SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended April 30, 1999
COMMISSION FILE NUMBER 0-26168
CAREADVANTAGE, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 52-1849794
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification Number)
485-C Route 1 South, Iselin, New Jersey 08830
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (732) 602-7000
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No__
82,189,883
Number of shares of Common Stock outstanding as of June 14, 1999
Transitional Small Business Disclosure Format
Yes X No__
<PAGE>
CareAdvantage, Inc. and Subsidiaries
Form 10-QSB
For the six-months ended April 30, 1999
I N D E X
Part I - Financial Information
Item 1. Financial Statements
o Condensed Consolidated Balance Sheets -
April 30, 1999 (Unaudited) and October 31, 1998 ........................ 2
o Condensed Consolidated Statements of Operations -
Three and Six-months ended April 30, 1999 and April 30, 1998 ........... 3
(Unaudited)
o Condensed Consolidated Statements of Cash Flows -
Six-months ended April 30, 1999 and April 30, 1998..................... 4
(Unaudited)
o Notes to Condensed Consolidated Financial Statements................... 5
(Unaudited)
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations................. 7
Item 3. Quantitative and Qualitative Disclosures about Market Risk... 13
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
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
CAREADVANTAGE, INC
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
April 30, October 31,
ASSETS 1999 1998
Unaudited Audited
--------- -------
<S> <C> <C> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents $2,907,000 $3,745,000
Accounts receivable for services:
Stockholder 1,045,000 1,080,000
Other 249,000 667,000
Other current assets 312,000 75,000
------- ------
Total current assets 4,513,000 5,567,000
Property and equipment, at cost less accumulated depreciation 1,045,000 1,374,000
Intangible assets 1,689,000 1,768,000
Other assets 101,000 91,000
------- ------
Total Assets $ 7.348,000 $ 8,800,000
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of capital lease obligation $109,000 $422,000
Accounts payable 302,000 163,000
Due to stockholder 1,209,000 1,153,000
Due to customer 902,000 902,000
Accrued salaries and employee benefits 848,000 1,211,000
Accrued expenses and other current liabilities (Note E) 606,000 455,000
Deferred revenue, current 184,000 184,000
------- -------
Total current liabilities 4,160,000 4,490,000
Due to stockholder, less current portion 199,000 710,000
Deferred revenue and other liabilities, less current portion 29,000 116,000
------- -------
Total Liabilities 4,388,000 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 22,035,000 22,009,000
Accumulated deficit (19,157,000) (18,607,000)
----------- ------------
Total Stockholders' Equity 2,960,000 3,484,000
--------- ---------
Total Liabilities and Stockholders' Equity $ 7,348,000 $ 8,800,000
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
2
<PAGE>
CAREADVANTAGE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three-months Ended Six-months Ended
April 30, April 30,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net revenues $3,955,000 $ 4,195,000 8,011,000 8,197,000
Costs of services 2,203,000 1,996,000 4,214,000 4,022,000
---------- ---------- --------- ---------
Gross margin 1,752,000 2,199,000 3,797,000 4,175,000
--------- --------- --------- ---------
Operating expenses:
Selling, general and administration 2,334,000 1,517,000 3,959,000 3,053,000
Depreciation and amortization 216,000 152,000 404,000 280,000
------- --------- ------- -------
Total operating expenses 2,550,000 1,669,000 4,363,000 3,333,000
--------- --------- --------- ---------
Operating income (loss) (798,000) 530,000 (566,000) 842,000
Net interest (income)/expense (7,000) 64,000 (17,000) 137,000
------- ------ -------- -------
Net income (loss) (791,000) 466,000 (549,000) 705,000
========= ======= ========= =======
Net income (loss)
per share of common stock-basic and diluted ($.01) $.01 ($.01) $.01
===== ===== ===== ====
Weighted average number
of common shares outstanding 82,190,000 74,390,000 82,190,000 74,390,000
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
3
<PAGE>
CAREADVANTAGE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Six-months Ended
April 30,
1999 1998
---- -----
<S> <C> <C>
Cash flows from operating activities:
Net profit (loss) $ (549,000) $ 705,000
Adjustments to reconcile net profit (loss)
to net cash provided from (used by)
operating activities:
Depreciation and amortization 651,000 549,000
Compensation due to option issuance 25,000 0
Change in assets and liabilities:
Due to/from customers/stockholders 493,000 (201,000)
Other assets (247,000) (84,000)
Accounts payable 139,000 51,000
Accrued expenses and other liabilities (213,000) (235,000)
Deferred revenue (87,000) 805,000
-------- -------
Net cash provided from (used by)
operating activities 212,000 1,590,000
------- ---------
Cash flows from investing activities:
Capital expenditures (242,000) (562,000)
--------- --------
Net cash provided from (used by) investing
activities (242,000) (562,000)
--------- ---------
Cash flows from financing activities:
Principal payments to stockholder (495,000) (0)
Principal payments under long-term debt (313,000) (279,000)
--------- ---------
Net cash provided from (used by) financing
Activities (808,000) (279,000)
Net increase (decrease) in cash (838,000) 749,000
Cash - beginning of fiscal year 3,745,000 1,038,000
--------- ---------
Cash - end of period $2,907,000 $1,787,000
========== ==========
The accompanying notes are an integral part of these statements.
