SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
Transition Report under Section 13 or 15 (d) of the
Securities Exchange Act of 1934
For the Transition Period From November 1, 1998 to December 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 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 (as of 10/31/98)
Aggregate market value of the voting stock held by non-affiliates of the
registrant as of July 31, 1999 (assuming, solely for purposes of this
calculation, that all directors and executive officers of the Registrant are
affiliates).: $28,766,459
Number of shares of common stock outstanding as of September 2, 1999: 82,189,883
Transitional Small Business Disclosure Format Yes No |X|
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 October 1994, the Company acquired CAHS
(under its prior corporate name, Advantage Health Systems, Inc., "AHS"). 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. At December 31,
1998, the Company had a cumulative deficit of $18,675,000.
From its inception through October 31, 1995, CAI relied on PMDX to
provide the bulk of its working capital. In addition to transferring all of its
AHS stock to the Company, 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 $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
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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.
The Company, Horizon BCBSNJ and CW Ventures are parties to an agreement
dated February 22, 1996 (the "Stockholders' Agreement") pursuant to which
Horizon BCBSNJ and CW Ventures agreed that the Board shall consist of seven
members. By unanimous written consent dated as of May 22, 1997, the Board of
Directors reduced the number of the Company's Directors to six, and by letters
to the Company dated the same date ("May 22, 1997 Letters"), Horizon BCBSNJ and
CW Ventures consented to such reduction and modified their voting obligations
under the Stockholders Agreement. As modified by the May 22, 1997 Letters, the
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Stockholders Agreement provides that Horizon BCBSNJ and CW Ventures each shall
vote their shares in favor of two members of the Board designated by Horizon
BCBSNJ, two members of the Board designated by CW Ventures, one member from
senior management of the Company who is acceptable to Horizon BCBSNJ and CW
Ventures, and one member not associated with operations of the Company who is
acceptable to Horizon BCBSNJ and CW Ventures.
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.
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 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.
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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.
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.
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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 Company's specific disease specialists or advisors review
the progress and treatment plans of a patient 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.
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
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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.
For its services, the Company is compensated either: (i) on a fixed fee
per subscriber basis; (ii) on a combination of both fixed fees 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 initial stages thereof.
(b) Revenue under the combination 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.
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(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 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 Northeastern United States 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 service agreement with an affiliate of
NYCPIC, HealthNow New York Inc. (See Item 6 - "Recent Developments of the
Business.")
The Company intends to market its services 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
insureds 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 fixed 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.
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Competition
The Company faces intense competition in a highly fragmented market of
managed care services 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 numbers 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.
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.")
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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
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 may be affected. Aspects of certain proposals, such as reductions
in Medicare and Medicaid payments, could adversely affect the Company. The
Company is unable to predict what impact, if any, future 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 115 contracted physician
advisors, the Company employed 12 full-time physicians as of December 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 December 31, 1998, in addition to its physicians, the Company
employed a total of 140 full-time employees. Of this total, 106 employees are
engaged in clinical activities including on-site nurse reviewers and contract
administrators. The 34 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.
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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 rent-free operations offices 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"). Additionally, the Company maintains rent-free operation offices in
New York and Vermont pursuant to informal arrangements with these customers.
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
that 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
11
<PAGE>
with, among other things, the termination of Mr. Caruso's consulting
arrangement with the Company. The Plaintiff seeks treble damages for
an unspecified amount and claims actual damages in the approximate
amount of $1.8-2.0 million. 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, but the
Company intends to defend the matter vigorously. No amounts have been
accrued for this claim as of December 31, 1998.
[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 its insurance carrier advised
the Company that it would 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.
12
<PAGE>
[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.
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 last two months of calendar year ended December 31, 1998.
13
<PAGE>
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 calendar years. The prices
reflect inter-dealer prices, without retail mark-up, markdown
or commission, and may not represent actual transactions.
