit plan, shall not be deemed to be a medical determination or intervention
in the provision of medical services.
7. Miscellaneous
7.1 Compliance With Laws and Certain Regulatory Requirements. Each party
shall, throughout the term of this Agreement, be in continuous compliance with
all applicable laws. In addition CAI shall be in continuous compliance with
applicable requirements of the American Accreditation Healthcare Commission/URAC
and the National Committee on Quality Assurance.
7.2 Notice. All notices and other communications hereunder shall be in
writing and shall be deemed to have been given upon receipt, and shall be
addressed as follows:
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If to HNNY: New York Care Plus Insurance Company.
1901 Main Street
Buffalo, New York 14240
Attn: Cheryl Howe,
Vice President
If to CAI: CareAdvantage, Inc.
485-C Route 1 South
Iselin, New Jersey 08830
Attn: Richard Freeman, M.D.,
President & Chief Operating Officer
or to such other address as any party hereto shall have designated to the other
parties in accordance with the provisions of this Agreement.
7.3 Parties in Interest. This Agreement is made for the exclusive benefit
of the parties hereto, their successors and permitted assigns, and no person or
entity other than CAI, HNNY, their successors or permitted assigns shall acquire
or have any rights under or by virtue of this Agreement.
7.4 Impossibility of Performance. No party shall be deemed to be in
violation of this Agreement if prevented from performing any obligation
hereunder due to matters that are beyond its control, including without
limitation war, fire, strikes, riots, floods, storms, earthquakes, other
elements or acts of God or the public enemy.
7.5 Binding Agreement; Assignability. This Agreement shall be binding upon
and shall inure to the benefit of the parties hereto and their respective
successors and permitted assigns and subcontractors. No party hereto shall sell,
assign, transfer, convey, subcontract or otherwise dispose of its rights or
obligations under, title to, or interest in, this Agreement, in whole or in
part, to a third party other than a wholly-owned subsidiary without the prior
written consent of the other party, which consent shall not be unreasonably
withheld.
7.6 Entire Agreement; Amendment. This Agreement and Attachment A embody
the entire agreement and understanding among the parties hereto with respect to
the subject matter hereof. This Agreement may not be amended except by a writing
executed by each of the parties hereto.
7.7 Disputes. In the event of any dispute between the parties hereto
arising out of or concerning this Agreement, the parties agree to use their
reasonable best efforts to resolve any such dispute amicably, in good faith, and
expeditiously prior to resorting to litigation.
7.8 Injunctive Relief. The parties acknowledge that in the event of the
breach of certain provisions of this Agreement, including Sections 3, 6.2 and
6.3, CAI or HNNY, as the case may be, may not have an adequate remedy at law and
will suffer irreparable damage and injury. Therefore,
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in addition to any other remedy available, CAI and HNNY each agree that if it
violates any of the provisions of Section 3, 6.2 or 6.3, the non-breaching party
shall be entitled to injunctive relief, without bond, from a court of competent
jurisdiction.
7.9 Governing Law. This Agreement shall be construed in accordance with
and governed by the laws of the State of New York without giving effect to the
principles of conflicts of laws.
7.10 Severability. If any term of this Agreement or application thereof
shall be invalid or unenforceable, the remainder of this Agreement shall remain
in full force and effect.
7.11 Effect of Prior Agreement. The parties acknowledge that the Prior
Agreement expired as of December 31, 1998.
7.12 Counterparts. This Agreement may be executed in several counterparts,
each of which is an original but all of which shall constitute one and the same
instrument.
IN WITNESS WHEREOF, the parties hereto have hereunto set their hands and
seals as of the date written above.
CAREADVANTAGE, INC.
HEALTHNOW NEW YORK INC.
BY:_________________________ BY:_________________________
TITLE:______________________ TITLE:______________________
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ATTACHMENT A
TRAINING PROGRAM
Program I Basic Care Management for all clinical staff and administrative staff
1. Customized levels of care
a. Care management continuum
b. Levels of care I, II and III
I: Outpatient, Observation, Acute
II: Subacute, Skilled Nursing Facility
III: Rehabilitation, Home Care
2. Facilitating appropriate level and progression of care
a. Review process I and II
b. Introduction to standard and clinical guidelines
c. Discharge planning
3. Communication and negotiation skills
a. Introduction to communication
b. Care management negotiations
c. Customer Service (administrative staff only)
Program II Basic Case Management for case managers
1. Coordination of care
2. Patient advocacy
3. Cost/benefit analysis theories
4. Legal implications
5. Generic care planning
Program III Clinical Training
Two clinical modules (to be selected through staff assessment process)
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EXHIBIT 10.36
AMENDED AND RESTATED EMPLOYMENT AGREEMENT
THIS AMENDED AND RESTATED EMPLOYMENT AGREEMENT (the "Agreement"), is
made as of this 29th day of September, 1998, by and among RICHARD W. FREEMAN,
M.D., an individual residing at 4325 Wickford Road, Baltimore, Maryland 21210
(hereinafter referred to as "Dr. Freeman"); CAREADVANTAGE HEALTH SYSTEMS, INC.,
a Delaware corporation with its principal place of business at 485-C Route 1
South, Iselin, New Jersey 08830 (hereinafter referred to as "CAHS"); and
CAREADVANTAGE, INC. a Delaware corporation and the parent and sole shareholder
of CAHS with its principal place of business at 485-C Route 1 South, Iselin, New
Jersey 08830 (hereinafter referred to as "CAI").
W I T N E S S E T H:
WHEREAS, Dr. Freeman and CAHS had entered into an employment
agreement dated May 26, 1995 (the "Original Employment Agreement") whereby CAHS
had employed Dr. Freeman as a Senior Vice President according to the terms and
conditions set forth therein;
WHEREAS, the Original Employment Agreement between CAHS and Dr.
Freeman was amended by two (2) addenda dated May 5, 1995 and June 28, 1996,
respectively, by a Second Addendum dated August 28, 1995, a Third Addendum dated
September 26, 1997 and a Fourth Addendum dated December 15, 1997 (collectively,
such Addenda, together with the Original Employment Agreement, are hereinafter
referred to, collectively, as the "Employment Agreement"); and
WHEREAS, each of CAHS, CAI and Dr. Freeman wish to amend and restate
the Employment Agreement in order to provide for Dr. Freeman's continued
employment and to appoint Dr. Freeman as President and Chief Operating Officer
of CAI and CAHS, according to the terms and conditions set forth herein.
NOW, THEREFORE, in consideration of the mutual premises set forth
herein and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, CAI, CAHS and Dr. Freeman agree as
follows:
1. DEFINITIONS
As used in this Agreement, the following terms shall have the meanings
set forth below:
1.1 "Affiliate" shall mean a corporation which, directly or indirectly,
controls, is controlled by or is under common control with either CAI or CAHS,
and for purposes hereof, "control" shall mean the ownership of 20% or more of
the Voting Stock of either CAI or CAHS.
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1.2 "Basic Salary" shall have the meaning assigned to it in Section 5
of this Agreement.
1.3 "Board" shall mean the Board of Directors of CAI as duly
constituted from time-to-time.
1.4 "The Business" shall mean the business to be conducted by any of
CAI, CAHS, any Affiliate or any Subsidiary, directly or indirectly, including,
but not limited to, Care Management Business as defined in Section 12.3.
1.5 "Cause" shall mean:
(a) Dr. Freeman's license to practice medicine in the State of
Maryland, or any other state, his Board Certification or his federal DEA
registration, is suspended, revoked, restricted or otherwise limited or
terminated as a result of any disciplinary action, conviction of a crime
or finding of incompetency.
(b) Dr. Freeman is expelled, suspended or is subject to other
disciplinary action by a professional organization on grounds other than
for non-payment of fees or resignation by Dr. Freeman from any such
professional organization under threat of disciplinary action on such
grounds;
(c) Dr. Freeman is adjudicated incompetent, dies, is unable to
perform substantially all of the duties set forth hereunder due to any
physical or mental illness, injury or impairment for one hundred eighty
(180) continuous days;
(d) The continuing willful failure of Dr. Freeman to perform his
duties to CAI, CAHS, an Affiliate or a Subsidiary (other than any such
failure resulting from Dr. Freeman's incapacity due to physical or mental
illness) after written notice thereof (specifying the particulars thereof
in reasonable detail) from CAI and a reasonable opportunity to be heard
and to cure such failure are given to Dr. Freeman by the Board;
(e) The conviction of Dr. Freeman of a felony or any serious crimes
(including any drug-related offenses) or the willful commission by Dr.
Freeman of any intentional wrongdoing ouside the scope of his duties under
this Agreement;
(f) The commission by Dr. Freeman of an act of fraud in the
performance of his duties;
(g) The order of a federal or state regulatory agency or a court of
competent jurisdiction requiring the termination of Dr. Freeman's
employment due to intentional misfeasance or malfeasance by Dr. Freeman;
(h) The failure of Dr. Freeman to maintain the standards set forth
in Section 11 of this Agreement; or
(i) Dr. Freeman becomes ineligible for professional liability
insurance pursuant to Section 6.1(xiv).
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For purposes of this subsection, no act, or failure to act, on Dr.
Freeman's part shall be considered "willful" unless done, or omitted to be done,
by him not in good faith without reasonable belief that his action or omission
was in the best interests of CAI, CAHS, an Affiliate or a Subsidiary.
1.6 "Code" shall mean the Internal Revenue Code of 1986, as amended,
and the rules, regulations and interpretations issued thereunder.
1.7 "Commencement Date" shall be October 30th, 1998.
1.8 "Confidential Information" shall include, without limitation by
reason of specification, any information, including, without limitation, trade
secrets, vendor and customer lists, pricing policies, operational methods,
methods of doing business, technical processes, formulae, designs and design
projects, inventions, research projects, strategic plans, product information,
production know-how and other business affairs of CAI, CAHS or its Affiliates,
which (i) is or are designed to be used in or are or may be useful in connection
with the business of CAI, CAHS, any Subsidiary or any Affiliate of any thereof,
or which, in the case of any of these entities, results from any of the research
or development activities of any such entity, and which (ii) is private or
confidential in that it is not generally known or available to the public,
except as the result of unauthorized disclosure by or information supplied by
Dr. Freeman, and (iii) which gives CAI, CAHS or a Subsidiary or any Affiliate an
opportunity or the possibility of obtaining an advantage over competitors who
may not know or use such information or who are not lawfully permitted to use
the same.
1.9 "Date of Termination" shall have the meaning assigned to it in
Section 7.6.
1.10 "Disability" shall mean the inability of Dr. Freeman to perform
his duties of employment for CAI and CAHS, pursuant to the terms of this
Agreement, because of the occurrence of an event that results in the physical or
mental disability, where such disability shall have existed for a period of more
than 90 consecutive days or an aggregate of 120 days in any 365 day period. Dr.
Freeman shall be entitled to receive long-term disability payments under the
long-term disability plan of CAI and CAHS or any Affiliate or Subsidiary that
employs Dr. Freeman. The fact of whether or not a disability exists hereunder
shall be determined by appropriate medical experts selected by the Board and
agreed to by Dr. Freeman's physician. The existence of a Disability means that,
Dr. Freeman's mental and/or physical condition substantially interferes with Dr.
Freeman's performance of his duties for CAI and CAHS, and/or its Affiliates and
Subsidiaries as specified in this Agreement.
1.11 "Employment Year" shall mean each twelve (12) month period, or
part thereof, during which Dr. Freeman is employed hereunder, commencing on the
Commencement Date and on the same day of any subsequent calendar year, the first
such subsequent Employment Year being the twelve (12) month period which will
begin on the first anniversary of the Commencement Date.
1.12 "Notice of Termination" shall have the meaning assigned to that
term in Section 7.5.
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1.13 "Person" shall mean any individual, sole proprietorship,
partnership, joint venture, limited liability company, limited liability
partnership, trust, unincorporated organization, association, corporation,
institution, public benefit corporation, entity or government (whether Federal,
state, county, city, municipal or otherwise, including, without limitation, any
instrumentality, division, agency, body or department thereof).
1.14 "Retirement" shall mean that Dr. Freeman shall have reached age 65
and shall voluntarily retire under CAI's, CAHS' or any Affiliate's or
Subsidiary's retirement plan (if any) applicable to him or any earlier actual
voluntary retirement by Dr. Freeman from his employment with CAI, CAHS and its
Affiliates or Subsidiaries.
1.15 "Restricted Period" shall have the meaning assigned to that term
in Section 12.2.
