SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
COMMISSION FILE NUMBER 0-26168
CAREADVANTAGE, INC.
(Exact name of registrant as specified in its charter)
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DELAWARE 52-1849794
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification Number)
485-C Route 1 South, Iselin, New Jersey 08830
(Address of principal executive offices) (Zip Code)
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Registrant's telephone number, including area code: (732) 602-7000
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No ___
82,189,883
Number of shares of Common Stock outstanding as of August 13, 1999
Transitional Small Business Disclosure Format
Yes X No__
<PAGE>
CareAdvantage, Inc. and Subsidiaries
Form 10-QSB
For the six months ended June 30, 1999
I N D E X
---------
Part I - Financial Information
Item 1. Financial Statements
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Condensed Consolidated Balance Sheets -
June 30, 1999 (unaudited) and October 31, 1998..................................... 2
Condensed Consolidated Statements of Operations -
Three and Six-months ended June 30, 1999 and July 31, 1998......................... 3
(Unaudited)
Condensed Consolidated Statements of Cash Flows -
Six-months ended June 30, 1999 and July 31, 1998................................... 4
(Unaudited)
Notes to Condensed Consolidated Financial Statements............................... 5
(Unaudited)
Item 2. Management Discussion and Analysis of
Financial Condition and Results of Operations.................................. 8
Item 3. Quantitative and Qualitative Disclosures about Market Risk .................... 14
Part II - Other Information
Item 1. Legal Proceedings.............................................................. 14
Item 2. Changes in Securities.......................................................... 14
Item 3. Defaults Upon Senior Securities................................................ 14
Item 4. Submission of Matters to a Vote of Security Holders............................ 14
Item 5. Other Information ............................................................. 14
Item 6. Exhibits and Reports on Form 8-K............................................... 14
Signature................................................................................. 15
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<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
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CAREADVANTAGE, INC
CONSOLIDATED BALANCE SHEETS
June 30, October 31,
ASSETS 1999 1998
Unaudited Audited
--------- ----------
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Current assets:
Cash and cash equivalents $ 1,994,000 3,745,000
Accounts receivable for services:
Stockholder 986,000 1,080,000
Other 409,000 667,000
Other current assets 279,000 75,000
----------- -----------
Total current assets 3,668,000 5,567,000
Property and equipment, at cost less accumulated depreciation 932,000 1,374,000
Intangible assets 1,656,000 1,768,000
Other assets 103,000 91,000
----------- -----------
Total Assets $ 6,359,000 $ 8,800,000
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of capital lease obligation 0 422,000
Accounts payable 152,000 163,000
Due to stockholder 1,217,000 1,153,000
Due to customer 902,000 902,000
Accrued salaries and employee benefits 541,000 1,211,000
Accrued expenses and other current liabilities (Note E) 521,000 455,000
Deferred revenue, current 184,000 184,000
-----------
Total current liabilities 3,517,000 4,490,000
Due to stockholder, less current portion 0 710,000
Deferred revenue and other liabilities, less current portion 0 116,000
----------- ----------
Total Liabilities 3,517,000 5,316,000
----------- ----------
Stockholders' equity (capital deficiency):
Preferred stock-par value $.10 per share;
authorized 10,000,000 shares ; none issued
Common stock-par value $.001 per share;
authorized 90,000,000 shares; issued
and outstanding 82,189,883 and 82,189,883 82,000 82,000
Additional capital 22,042,000 22,009,000
Accumulated deficit (19,282,000) (18,607,000)
------------ -----------
Total Stockholders' Equity 2,842,000 3,484,000
------------ -----------
Total liabilities and Stockholders' Equity $ 6,359,000 $ 8,800,000
============ ===========
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The accompanying notes are an integral part of these statements.