1998 1997
-------- --------
Quarter Ended .......... High Low High Low
-------- -------- -------- --------
March 31, ............. $ .25 $ .23 $ .56 $ .31
June 30, .............. $ .27 $ .21 $ .47 $ .31
September 30, ......... $ .24 $ .10 $ .36 $ .27
December 31, .......... $ .10 $ .02 $ .27 $ .23
(b) Holders: As of August 24, 1999, there were approximately 2,916
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.
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.
14
<PAGE>
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.
CAUTIONARY STATEMENTS:
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
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
15
<PAGE>
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. 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.
16
<PAGE>
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 91.65%
of the outstanding shares of Common Stock of the Company. Pursuant to the
Stockholders Agreement, as amended 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) one member 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.
17
<PAGE>
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. In addition,
the Company has experienced a loss of $68,000 for the 2 months ended December
31, 1998. At October 31, 1998, the Company had working capital of approximately
$1,077,000, a stockholders equity 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 as of October 31, 1997.
At December 31, 1998, the Company has a working capital of approximately
$715,000, stockholders equity of $3,416,000, and an accumulated deficit of
approximately $18,675,000.
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 91.65% of the Common Stock by two stockholders.
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 worth 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.
18
<PAGE>
Overview
For fiscal years prior to 1997, the Company experienced significant
operating losses on a consolidated basis.
At December 31, 1998, the Company had working capital of approximately
$715,000, stockholders equity of $3,416,000, and an accumulated deficit of
approximately $18,675,000. At October 31, 1998, the Company had working capital
of approximately $1,077,000, stockholders equity of $3,484,000, and an
accumulated deficit of $18,607,000. At October 31, 1997 the Company had a
working capital deficit of approximately $2,487,000, a capital deficiency of
$1,976,000 and an accumulated deficit of $21,690,000. The Company realized a net
loss of approximately $68,000 on revenues of approximately $2,742,000 for the
two months ended December 31, 1998 compared to a net income of approximately
$223,000 on revenues of approximately $2,644,000 for the two-month period ended
December 31, 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.
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 has 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 believes 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.
Recent Developments of the Business:
19
<PAGE>
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 was attached as Exhibit 10.35 to the Company's Form 10-KSB
for the fiscal year ended October 31, 1998, incorporated by reference herein.
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 service agreement, the initial term of which expired on June 30, 1999,
provided 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. The Company executed a 90-day extension on this contract until
September 30, 1999.
General Developments of the Business during Calendar 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. No
revenue was recognized on this contract for the two-month period ended December
31, 1998. 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 Joint Services Agreement, the
Company and CAHS were to deliver health care management services in the form of
20
<PAGE>
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 calendar year 1999. Additionally, the Company
re-negotiated the service 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 for the Company. Management estimates
the revenue realized from this customer during the calendar year ending December
31, 1999 would be approximately $1,300,000 less than the aggregate amounts of
approximately $3,100,000 received for the fiscal year ended October 31, 1998.
21
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Results of Operations--12 Months Ended October 31, 1998 Compared to 12 Months
Ended October 31, 1997
<TABLE>
<CAPTION>
Revenues: Year Ended 10/31,
---------------------------------------------------------------
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>
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 fiscal 1998 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 ended
October 31, 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 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,
22
<PAGE>
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 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.
23
<PAGE>
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 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.
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 term of the Master Lease Agreement
24
<PAGE>
expired June 30, 1999, at which time, pursuant to its terms the company
purchased all such items for one dollar. The Company's obligations under this
Master Lease arrangement were guaranteed by Horizon BCBSNJ.