1.16 "Severance" shall have the meaning assigned to that term in
Section 7.7.
1.17 "Subsidiary" shall mean a corporation of which more than 50% of
the Voting Stock is owned, directly or indirectly, by either CAI or CAHS.
1.18 "Term" shall mean the term of employment of Dr. Freeman under the
Agreement.
1.19 "Voting Stock" shall mean capital stock of a corporation which
gives the holder the right to vote in the election of directors for such
corporation in the ordinary course of business and not as the result of, or
contingent upon, the happening of any event.
Wherever from the context it appears appropriate, each word or phrase
stated in either the singular or the plural shall include the singular and the
plural, and each pronoun stated in the masculine, feminine or neuter gender
shall include the masculine, feminine and neuter.
2. EMPLOYMENT AND DUTIES OF EMPLOYEE
2.1 Employment; Title; Duties. CAI and CAHS hereby employ Dr. Freeman,
and Dr. Freeman hereby accepts appointment as the President and Chief Operating
Officer of each of CAHS and CAI. The principal duties of Dr. Freeman shall be to
perform those services and have such responsibilities as are consistent with
such positions, and shall serve faithfully and to the best of his ability, under
the direction and supervision of the Board. Dr. Freeman shall devote all of his
business time and attention to his duties under this Agreement. Without further
compensation, Dr. Freeman agrees to serve (if requested to do so by the Board)
as a Board member and, to the extent it is reasonably practicable to do so, as
an officer and/or director of one or more additional Affiliates and
Subsidiaries.
2.2 Performance of Duties. Dr. Freeman's primary working responsibility
shall be the performance of his duties as the President and Chief Operating
Officer for CAI and CAHS. During the Term, Dr. Freeman shall not engage in or
become employed, directly, or indirectly, in any business activities, nor shall
he act as a consultant to or provide any services to, whether on a remunerative
basis or otherwise, the commercial or professional business of any
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other Person which competes with the Business of CAI, CAHS and its Affiliates
and Subsidiaries.
3. TERM OF EMPLOYMENT
The employment of Dr. Freeman pursuant to this Agreement shall commence
as of the Commencement Date and end two (2) years thereafter, unless sooner
terminated pursuant to Section 7 of this Agreement. On the second anniversary of
the Commencement Date, and on each anniversary thereafter, the term of this
Agreement shall be extended for an additional one (1) year period unless within
sixty (60) days prior to such anniversary date, CAI shall have given written
notice to Dr. Freeman that the term shall not be so extended. The term of this
Agreement, including any extensions thereof, as provided herein, is hereinafter
referred to as the "Term".
4. COMPENSATION AND BENEFITS
CAI and/or CAHS and/or its Affiliates or Subsidiaries shall pay Dr.
Freeman as compensation for all of the services to be rendered by him hereunder
during the Term, and in consideration of the various restrictions imposed upon
Dr. Freeman during the Term, and otherwise under this Agreement, the Basic
Salary and other benefits as provided for and determined pursuant to Sections 5
and 6, inclusive, of this Agreement.
5. BASIC SALARY
5.1 CAI and/or CAHS shall pay Dr. Freeman, as compensation for all of
the services to be rendered by him hereunder during each Employment Year, a base
annual salary of $275,000 (the "Basic Salary"), payable in accordance with such
companies' payroll practices, less such deductions or amounts as are required to
be deducted or withheld by applicable laws or regulations, deductions for
employee contributions to welfare and/or fringe benefits provided by CAI, CAHS
or an Affiliate or Subsidiary to Dr. Freeman and less such other deductions or
amounts, if any, as are authorized by Dr. Freeman. The Basic Salary shall be
prorated for the month in which employment by such companies or an Affiliate or
Subsidiary commences or terminates, and for any Employment Year which is less
than twelve (12) months in duration.
6. ADDITIONAL BENEFITS AND REIMBURSEMENT FOR EXPENSES
6.1 Additional Benefits. CAI and CAHS shall provide the following
additional benefits to Dr. Freeman during the Term, except, however, that either
company reserves the right to alter or modify any of these benefits provided
such alterations or modifications do not unreasonably affect Dr. Freeman's terms
and conditions of employment:
(i) participation on an equitable basis in CAI's or CAHS' health
insurance benefit plans established for senior management employees of CAI or
CAHS;
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(ii) vacation leave consistent with CAI's and CAHS' vacation leave
policy;
(iii) personal leave consistent with CAI's and CAHS' personal leave
policy;
(iv) education leave consistent with CAI's and CAHS' education leave
policy;
(v) all holidays generally observed by employees of CAI and/or CAHS;
(vi) participation in the group life insurance policy available to
all employees of CAI or CAHS with Dr. Freeman having the option to purchase at
his own cost and expense additional insurance (with the benefit payable to Dr.
Freeman's designee), and the option to purchase or continue the policy, at his
sole cost, upon termination of his employment hereunder if permissible under the
terms of the policy;
(vii) participation in the long-term disability plan whereby either
CAI or CAHS is to pay the premium for such long-term disability insurance
coverage. During the Term, Dr. Freeman shall be entitled to any improvements to
CAI's or CAH's long-term liability plan;
(viii) participation in the short-term disability plan whereby
either CAI or CAHS is to pay the premium for such short-term disability
insurance coverage. During the Term, Dr. Freeman shall be entitled to any
improvements to CAI's or CAH's short-term disability plan;
(ix) participation by Dr. Freeman in a stock award and stock option
plan for senior management of CAI and CAHS on a basis determined by such
companies' Board of Directors on a basis at least consistent for senior
management;
(x) participation by Dr. Freeman in either CAI's or CAHS' 401(K)
plan;
(xi) participation by Dr. Freeman in either CAI's or CAHS' Cafeteria
Plan which will include a Flexible Spending Account;
(xii) Dr. Freeman shall be eligible to participate in the CAI
Executive Long Term Incentive Plan or any successor plan thereto (the "Long Term
Plan") and the cash payment made under the Long Term Plan to Dr. Freeman is
referred to herein as the "Long Term Bonus." Dr. Freeman's Long Term Bonus paid
under the Long Term Plan shall be consistent with his position as President and
Chief Operating Officer;
(xiii) Dr. Freeman shall be eligible to participate in the CAI
Executive Short Term Incentive Plan or any successor plan thereto (the "Short
Term Plan") and the cash payment made under the Short Term Plan to Dr. Freeman
is referred to herein as the "Short Term Bonus." Dr. Freeman' Short Term Bonus
paid under the Short Term Plan shall be consistent with his position as
President and Chief Operating Officer;
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(xiv) Either CAI or CAHS will purchase and maintain professional
liability insurance for Dr. Freeman in the minimum amount of $1,000,000.000 per
claim and a minimum annual aggregate of $3,000,000.00; and
(xv) During the period commencing on the Commencement Date and
terminating on October 1, 2000, either CAI or CAHS shall pay to Dr. Freeman an
allowance of $1,200 monthly in lieu of payment for Dr. Freeman's travel expenses
between Baltimore, Maryland and Iselin, New Jersey and Dr. Freeman shall obtain
and maintain suitable lodging in New Jersey during this period.
6.2 Reimbursement of Licensing Fees and Subscription Charges. Either
CAI or CAHS shall reimburse Dr. Freeman, consistent with CAI's and/or CAHS'
continuing education program, Dr. Freeman for any out-of-pocket expenses (not
paid directly by either CAI or CAHS) that are incurred by Dr. Freeman in
connection with the renewal of his medical license(s) and subscription charges
and costs incurred by Dr. Freeman in connection with his receipt of professional
periodicals and publications.
6.3 Reimbursement of Expenses. Either CAI or CAHS shall reimburse Dr.
Freeman for any reasonable and necessary out-of-pocket expenses (not paid
directly by either CAI or CAHS) that are incurred by Dr. Freeman in connection
with the duties performed under this Agreement, including travel, lodging and
meals.
6.4 Documentation. Dr. Freeman will submit appropriate documentation,
approved as to form, by either CAI or CAHS, to either CAI or CAHS on a monthly
basis for the expenses incurred during that time period. Payment will be made to
Dr. Freeman no later than the thirtieth (30th) business day following receipt of
such bills.
6.5 Change in Control Bonus. In addition to the Basic Salary and
Additional Benefits paid and provided to Dr. Freeman under this Agreement, and
as an additional inducement to Dr. Freeman not to voluntarily leave the employ
of CAI, CAHS or any of its Affiliates or Subsidiaries, Dr. Freeman shall be
eligible to receive a Bonus Payment following a "Change in Control of the
Company" as such term is hereinafter defined.
(i) "Change in Control of the Company" is defined as, and shall be
deemed to occur if:
(W) any "person" (as such term is used in Sections 13(d) and 14(d) of
the Securities Exchange Act of 1934, as amended (the "Exchange Act")), other
than a trustee or other fiduciary holding securities under an employee benefit
plan of CAI or Blue Cross and Blue Shield of New Jersey, Inc. ("BCBS") or CW
Ventures II, L.P. ("CW") or any person who represents CW or BCBS or controls
BCBS or CW, or a person engaging in a transaction of the type described in
clause (Y) of this subsection but which does not constitute a change in control
under such clause, is or become the "beneficial owner" (as defined in Rule 13d-3
under the Exchange Act), directly or indirectly, of securities of CAI
representing 51% or more of the combined voting power of CAI's then outstanding
securities; or
(X) during any period in which Dr. Freeman is eligible to receive a
Bonus Payment for a Change in Control of the Company, individuals who at the
beginning of such
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period constitute the Board and any new director (other than a director
designated by a person who has entered into an agreement with CAI to effect a
transaction described in clauses (W), (Y) or (Z) of this subsection or a
director nominated by CW or BCBS in accordance with the terms of the
Stockholders' Agreement among CW, BCBS and CAI dated February 22, 1996 as the
same may be amended from time to time) whose election by the Board or nomination
for election by CAI's shareholders was approved by a vote of at least two-thirds
(2/3) of the directors then still in office who either were directors at the
beginning of the period or whose election or nomination for election was
previously so approved, cease for any reason to constitute a majority thereof;
or
(Y) the shareholders of CAI approve or, if no shareholder approval is
required or obtained, CAI or a Subsidiary thereof completes a merger,
consolidation or similar transaction of CAI or a Subsidiary thereof with or into
any other corporation, or a binding share exchange involving CAI's securities,
other than any such transaction which would result in the voting securities of
CAI outstanding immediately prior thereto continuing to represent (either by
remaining outstanding or by being converted into voting securities of the
surviving entity) at least 75% of the combined voting power of the voting
securities of CAI or such surviving entity outstanding immediately after such
transaction, or the shareholders of CAI approve a plan of complete liquidation
of CAI or an agreement for the sale or disposition by CAI of all or
substantially all of CAI's assets; or
(Z) CAI or a Subsidiary thereof executes a definitive agreement with
respect to the merger, consolidation or similar transaction of CAI or a
Subsidiary thereof with or into any other corporation or entity, or the sale or
disposition of all or substantially all of CAI's assets; provided, however, that
if such agreement is subsequently terminated, a "Change in Control of the
Company" shall be deemed not to have occurred.
(ii) In the event any person commences a tender or exchange offer,
circulates a proxy statement to CAI's shareholders or takes other steps designed
to effect a Change in Control of the Company as defined herein, Dr. Freeman
agrees that he will not voluntarily leave the employ of CAI, CAHS or a
Subsidiary, and will continue to perform his regular duties and to render the
services specified in this Agreement, until such person has abandoned or
terminated his efforts to effect a Change in Control of the Company or until a
Change in Control of the Company has occurred. Should Dr. Freeman voluntarily
terminate his employment before any such effort to effect a Change in Control of
the Company has commenced, or after any such effort has been abandoned or
terminated without effecting a Change in Control of the Company and no such
effort is then in process, this Section 6.5 shall lapse and be of no further
force or effect.
(iii) If a Change in Control of the Company shall have occurred, Dr.
Freeman shall be entitled to the benefits provided in this Section 6.5 if Dr.
Freeman shall remain in the employ of CAI, CAHS or one of its Subsidiaries for a
period of six (6) months after the date of the Change in Control of the Company
(the "Bonus Period") or such employment shall terminate during the Bonus Period
other than by reason of a Qualified Termination. For purposes of clarification,
if a Change in Control of the Company as defined in Section 6.5(i)(Z) shall have
occurred, the Bonus Period shall be defined as the period of six (6) months
after the
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execution of the definitive agreement set forth in Section 6.5(i)(Z) provided
the Change in Control actually occurs, or, if the Change in Control does not
occur within such six (6) month period, upon the date of the subsequent closing
of the transactions contemplated by such definitive agreement.