2
<PAGE>
CAREADVANTAGE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
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Three-Months Ended Six-Months Ended
June 30, July 31, June 30, July 31,
1999 1998 1999 1998
---- ---- ---- ----
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Net revenues $3,795,000 $4,681,000 7,829,000 8,875,000
Costs of services 2,214,000 2,032,000 4,246,000 4,194,000
--------- --------- --------- ---------
Gross margin 1,581,000 2,649,000 3,583,000 4,681,000
--------- --------- --------- ---------
Operating expenses:
Selling, general and administration 1,863,000 1,931,000 3,791,000 3,448,000
Depreciation and amortization 211,000 61,000 415,000 46,000
------- ------ ------- ------
Total operating expenses 2,074,000 1,992,000 4,206,000 3,494,000
--------- --------- --------- ---------
Operating (loss)/income (493,000) 657,000 (623,000) 1,187,000
Net interest income/(expense) 10,000 (50,000) 17,000 (114,000)
Net (loss)/income (483,000) 607,000 (606,000) 1,073,000
======== ======= ======== =========
Net (loss)/income
per share of common stock-basic and diluted ($.01) $.01 ($.01) $.01
Weighted average number
of common shares outstanding 82,190,000 76,990,000 82,190,000 74,390,000
========== ========== ========== ==========
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The accompanying notes are an integral part of these statements.
3
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CAREADVANTAGE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
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Six-Months Ended
June 30, July 31,
1999 1998
---- -----
Cash flows from operating activities:
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Net (loss)/profit $ (606,000) $ 1,073,000
Adjustments to reconcile net (loss)/profit
to net cash (used by)/provided from operating
activities:
Depreciation and amortization 668,000 573,000
Compensation due to option issuance 32,000 0
Change in assets and liabilities:
Due to/from customers/stockholders 40,000 (287,000)
Other assets 19,000 (53,000)
Accounts payable (41,000) (109,000)
Accrued expenses and other liabilities (380,000) 188,000
Deferred revenue (87,000) 1,631,000
-------- ---------
Net cash (used by) /provided from
operating activities (355,000) 3,016,000
-------- ---------
Cash flows from investing activities:
Capital expenditures (282,000) (454,000)
--------- --------
Net cash (used by) investing
activities (282,000) (454,000)
--------- ---------
Cash flows from financing activities:
Principal payments to stockholder (405,000) (0)
Principal payments under long-term debt (319,000) (287,000)
--------- ---------
Net cash (used by) financing
Activities (724,000) (287,000)
---------- ---------
Net (decrease)/increase in cash (1,361,000) 2,275,000
Cash - beginning of fiscal year 3,355,000 1,311,000
--------- ---------
Cash - end of period $1,994,000 $3,586,000
========== ==========
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The accompanying notes are an integral part of these statements.
4
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CAREADVANTAGE, INC.
NOTES TO THE FINANCIAL STATEMENTS
Note A--Basis of preparation:
Fiscal Year Change:
- -------------------
On June 8, 1999, the Company changed its fiscal year from one ending October 31
to a calendar year ending December 31. The Company has not recast data for the
comparative periods as such recasting is not practicable. Additionally, the
Company does not experience seasonality in its results of operations and cash
flows and such a restatement is not cost justified. The Company has prepared its
financial statements for the calendar quarters ended June 30, 1999 compared to
the fiscal quarters ended July 31, 1998 (for the most recent three and six month
periods). The Company believes such a comparison to the periods ended July 31,
1998 provides a reliable basis for comparing changes in its results of
operations and cash flows for the periods ended June 30, 1999.
The consolidated financial statements have been prepared by CareAdvantage, Inc.
("CAI" or the "Company") and have not been audited by the Company's independent
auditors. The accompanying financial statements include all adjustments (which
include only normal recurring adjustments) which in the opinion of management
are necessary to present fairly the financial position, results of operations
and cash flows at June 30, 1999 and for all periods presented.
Certain information and note disclosures required to be included in the
financial statements prepared in accordance with generally accepted accounting
principles have been omitted. These consolidated financial statements should be
read in conjunction with the consolidated financial statements and notes thereto
included with the Company's October 31, 1998 Annual Report on Form 10-KSB filed
with the Securities and Exchange Commission on January 29, 1999. The results of
operations for the period ended June 30, 1999 are not necessarily indicative of
operating results to be expected for the full year.