Results of Operations--2 Months Ended December 31, 1998 Compared to 2 Months
Ended December 31, 1997
<TABLE>
<CAPTION>
Two-Months Ended 12/31,
---------------------------------------------------------------
1998 1997(Unaudited)
---------------------- ----------------------
Amount Percent Amount Percent
<S> <C> <C> <C> <C>
Revenues from fixed-fee arrangements $2,720,000 99% $2,507,000 95%
Revenues from performance-based arrangements 21,000 1% 136,000 5%
Consulting revenues 1,000 0% 1,000 0%
----- -- ----- --
Total revenues $2,742,000 100% $2,644,000 100%
========== ==== ========== ====
</TABLE>
Total revenues for the two months ended December 31, 1998 and December
31, 1997 were approximately $2,742,000 and $2,644,000, respectively. The
increase in the current year was primarily attributable to increased fixed- fee
revenue resulting from contract renegotiations offset by decreased revenue of
approximately $142,000 from Allied Health Group, Inc. due to a contract
termination.
Cost of services - Cost of services for the two months ended December
31, 1998 and December 31, 1997 were approximately $1,414,000 and $1,319,000,
respectively. The increase in the cost of services of approximately $95,000 is
largely due to increases in personnel costs of approximately $135,000, primarily
offset by decreases in professional, consulting and travel costs.
Operating expenses
Selling, general and administrative:
Selling, general and administrative costs for the two month ended
December 31, 1998 and December 31, 1997 were approximately $1,251,000 and
$944,000, respectively. The increase in selling, general and administrative
costs of approximately $307,000 is largely due to increases in personnel costs
of approximately $61,000, an increase of approximately $28,000 in facility
costs, an increase in travel costs of approximately $24,000, an increase in
information and communication costs of approximately $51,000, an increase in
professional and consulting costs of approximately $56,000 and an increase in
other general and administrative costs of approximately $87,000, which includes
$40,000 in investor relations. The Company experienced increased marketing and
sales costs during the period ended December 31, 1998. This increase is
attributable to the Company's increased marketing and sales efforts, as well as,
increased emphasis on new product development.
Depreciation and amortization:
Depreciation and amortization for the two months ended December 31,
1998 and December 31, 1997 was approximately $215,000, of which $90,000 is
included in cost of services, compared to $175,000 for the two months ended
25
<PAGE>
December 31, 1997, of which $90,000 is included in cost of services.
Depreciation and amortization for the two months ended December 31, 1998
includes amortization of intangible assets attributed to the Services Agreement
with Horizon BCBSNJ, in connection with the acquisition of CHCM of approximately
$20,000 ( See "Notes to Financial Statements - Introduction and Background"),
amortization of approximately $72,000 relating to other intangible assets and
depreciation of property and equipment of approximately $123,000.
Interest expense:
Net interest expense for the two months ended December 31, 1998 was
$20,000 compared with net interest expense of $61,000 for the two months ended
December 31, 1997. The decrease in net interest expense of approximately $41,000
is largely due to decreased interest costs under the IBM master lease agreement
of approximately $12,000, decreased interest costs related to the CW Note of
approximately $27,000 (for a more detailed explanation of the CW Note, see
"Notes to Financial Statements - Introduction and Background"), and a decrease
in interest costs under the Horizon BCBSNJ Note of approximately $2,000 (for a
more detailed explanation of the Horizon BCBSNJ Note, see "Financial
Condition-Liquidity and Capital Resources.)
Financial Condition
Liquidity and Capital Resources:
At December 31, 1998, the Company had cash of $3,354,000 and working
capital of approximately $715,000. At December 31, 1997, the Company's cash
balance was $1,142,000 and its working capital deficiency was approximately
$1,969,000. The change in working capital of approximately $2,841,000 is largely
due to the conversion of the $2,000,000 CW Note for Common Stock.
Net cash provided from operating activities amounted to approximately
$30,000 and $377,000 for the two-month periods ended December 31, 1998 and 1997,
respectively. The change is largely due to a decrease in accrued expenses and
other liabilities of approximately $224,000, and an increase in other assets of
approximately $236,000, offset by decreases in customer receivables of
approximately $352,000, and non-cash charges of approximately $215,000.
Net cash used by investing activities amounted to approximately $47,000
and $182,000 for the two-month periods ended December 31, 1998 and 1997,
respectively. This decrease of approximately $145,000 is primarily due to
decreased capital expenditures incurred in connection with Software Development
during the current two-month period.