</TABLE>
4
<PAGE>
CAREADVANTAGE, INC.
NOTES TO THE FINANCIAL STATEMENTS
Note A--Basis of preparation:
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 April 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 April 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 fiscal year 1999, the
dilutive effect of stock options is included in the calculation of diluted
earnings per share using the treasury stock method. Common stock equivalents
have not been included since they are not dilutive.
The Company adopted SFAS No. 128 "Earnings Per Share" and has retroactively
applied the effects thereof for all periods presented. Accordingly, the
presentation of per share information includes calculations of basic and diluted
net income per share. The impact on the per share amounts previously reported
was not significant.
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,
Achillare and, subject to their having acted in good faith, the Company has
agreed to indemnify them and 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.
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
5
<PAGE>
CAREADVANTAGE, INC.
NOTES TO THE FINANCIAL STATEMENTS
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
April 30, 1999 and 1998:
<TABLE>
<CAPTION>
April 30,
<S> <C> <C>
1999 1998
---- ----
Income taxes paid 104,000 0
Interest paid, IBM capital lease obligations 17,000 50,000
Interest paid, Horizon BCBS-NJ Note 35,000 0
</TABLE>
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 forth, fifth and sixth anniversary of the date of grant subject to
acceleration upon achievement of certain performance targets. The Company will
realize compensation costs related to this amendment of approximately $252,000
and will amortize this cost over six years. In connection with this grant, and
subject to stockholder approval, the Board amended the Company's 1996 Stock
Option Plan (now known as 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.
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.
6
<PAGE>
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 April 30, 1999, with those for the six and three
months ended April 30, 1998.
Three Months Ended April 30, 1999, Compared to Three Months Ended April 30, 1998
<TABLE>
<CAPTION>
Net revenues: Three Months Ended
------------------
April 30, 1999 April 30, 1998
-------------- --------------
Amount Percent Amount Percent
------ ------- ------ -------
<S> <C> <C> <C> <C>
Revenues from fixed fee
arrangements $3,987,000 101% $3,993,000 95%
Revenues from performance-
based arrangements (33,000) (1)% 200,000 5%
Other revenues 1,000 0% 2,000 0%
-------- ------- ---------- ------
Total revenues $3,955,000 100% $4,195,000 100%
========== ===== =========== =====
</TABLE>
7
<PAGE>
CAREADVANTAGE, INC.
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Revenues:
The Company's total operating revenues for the three-month period ended April
30, 1999 and April 30, 1998 were approximately $3,955,000 and $4,195,000,
respectively. This represents a decrease of approximately $240,000 for the
three-month period ended April 30, 1999 over the corresponding period of the
prior fiscal year. The decrease for the three-month period ended April 30, 1999
is largely due to decreased revenue of approximately $518,000 due to contract
terminations, of which $346,000 is related to the termination of the Allied
Health Group, Inc. agreement, offset by increased revenue of approximately
$101,000 from the Company's major customers due to increased membership, and
approximately $177,000 due to new contracts entered into during the current
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.
Cost of services:
The Company's total direct cost of services for the three-month period ended
April 30, 1999 and April 30, 1998 were approximately $2,203,000 and $1,996,000,
respectively. This represents an increase of approximately $207,000 for the
three- month period ended April 30, 1999 over the corresponding period of the
prior fiscal year. This increase in the cost of services for the three-month
period ended April 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 period ended April 30, 1999 and April 30, 1998 were approximately
$2,334,000 and $1,517,000, respectively. This represents an increase of
approximately $817,000 for the three-month period ended April 30, 1999 over the
corresponding period of the prior fiscal year. This increase for the three-month
period ended April 30, 1999 is due to increases in personnel costs of
approximately $484,000, which includes approximately $300,000 of severance costs
for two executive officers, travel costs of approximately $52,000, information
and communication costs of approximately $64,000, professional and consulting
costs of approximately $79,000, and other general and administrative costs of
approximately $138,000. The increase in other general and administrative costs
is largely due to increases of approximately $75,000 in increased investor
relations and marketing materials costs, approximately $14,000 related to stock
compensation expense and approximately $30,000 related to clinical guidelines
licenses. The Company experienced increased marketing and sales costs during the
three-month period ended April 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 three-month
period ended April 30, 1999 and April 30, 1998 were approximately $358,000 and
$286,000, respectively. This increase is largely due to increased amortization
related to internally developed software costs of approximately $73,000.