(iv) If, during the Bonus Period, either CAI, CAHS or a Subsidiary
causes Dr. Freeman to sustain a Qualified Termination, either CAI or CAHS shall
pay to Dr. Freeman his full Basic Salary through the Date of Termination at the
rate in effect at the time Notice of Termination is given, and either CAI or
CAHS shall have no further obligations to Dr. Freeman under this Agreement.
(v) For purposes of this Agreement.
(A) "Qualified Termination" shall mean:
(I) if a Change in Control of the Company as defined in
Section 6.5(i)(W), (X) or (Y) shall have occurred, the termination of employment
of Dr. Freeman for Cause, voluntarily by Dr. Freeman without Good Reason, or by
death or Disability of Dr. Freeman; and
(II) if a Change in Control of the Company as defined in
Section 6.5(i)(Z) shall have occurred, the termination of employment of Dr.
Freeman for Cause or by death or Disability of Dr. Freeman.
(B) "Good Reason" shall mean:
(I) The assignment by CAI or a Subsidiary to Dr. Freeman of
duties without Dr. Freeman's express written consent, which: (i) are materially
different or require travel significantly more time-consuming or extensive than
Dr. Freeman's duties or business travel obligations immediately prior to the
Change in Control of the Company; or (ii) result, in either a significant
reduction in Dr. Freeman's authority and responsibility as the President and
Chief Operating Officer of CAI or a Subsidiary thereof; or, (iii) without Dr.
Freeman's express written consent, the removal of Dr. Freeman from, or any
failure to reappoint or reelect Dr. Freeman to, President and Chief Operating
Officer of CAI, except in connection with a termination of Dr. Freeman's
employment by CAI for Cause, or by reason of Dr. Freeman's death, or Disability;
(II) A reduction by CAI or a Subsidiary of Dr. Freeman's Basic
Salary, or the failure to grant increases in Dr. Freeman's Basic Salary on a
basis at least substantially comparable to those granted to other executives of
CAI or a Subsidiary of comparable title, salary and performance ratings made in
good faith;
(III) The relocation of CAI's principal executive offices (or
in the case of an employee of a Subsidiary; the principal executive offices of
such Subsidiary) to a location outside the State of New Jersey, or CAI's
requiring Dr. Freeman to be based anywhere other than CAI's principal executive
offices (or in the case of an employee of a Subsidiary; the principal executive
offices of such Subsidiary) except for required travel on CAI's or a
Subsidiary's business to an extent substantially consistent with Dr. Freeman's
business travel
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obligations immediately prior to the Change in Control of the Company, or in the
event of any relocation of Dr. Freeman with Dr. Freeman's express written
consent, the failure by CAI or a Subsidiary to pay (or reimburse Dr. Freeman
for) all reasonable moving expenses by Dr. Freeman relating to a change of
principal residence in connection with such relocation and to indemnify Dr.
Freeman against any loss realized in the sale of Dr. Freeman's principal
residence in connection with any such change of residence, all to the effect
that Dr. Freeman shall incur no loss upon such sale on an after tax basis;
(IV) The failure by CAI or a Subsidiary to continue to provide
Dr. Freeman with substantially the same benefits (which for purposes of this
Agreement shall mean benefits under all welfare plans as that term is defined in
Section 3(l) of the Employee Retirement Income Security Act of 1974, as
amended), and perquisites, including participation on a comparable basis in
CAI's, CAHS' or a Subsidiary's retirement plans, stock options plans, stock
award plans, and other plans in which executives of CAI or CAHS of comparable
title and salary participate and as were provided to Dr. Freeman immediately
prior to such Change in Control of the Company, or with a package of welfare
benefits and perquisites, that, though one or more of such benefits or
perquisites may vary from those, including participation on a comparable basis
in CAI's, CAHS' or a Subsidiary's retirement plans, stock option plans and stock
award plans, is substantially comparable in all material respects to such
benefits and perquisites, including participation on a comparable basis in
CAI's, CAHS' or a Subsidiary's retirement plans, stock option plans and stock
award plans, taken as a whole; or
(V) The failure of CAI to obtain the express written
assumption of and agreement to perform this Agreement by any successor as
contemplated in this Section 6.5 hereof.
(C) Notwithstanding any other provisions of this
Agreement, "Basic Salary" shall mean the amount determined by multiplying Dr.
Freeman's highest semimonthly or other periodic rate of base pay paid to Dr.
Freeman during the twelve (12) month period immediately prior to the giving of
the Notice of Termination by the number of pay periods per year. The following
items are not part of base pay, as used herein: reimbursed expenses, any amount
paid on account of overtime or holiday work, payment on account of insurance
premiums or other contributions made to other welfare benefit plans, any
year-end or other bonuses, commissions and gifts.
(vi) (A) Upon the earlier to occur of: (I) the date
immediately following the expiration of the Bonus Period if Dr. Freeman shall be
employed by CAI or a Subsidiary on the last day of the Bonus Period; or (II)
date of the termination of employment of Dr. Freeman by CAI or a Subsidiary
during the Bonus Period, where such termination is other than by reason of a
Qualified Termination, then CAI shall pay Dr. Freeman a cash bonus in the amount
of $95,000 (subject to any applicable payroll or other taxes required to be
withheld);
(B) In the event that any payment or benefit received or
to be received by Dr. Freeman in connection with a Change in Control of the
Company or the termination of Dr. Freeman's employment (whether pursuant to the
terms of this Agreement or any other plan, arrangement or agreement with CAI,
any person whose actions result in a Change in Control of the Company or any
person affiliated with CAI or such person) (collectively
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with the payments and benefits hereunder; "Total Payments") would not be
deductible (in whole or part) as a result of Section 280G of the Code by CAI, an
Affiliate or other person making such payment or providing such benefit, the
payments and benefits hereunder shall be reduced until no portion of the Total
Payments is not deductible, or the payments and benefits hereunder are reduced
to zero. At CAI's sole discretion, such reduction may be effected by extending
the date the payment would otherwise be due by not more than one (1) year or by
decreasing the amount of the payment or benefit otherwise due and payable. For
purposes of this limitation: (I) no portion of the Total Payments the receipt or
enjoyment of which Dr. Freeman shall have effectively waived in writing prior to
the date of payment under subsection (vi)(A) shall be taken into account; (II)
no portion of the Total Payments shall be taken into account which, in the
opinion of tax counsel selected by Dr. Freeman and acceptable to CAI's
independent auditors, is not likely to constitute a "parachute payment" within
the meaning of Section 280G(b)(2) of the Code; (III) the payments and benefits
hereunder shall be reduced only to the extent necessary so that, in the opinion
of the tax counsel referred to in clause (ii), the Total Payments (other than
those referred to in clauses (i) or (ii)) in their entirety are likely to
constitute reasonable compensation for services actually rendered within the
meaning of Section 280G(b)(4) of the Code or are otherwise not likely to be
subject to disallowance as deductions; and (IV) the value of any non-cash
benefit or any deferred payment or benefit included in the Total Payments shall
be determined by CAI's independent auditors in accordance with the principles of
Sections 280G(d)(3) and (4) of the Code.
(C) The cash bonus payable under this Section 6.5 shall
be in addition to any other Severance to which Dr. Freeman may be entitled
hereunder.
(vii) Notwithstanding any other provision of this Agreement,
this Section 6.5 shall continue in effect commencing on the Commencement Date
and terminating on December 31, 1998; provided, however, that if the Term has
not expired, the term of this Section 6.5 may be extended for additional six (6)
month periods upon written notice from CAI to Dr. Freeman.
(viii) If litigation or other proceeding shall be brought to
enforce or interpret any provision contained in this Section 6.5 or in
connection with any tax audit to the extent attributable to the application of
Section 4999 of the Code to any payment or benefit provided hereunder, CAI shall
indemnify Dr. Freeman for his reasonable attorneys' fees and disbursements
incurred in connection therewith and pay prejudgment interest on any money
judgment obtained by Dr. Freeman calculated at the prime rate of interest as
quoted in the Wall Street Journal for banking institutions in effect from time
to time from the date that payment should have been made under this Agreement;
provided, however, that if Dr. Freeman initiated the proceedings, Dr. Freeman
shall not have been found by the court or other fact finder to have acted in bad
faith in initiating such litigation or other proceeding, which finding must be
final without further rights of appeal.
(ix) CAI's obligation to pay Dr. Freeman the compensation and
to make the arrangements provided herein shall be absolute and unconditional and
shall not be affected by any circumstance, including, without limitation, any
setoff, counterclaim, recoupment, defense or other right which CAI may have
against Dr. Freeman or anyone else. All amounts payable by CAI hereunder shall
be paid without notice or demand. Except as
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expressly provided herein, CAI waives all rights which it may now have or may
hereafter have conferred upon it, by statute or otherwise, to terminate, cancel
or rescind this Agreement in whole or in part. Each and every payment made
hereunder by CAI shall be final and CAI will not seek to recover for any reason
all or any part of such payment from Dr. Freeman or any person entitled thereto.
Dr. Freeman shall not be required to mitigate the amount of any payment or other
benefit provided for in this Agreement by seeking other employment or otherwise.
7. TERMINATION OF EMPLOYMENT
7.1 Death. If Dr. Freeman dies during the Term, on the date of his
death this Agreement shall terminate.
7.2 Disability. If, during the Term, Dr. Freeman has a Disability,
either CAI or CAHS may, at any time after Dr. Freeman has a Disability,
terminate Dr. Freeman's employment by written notice to him; provided, however,
that either CAI or CAHS shall maintain in effect and continue to pay all
premiums due under Dr. Freeman's disability insurance policy if the continued
payments of such premium is a condition of the continuation of Dr. Freeman's
disability payments.
7.3 Retirement. The Agreement will be terminated by Dr. Freeman's
Retirement at the date of such Retirement.
7.4 Termination for Cause. Either CAI or CAHS may terminate Dr.
Freeman's employment hereunder for Cause at any time by written notice given to
Dr. Freeman.
7.5 Notice of Termination. Any purported termination of employment: (x)
by CAI, CAHS or a Subsidiary by reason of Dr. Freeman's Disability or for Cause;
or (y) by Dr. Freeman to CAI and CAHS for Good Reason shall be communicated by
written Notice of Termination to the other parties. For purposes of this
Agreement, a "Notice of Termination" shall mean a notice given: (i) by either
CAI or CAHS to Dr. Freeman; or (ii) by Dr. Freeman to CAI and CAHS which shall
indicate the specific basis for termination and shall set forth in reasonable
detail the facts and circumstances claimed to provide a basis for determination
of termination under this Agreement.
7.6 Date of Termination. For purposes of this Agreement, "Date of
Termination" shall mean the date of Death, Retirement or the Date of Termination
of employment specified in the Notice of Termination, which date shall not be
more than ninety (90) days after such Notice of Termination is given.
7.7 Payments on Termination. Upon termination of Dr. Freeman's
employment by either CAI or CAHS other than by reason of Dr. Freeman's Death,
Disability, Retirement or for Cause, but, including for failure to renew this
Agreement, either CAI or CAHS will pay to Dr. Freeman the following Severance
(subject to any applicable payroll or other taxes required to be withheld),
one-twelfth (1/12) of the Basic Salary of Dr. Freeman's payable monthly for a
period covering twelve (12) months.
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7.8 Termination by CAI or CAHS for Cause. In the event of the
termination of Dr. Freeman's employment by either CAI or CAHS for Cause, Dr.
Freeman or his estate or beneficiary, as the case may be, shall receive his
Basic Salary to the Date of Termination and no other amount except as required
by law or by the terms of employee welfare plans in which Dr. Freeman was a
participant.
7.9 Termination by Death, Retirement or Disability. In the event of the
termination of Dr. Freeman's employment by Retirement, Death or Disability, Dr.
Freeman or his estate or beneficiary, as the case may be, shall receive his
Basic Salary through the Date of Termination.
8. REPRESENTATIONS, WARRANTIES AND INDEMNIFICATION BY EMPLOYEE
8.1 Representations and Warranties. Dr. Freeman represents that each of
the representations and warranties previously made by him in the Employment
Agreement are true, correct and complete as of the Commencement Date.
8.2 Indemnification. Dr. Freeman hereby agrees to indemnify, defend and
hold harmless CAI and CAHS from and against any and all claims, losses,
liabilities, damages (including, without limitation, compensatory and/or
punitive damages), costs and expenses (including, without limitation, reasonable
attorneys' fees and expenses) incurred by either CAI or CAHS as a result of any
claim or action relating to Dr. Freeman's practice of medicine prior to the
Commencement Date.