Net cash used by financing activities amounted to approximately
$384,000 and $91,000 for the two-month periods ended December 31, 1998 and 1997,
respectively. This increase of approximately $293,000 is primarily due to
increased principal payments to a stockholder/customer company of approximately
$281,000 and increased principal payments related to the IBM Master lease
agreement of approximately $12,000.
26
<PAGE>
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 December 31, 1999.
Financing:
Amounts payable pursuant to long-term financing arrangements as of
December 31, 1998 consisted of approximately $319,000 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 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.
Pursuant to the BCBSNJ Note, the Company owes $1,748,000 (including
approximately $166,000 in accrued interest) and $1,863,000 to Horizon BCBSNJ as
of December 31, 1998 and October 31, 1998, respectively, 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.
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 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 noncancelable 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.
Year 2000:
Potential Impact of Year 2000 Computer Issues Overview:
The year 2000 computer problem is the inability of computer systems which
27
<PAGE>
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 remedied to a
state of year 2000 readiness, with the remainder scheduled to be remedied 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 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,
28
<PAGE>
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.
29
<PAGE>
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,
reputation 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.
30
<PAGE>
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.
31
<PAGE>
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons
The Company's directors, executive officers and control persons, as of December
31, 1998, (except as otherwise noted) are as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
Name Age Positions with the Company
---- --- --------------------------
William J. Marino (1)(6) 55 Chairman of the Board of Directors
Robert J. Pures (2)(6) 53 Director
Barry Weinberg (1)(6) 60 Director
David McDonnell (1) (2)(6) 56 Director
Walter Channing, Jr. (2)(6) 58 Director
Richard W. Freeman(3) 51 President and Chief Operating Officer
David Noone(5)(6) 45 Director, Chief Executive Officer
Stephan D. Deutsch 55 Senior Vice President and National Medical Director
Elaine del Rossi(5) 55 Senior Vice President, Marketing and Sales
David G. DeBoskey 33 Vice President, Finance and Accounting
- -------------------------------------------------------------------------------
<FN>
(1) Member of Compensation Committee
(2) Member of Audit Committee
(3) Appointed President and Chief Operating Officer effective October 30, 1998.
(4) Effective January 8, 1999
(5) Effective April 21, 1999, the Company terminated Ms. del Rossi's employment without cause.
(6) Re-elected to the Board of Directors of the Company at the Company's Annual Meeting held on July 7, 1999.
</FN>
</TABLE>
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
32
<PAGE>
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.
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.
The following sets forth certain information with respect to each
Director and Executive Officer of the Company:
William J. Marino has been a director of the Company since February
1996, and a director of Contemporary HealthCare Management System, Inc. since
December 1993. He has been President, Chief Executive Officer and a director of
Horizon BCBSNJ since January 1994, and Senior Vice President of Horizon BCBSNJ
from January 1992 through December 1993. Mr. Marino also currently serves as a
director of Digital Solutions, Inc.
Robert J. Pures has been a director of the Company since February 1996.
He has been Senior Vice President - Administration, Chief Financial Officer and
Treasurer of Horizon BCBSNJ since 1995, and Vice President Finance and Treasurer
of Horizon BCBSNJ from October 1985 through July 1995.
Barry Weinberg has been a director of the Company since May 1997. He
has been President of the CW Group, Inc., a company engaged in investing in the
health care field since 1981. Mr. Weinberg currently serves on the boards of
directors of Autoimmune Inc. and several privately owned companies, and is a
general partner of CW Partners.
David J. McDonnell has been a director of the Company since January
1997. He served from December 1993 to February 1997 as a director of Value
Health, Inc., a company engaged in the health care service business. Prior to
that, he was employed by Preferred Health Care Ltd., a behavioral managed care
company, where he served as that company's Chief Executive Officer from 1988 to
1993, and its President from 1988 to 1992. Mr. McDonnell also served as Chairman
of Preferred Health Care Ltd.'s board of directors from 1991 to 1993.