Note B--Per share data:
Basic net income per share has been computed based on the weighted average
number of shares outstanding during the periods. In the 1998 periods, the
dilutive effect of stock options is included in the calculation of diluted
earnings per share using the treasury stock method. For 1999, common stock
equivalents have not been included since they are not dilutive.
Note C--Contingencies:
Potential uninsured exposure to litigation:
a) 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 Blue Cross Blue Shield of New Jersey, Inc.
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 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 defendants Petillo and
Achillare and, subject to their having acted in good faith, the Company has
agreed to indemnify them and defendant Whipple to pay their reasonable
defense costs. 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.
<PAGE>
(b) On or about January 16, 1998, an action entitled Mary DeStefano v. Care
Advantage, Inc., 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 contesting 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.
Note D - Supplemental Cash Flow Information:
Below is supplemental cash flow information related to the six months ended June
30, 1999 and July 31, 1998:
June 30, July 31,
-------- --------
1999 1998
---- ----
Income taxes paid 104,000 13,000
Interest paid, IBM capital lease obligations 11,000 44,000
Interest paid, Horizon BCBS-NJ Note 31,000 0
Note E - Stock Option Grant and 1996 Stock Option Plan Amendment
On January 8, 1999, the Board of Directors of the Company ("Board") granted
stock options for 3,600,000 shares of Common Stock of the Company to David
Noone, its Chief Executive Officer, in connection with Mr. Noone's employment
agreement. The options have an exercise price of $.03 per share and a term of 10
years. Options for 1,800,000 shares shall become exercisable as follows: (a) 1/3
on December 31, 1999; and (b) the remaining 2/3 shall become exercisable in
equal monthly amounts over the period January 1, 2000, to December 31, 2001.
Options for the remaining 1,800,000 shares originally were to become exercisable
over a period of 3 years commencing January 8, 2000 if certain performance
criteria were met. On February 24, 1999, the Board approved an amendment to
these options. Under the terms of this amendment the options for the remaining
1,800,000 shares shall become exercisable in three equal annual installments on
the fourth, fifth and sixth anniversary of the date of grant subject to
acceleration upon achievement of certain performance targets. The Company
realized compensation costs related to this amendment of approximately $252,000
and is amortizing this cost over the six year vesting period of the options. In
connection with this grant, and subject to stockholder approval, the Board
amended the Company's 1996 Stock Option Plan (the "Stock Option Plan") to
provide the Board (or a Committee thereof) with increased discretion in the
terms and conditions of stock options it may award.
6
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CAREADVANTAGE, INC.
NOTES TO THE FINANCIAL STATEMENTS
On January 26, 1999, the Board granted stock options, subject to stockholder
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
vests immediately and the remainder vests over 3 years. In connection with these
grants, and subject to stockholder approval, the Board amended the Stock Option
Plan to increase the number of shares authorized for issuance from 10% to 18% of
the Company's authorized Common Stock, and it amended the Company's 1996
Directors Stock Option Plan (now known as the "Directors Stock Option Plan") to
provide the Board with increased discretion in the terms and conditions of stock
options it may award.
In addition on January 26, 1999, subject to stockholder approval, the Board
amended the Company's Certificate of Incorporation to increase the number of
shares of the Company's Common Stock for issuance from 90,000,000 shares to
103,600,000 shares.
Note F - Subsequent Event
The Company held its Annual Meeting of Stockholders on July 7, 1999 at which the
stockholders elected six directors, approved amendments to the Company's Stock
Option Plan and Directors' Option Plan, and approved an amendment to the
Certificate of Incorporation increasing the number of authorized shares of
common stock to 103,600,000 shares.
7
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CAREADVANTAGE, INC.