8.3 The foregoing representations, warranties and indemnification shall
remain in effect throughout the Term and for a period of two (2) years following
the termination or expiration of this Agreement.
9. CONFIDENTIAL INFORMATION AND PROPRIETARY INTERESTS
9.1 Acknowledgment of Confidentiality. Dr. Freeman understands and
acknowledges that he may obtain Confidential Information during the course of
his employment by CAI and CAHS. Dr. Freeman further acknowledges that the
services to be rendered by him are of a special, unique and extraordinary
character and that, in connection with such services, he will have access to
Confidential Information vital to both CAI's, CAHS' and their Affiliates'
business. Accordingly, Dr. Freeman agrees that he shall not, either during the
Term or at any time within one (1) year after the Date of Termination: (i) use
or disclose any such Confidential Information outside of CAI, CAHS and their
Affiliates; or (ii), except as required in the proper performance of his
services hereunder, remove or aid in the removal from the premises of CAI, CAHS
or any Affiliate, any Confidential Information or any property or material
relating thereto.
The foregoing confidentiality provisions shall cease to be applicable
to any Confidential Information which becomes generally available to the public
(except by reason of or as a consequence of a breach by Dr. Freeman of his
obligations under this Section 9).
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In the event Dr. Freeman is required by law or a court order to
disclose any such Confidential Information, he shall, subject to the
requirements of applicable law, promptly notify both CAI and CAHS of such
requirement and provide CAI and CAHS with a copy of any court order or of any
law which in his opinion requires such disclosure and, if either CAI or CAHS so
elects, and if he is legally able to do so, permit either CAI or CAHS an
adequate opportunity, at its own expense, to contest such law or court order.
9.2 Delivery of Material. Dr. Freeman shall promptly, and without
charge, deliver to CAI and CAHS on the termination of his employment hereunder,
or at any other time CAI or CAHS may so request, all memoranda, notes, records,
reports, manuals, computer disks, videotapes, drawings, blueprints and other
documents (and all copies thereof) relating to the business of CAI and CAHS and
the Affiliates, and all property associated therewith, which he may possess or
have under his control.
9.3 Extension of Section 12. All of the provisions of Section 12 shall
be deemed to be applicable to all Confidential Information to which Dr. Freeman
may have obtained access or which he may have invented or developed during his
employment by CAI, CAHS or any Affiliate or Subsidiary.
10. DISPUTES AND REMEDIES
10.1 Waiver of Jury Trial. Each of Dr. Freeman, CAI and CAHS hereby
waives the right to a trial by jury in the event of any dispute, which arises
under this Agreement.
10.2 Injunctive Relief. If Dr. Freeman commits a breach, or threatens
to commit a breach, of any of the provisions of Section 12, either CAI or CAHS
shall have the following rights and remedies (each of which shall be independent
of the other, and shall be severally enforceable, and all of which shall be in
addition to, and not in lieu of, any other rights and remedies available to
either CAI or CAHS at law or in equity):
(i) the right and remedy to have the provisions of this Agreement
specifically enforced by any court having equity jurisdiction, it being
acknowledged by Dr. Freeman that any such breach or threatened breach will or
may cause irreparable injury to CAI and CAHS and that money damages will or may
not provide an adequate remedy thereto; and
(ii) the right and remedy to require Dr. Freeman to account for and
pay over to CAI and CAHS all compensation, profits, monies, increments, things
of value or other benefits, derived or received by Dr. Freeman as the result of
any acts or transactions constituting a breach of any of the provisions of
Section 12 of this Agreement, and Dr. Freeman hereby agrees to account for and
pay over all such compensation, profits, monies, increments, things of value or
other benefits to CAI and CAHS.
10.3 Partial Enforceability. If any provision contained in Section 12,
or any part thereof, is construed to be invalid or unenforceable, the same shall
not affect the remainder of Dr. Freeman's agreements, covenants and
undertakings, or the other restrictions which he has
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accepted, in Section 12, and the remaining such agreements, covenants,
undertakings and restrictions shall be given the fullest possible effect,
without regard to the invalid parts.
10.4 Intention of Parties. It is expressly understood and agreed that
the confidentiality and proprietary rights provisions of this Agreement have
been accepted, and agreed to by Dr. Freeman in contemplation of this Agreement.
It is therefore the specific intention of the parties, any general
considerations of public policy to the contrary notwithstanding, that the
provisions of Section 12 of this Agreement shall be enforced as written and to
the fullest extent possible.
11. GOOD STANDING
11.1 Each of CAI and CAHS represents that it is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware. Each of CAI and CAHS further represents that it has full power and
authority to conduct it business and to enter into this Agreement.
11.2 Dr. Freeman represents that he presently meets the following
criteria and that he will continue to maintain compliance with these criteria
unless waived by either CAI or CAHS:
(i) Current license to practice medicine in the State of Maryland;
(ii) Full compliance with all applicable federal, state and local
laws, regulations, and ethical standards governing the practice of medicine
generally; and
(iii) High ethical standards and is good professional standing in
the community.
12. RESTRICTIONS
12.1 Acknowledgment. Dr Freeman acknowledges that his services provided
to CAI and CAHS under this Agreement will provide him with exposure to insurance
companies and other third-party payers of health care services.
12.2 Restrictions. Accordingly, the parties hereby agree that during
the term of this Agreement and for a period of two (2) years from the date of
termination of this Agreement by any party (the "Restrictive Period"), Dr.
Freeman shall not directly or indirectly:
(i) induce or attempt to influence any organization or entity that
has a contractual relationship with CAI, CAHS or any Affiliate at any time
during the Restrictive Period to terminate such relationship or, to the extent
such relationship terminates for any reason, prevent or attempt to prevent the
reestablishment of such relationship(s);
(ii) solicit to provide medical management services, directly or
indirectly through association with any entity that so solicits, to any
insurance company or other
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third party payor of health care services with which either CAI, CAHS or any
Affiliate has any such contractual relationship(s) at the time of termination of
his employment hereunder and at any time during the remainder of the Restrictive
Period; or
(iii) for the purpose of conducting or providing services similar to
those provided hereunder, engage, hire, offer to engage or hire, or employ or
enter into business with any person or entity which served as an employee or
independent contractor of either CAI, CAHS or any Affiliate at the time of
termination of his employment hereunder and at any time during the remainder of
the Restrictive Period, whether as a joint venture, partnership, corporation, or
otherwise, without the prior written consent of both CAI and CAHS.
12.3 During the term of this Agreement and for a period of two (2)
years following the termination of the Employment by any party, Dr. Freeman
agrees that he will not in any way, directly or indirectly, manage, operate,
control or accept employment or a consulting position with or otherwise be
connected with, or own, or have any other interest in or right with respect to
(other than through ownership of not more than five (5%) percent of the
outstanding shares of a corporation's stock which is publicly traded or listed
on a national securities exchange) a Care Management Company (as hereinafter
defined) which competes (or is deemed to compete by fulfilling the conditions
stated in the following sentence) with either CAI or CAHS or any Subsidiary or
Affiliate in the Care Management Business (as hereinafter defined).
For purposes of this Agreement, (i) a "Care Management Business" means,
and is limited to, utilization review of inpatient and outpatient care and
managed care or disease management services for other entities such as insurance
companies and other payers; (ii) a "Care Management Company" means an entity
substantially all of the business of which consists of the Care Management
Business.
The foregoing restriction on competition shall be limited to
competition in any State, including the District of Columbia, in which either
CAI, CAHS or any of its Affiliates or Subsidiaries conducts its Care Management
Business.
12.4 For purposes of Section 12.3, an enterprise shall be deemed to be
competing with CAI's or CAHS' or its Affiliates' or Subsidiaries' business
notwithstanding the fact that it does not within the two (2) year period
following the termination of the Employment actually compete with such entities
if (i) within the two (2) year period following the termination of the
Employment the enterprise is actively developing the capability to compete with
such entities; (ii) Dr. Freeman has knowledge of such efforts and (iii) within
six (6) months of developing such capability but in no event later than six (6)
months following two (2) years from the date of termination of the Employment
the enterprise actively competes with such entities.
Notwithstanding any provision of this Agreement to the contrary,
nothing in this Agreement shall be interpreted to restrict Dr. Freeman from
treating clinical patients and conducting the practice of medicine (directly or
through another person or entity) during or after the term of this Agreement, or
after the term of this Agreement (subject to Section 12.5) accepting employment
with an insurance company or other third party payer, hospital, health
maintenance organization, or other facility providing care to patients.
12.5 During the term of this Agreement and for a period of two (2)
years following the termination of the Employment by any party, Dr. Freeman
agrees that he will not seek or accept employment, an affiliation, a consultancy
or any other arrangement with any company, entity, employer, health plan or
customer with which either CAI, CAHS or Contemporary HealthCare Management, Inc.
at the time of termination of his employment hereunder has or is negotiating a
customer/client relationship.
16
<PAGE>
12.6 Reasonableness of Restrictions. The parties hereby acknowledge
that the restrictions contained in Section 12.2 above are reasonable and
necessary to protect the legitimate interests of CAI and CAHS and that any
violation of such restrictions would result in irreparable injury to such
entities.. CAI, CAHS and Dr. Freeman acknowledge that in the event of a
violation of any such restriction which is not corrected within thirty (30) days
thereof, either CAI or CAHS shall be entitled to injunctive relief without
having to prove actual damages or immediate or irreparable harm or to post a
bond. CAI and CAHS shall also be entitled to an equitable accounting of all
earnings, profits, and other benefits arising from such violation, which rights
shall be cumulative and in addition to any other rights or remedies to which
either CAI or CAHS may be entitled at law or in equity. In the event of any such
violation, the Restrictive Period referred to in Section 12.2 shall be extended
by a period of time equal to that period beginning with the commencement of any
such violation and ending when such violation finally shall have been terminated
in good faith.
13. GENERAL
13.1 Headings. The headings of the Sections of this Agreement are for
convenience only and shall not affect the meanings or interpretations of the
contents thereof.
13.2 Entire Agreement. This Agreement represents the complete
understanding among the parties, and supersedes all prior negotiations,
representations or agreements, whether written or oral, as to the matters
described herein. It may be amended only by a written instrument signed by the
duly authorized representatives of all parties. No requirement, obligation,
remedy or provision of this Agreement shall be deemed to have been waived,
unless so waived expressly in writing, and any waiver of any provision shall not
be considered a waiver of any right to enforce such provision thereafter.
13.3 Notice. All notices authorized or required herein shall be in
writing and shall be sent by first class mail, postage prepaid, to Dr. Freeman
or to CAI and CAHS at their respective addresses as set forth below.
Richard W. Freeman, M.D.
4325 Wickford Road
Baltimore, Maryland 21210
and
CareAdvantage, Inc. and
CareAdvantage Health Systems, Inc.
485-C Route 1 South
Iselin, New Jersey 08830
17
<PAGE>
13.4 Governing Law. This Agreement shall be construed and governed by
the laws of the State of New Jersey applicable to contracts made and to be
performed entirely within such state.
13.5 Negotiations. For all purposes, this Agreement shall be deemed to
have been drafted by all parties executing it. The representations, terms,
covenants and conditions contained herein shall be deemed to be material and to
have been relied upon by the party or parties to whom they have been made.
13.6 Assignment. Without the prior written consent of the other party
hereto, neither party may assign any of its rights or delegate any of its
obligations hereunder; provided, however, that either CAI or CAHS may assign
this Agreement to any Affiliate without the prior written consent of Dr.
Freeman. Subject to the foregoing, this Agreement inures to the benefit of, and
is binding upon, the successors and assigns of the parties hereto.
13.7 Financing. All amounts due and benefits provided under this
Agreement shall constitute general obligations of CAI in accordance with the
terms of this Agreement. Dr. Freeman shall have only an unsecured right to
payment thereof out of the general assets of CAI and CAHS. Notwithstanding the
foregoing, CAI may, by agreement with one or more trustees to be selected by
CAI, create a trust on such terms as CAI shall determine to make payments to Dr.
Freeman in accordance with the terms of this Agreement.
18
<PAGE>
IN WITNESS WHEREOF, the parties by their duly authorized
representatives have executed this Agreement under their respective hands and
seals as of the day and year first above written.
WITNESS:
_______________________________ _______________________________
RICHARD W. FREEMAN, M.D.
ATTEST: CAREADVANTAGE HEALTH SYSTEMS, INC.