Walter Channing, Jr. has been a director of the Company since May 1997.
He has been Vice President of the CW Group, Inc., a Company engaged in investing
in the health care field since 1981. Mr. Channing currently serves on the boards
of directors of several privately owned companies and is general partner of CW
Partners.
33
<PAGE>
Richard W. Freeman, M.D has served as President and Chief Operating
Officer of the Company since October 1998, and from September 1997 through
October 1998 as Executive Vice President of the Company. Prior to that, he
served from April 1995 through September 1997 as Senior Vice President of CAHS.
From 1994 to 1995, Dr. Freeman served as Vice-President for Medical Affairs,
Johns Hopkins Bayview Medical Center, a 667 bed academic medical center, and
from 1992 to 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 has been a director of the Company and CEO since January 8,
1999. Mr. Noone served from September 1995 to February 1997 as the President and
Chief Executive Officer of Value Health International, a subsidiary of Value
Health, Inc., where he was responsible for the migration of Managed Health Care
strategies to emerging opportunity markets in Europe, Latin America and Asia and
from December 1993 to February 1995, as President and Chief Executive Officer of
Value Health Insurance Services Group, another Value Health, Inc. subsidiary,
where he was responsible for development of a diversified managed health care
company serving the property casualty, group health and auto liability sectors.
Prior to that time, Mr. Noone served as President and Chief Operating Officer of
Preferred Health Care Ltd. from 1992 to 1993, and in a variety of capacities
with that company from 1987 to 1992.
Stephan D. Deutsch, M.D. has been Senior Vice President and National
Medical Director since July 1995. Prior to that, 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 was Senior Vice President of Marketing and Sales
from April 1998 through April 1999. Prior to that, she served as 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. has served as Vice President of Finance and
Accounting of the Company since November 1997, and from April 1996 through
November 1997, as Director of Finance and Accounting of the Company. From August
1992 through April 1996, Mr. DeBoskey served as Accounting Manager and
Subsidiary Controller for two New Jersey hospitals.
34
<PAGE>
Section 16(a) Beneficial Ownership Reporting Compliance:
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.
34
<PAGE>
Item 10. Executive Compensation
The following table sets forth information concerning the compensation
paid or accrued by the Company for each of the three calendar years ended
December 31, 199X, to the individual performing the function of Chief Executive
Officer and each of the next four most highly compensated executive officers
with compensation in excess of $100,000, during such periods.
<TABLE>
<CAPTION>
Summary Compensation Table
- ---------------------------- -------------- ------------------------------------------------- -----------------------------------
Annual Compensation Long Term Compensation
- ---------------------------- -------------- ------------------------------------------------- -----------------------------------
- ---------------------------- -------------- ---------------- -------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
Awards Payouts
Securities All Other
Name and Principal Year Ended Salary Bonus Other Annual Underlying Compensation
Position December 31, Compensation(2) Options/SARs ($)
(#)
- ---------------------------- -------------- ---------------- -------------- ----------------- ----------------- -----------------
- ---------------------------- -------------- ---------------- -------------- ----------------- ----------------- -----------------
Thomas P. Riley, (3) 1998 $275,000 $ -0- $ 70,138 -0- $ 4,313 (1)
President & 1997 272,885 300,000 -0- -0- 4,115 (1)
Chief Executive Officer 1996 160,213 -0- -0- -0- -0-
- ---------------------------- -------------- ---------------- -------------- ----------------- ----------------- -----------------
- ---------------------------- -------------- ---------------- -------------- ----------------- ----------------- -----------------
Richard W. Freeman, M.D. 1998 $ 270,162 (4) $ -0- $ -0- -0- $ 4,800 (1)
President & 1997 261,000 35,000 25,000 -0- 4,750 (1)
Chief Operating Officer 1996 265,731 -0- -0- 250,000 3,888 (1)
- ---------------------------- -------------- ---------------- -------------- ----------------- ----------------- -----------------