Approximately $142,000 and $134,000 were included in costs of services for such
periods.
Interest expense:
The Company's total net interest expense/(income) for the three-month period
ended April 30, 1999 and April 30, 1998 was approximately ($7,000) and $64,000,
respectively. This represents a decrease of approximately $71,000 for the
three-month period ended April 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 $18,000 under the Master Lease
Agreement with IBM Credit Corporation ("IBM"), decreased interest costs of
approximately $40,000 related to the 8% Exchangeable Note in the original
principal amount of $2,000,000, maturing on June 30, 1998
8
<PAGE>
CAREADVANTAGE, INC.
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
issued by the Company to CW Ventures II, L.P. (the "CW Note") which was
converted to common stock on June 30, 1998, and decreased interest costs under
the Horizon BCBSNJ Note of approximately $4,000. In addition, the Company
realized increased interest income of approximately $9,000 from the Company's
short-term investments.
Six Months Ended April 30, 1999, Compared to Six Months Ended April 30, 1998
<TABLE>
<CAPTION>
Net revenues: Six Months Ended
----------------
April 30, 1999 April 30, 1998
-------------- --------------
Amount Percent Amount Percent
------ ------- ------ -------
<S> <C> <C> <C> <C>
Revenues from fixed fee
arrangements $7,979,000 100% $7,795,000 95%
Revenues from performance-
based arrangements 29,000 0% 396,000 5%
Other revenues 3,000 0% 6,000 0%
-------- ------ --------- ------
Total revenues $8,011,000 100% $8,197,000 100%
========== ===== =========== =====
</TABLE>
Revenues:
The Company's total operating revenues for the six-month period ended April 30,
1999 and April 30, 1998 were approximately $8,011,000 and $8,197,000,
respectively. This represents a decrease of approximately $186,000 for the
six-month period ended April 30, 1999 over the corresponding period of the prior
fiscal year. The decrease for the six-month ended April 30, 1999 is largely due
to decreased revenue of approximately $735,000 due to contract terminations, of
which $591,000 is related to the termination of the Allied Health Group, Inc.
agreement offset by increased revenue of approximately $294,000 from the
Company's major customers due to increased membership, and approximately
$255,000 due to new contracts entered into during the current fiscal year.
Cost of services:
The Company's total direct cost of services for the six-month period ended April
30, 1999 and April 30, 1998, were approximately $4,214,000 and $4,022,000,
respectively. This represents an increase of approximately $192,000 for the
six-month period ended April 30, 1999 over the corresponding period of the prior
fiscal year. This increase in the cost of services for the six-month period
ended April 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
period ended April 30, 1999 and April 30, 1998 were approximately $3,959,000 and
$3,053,000, respectively. This represents an increase of approximately $906,000
for the six-month period ended April 30, 1999 over the corresponding period of
the prior fiscal year. This increase for the six-month period ended April 30,
1999 is due to increases in personnel costs of approximately $515,000, which
includes approximately $300,000 of severance costs for two executive officers,
travel costs of approximately $85,000, information and communication costs of
approximately $75,000, professional and consulting costs of approximately
$40,000, and other general and administrative costs of approximately $191,000.
The increase in general and administrative costs is largely due to increases of
approximately $75,000 in investor relations and marketing materials costs,
approximately $25,000 related to stock compensation expense, approximately
$30,000 related to clinical guidelines licenses and other general and
administrative costs of approximately $20,000. The Company experienced increased
marketing and sales costs during the six-month period ended April 30, 1999. This
increase is attributable to the Company's increased marketing and sales efforts,
as well as increased emphasis on new product development.
9
<PAGE>
CAREADVANTAGE, INC.
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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 period
ended April 30, 1999 and April 30, 1998 were approximately $651,000 and
$549,000, respectively. This increase of approximately $102,000 is largely due
to amortization related to internally developed software costs of approximately
$118,000. Approximately $277,000 and $269,000 were included in costs of services
for such periods.