_______________________________ By:_______________________________(Seal)
Name:
Title:
ATTEST: CAREADVANTAGE, INC.
_______________________________ By:_______________________________(Seal)
Name:
Title:
19
EXHIBIT 10.37
EMPLOYMENT AGREEMENT
AGREEMENT dated as of March 25 1998 ("Commencement Date) by and between
CareAdvantage, Inc. ("Company") and Elaine del Rossi ("Employee").
1. Employment. Company agrees to employ Employee, and Employee agrees to be so
employed, in the capacity of Senior Vice President for Marketing and Sales at
the Company's headquarters, and shall have the duties customary to such office
and such ancillary and other duties as the Executive Vice President shall
reasonably determine.
2. Time and Efforts. Employee shall diligently and conscientiously devote her
full and exclusive time and attention and best efforts in discharging her duties
as Senior Vice President for Marketing and Sales.
3. Compensation.
3.1 Salary. Commencing upon the Commencement Date, the Company shall pay
Employee compensation for her services at an annual rate of $160,000. This
amount shall be paid in bi-weekly installments. The Company shall deduct from
all compensation due the Employee applicable payroll taxes, withholding taxes
and other required amounts.
3.2 One-time Bonus. Upon Employee's commencement of employment with the
Company, the Company shall pay her a one-time bonus of $50,000. The Company
shall deduct from the amount of this bonus applicable payroll taxes, withholding
taxes and other required amounts. In the event (a) Employee terminates her
employment with the Company prior to the first anniversary of the Commencement
Date, and (b) at the time of her termination her efforts have not resulted in
new sales for the Company of at least $5 million with a Contribution Margin (as
defined herein) of at least $1.5 million, Employee shall repay the Company
$4,166 for each month (or major portion thereof) the date of her termination
precedes the anniversary of the Commencement Date.
3.3 Commissions. As additional compensation, the Company agrees to pay
Employee sales commissions with respect to new contracts resulting from the
Employee's sales efforts in an amount equal to three and one-half (3.5%) percent
of the Contribution Margin for the first year such contracts remain in effect.
"Contribution Margin" shall mean with respect to any contract the excess, if
any, of the revenue collected by the Company with respect to such contract over
the direct costs incurred by the Company with respect to such contract. (For
this purpose, direct costs shall be determined under generally accepted
accounting principles, consistently applied.) The Company shall pay commissions
due to the Employee monthly, with commissions on account of any month to be paid
the month following the month in which the Company collects revenues. The
Employee shall be entitled to commissions on any bonus received by the Company
on account of the first year of a contract, notwithstanding the Company's
receipt of such bonus after the first year of such contract. The Company shall
deduct from all commissions due the Employee applicable payroll taxes,
withholding taxes and other required amounts.
4. Bonus, Stock Options and Fringe Benefits. The Company shall provide the
Employee with the bonus, stock options and fringe benefits as described in
Exhibit A.
5. Expense Reimbursement. The Company shall reimburse Employee for all
reasonable and necessary expenses incurred in carrying out her duties under this
Agreement. Employee shall present to the Company from time to time an itemized
account of such expenses in any form required by the Company.
<PAGE>
6. Term. Except as otherwise provided, this Agreement shall be for a one-year
term ending on the anniversary of the Commencement Date and shall renew for
successive one-year terms unless at least sixty (60) days prior to an
anniversary of the Commencement Date either party gives notice to the contrary.
7. Termination Without Cause.
(a) The Company may without cause terminate this Agreement at any time by
notifying the Employee of such termination. In that event, (i) Employee shall
receive salary in accordance with Section 3.1 for the term of this Agreement
that would have remained had the Company not terminated the Agreement without
cause (computed by assuming that the Company gives notice of non-renewal of the
Agreement pursuant to Section 6 on the date the Company notifies the Employee of
her termination); (ii) the Employee shall have no obligation to repay the
one-time bonus provided by Section 3.2; (iii) the Employee shall be entitled to
receive commissions provided by Section 3.3 on account of sales closed prior to
her termination; and (iv) Section 5.1 of the agreement entitled
"Confidentiality, Invention and Non-Compete Agreement" shall not apply after the
date of the Employee's termination.
(b) The Employee may without cause terminate this Agreement by giving
sixty (60) days' written notice to the Company. In such event, the Employee
shall continue to render her services and shall be paid salary and commissions
in accordance with Sections 3.1 and 3.3 respectively up to the date of
termination. Thereafter, (i) the Employee shall receive no salary under Section
3.1; (ii) the Employee shall be obligated to repay the Company an amount with
respect to the one-time bonus in accordance with Section 3.2; and (iii) the
Employee shall receive no commissions with respect to (A) revenues received for
the month in which the date of termination occurs or thereafter, or (B) bonuses
received for a period ending on or after the date of termination occurs.
8. Termination With Cause. The Company may for cause terminate this Agreement at
any time by notifying the Employee of such termination and the cause therefor,
which cause may include, but not be limited, to death and disability. In such
event, Section 7 shall not apply, and the Employee shall receive no salary under
Section 3.1 after the date of termination; and, in the event such termination is
for a reason other than death or disability, (i) the Employee shall be obligated
to repay the one-time bonus in accordance with Section 3.2; and (ii) the
Employee shall receive no commissions with respect to (A) revenues received for
the month in which the date of termination occurs or thereafter, or (B) bonuses
received for a period ending on or after the date of termination occurs.
9. Confidentiality, Invention and Non-Compete Agreement. Simultaneously with the
execution of this Agreement, the parties shall execute the agreement entitled
"Confidentiality, Invention and Non-Compete Agreement."
10. Notices. All notices required or permitted to be given under this Agreement
shall be given by certified mail, return receipt requested, to the parties at
the following addresses or to such other addresses as either may designate in
writing to the other party.
If to Company:
Executive Vice President
CareAdvantage, Inc.
485-C Route 1 South
Iselin, New Jersey 08830
If to Employee:
26 Viewpoint Lane
Levittown, Pennsylvania 19054
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<PAGE>
11. Governing Law. This Agreement shall be construed and enforced in accordance
with the laws of the state of New Jersey.
12. Amendments. This Agreement may be amended only in writing, signed by both
parties.
13. Non-Waiver. A delay or failure by either party to exercise a right under
this Agreement, or a partial or single exercise of that right, shall not
constitute a waiver of that or any other right.
14. Binding Effect. The provisions of this Agreement shall be binding upon and
inure to the benefit of both parties and their respective successors and
assigns.
IN WITNESS WHEREOF, Company has by its appropriate officers, signed and
affixed its seal and Employee has signed and sealed this Agreement.
CAREADVANTAGE, INC. ELAINE DEL ROSSI
By: ____________________________ _______________________________
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<PAGE>
EXHIBIT A
BONUS, STOCK OPTIONS AND FRINGE BENEFITS
1. Bonus. The Employee shall participate in the Company's Management Bonus
Program, which provides that in the event Employee and the Company meet targets
specified by the Board of Directors (or an appropriate committee thereof), the
Employee shall be entitled to a bonus in such amount as the Board of Directors
(or an appropriate committee thereof) may determine in its sole discretion.
2. Stock Options. The Employee shall be granted stock options in the Company, in
such amounts and on such terms and conditions as the Company's Board of
Directors (or an appropriate committee thereof) may determine in its sole
discretion.
3. Fringe Benefits. The Employee shall be entitled to the following fringe
benefits:
(a) vacation leave in the amount of 20 days per year, accruing at the rate
of 1.67 days per month;
(b) other leave (sick leave, personal time, and holidays) in the amount
and on the same terms and conditions as provided to other employees of the
Company;
(c) medical insurance, life insurance, and participation in the Company's
401(k) plan on the same terms and conditions as these benefits are provided to
other employees of the Company;
(d) disability insurance (long- and short-term) on the same terms and
conditions as provided to senior management of the Company; and
(e) an allowance of $600 per month for the lease of an automobile.
4
Exhibit 10.38
CAREADVANTAGE HEALTH SYSTEMS, INC.
CONFIDENTIALITY, INVENTION AND NON-COMPETE AGREEMENT
I, Elaine del Rossi, as partial consideration for my employment by
CareAdvantage Health Systems, Inc. or its subsidiaries and affiliates (including
without limitation CareAdvantage, Inc. and Contemporary HealthCare Management,
Inc.) or successors in business (hereinafter individually and collectively the
"Company"), and for the compensation to be paid to me during the continuance of
such employment, enter into this Confidentiality, Invention and Non-Compete
Agreement (hereinafter "Agreement") as follows:
1. Non-Interference With Third-Party Rights
1.1 I understand that my employment with the Company is based on (a) my
representation that I am free to undertake employment with the Company and the
duties and obligations imposed under this Agreement without breach of any other
agreement (whether written or oral) or duty to another party, and (b) my
acknowledgment that the Company is entitled to the benefit of my work. I further
understand that the Company has no interest in using any person's patents,
copyrights, trade secrets or trademarks in an unlawful manner. As such, I shall
not misapply proprietary rights that the Company has no rights to use.
2. Confidentiality of Trade Secrets and Business Information
2.1 I acknowledge that during the course of my employment, I may develop
and obtain access to trade secrets and confidential business information of the
Company. Under the law a "trade secret" is a type of intangible property, and
its theft is a crime in most states. A trade secret generally consists of
valuable, secret information or ideas that the Company collects or uses in order
to keep its competitive edge. Examples of trade secrets are system designs,
computer programs and software, proprietary clinical protocols, operating
processes, and any other proprietary technology. "Confidential business
information," which the Company also treats as proprietary, consists of all
other competitively sensitive information kept in confidence by the Company.
Examples of confidential business information are selling and pricing
information and procedures, business and marketing plans, and internal financial
statements.
2.2 I agree to not use or disclose any trade secrets to which I am exposed
or have access to in the course of my employment with the Company, whether such
trade secrets belong to the Company (including trade secrets embodied or
contained in any Employee Developments as defined in Section 4.1) or to third
parties, during my employment and for so long afterward as the pertinent
information or data remain trade secrets, whether or not the trade secrets are
in written or tangible form, except as required and authorized during the
performance of my duties. I further agree to not use or disclose any
confidential business information to which I am exposed or have access to in the
course of my employment with the Company, whether such information belongs to
the Company (including confidential business information embodied or contained
in any Employee Developments as defined in Section 4.1) or to third parties,
during my employment and for so long afterward as the pertinent information or
data remain confidential business information, whether or not the confidential
business information is in written or tangible form, except as required and
authorized during the performance of my duties.
<PAGE>
3. Return of Company Property
3.1 At the request of the Company, and in any event, at the time of
termination of my employment, I will return all records, materials and other
physical objects that pertain to the Company's business or to my employment,
including but not limited to all memoranda, notes, records, drawings, manuals,
documents, papers, computer software and passwords or other identification
materials (including all copies thereof). The foregoing obligation applies to
all materials relating to the affairs of the Company or to any of its customers,
clients, vendors or agents which may be in may possession or control. I will
also leave the Company all materials involving any trade secrets or confidential
business information of the Company.
4. Ownership of Employee Developments
4.1 The Company shall be entitled to own and to control all care
management, medical, technological, operating, and training ideas, processes and
materials that are developed or conceived by me, solely or jointly with others,
at any time during my employment to the extent that they relate to the Company's
then present business or interest (collectively known as "Employee
Developments"). Accordingly, I will promptly disclose and make available to the
Company all work papers, models or other tangible embodiments of such Employee
Developments. Further, I will deliver and assign to the Company all copyrights,
inventions, discoveries, improvements and trade secrets (whether or not
patentable), including all interests in computer programs, arising in connection
with my employment, and I will take whatever steps may be needed to give the
Company the full and exclusive benefit of them. To the fullest extent permitted
by applicable law, all such inventions and developments shall be considered work
made for hire under applicable law, and I shall assign to the Company all other
rights that I may have in any such inventions and developments.
5. Non-Competition
5.1 I agree that during the period commencing on the date hereof to and
including the anniversary of the date on which I cease to be employed by the
Company (the "Non-Competition Period"), I and any entity in which I may be
interested as a partner, trustee, director, officer, employee, shareholder,
option holder, consultant, lender of money or guarantor shall not engage
directly or indirectly in utilization review of inpatient or outpatient care,
managed care services, or disease management services (collectively, "Care
Management Business") in any state (including the District of Columbia) in which
the Company (including its subsidiaries and affiliates) conducts a Care
Management Business; provided, however, that the foregoing shall not be deemed
to prevent me from (a) investing in securities if such class of securities in
which the investment is so made is listed on a national securities exchange or
is issued by a company registered under Section 12(g) of the Securities Exchange
Act of 1934, so long as such investment holdings do not, in the aggregate,
constitute more than 1% of the voting stock of any company's securities, or (b)
making passive investments in which I do not participate in management; and
provided further, however, that the foregoing shall not be deemed to prevent me
from treating patients in the practice of medicine. I further agree that during
the Non-Competition Period, I shall not seek or accept employment, an
affiliation, a consultancy or any other arrangement with any entity with which
Company, at the time of the termination of my employment, has or is negotiating
a business relationship.