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
ITEM 2. Management Discussion and Analysis of Financial Condition and Results
of Operations
FORWARD LOOKING STATEMENTS:
Certain statements in this Form 10-QSB may constitute "forward-looking
statements" contemplated under the Private Securities Litigation Reform Act of
1995, including those concerning management's plans, intentions and expectations
with respect to future financial performance and future events and the outcome
of pending litigation, particularly relating to revenues from performance-based
services and re-negotiations of existing and new contracts with customers. Such
statements involve known and unknown risks, uncertainties and contingencies,
many of which are beyond the control of the Company, and which could cause
actual results and outcomes to differ materially from those expressed herein.
Although the Company believes that its plans, intentions and expectations
reflected in such forward looking statements are reasonable, it can give no
assurance that such plans, intentions or expectations will be achieved. Certain
risk factors exist, such as the ability to generate new business, the Company's
inability to prevent its customers from terminating existing contracts by
invoking standard termination clauses, as well as other inherent contractual
risks, which are beyond the control of the Company, could have a material
adverse impact on the Company or prevent the Company from achieving the growth
or obtaining the results discussed. For a more complete discussion of these and
other risk factors, please see "Cautionary Statements in Item 6 of the Company's
Form 10-KSB for the fiscal year ended October 31, 1998 filed with the Securities
and Exchange Commission on January 29, 1999.
GENERAL OVERVIEW:
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 services organizations in
the Northeastern United States.
RESULTS OF OPERATIONS:
The following discussion compares the Company's results of operations for the
six and three months ended June 30, 1999, with those for the six and three
months ended July 31, 1998.
Three Months Ended June 30, 1999, Compared to Three Months Ended July 31, 1998
Revenues:
The Company's total operating revenues for the three-month periods ended June
30, 1999 and July 31, 1998 were approximately $3,795,000 and $4,681,000,
respectively. This represents a decrease of approximately $886,000 for the
three-month period ended June 30, 1999 over the corresponding period of the
prior fiscal year. The decrease for the three months ended June 30, 1999 is
largely due to decreased revenue of approximately $370,000 on account of the
termination of the Allied Health Group, Inc. agreement, and decreased revenue of
approximately $500,000 from the Company's major customers related to the
realization of one-time performance revenues during the prior fiscal year.
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. While the Company is pursuing an
aggressive marketing and sales campaign to increase its revenues, there can be
no assurance that the Company will be successful in increasing its revenues.
8
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CAREADVANTAGE, INC.
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Cost of services:
The Company's total direct cost of services for the three-month periods ended
June 30, 1999 and July 31, 1998 were approximately $2,214,000 and $2,032,000,
respectively. This represents an increase of approximately $182,000 for the
three-month period ended June 30, 1999 over the corresponding period of the
prior fiscal year. This increase in the cost of services for the three-month
period ended June 30, 1999 was primarily due to increases in personnel related
to increased staffing for the Company's product and business development
processes.
Operating expenses:
Selling, general, and administrative:
The Company's total selling, general, and administrative costs for the
three-month periods ended June 30, 1999 and July 31, 1998 were approximately
$1,863,000 and $1,931,000, respectively. This represents a decrease of
approximately $68,000 for the three-month period ended June 30, 1999 over the
corresponding period of the prior fiscal year. This decrease for the three-month
period ended June 30, 1999 is largely due to decreases in professional and
consulting costs of approximately $193,000, offset by increases in personnel
costs of approximately $68,000, travel costs of approximately $53,000,
information and communication costs of approximately $37,000, and other costs of
approximately $35,000. Management has taken and intends to take additional steps
to reduce general and administrative costs. There is no assurance, however, that
the Company will be successful in reducing general and administrative costs by
any significant amount.
Depreciation and amortization:
The Company's total depreciation and amortization costs for the three-month
periods ended June 30, 1999 and July 31, 1998 were approximately $355,000 and
$286,000, respectively. This increase is largely due to increased amortization
related to internally developed software costs of approximately $77,000.
Approximately $144,000 and $134,000 were included in costs of services for such
periods.