- ---------------------------- -------------- ---------------- -------------- ----------------- ----------------- -----------------
Stephen D. Deutsch, M.D. 1998 $ 300,000 (5) $ -0- $ -0- -0- $ -0-
Senior Vice President and 1997 267,307 92,308 -0- -0- -0-
National Director of CAHS 1996 250,028 118,269 -0- 250,000 -0-
- ---------------------------- -------------- ---------------- -------------- ----------------- ----------------- -----------------
- ---------------------------- -------------- ---------------- -------------- ----------------- ----------------- -----------------
Elaine del Rossi, 1998 $ 110,769 (6) $55,000 $ -0- -0- $ -0-
Sr. Vice President, 1997 -0- -0- -0- -0- -0-
Marketing and Sales 1996 -0- -0- -0- -0- -0-
- ---------------------------- -------------- ---------------- -------------- ----------------- ----------------- -----------------
- ---------------------------- -------------- ---------------- -------------- ----------------- ----------------- -----------------
David DeBoskey, CPA 1998 $87,654 $25,000 $ -0- -0- $ 2,608 (1)
Vice President, 1997 75,769 12,500 -0- -0- 1,894 (1)
Finance and Accounting 1996 34,423 1,000 -0- -0- 751 (1)
- ---------------------------- -------------- ---------------- -------------- ----------------- ----------------- -----------------
<FN>
- -----------------------------------------------------------
(1) Represents Company matching contributions to a 401(k) profit
sharing/savings plan.
(2) Other Annual Compensation includes taxable fringe benefits and unused
accrued vacation days that were paid.
(3) Effective October 30, 1998, Mr. Riley resigned his position as President
and Chief Executive of the Company.
(4) Dr. Freeman is paid an annual salary of $275,000 under the terms of his
amended and restated employment agreement dated September 29, 1998.
(5) Dr. Deutsch is paid an annual salary of $300,000 under the terms of his
employment agreement
(6) 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.
Ms. del Rossi's employment with the Company was terminated without cause
on April 21, 1999.
</FN>
</TABLE>
35
<PAGE>
Compensation Plans
1996 Stock Option Plan:
The 1996 Stock Option Plan ("Stock Option Plan"), which was adopted by
the Company June 6, 1996, and amended July 24, 1996, is administered by a
Committee of the Board of Directors consisting of at least two members who are
"outside directors" as defined in Section 162(m) of the Internal Revenue Code
who are also "disinterested persons" as defined in regulations under the
Securities and Exchange Act of 1934. Pursuant to the terms of the Stock Option
Plan, the Committee will select persons to be granted options and will
determine: (i) whether to grant a non-qualified stock option and/or an incentive
stock option; (ii) the number of shares of the Company's Common Stock that may
be purchased upon the exercise of such option; (iii) the time or times when the
option becomes exercisable, except that no stock received pursuant to an option
shall be sold by the recipient prior to six months from the date of grant; (iv)
the exercise price, which 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 110% 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 stock options may only be granted to employees
(including officers) of the Company and/or any of its subsidiaries.
Non-qualified stock options may be granted to any employees (including employees
who have been granted incentive stock options) and other persons who the
Committee may select. Options, which must be granted substantially in the form
prescribed by the Stock Option Plan, are not valid unless signed by the grantee.
Under the Stock Option Plan, an aggregate of 10% of the Company's authorized
number of shares of Common Stock (equal to 9,000,000 shares of Common Stock) is
reserved for issuance.
All options granted under the Stock Option Plan are exercisable during the
option grantee's lifetime only by the option holder (or his or her legal
representative) and generally only while such option grantee is in the Company's
employ. In the event an option grantee's employment is terminated other than by
death or disability, such person shall have three months from the date of
termination to exercise such option to the extent the option was exercisable at
such date, but in no event subsequent to the option's expiration date. In the
event of termination of employment due to death or disability of the option
grantee, such person (or such person's legal representative) shall have 12
months from such date to exercise such option to the extent the option was
exercisable at the date of termination, but in no event subsequent to the
option's expiration date.