5.2 I acknowledge that I have been employed for my special talents and
that my leaving the employ of the Company would seriously hamper the business of
the Company. I further acknowledge that my training, experience and technical
skills are of such breadth that they can be employed to advantage in areas other
than the Managed Care Business during the Non-Competition Period, and
consequently the foregoing obligations will not unreasonably impair my ability
to engage in business activity after the termination of my employment.
2
<PAGE>
5.3 I agree that I will not, during the Non-Competition Period, hire or
offer to hire or entice away or in any other manner persuade or attempt to
persuade, either in my individual capacity or as agent for another, any of
Company's officers, employees, or agents to discontinue their relationship with
the Company. I further agree that I will not, during the Non-Competition Period,
contract, solicit or divert or attempt to contact or divert from the Company any
business whatsoever by influencing or attempting to influence any customer or
account of the Company at the time of termination of my employment.
Section 6. Other Terms
6.1 This Agreement shall inure to the benefit of, and shall be binding
upon, the Company and its subsidiaries and affiliates, together with their
successors and assigns, and me, together with my executor, administrator,
personal representative, heirs and legatees.
6.2 This Agreement merges with and supersedes all prior and
contemporaneous agreements and understandings (except the Employment Agreement
between the parties executed contemporaneously herewith), whether written or
oral, express or implied, to the extent they contradict or conflict with the
provisions hereof.
6.3 If any term of this Agreement is found to be unlawful or unenforceable
in any respect, the courts shall enforce such term, in whole or in part, and all
other terms of this Agreement to the fullest extent possible.
6.4 Irreparable harm should be presumed if this Agreement is breached in
any way. Damages would be impossible to ascertain, and the faithful observance
of all terms of this Agreement is an essential condition of employment with the
Company. Furthermore, this Agreement is intended to protect the proprietary
rights of the Company in important ways, and even the threat of any misuse of
any proprietary information disclosed to or developed by me under this Agreement
would be extremely harmful because of the importance and value of such material.
In light of these considerations, I agree that a court of competent jurisdiction
should immediately enjoin any breach of this Agreement, upon the Company's
request, and the Company is released from the requirement to post any bond in
connection with a grant of a temporary or interlocutory relief, to the extent
permitted by law.
6.5 My obligations under this Agreement shall remain unaffected by the
termination of my employment with the Company.
6.7 This Agreement shall be governed by and enforced in accordance with
the laws of the State of New Jersey.
CAREADVANTAGE HEALTH SYSTEMS, INC. ELAINE DEL ROSSI
By: _______________________________ __________________________________
EXHIBIT 10.39
EMPLOYMENT AGREEMENT
This Agreement (the "Agreement"), is effective as of the 28th day of
April, 1998, by and among STEPHAN D. DEUTSCH, M.D., residing at 82 Freeman
Parkway, Providence, Rhode Island 02906 (referred to herein as "Dr. Deutsch"),
CAREADVANTAGE, INC., a Delaware corporation with its principal place of business
at Metropolitan Corporate Plaza, 485 C Route 1, Iselin, New Jersey 08830
(referred to herein as "CAI"), and CAREADVANTAGE HEALTH SYSTEMS, INC., a
Delaware corporation that is wholly-owned by CAI, with its principal place of
business at Metropolitan Corporate Plaza, 485 C Route 1, Iselin, New Jersey
08830 (referred to herein as "CAHS").
WHEREAS, Dr. Deutsch is a duly licensed, highly credentialed, board
certified and respected orthopedic surgeon who enjoys an outstanding reputation
in the community for his ability to provide high quality medical care and his
outstanding management and leadership skills; and
WHEREAS, CAHS provides medical and surgical management and comprehensive
provider network services to insurers and health care organizations for the
purpose of assuring high quality, cost efficient medical care. CAHS currently
provides these services to organizations operating in various states; and
WHEREAS, CAHS and Dr. Deutsch desire to enter into this Employment
Agreement ("Agreement") for Dr. Deutsch's performance of his duties as Senior
Vice President and National Medical Director of CAHS.
In consideration of the mutual premises set forth herein and other good
and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, CAHS and Dr. Deutsch agree as follows:
1. DEFINITIONS
As used in this Agreement, the following terms shall have the meanings set
forth below:
1.1 "Affiliate" shall mean a corporation which, directly or indirectly,
controls, is controlled by or is under common control with CAHS, and for
purposes hereof, "control" shall mean the ownership of 20% or more of the Voting
Stock of CAHS.
1.2 "Basic Salary" shall have the meaning assigned to it in Section 5 of
this Agreement.
1.3 "Board" shall mean the Board of Directors of CAHS as duly constituted
from time-to-time.
<PAGE>
1.4 "The Business" shall mean the business to be conducted by CAHS or any
Subsidiary including, but not limited to, Care Management Business as defined in
Section 12.3.
1.5 "Cause" shall mean:
(a) Dr. Deutsch's license to practice medicine in the State of Rhode Island, or
any other state, his Board Certification or his federal DEA registration, is
suspended, revoked, restricted or otherwise limited or terminated as a result of
any disciplinary action, conviction of a crime or finding of incompetency;
(b) Dr. Deutsch is expelled, suspended or is subject to other disciplinary
action by a professional organization having jurisdiction over Dr. Deutsch on
grounds other than for non-payment of fees or resignation by Dr. Deutsch from
any such professional organization under threat of disciplinary action on such
grounds;
(c) Dr. Deutsch is adjudicated incompetent, dies, is unable to perform
substantially all of the duties set forth hereunder due to any physical or
mental illness, injury or impairment for one hundred eighty (180) continuous
days;
(d) The continuing failure of Dr. Deutsch to perform his duties to CAHS or a
Subsidiary (other than any such failure resulting from Dr. Deutsch's incapacity
due to physical or mental illness) after written notice thereof (specifying the
particulars thereof in reasonable detail) from CAHS and a reasonable opportunity
to be heard and to cure such failure are given to Dr. Deutsch by CAHS;
(e) The conviction of Dr. Deutsch of a felony or any serious crimes (including
any drug-related offenses) or the willful commission by Dr. Deutsch of any
intentional wrongdoing outside the scope of his duties under this Agreement;
(f) The commission by Dr. Deutsch of an act of fraud in the performance of his
duties;
(g) The order of a federal or state regulatory agency or a court of competent
jurisdiction requiring the termination of Dr. Deutsch's employment due to
intentional misfeasance or malfeasance by Dr. Deutsch;
(h) The failure of Dr. Deutsch to maintain the standards set forth in Section 11
of this Agreement; or
(i) Dr. Deutsch becomes ineligible for professional liability insurance pursuant
to Section 6.1 (xii).
For purposes of this subsection, no act, or failure to act, on Dr. Deutsch's
part shall be considered "willful" unless done, or omitted to be done, by him
not in good faith without reasonable belief that his action or omission was in
the best interests of CAHS or a Subsidiary.
2
<PAGE>
1.6 "Code" shall mean the Internal Revenue Code of 1986, as amended, and the
rules, regulations and interpretations issued thereunder.
1.7 "Commencement Date" shall be the date first set forth on page one of this
Agreement.
1.8 "Confidential Information" shall include, without limitation by reason of
specification, any information, including, without limitation, trade secrets,
vendor and customer lists, pricing policies, operational methods, methods of
doing business, technical processes, formulae, designs and design projects,
inventions, research projects, strategic plans, product information, production
know-how and other business affairs of CAHS or its Affiliates, which (i) is or
are designed to be used in or are or may be useful in connection with the
business of CAHS, any Subsidiary or any Affiliate of any thereof, or which, in
the case of any of these entities, results from any of the research or
development activities of any such entity, and which (ii) is private or
confidential in that it is not generally known or available to the public,
except as the result of unauthorized disclosure by or information supplied by
Dr. Deutsch, and (iii) which gives CAHS or a Subsidiary or any Affiliate an
opportunity or the possibility of obtaining an advantage over competitors who
may not know or use such information or who are not lawfully permitted to use
the same.
1.9 "Date of Termination" shall have the meaning assigned to it in Section 7.6.
1.10 "Disability" shall mean the inability of Dr. Deutsch to perform his duties
of employment for CAHS, pursuant to the terms of this Agreement, because of the
occurrence of an event that results in the physical or mental disability, where
such disability shall have existed for a period of more than 90 consecutive days
or an aggregate of 120 days in any 365 day period. Dr. Deutsch shall be entitled
to receive long term disability payments under the long term disability plan of
CAHS or any Subsidiary which employs Dr. Deutsch. The fact of whether or not a
disability exists hereunder shall be determined by appropriate medical experts
selected by the Board and agreed to by Dr. Deutsch's physician. The existence of
a Disability means that, Dr. Deutsch's mental and/or physical condition
substantially interferes with Dr. Deutsch's performance of his duties for CAHS,
and/or its Subsidiaries as specified in this Agreement.
1.11 "Employment Year" shall mean each twelve-month period, or part thereof,
during which Employee is employed hereunder, commencing on the Commencement Date
and on the same day of any subsequent calendar year, the first such subsequent
Employment Year being the twelve-month period which will begin on the first
anniversary of the Commencement Date.
1.12 "Notice of Termination" shall have the meaning assigned to that term in
Section 7.5.
1.13 "Person" shall mean any individual, sole proprietorship, partnership, joint
venture, trust, unincorporated organization, association, corporation,
institution, public benefit corporation, entity or government (whether Federal,
state, county, city, municipal or otherwise, including, without limitation, any
instrumentality, division, agency, body or department thereof).
3
<PAGE>
1.14 "Retirement" shall mean that Dr. Deutsch shall have reached age 65 and
shall voluntarily retire under CAHS' or a Subsidiary's retirement plan (if any)
applicable to him or any earlier actual voluntary retirement by Dr. Deutsch from
his employment with CAHS and its Subsidiaries.
1.15 "Restricted Period" shall have the meaning assigned to that term in Section
12.2.
1.16 "Severance" shall have the meaning assigned to that term in Section 7.7.
1.17 "Subsidiary" shall mean a corporation of which more than 50% of the Voting
Stock is owned, directly or indirectly, by CAHS.
1.18 "Supplemental Salary shall have the meaning assigned to it in Section 5 of
this Agreement.
1.19 "Term" shall mean the term of employment of Dr. Deutsch under this
Agreement.
1.20 "Voting Stock" shall mean capital stock of a corporation which gives the
holder the right to vote in the election of directors for such corporation in
the ordinary course of business and not as the result of, or contingent upon,
the happening of any event.
Wherever from the context it appears appropriate, each word or phrase stated in
either the singular or the plural shall include the singular and the plural, and
each pronoun stated in the masculine, feminine or neuter gender shall include
the masculine, feminine and neuter.
2. EMPLOYMENT AND DUTIES OF EMPLOYEE
Employment; Title; Duties. CAHS hereby employs Dr. Deutsch, and Dr. Deutsch
hereby accepts appointment as Senior Vice President of CAHS and National Medical
Director of CAHS. The principle duties of Dr. Deutsch, as National Medical
Director, shall be to perform those services set forth on Exhibit A attached
hereto and incorporated herein, and, as Senior Vice President and as National
Medical Director, to render services as are necessary and desirable to protect
and advance the best interests of CAHS and its Subsidiaries, acting in all
instances, under the supervision of and in accordance with instructions,
directives, and guidelines established by the President or Executive Vice
President of CAHS. Without further compensation, Dr. Deutsch agrees to serve (if
requested to do so by the Board and if there is liability insurance in effect
satisfactory to Dr. Deutsch) as a director of CAHS and, to the extent it is
reasonably practicable to do so, as an officer and/or director of one or more
Subsidiaries. At all times during the term of this Agreement, Dr. Deutsch shall
retain the title of Senior Vice President of CAHS and the title of National
Medical Director of CAHS.