Interest expense:
The Company's total net interest income/(expense) for the three-month periods
ended June 30, 1999 and July 31, 1998 was approximately $10,000 and ($50,000),
respectively. This represents a decrease of approximately $60,000 for the
three-month periods ended June 30, 1999 over the corresponding period of the
prior fiscal year. The decrease in net interest expense is largely due to
decreased interest costs of approximately $16,000 under the Master Lease
Agreement with IBM Credit Corporation ("IBM"), decreased interest costs of
approximately $27,000 related to the 8% Exchangeable Note in the original
principal amount of $2,000,000, issued by the Company to CW Ventures II, L.P.
(the "CW Note") which matured and was converted to common stock on June 30,
1998, and decreased interest costs under the Horizon BCBSNJ Note of
approximately $7,000. In addition, the Company realized increased interest
income of approximately $10,000 from the Company's short-term investments.
Six Months Ended June 30, 1999, Compared to Six Months Ended July 31, 1998
Revenues:
The Company's total operating revenues for the six-month periods ended June 30,
1999 and July 31, 1998 were approximately $7,829,000 and $8,875,000,
respectively. This represents a decrease of approximately $1,046,000 for the
six-month period ended June 30, 1999 over the corresponding period of the prior
fiscal year. The decrease for the six-month ended June 30, 1999 is largely due
to decreased revenue of approximately $717,000 related to the termination of the
Allied Health Group, Inc. agreement, decreased revenue of approximately $734,000
from the Company's major customers related to the realization of one time
performance revenues realized during the prior fiscal year, offset by increased
revenue of approximately $405,000 due to re-negotiations of the Company's major
customer contracts.
9
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CAREADVANTAGE, INC.
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Cost of services:
The Company's total direct cost of services for the six-month periods ended June
30, 1999 and July 31, 1998, were approximately $4,246,000 and $4,194,000,
respectively. This represents an increase of approximately $52,000 for the
six-month period ended June 30, 1999 over the corresponding period of the prior
fiscal year. This increase in the cost of services for the six-month period
ended June 30, 1999 was primarily due to increases in personnel costs.
Operating expenses:
Selling, general and administrative:
The Company's total selling, general, and administrative costs for the six-month
periods ended June 30, 1999 and July 31, 1998 were approximately $3,791,000 and
$3,448,000, respectively. This represents an increase of approximately $343,000
for the six-month period ended June 30, 1999 over the corresponding period of
the prior fiscal year. This increase for the six-month period ended June 30,
1999 is due to increases in personnel costs of approximately $320,000,
information and communication costs of approximately $42,000, travel costs of
approximately $94,000, and other general and administrative costs of
approximately $118,000, offset by decreases in facility costs of approximately
$18,000 and professional and consulting costs of approximately $213,000. The
increase in general and administrative costs is largely due to increases of
approximately $35,000 in investor relations and marketing materials costs,
approximately $32,000 related to stock compensation expense, approximately
$44,000 related to clinical guidelines licenses and other general and
administrative costs of approximately $7,000. The Company experienced increased
marketing and sales costs during the six-month period ended June 30, 1999. This
increase is attributable to the Company's increased marketing and sales efforts,
as well as increased emphasis on new product development.
Management has taken and intends to take additional steps to reduce general and
administrative costs. There is no assurance, however, that the Company will be
successful in reducing general and administrative costs by any significant
amount.
Depreciation and amortization:
The Company's total depreciation and amortization costs for the six-month
periods ended June 30, 1999 and July 31, 1998 were approximately $668,000 and
$573,000, respectively. This increase of approximately $95,000 is largely due to
amortization related to internally developed software costs of approximately
$140,000. Approximately $282,000 and $527,000 were included in costs of services
for such periods.