Interest expense:
The Company's net interest expense/(income) for the six-month period ended April
30, 1999 and April 30, 1998 was approximately ($17,000) and $137,000,
respectively. This represents a decrease of approximately $154,000 for the
six-month period ended April 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
$34,000, decreased interest costs of approximately $80,000 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 $8,000. In
addition, the Company realized increased interest income of approximately
$32,000 from the Company's short-term investments.
RESULTS FOR THE QUARTER:
The Company has incurred a net loss of approximately $791,000 during the second
quarter ended April 30, 1999 and such loss is primarily due to charges related
to the following:
Severance charges of approximately $300,000 related to the employment
termination of two executive officers, $70,000 of software development costs
that were written off due to the abandonment of the project, $250,000 related to
additional legal support and investor relations costs for on-going legal
disputes and the holding of the Company's annual shareholders meeting, and
$50,000 of travel and lodging expenses related to the Company's increased
marketing and sales efforts.
Other expense increases have been identified and the Company implemented a cost
reduction strategy to control these increased costs. However, there are no
assurances that management will be successful in controlling general and
administrative expenses in the future.
LIQUIDITY, FINANCIAL CONDITION AND CAPITAL RESOURCES:
General overview:
At April 30, 1999, the Company had a working capital surplus of approximately
$353,000, a capital surplus of approximately $2,960,000 and an accumulated
deficit since its inception of approximately $19,157,000. 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.
10
<PAGE>
CAREADVANTAGE, INC.
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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 April 30, 1999, the Company had cash of approximately $2,907,000 and a
working capital surplus of approximately $353,000. At October 31, 1998, the
Company had cash of approximately $3,745,000 and a working capital surplus of
approximately $1,077,000.
Net cash provided from operating activities amounted to approximately $212,000
and $1,590,000 for the six-month period ended April 30, 1999 and 1998,
respectively. The cash provided from 1999 operating activities is largely due to
an increase in accounts payable of approximately $139,000, a decrease in
customer receivables of approximately $493,000, and non-cash charges of
approximately $676,000 offset by decreases of approximately $87,000 in deferred
revenue, accrued expenses and other liabilities of approximately $213,000, other
assets of approximately $247,000 and a $549,000 net loss.
Net cash used in investing activities amounted to approximately $242,000 and
$562,000 for the six-month period ended April 30, 1999 and 1998, respectively.
The decrease in cash used of approximately $320,000 is due to decreased capital
outlays for computer related equipment incurred during the six-month period
ended April 30, 1999.
Net cash used in financing activities amounted to approximately $808,000 and
$279,000 for the six-month period ended April 30, 1999 and 1998, respectively.
The increase in cash used of approximately $529,000 is largely due to increased
principal payments to a stockholder/customer of approximately $495,000 and
increased principal payments related to the Master Lease Agreement with IBM of
approximately $34,000.
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:
Amounts payable pursuant to long-term financing arrangements as of April 30,
1999 were approximately $109,000, consisting of capital lease obligations
pursuant to a Master Lease Agreement for the financing of computer and telephone
equipment, installation, software and related system integration expenses. The
term of the Master Lease Agreement is four years; it expires in June 30 1999, at
which time, pursuant to its terms the Company will purchase all such items for
one dollar, and bears interest at 11.39% per annum. Horizon Blue Cross and Blue
Shield of New Jersey, formerly known as Blue Cross and Blue Shield of New
Jersey, Inc. ("Horizon BCBSNJ") guarantees the Company's obligations under the
Master Lease Agreement.
Pursuant to the Horizon BCBSNJ Note, the Company owes $1,368,000 to Horizon
BCBSNJ as of April 30, 1999. The Horizon BCBSNJ Note provides for equal monthly
payments of principal and interest commenced on October 1, 1998 and ending on
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.
11
<PAGE>
CAREADVANTAGE, INC.
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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
fiscal 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 upgraded, 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 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 the third quarter of fiscal year 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.
12
<PAGE>
CAREADVANTAGE, INC.
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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.
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk
As of April 30, 1999, the Company's investments are not adversely impacted by
changes 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.
13
<PAGE>
CAREADVANTAGE, INC.
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
PART II--OTHER INFORMATION
Item 1. Legal Proceedings
Not applicable
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 - None
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
June 14, 1999 /s/ David G. Noone
------------------
David G. Noone
Chief Executive Officer
June 14, 1999 /s/ David G. DeBoskey
---------------------
David G. DeBoskey
Principal Financial and Accounting Officer
15
<PAGE>
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