4
<PAGE>
Performance of Duties. Dr. Deutsch's primary working responsibility shall be the
performance of his duties as an executive of CAHS and the performance of such
other reasonable executive and medical duties as are assigned him from
time-to-time that are consistent with his position. During the Term and except
as otherwise provided herein, Dr. Deutsch shall not engage in or become
employed, directly or indirectly, in any business activities without the prior
written consent of CAHS, nor shall he act as a consultant to or provide any
services to, whether on a remunerative basis or otherwise, the commercial or
professional business of any other Person which competes with the Business of
CAHS and its Subsidiaries, without such prior written consent. Nothing contained
in this Section 2.2 shall restrict or prohibit Dr. Deutsch from practicing
medicine and/or participating in any meetings concerning Occupational Health and
Rehabilitation and Health Solutions (organizations with which Dr. Deutsch had
associations prior to the execution of this Employment Agreement) during the
Term hereof provided such practice or participation does not impede Dr.
Deutsch's fulfillment of his duties and responsibilities under this Employment
Agreement.
3. TERM OF EMPLOYMENT
The employment of Dr. Deutsch pursuant to this Agreement shall commence as of
the Commencement Date and end two years thereafter, unless sooner terminated
pursuant to Section 7 of this Agreement. On the second anniversary of the
Commencement Date, and on each anniversary thereafter, the term of this
Agreement shall be extended for an additional one (1) year period unless within
sixty (60) days prior to such anniversary date, either party may give written
notice to the other that the term shall not be so extended. The term of this
Agreement, including any extensions thereof, as provided herein, is hereinafter
referred to as the "Term".
4. COMPENSATION AND BENEFITS
CAHS and/or its Subsidiaries shall pay Dr. Deutsch as compensation for all of
the services to be rendered by him hereunder during the Term, and in
consideration of the various restrictions imposed upon Dr. Deutsch during the
Term, and otherwise under this Agreement, the Basic Salary and other benefits as
provided for and determined pursuant to Sections 5 and 6, inclusive, of this
Agreement.
5. BASIC SALARY/SUPPLEMENTAL SALARY/BONUS AWARDS
5.1 CAHS shall pay Dr. Deutsch a basic annual salary of $250,000 (the "Basic
Salary"). The Basic Salary shall be prorated for the month in which employment
by CAHS or a Subsidairy commences or terminates, and for any Employment Year
which is less than twelve (12) months in duration.
5
<PAGE>
5.2 CAHS shall pay Dr. Deutsch an annual supplemental salary of $50,000 (the
"Supplemental Salary") for his services as National Medical Director of CAHS.
The supplemental salary shall be prorated for the month in which employment with
CAHS or a Subsidiary commences or terminates, and for any Employment Year which
is less than twelve (12) months in duration.
5.3 During the term of this Agreement, Dr. Deutsch shall be entitled to
participate in such CAHS' Executive Annual Bonus Incentive Plan as may be
established by the Board, which provides employees with annual bonuses based
upon CAHS profitability.
5.4 The Basic Salary specified in Section 5.1 and the Supplemental Salary
specified in Section 5.2 shall be payable in bi-weekly installments in
accordance with CAHS' payroll practices, less such deductions or amounts as are
required to be deducted or withheld by applicable laws or regulations,
deductions for employee contributions to welfare and/or fringe benefits provided
by CAHS to Dr. Deutsch and less such other deductions or amounts, if any, as are
authorized by Dr. Deutsch.
6. ADDITIONAL BENEFITS AND REIMBURSEMENT FOR EXPENSES
6.1 Additional Benefits. CAHS shall provide the following additional benefits to
Dr. Deutsch during the Term, except, however, that CAHS reserves the right to
alter or modify any of these benefits provided such alterations or modifications
do not unreasonably affect Dr. Deutsch's terms and conditions of employment:
(i) participation on an equitable basis in CAHS' health insurance
benefit plans established for senior management employees of CAHS;
(ii) vacation leave with pay in each Employment Year to accrue in
accordance with CAHS personnel policies;
(iii) personal leave with pay in each Employment Year to accrue in
accordance with CAHS personnel policies;
(iv) five (5) days education leave with pay in each Employment Year
to accrue at the rate of .42 days per month or part thereof;
(v) Dr. Deutsch shall also be entitled to all holiday privileges
approved by the Board during the Term;
6
<PAGE>
(vi) participation in the group life insurance available to all
employees of CAHS whereby CAHS will pay the annual premium attributable to
one times Dr. Deutsch's Basic Salary with Dr. Deutsch having the option to
purchase at his cost and expense additional insurance (with the benefit
payable to Dr. Deutsch's designee) if permissible under the terms of the
policy, and the option to purchase or continue the policy, at his sole
cost, upon termination of his employment hereunder if permissible under
the terms of the policy.
(vii) participation in the long-term disability plan of CAHS in
accordance with company policy;
(viii) participation in the short-term disability plan of CAHS in
force at the time of such disability.
(ix) participation by Dr. Deutsch in a CAI stock award and CAI stock
option plan for senior management of CAHS on a basis determined by CAHS on
a basis at least consistent for senior management of CAHS.
(x) participation by Dr. Deutsch in CAHS's 401(k) plan in accordance
with Company policy;
(xi) participation by Dr. Deutsch in other benefits, as established
from time to time by CAHS.
(xii) Dr. Deutsch will be covered by professional liability
insurance in force for senior management of the Company;
6.2 Reimbursement of Licensing Fees and Subscription Charges. CAHS shall
reimburse Dr. Deutsch for any out-of-pocket expenses (not paid directly by CAHS)
that are incurred by Dr. Deutsch in connection with the renewal of his medical
license in Rhode Island, subscription charges, professional membership fees and
costs incurred by Dr. Deutsch in connection with professional fees related to
medical licensure. Reimbursement under this Section 6.2 shall not exceed the
amount of $2500 per year.
6.3 Reimbursement of Continuing Medical Education. CAHS shall reimburse
Dr. Deutsch for any reasonable and necessary out-of-pocket expenses (not paid
directly by CAHS) that are incurred by Dr. Deutsch in connection with his annual
Continuing Medical Education requirements, if any, including program or tuition
costs, travel, lodging, meals and telephone. Reimbursement under this Section
6.3 shall not exceed the amount of $5,000 per year.
7
<PAGE>
6.4 Reimbursement of Expenses. CAHS shall reimburse Dr. Deutsch for any
reasonable and necessary out-of-pocket expenses (not paid directly by CAHS) that
are incurred by Dr. Deutsch in connection with the duties performed under this
Agreement, including travel, lodging, meals and telephone calls in connection
with the business of CAHS. Dr. Deutsch will submit appropriate documentation,
approved as to form, by CAHS, to CAHS on a monthly basis for the eligible
expenses specified hereunder that were incurred during that time period. Payment
will be made by CAHS to Dr. Deutsch no later than the thirtieth (30th) calendar
day following receipt of such bills.
6.5 CAHS agrees to provide Dr. Deutsch with appropriate computer hardware
and software as determined by CAHS and a pager/beeper to be used in connection
with his duties and responsibilities under this Employment Agreement.
6.6 Reimbursement of Malpractice Insurance Expense. CAHS shall reimburse
Dr. Deutsch up to $8,000 per year for the first year of this Agreement and up to
$6,500 per year for the second year of this Agreement for malpractice insurance
upon presentation of paid receipts by Dr. Deutsch.
7. TERMINATION OF EMPLOYMENT
7.1 Death. If Dr. Deutsch dies during the Term, on the date of his death
this Agreement shall terminate.
7.2 Disability. If, during the Term, Dr. Deutsch has a Disability, CAHS
may, at any time after Dr. Deutsch has a Disability, terminate Dr. Deutsch's
employment by written notice to him; provided, however, that CAHS shall maintain
in effect and continue to pay all premiums due under Dr. Deutsch's disability
insurance policy if the continued payments of such premium is a condition to the
continuation of Dr. Deutsch's disability payments.
7.3 Retirement. The Agreement will be terminated by Dr. Deutsch's
Retirement at the date of such Retirement.
7.4 Termination for Cause. CAHS may terminate Dr. Deutsch's employment
hereunder for Cause at any time by written notice given to Dr. Deutsch by the
CEO.
7.5 Notice of Termination. Any purported termination of employment by CAHS
or a Subsidiary by reason of Dr. Deutsch's Disability or for Cause shall be
communicated by written Notice of Termination to Dr. Deutsch signed by the Chief
Executive Officer. For purposes of this Agreement, a "Notice of Termination"
shall mean a notice given by CAHS which shall indicate the specific basis for
termination and shall set forth in reasonable detail the facts and circumstances
claimed to provide a basis for determination of or termination under this
Agreement.
8
<PAGE>
7.6 Date of Termination. For purposes of this Agreement, "Date of
Termination" shall mean the date of Death, Retirement or the date of termination
of employment specified in the Notice of Termination.
7.7 Payments on Termination. Upon termination of Dr. Deutsch's employment
by CAHS other than by reason of Dr. Deutsch's Death, Disability, Retirement or
for Cause, CAHS will pay to Dr. Deutsch the following Severance (subject to any
applicable payroll or other taxes required to be withheld): in the event such
termination, one-twelfth (1/12) of Dr. Deutsch's Basic Salary and Supplemental
Salary shall be paid monthly for a period covering twelve months following such
termination.
7.8 Termination by CAHS for Cause. In the event of the termination of Dr.
Deutsch's employment by CAHS for Cause, Dr. Deutsch or his estate or
beneficiary, as the case may be, shall receive his Basic Salary to the Date of
Termination and no other amount except as required by law or by the terms of
employee welfare plans in which Dr. Deutsch was a participant.
7.9 Termination by Death, Retirement or Disability. In the event of the
termination of Dr. Deutsch's employment by Retirement, Death or Disability, Dr.
Deutsch or his estate or beneficiary, as the case may be, shall receive his
Basic Salary through the Date of Termination.
8. REPRESENTATIONS, WARRANTIES AND INDEMNIFICATION BY EMPLOYEE
8.1 Prior Medical Practice. Dr. Deutsch represents that he is not subject
to any restrictive covenant that would prevent his performance of the duties of
National Medical Director at CAHS as described above.
8.2 Pending Patient-Related Litigation. Dr. Deutsch hereby represents that
to the best of his knowledge and belief, he is not a party to any pending
professional liability or other patient-related litigation, that no such actions
have been threatened, that there are no proceedings threatened or pending
against Dr. Deutsch before any professional licensing board, and that Dr.
Deutsch is not aware of any state of facts which reasonably could be expected to
lead to any such litigation or proceeding.
8.3 Prior Acts Insurance Coverage. Dr. Deutsch has provided CAHS with a
certificate of insurance as evidence of adequate professional liability
insurance to insure against professional liability claims arising out of
occurrences prior to the Effective Date hereof and a copy of such certificate of
insurance is attached hereto.
8.4 Indemnification. Dr. Deutsh hereby agrees to indemnify, defend and
hold harmless CAHS from and against any and all claims, losses, liabilities,
damages (including, without limitation, compensatory and/or punitive damages),
costs and expenses (including, without limitation, reasonable attorneys' fees
and expenses) incurred by CAHS as a result of any claim or action relating to
Dr. Deutsch's practice of medicine prior to the Effective Date.
9
<PAGE>
8.5 The foregoing representations, warranties and indemnification shall
remain in effect throughout the Term and for a period of two (2) years following
the termination or expiration of this Agreement.
9. CONFIDENTIAL INFORMATION AND PROPRIETARY INTERESTS
9.1 Acknowledgment of Confidentiality. Dr. Deutsch understands and
acknowledges that he may obtain Confidential Information during the course of
his employment by CAHS. Dr. Deutsch further acknowledges that the services to be
rendered by him are of a special, unique and extraordinary character and that,
in connection with such services, he will have access to Confidential
Information vital to CAHS's and Affiliates' business. Accordingly, Dr. Deutsch
agrees that he shall not, either during the Term or at any time within one year
after the Date of Termination, (i) use or disclose any such Confidential
Information outside CAHS and Affiliates' or (ii), except as required in the
proper performance of his services hereunder, remove or aid in the removal from
the premises of CAHS or any Affiliate, any Confidential Information or any
property or material relating thereto.
The foregoing confidentiality provisions shall cease to be applicable to
any Confidential Information which becomes generally available to the public
(except by reason of or as a consequence of a breach by Dr. Deutsch of his
obligations under this Section 9).
In the event Dr. Deutsch is required by law or a court order to disclose
any such Confidential Information, he shall, subject to the requirements of
applicable law, promptly notify CAHS of such requirement and provide CAHS with a
copy of any court order or of any law which in his opinion requires such
disclosure and, if CAHS so elects, and if he is legally able to do so, permit
CAHS an adequate opportunity, at its own expense, to contest such law or court
order.