Interest expense:
The Company's net interest income/(expense) for the six-month periods ended June
30, 1999 and July 31, 1998 was approximately $17,000 and ($114,000),
respectively. This represents a decrease of approximately $131,000 for the
six-month periods ended June 30, 1999 over the corresponding period of the prior
fiscal year. The decrease in net interest expense is largely due to decreased
interest costs under the Master Lease Agreement with IBM of approximately
$32,000, decreased interest costs of approximately $67,000 related to the CW
Note, which was converted to common stock on June 30, 1998, and decreased
interest costs under the Horizon BCBSNJ Note of approximately $14,000. In
addition, the Company realized increased interest income of approximately
$18,000 from the Company's short-term investments.
RESULTS FOR THE QUARTER:
The above factors resulted in a net loss of approximately $483,000 for the
second quarter ended June 30, 1999 and such loss is primarily due to charges
related to the following:
Severance charges of approximately $160,000 related to the employment
termination of an executive officer, $70,000 of software development costs that
were written off due to the abandonment of the project, $75,000 related
10
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CAREADVANTAGE, INC.
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
to additional legal support for on-going legal disputes, and $50,000 of travel
and lodging expenses related to the Company's increased marketing and sales
efforts.
LIQUIDITY, FINANCIAL CONDITION AND CAPITAL RESOURCES:
General overview:
At June 30, 1999, the Company had working capital of approximately $151,000, a
stockholders equity of approximately $2,842,000 and an accumulated deficit since
its inception of approximately $19,282,000. By continuing to provide high
quality care cost containment services to its existing customer base of five
BCBS plans, management believes it can continue to market its products to other
BCBS plans. This strategy is particularly significant given the current health
care environment where large third-party payers are merging in an effort to
protect their respective franchises and expand their market reach. The various
BCBS plans throughout the country are no exception to this phenomenon and the
Company believes it can leverage its core competencies to participate in this
consolidating environment.
Management is of the opinion that it must continue to refine its current service
lines in order to continue to add value to existing and potential customers.
Additionally, the Company intends to broaden its services offered with unique
and complementary cost-containment strategies. Management will evaluate each
service with regard to anticipated changes in the health care industry, the cost
to enter any such line of service as well as the availability of competent
resources. To further expand its line of services, the Company intends to pursue
alternatives to its internal products and service development efforts by
entering into strategic alliances and joint ventures as well as through
acquisitions.
Financial condition:
At June 30, 1999, the Company had cash of approximately $1,994,000 and working
capital of approximately $151,000. At October 31, 1998, the Company had cash
of approximately $3,745,000 and a working capital of approximately $1,077,000.
Net cash (used by)/provided from operating activities amounted to approximately
($355,000) and $3,016,000 for the six-month periods ended June 30, 1999 and July
31, 1998, respectively. The cash used by 1999 operating activities is largely
due to, a decrease in accounts payable of approximately $41,000, a decrease in
accrued expenses and other liabilities of approximately $380,000, a decrease of
approximately $87,000 in deferred revenue and a $606,000 net loss, offset by
non-cash charges of approximately $700,000, an increase in other assets of
approximately $19,000 and an increase in customer receivable of approximately
$40,000.
Net cash used in investing activities amounted to approximately $282,000 and
$454,000 for the six-month periods ended June 30, 1999 and July 31,1998,
respectively. The decrease in cash used of approximately $172,000 is due to
decreased capital outlays for computer-related equipment incurred during the
six-month period ended June 30, 1999.
Net cash used in financing activities amounted to approximately $724,000 and
$287,000 for the six-month periods ended June 30, 1999 and July 31, 1998,
respectively. The increase in cash used of approximately $437,000 is largely due
to increased principal payments to a stockholder/customer of approximately
$405,000 and increased principal payments related to the Master Lease Agreement
with IBM of approximately $32,000.
While there can be no assurances, management believes that its cash on hand,
projected future cash flows from operations and the Company's borrowing capacity
under its credit facility with Summit Bank (see discussion below under Capital
Resources) will provide adequate capital resources to support the Company's
anticipated cash needs for the next twelve months.
Capital resources:
There are no amounts payable pursuant to long-term financing arrangements as of
June 30, 1999. The term of the Master Lease Agreement expired June 30, 1999, at
which time, pursuant to its terms the Company purchased all such items for one
dollar.