The Stock Option Plan contains 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 Committee or the Board shall
proportionately adjust the number of shares covered by each option granted and
the exercise price per share. The Committee's or Board's determinations in these
matters shall be conclusive.
The Board of Directors has the authority to terminate the Stock Option
Plan as well as to make changes in and additions to such plans. The plan will
terminate on June 6, 2006, unless previously terminated by the Board. However,
unless approved by the stockholders of the Company, the Board may not change the
aggregate number of shares subject to the Stock Option Plan, terminate, modify
36
<PAGE>
or amend such plan so as to adversely affect the rights of option holders
previously granted under such plan, change the requirements of eligibility to
such plan or materially increase the benefits accruing to participants under
such plan.
No options were granted to or exercised by the named executives during
the year ended December 31, 1998.
<TABLE>
<CAPTION>
Aggregated Option Exercises in Last Fiscal Year
and Fiscal Year-End Option Values
<S> <C> <C>
Number of Value of
Shares Underlying Unexcerised
Unexercised In-the-Money
Options at Options at
December 31, 1998 December 31, 1998
Exercisable/ Exercisable/
Name Unexercisable Unexercisable (1)
- ---- ------------- -----------------
Thomas P. Riley 0 0
Richard W. Freeman, M.D. 166,667/83,333 $0/$0
Stephan D. Deutsch, M.D. 166,667/83,333 $0/$0
Elaine del Rossi 0 0
David G. DeBoskey, CPA 0 0
<FN>
- ----------------------------------------------------------
(1)Based upon the average Bid and Asked prices on the OTC Bulletin Board of the
Company's Common Stock on July 31, 1999.
</FN>
</TABLE>
Resignations, Employment Contracts and Board Appointments
Resignation of Chief Executive Officer, President and Director
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 were attached as Exhibits 10.32 and 10.33 in the
Company's Form 10-KSB for the period ended October 31, 1998 which was filed on
January 29, 1999 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-month 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
(4%) of the Company's capitalization on such date, upon the terms and conditions
37
<PAGE>
set forth therein. These options are subject to accelerated vesting, if: (a) the
Company's Common Stock reaches certain target levels or (b) if 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 was attached as Exhibit
10.36 in the Company's Form 10-KSB for the period ended October 31, 1998 which
was filed on January 29, 1999 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, a former Senior Vice President for Marketing
and Sales of the Company, which was attached as Exhibit 10.37 and 10.38 in the
Company's Form 10-KSB for the period ended October 31, 1998 which was filed on
January 29, 1999 and are incorporated by reference herein. The terms of the del
Rossi Employment Agreement commenced on March 25, 1998 and continued until
April, 1999. Ms. del Rossi was entitled to an annual salary of $160,000, plus
other benefits set forth therein. The del Rossi Employment Agreement provided
for a cash bonus of $50,000 upon Ms. del Rossi's commencement of employment with
the Company. In addition, Ms. del Rossi was 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. Effective April 21, 1999,
the Company terminated Ms. del Rossi's employment without cause.
38
<PAGE>
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 was attached as Exhibit 10.39 in the Company's Form
10-KSB for the period ended October 31, 1998 which was filed on January 29, 1999
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. Deutsch 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.
Compensation of Directors:
Generally
No member of the Board of Directors of the Company presently receives
annual remuneration for acting in that capacity, except disinterested Directors
who are neither officers nor associated with stockholders. Disinterested
Directors are paid $1,000 for each meeting of the Board they attend and are
eligible for the grants of options under the 1996 Directors Stock Option Plan.
Directors are also reimbursed their reasonable out-of-pocket expenses for each
attended meeting of the Board or any committee thereof. As of December 31, 1998,
no director has been granted any options pursuant to the 1996 Directors Stock
Option Plan.