9.2 Delivery of Material. Dr. Deutsch shall promptly, and without charge,
deliver to CAHS on the termination of his employment hereunder, or at any other
time CAHS may so request, all memoranda, notes, records, reports, manuals,
computer disks, videotapes, drawings, blueprints and other documents (and all
copies thereof) relating to the business of CAHS and the Affiliates, and all
property associated therewith, which he may possess or have under his control.
9.3 Extension of Section 12. All of the provisions of Section 12 shall be
deemed to be applicable to all Confidential Information to which Dr. Deutsch may
have obtained access or which he may have invented or developed during his
employment by CAHS or any Subsidiary.
10. DISPUTES AND REMEDIES
10.1 Waiver Of Jury Trial. Dr. Deutsch and CAHS hereby waive the right to
a trial by jury in the event of any dispute which arises under this Agreement.
10
<PAGE>
10.2 Injunctive Relief. If Dr. Deutsch commits a breach, or threatens to
commit a breach, of any of the provisions of Section 12, CAHS shall have the
following rights and remedies (each of which shall be independent of the other,
and shall be severally enforceable, and all of which shall be in addition to,
and not in lieu of, any other rights and remedies available to CAHS at law or in
equity):
(i) the right and remedy to have the provisions of this Agreement
specifically enforced by any court having equity jurisdiction, it being
acknowledged by Dr. Deutsch that any such breach or threatened breach will
or may cause irrespirable injury to CAHS and that money damages will or
may not provide an adequate remedy to CAHS; and
(ii) the right and remedy to require Dr. Deutsch to account for and
pay over to CAHS all compensation, profits, monies, increments, things of
value or other benefits, derived or received by Dr. Deutsch as the result
of any acts or transactions constituting a breach of any of the provisions
of Section 12 of this Agreement, and Dr. Deutsch hereby agrees to account
for and pay over all such compensation, profits, monies, increments,
things of value or other benefits to CAHS.
10.3 Partial Enforceability. If any provision contained in Section 12, or
any part thereof, is construed to be invalid or unenforceable, the same shall
not affect the remainder of Dr. Deutsch's agreements, covenants and
undertakings, or the other restrictions which he has accepted, in Section 12,
and the remaining such agreements, covenants, undertakings and restrictions
shall be given the fullest possible effect, without regard to the invalid parts.
10.4 Intention of Parties. It is expressly understood and agreed that the
confidentiality and proprietary rights provisions of this Agreement have been
accepted, and agreed to by Dr. Deutsch in contemplation of this Agreement. It is
therefore the specific intention of the parties, any general considerations of
public policy to the contrary nothwithstanding, that the provisions of Section
12 of this Agreement shall be enforced as written and to the fullest extent
possible.
11. GOOD STANDING
11.1 CAHS represents that it is a corporation duly organized, validly
existing and in good standing under the laws of the State of Delaware. CAHS
further represents that it has full power and authority to conduct its business
and to enter into this Agreement.
11
<PAGE>
11.2 Dr. Deutsch represents that he presently meets the following criteria
and that he will continue to maintain compliance with these criteria unless
waived by CAHS:
(i) Current license to practice medicine in the State of Rhode
Island;
(ii) Full compliance with all applicable federal, state and local
laws, regulations, and ethical standards governing the practice of
medicine generally; and
(iii) High ethical standards and in good professional standing in
the community.
12. RESTRICTIONS
12.1 Acknowledgement. Dr. Deutsch acknowledges that his services provided
to CAHS under this Agreement will provide him with exposure to insurance
companies and other third-party payers of health care services.
12.2 Restrictions. Accordingly, the parties hereby agree that during the
term of this Agreement and for a period of one (1) year from the date of
termination of this Agreement by either party (the "Restrictive Period"), Dr.
Deutsch shall not directly or indirectly:
(i) induce or attempt to influence any organization or entity that
has a contractual relationship with CAHS at any time during the
Restrictive Period to terminate such relationship or, to the extent such
relationship terminates for any reason, prevent or attempt to prevent the
reestablishment of such relationship(s).
(ii) solicit to provide medical management services, directly or
indirectly through association with any entity that so solicits, to any
insurance company or other third party payor of health care services with
which CAHS has any such contractual relationship(s) at the time of
termination of his employment hereunder and at any time during the
remainder of the Restrictive Period; or
(iii) for the purpose of conducting or providing services similar to
those provided hereunder, engage, hire, offer to engage or hire, or employ
or enter into business with any person or entity which served as an
employee or independent contractor of CAHS at the time of termination of
his employment hereunder and at any time during the remainder of the
Restrictive Period, whether as a joint venture, partnership, corporation,
or otherwise, without the prior written consent of CAHS.
12
<PAGE>
12.3 During the term of this Agreement and for a period of one (1) year
following the termination of Dr. Deutsch's Employment by either party, Dr.
Deutsch agrees that he will not in any way, directly or indirectly, manage,
operate, control or accept employment or a consulting position with or otherwise
be connected with, or own, or have any other interest in or right with respect
to (other than through ownership of not more than five (5%) percent of the
outstanding shares of a corporation's stock which is public traded or listed on
a national securities exchange) a Care Management Company (as hereinafter
defined) which competes (or is deemed to compete by fulfilling the conditions
stated in the following sentence) with CAHS or a subsidiary or affiliate of CAHS
in the Care Management Business (as hereinafter defined).
For purposes of this Agreement, (i) a "Care Management Business" means,
and is limited to, utilization review of inpatient and outpatient care and
managed care or disease management services for other entities such as insurance
companies and other payers; (ii) a "Care Management Company" means an entity
substantially all of the business of which consists of the Care Management
Business.
The foregoing restriction on competition shall be limited to competition
in any State, including the District of Columbia, in which CAHS or any of its
subsidiaries conducts its Care Management Business.
12.4 For purposes of Section 12.3, an enterprise shall be deemed to be
competing with CAHS' business nothwithstanding the fact that it does not within
the one (1) year period following the termination of the Employment actually
compete with CAHS if (i) within the one (1) year period following the
termination of the Employment the enterprise is actively developing the
capability to compete with CAHS; (ii) Dr. Deutsch has knowledge of such efforts
and (iii) within six (6) months of developing such capability but in no event
later than six (6) months following one (1) year from the date of termination of
the Employment the enterprise actively competes with CAHS.
Nothwithstanding any provision of this Agreement to the contrary, nothing
in this Agreement shall be interpreted to restrict Dr. Deutsch from treating
clinical patients and conducting the practice of medicine (directly or through
another person or entity) during or after the term of this Agreement, or after
the term of this Agreement (subject to Section 12.5) accepting employment with
an insurance company or other third party payer, hospital, health maintenance
organization, other facility providing care to patients or continuing or
renewing his relationship with Occupational Health and Rehabilitation and Health
Solutions.
12.5 During the term of this Agreement and for a period of one (1) year
following the termination of Dr. Deutsch's Employment by either party, Dr.
Deutsch agrees that he will not seek or accept employment, an affiliation, a
consultancy or any other arrangement with any company, entity, employer, health
plan or customer with which CAHS, at the time of termination of his employment
hereunder has or is negotiating a business relationship and about which he has
actual or contructive knowledge.
13
<PAGE>
12.6 Reasonableness of Restrictions. The parties hereby acknowledge that
the restrictions contained in Section 12.2 above are reasonable and necessary to
protect the legitimate interests of CAHS and that any violation of such
restrictions would result in irreparable injury to CAHS. CAHS and Dr. Deutsch
acknowledge that in the event of a violation of any such restriction which is
not corrected within thirty (30) days thereof, CAHS shall be entitled to
injunctive relief without having to prove actual damages or immediate or
irreparable harm or to post a bond. CAHS shall also be entitled to an equitable
accounting of all earnings, profits, and other benefits arising from such
violation, which rights shall be cumulative and in addition to any other rights
or remedies to which CAHS may be entitled at law or in equity. In the event of
any such violation, the Restrictive Period referred to in Section 12.2 shall be
extended by a period of time equal to that period beginning with the
commencement of any such violation and ending when such violation finally shall
have been terminated in good faith.
13. GENERAL
13.1 The headings of the Sections of this Agreement are for convenience
only and shall not affect the meanings or interpretations of the contents
thereof.
13.2 This Agreement is intended by the parties to replace the Employment
Agreement among them dated as of July 1, 1995 ("Prior Employment Agreement") as
of its Effective Date. Commencing the 28th day of April, 1998, the Prior
Employment Agreement shall be terminated and of no effect, except to the extent
of obligations thereunder that have accrued prior to such date and that have not
been satisfied as of such date. Notwithstanding anything in this Section to the
contrary, the parties intend that the "Addendum to Employment Agreement of
Stephan D. Deutsch, M.D., dated July 1, 1995" shall continue to remain in full
force and effect, and that such Addendum shall be amended to substitute "April
28, 1998" for each reference therein to "July 1, 1995."
13.3 This Agreement represents the complete understanding between the
parties, and supersedes all prior negotiations, representation or agreements,
wheter written or oral, as to the matters described herein. It may be amended
only by a written instrument signed by the duly authorized representatives of
both parties. No requirement, obligation, remedy or provision of this Agreement
shall be deemed to have been waived, unless so waived expressly in writing, and
any waiver of any provision shall not be considered a waiver of any right to
enforce such provision thereafter.
13.4 All notices authorized or required herein shall be in writing and
shall be sent by certified mail, return receipt requested, to the parties at
their respective addresses as set forth above:
13.5 This Agreement shall be governed by the laws of the State of New
Jersey.
13.6 For all purposes, this Agreement shall be deemed to have been drafted
by both parties executing it. The representations, terms, covenants and
conditions contained herein shall be deemed to be material and to have been
relied upon by the party or parties to whom they have been made.
14
<PAGE>
13.7 Without the prior written consent of the other party hereto, neither
party may assign any of its rights or delegate any of its obligations hereunder.
Subject to the foregoing, this Agreement inures to the benefit of, and is
binding upon, the successors and assigns of the parties hereto.
IN WITNESS WHEREOF, the parties by their duly authorized representatives have
executed this Agreement under their respective hands and seals as of the day and
year first written above.
WITNESS: STEPHAN D. DEUTSCH, M.D.
______________________________ _______________________________________
ATTEST: CAREADVANTAGE, INC.
______________________________ By: ______________________________________
Richard W. Freeman, M.D., Executive Vice
President
ATTEST: CAREADVANTAGE HEALTH SYSTEMS, INC.
______________________________ By: ______________________________________
Richard W. Freeman, M.D., Executive Vice
President
15
<PAGE>
EXHIBIT A
NATIONAL MEDICAL DIRECTOR DUTIES AND RESPONSIBILITIES
1. Synthesis of products into Model CareManagement Program. Primary
responsibility for development and continued enhancement of the
CareAdvantage Care Management Program, including assurance that Program
can meet accreditation criteria, either directly or under delegate status,
as appropriate for various CAI clients, of URAC, NCQA or JCAHO, and other
regulatory or accrediting agencies
2. National Recognition for CareAdvantage. Primary responsibility (a) for
establishment of and development of role of CareAdvantage National
Advisory Board, and (b) for maintenance of the CareAdvantage National
Specialty Physician Panel, and (c) development and maintenance of formal
relationships with appropriate national medical and professional
societies, such as the American College of Physicians, the Americal
College of Obstetricians and Gynecologists, etc., as well as liaison with
medical schools
3. Quality management. Primary responsibility (a) for development and
enhancement of career development opportunities for CareAdvantage medical
directors, including orientation and initial training and for continued
training on current and new products, and (b) for development and
application of quality indicators to assure consistency of application of
products and programs by CareAdvantage medical directors
4. Selection of combinations of products and product components for model
applications for specific market niches. Secondary responsibility, in
support of senior vice president for marketing and sales, for selecting
the components of the Care Management Program to develop optimal model
care management programs marketable to each market niche, including , but
not limited to, large insurers, HMOs, TPAs, re-insurers, integrated
delivery systems, and large PPMs/MSOs
16
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<PERIOD-START> NOV-01-1997
<PERIOD-END> OCT-31-1998
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<SECURITIES> 1,747,445
<RECEIVABLES> 0
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<PP&E> 1,373,571
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0
0
<COMMON> 82,190
<OTHER-SE> 3,401,796
<TOTAL-LIABILITY-AND-EQUITY> 8,800,263
<SALES> 0
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