11
<PAGE>
CAREADVANTAGE, INC.
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Pursuant to the Horizon BCBSNJ Note, the Company owes $1,177,000 to Horizon
BCBSNJ as of June 30, 1999. The Horizon BCBSNJ Note provides for equal monthly
payments of principal and interest from October 1, 1998 through June 30, 2000,
at which time the principal of the note is payable and due in full. The Horizon
BCBSNJ 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.
The Company has a credit facility with Summit Bank (the "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 irrevocable 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 non-cancelable operating lease. This letter of credit is
issued under the Company's credit facility and the availability is thus reduced
by the face amount of the letter of credit. The remainder of the credit facility
is available to the Company.
In connection with management's intention 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 third and fourth quarter of
calendar 1999 of approximately $300,000. Such costs are expected to be financed
with the Company's current cash reserves and future operating cash flows.
YEAR 2000:
POTENTIAL IMPACT OF YEAR 2000 COMPUTER ISSUES OVERVIEW:
The year 2000 computer problem is the inability of computer systems which
store dates by using the last two digits of the year (i.e. "98" for "1998") to
reliably recognize that dates after December 31, 1999 are later than, and not
before, 1999. For instance, the date January 1, 2000, may be mistakenly
interpreted as January 1, 1900, in calculations involving dates on systems that
are non-year 2000 compliant. The Company relies on information technology ("IT")
systems and other systems and facilities such as telephones, building access
control systems and heating and ventilation equipment ("Embedded Systems") to
conduct its business. These systems are potentially vulnerable to year 2000
problems due to their use of date information. The Company also has business
relationships with customers and health care providers and other critical
vendors who are themselves reliant on IT and Embedded Systems to conduct their
businesses.
STATE OF READINESS:
The Company's IT systems are largely centralized, with substantially all
systems maintained in the Company's corporate headquarters in Iselin, New
Jersey, the Company has developed its own standards for systems which include
both purchased and internally-developed software. The Company's IT hardware
infrastructure is built mainly around mid-range computers and IBM PC-compatible
servers and desktop systems. The Company's principal means of ensuring year 2000
readiness for purchased software has been the replacement, upgrade or repair of
non-compliant systems. This replacement process would have been undertaken for
business reasons irrespective of the year 2000 problem; however, it would, more
than likely, have been implemented over a longer period of time. The Company's
internally-developed software was either designed to be year 2000 ready from
inception or is in the process of being modified to be year 2000 ready.
Substantially all of the Company's mid-range IT hardware has been remediated to
a state of year 2000 readiness, with the remainder scheduled to be remediated by
the end of the third quarter of fiscal 1999. Most of the Company's non-compliant
IBM PC-compatible servers and desktops have been replaced, with the remainder
expected to be replaced by the end of fiscal 1999. The Company's plan for IT
systems consists of several phases, primarily: (i) Inventory--identifying all IT
systems and the magnitude of year 2000 readiness risk of each according to its
potential business impact; (ii) Date assessment--identifying IT systems that use
date functions and assessing them for year 2000 functionality; (iii)
Remediation--reprogramming, replacing or upgrading where necessary, inventoried
items to ensure they are year 2000 ready; and (iv) Testing and
certification--testing the code modifications and new inventory with other
associated systems, including extensive date testing and performing quality
assurance testing to ensure successful operation in the post-1999 environment.
The Company has substantially completed the inventory and assessment
12
<PAGE>
CAREADVANTAGE, INC.
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
phases for substantially all of its IT systems. The Company's IT systems are
currently in the remediation and testing and certification phases. The Company
plans to complete the remediation, testing and certification of all of its IT
systems by the end of fiscal 1999. The Company leases most of the office space
in which its reliance on Embedded Systems presents a potential problem and is
currently working with the respective lessors to identify and correct any
potential year 2000 problems related to these Embedded Systems. The Company
believes that its year 2000 projects generally are on schedule.
EXTERNAL RELATIONSHIPS:
The Company also faces the risk that one or more of its critical suppliers or
customers ("External Relationships") will not be able to interact with the
Company due to the third party's inability to resolve its own year 2000 issues,
including those associated with its own External Relationships. The Company is
attempting to determine the overall year 2000 readiness of its External
Relationships. In the case of significant customers and mission critical
suppliers such as banks, telecommunications providers and other utilities and IT
vendors, the Company is engaged in discussions with the third parties and is
attempting to obtain detailed information as to those parties' year 2000 plans
and state of readiness. The Company, however, does not have sufficient
information at the current time to predict whether its External Relationships
will be year 2000 ready.
YEAR 2000 COSTS:
Total costs incurred solely for remediation of potential year 2000 problems are
currently estimated to be approximately $100,000 in fiscal 1999. A large
majority of these costs are expected to be incremental expenses that will not
recur in the year 2000 or thereafter. The Company expenses these costs as
incurred and funds these costs through operating cash flows. Year 2000 readiness
is critical to the Company. The Company has re-deployed some resources from
non-critical system enhancements to address year 2000 issues. Due to the
importance of IT systems to the Company's business, management has deferred
non-critical systems enhancements to become year 2000 ready. The Company does
not expect these redeployments and deferrals to have a material impact on the
Company's financial condition or results of operations.
RISKS AND CONTINGENCY/RECOVERY PLANNING:
If the Company's year 2000 issues were unresolved, the most reasonably likely
worst case scenario would include, among other possibilities, the inability to
accurately and timely authorize and process benefits and medical stays,
accurately bill customers, assess claims exposure, determine liquidity
requirements, report accurate data to management, stockholders, customers,
regulators and others, business interruptions or shut downs, financial losses,
reputational harm, loss of significant customers, increased scrutiny by
regulators and litigation related to year 2000 issues. The Company is attempting
to limit the potential impact of the year 2000 by monitoring the progress of its
own year 2000 project and those of its critical External Relationships and by
developing contingency/recovery plans. The Company cannot guarantee that it will
be able to resolve all of its year 2000 issues. Any critical unresolved year
2000 issues at the Company or its External Relationships, however, could have a
material adverse effect on the Company's results of operations, liquidity or
financial condition. The Company has developed, or is developing,
contingency/recovery plans aimed at ensuring the continuity of critical business
functions before and after December 31, 1999. As part of that process, the
Company has substantially completed the development of manual work alternatives
to automated processes which will both ensure business continuity and provide a
ready source of input to affected systems when they are returned to an
operational status. These manual alternatives presume, however, that basic
infrastructure such as electrical power and telephone service, as well as
purchased systems which are advertised to be year 2000 ready by their
manufacturers (primarily personal computers and productivity software) will
remain unaffected by the year 2000 problem.
13
<PAGE>
CAREADVANTAGE, INC.
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk
As of June 30, 1999, the Company's investments are not adversely impacted by
change in market interest rates. The Company does not believe that changes in
interest rates will have a material impact on future earnings or cash flows
during the next twelve months.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
For a description of legal proceedings, see Note C to the Financial Statements.
With the exception of the legal proceedings described in Note C to the Financial
Statements, there are no material pending legal proceedings other than ordinary
routine litigation incidental to the business of the Company.
Item 2. Changes in Securities
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and reports on Form 8-K
(a) Exhibits
(27) Financial Data Schedule
(b) Reports on Form 8-K
On June 25, 1999 a Form 8-K/A, dated June 8, 1999, was filed to report that the
Board of Directors of CareAdvantage, Inc. elected to change its fiscal year end
from October 31 to December 31.
14
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned thereunto duly
authorized.
CareAdvantage, Inc
August 16, 1999 /s/ David G. Noone
----------------------------------------------
David G. Noone
Chief Executive Officer
August 16, 1999 /s/ David G. DeBoskey
----------------------------------------------
David G. DeBoskey
Principal Financial and Accounting Officer
15
<PAGE>
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