1996 Directors' Stock Option Plan
The 1996 Directors' Stock Option Plan ("Directors' Stock Option Plan"),
was adopted by the Company June 6, 1996, and amended July 24, 1996. Pursuant to
the terms of the Directors' Stock Option Plan, the Board of Directors shall
grant non-employee Directors (other than certain named persons) upon their
appointment as Directors options to purchase (i) 166,667 shares of Common Stock
(as adjusted for a one-for-six reverse stock split); (ii) at an exercise price
equal to the fair market value of the Common Stock on the date of grant; (iii)
exercisably ratably over 36 months; and (iv) having a duration of five years
from the date of grant. Option grants, which must be evidenced by written
agreements substantially in the form prescribed by the Directors' Stock Option
Plan, are not valid unless signed by the grantee. Under the Directors' Stock
Option Plan, and aggregate of 2% of the Company's authorized number of shares of
Common Stock (equal to 1,800,000 shares of Common Stock) is reserved for
issuance.
All options granted under the Directors' Stock Option Plan are exercisable
during the option grantee's lifetime only by the option grantee (or his or her
legal representative). In the event of termination of an option grantee's
directorship, such person shall have three months from such date to exercise
39
<PAGE>
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. In the
event of termination of an option grantee's directorship due to death, such
person's legal representative shall have 12 months from such date to exercise
such option to the extent the option was exercisable at the date of death, but
in no event subsequent to the option's expiration date.
The Directors' Stock Option Plan contains 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 equitably adjust
the aggregate number and kind of shares reserved for issuance, and for
outstanding options, the number of shares covered by each option and the
exercise prices per share.
The Board of Directors has the authority to terminate the Directors' Stock
Option Plan with respect to any shares of Common Stock not at the time subject
to an option as well as to make changes in and additions to such plans. The plan
will terminate on June 6, 2006, unless previously terminated by the Board.
However, the Board may not, unless approved by the stockholders of the Company,
change the aggregate number of shares subject to the Directors' Stock Option
Plan, terminate, modify or amend such plan so as to adversely affect the rights
of option holders previously granted under such plan, change the requirements of
eligibility to such plan or materially increase the benefits accruing to
participants under such plan.
Item 11. Security Ownership of Certain Beneficial Owners and Management
The following table sets as of July 31, 1999 certain information
regarding the beneficial ownership of the Company's 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 of the executive officers named in the
Summary Compensation Table, and (iv) all executive officers and Directors as a
group. 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.
40
<PAGE>
<TABLE>
<CAPTION>
Beneficial Ownership of Common Stock by
Certain Stockholders and Management
<S> <C> <C>
Name Number of Shares Percent of
Beneficially Owned(1) Ownershipp(2)
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 45.88
William J. Marino(3)........................................... 334 *
Robert J. Pures(3)............................................. 0 0
Walter Channing, Jr.(5)(6)(7)(8)............................... 37,784,087 45.88
Charles Hartman(5)(6)(7)(8).................................... 37,784,087 45.88
Barry Weinberg(5)(6)(7)(8)..................................... 37,784,087 45.88
David J. McDonnell(9) ......................................... 0 *
Thomas P. Riley(10)(11)........................................ 0 *
Richard W. Freeman, M.D (12)(13)............................... 254,050 *
Stephan Deutsch, M.D (12)(13)................................. 251,233 *
Elaine del Rossi (12)(13)(14)................................. 0 0
All Directors and executive officers as a Group (9 38,289,704 46.21
persons) (8)(11)(13)
- -------------------------------------------------------------
<FN>
* Less than 1%
(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.
Beneficial ownership 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 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) In the event that the Services Agreement dated February 22, 1996, among
the Company, its subsidiaries, and Blue Cross and Blue Shield of New
Jersey (now known as "Horizon BCBS") is terminated by Horizon BCBSNJ,
CW Ventures II, L.P. ("CW Ventures") will have the right to purchase
Horizon BCBSNJ shares in accordance with the terms of the Stockholders'
Agreement. See below, "Certain Relationships and Related Transactions."
(5) Horizon 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. Horizon 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.
41
<PAGE>
(6) The business address of such person or entity is 1041 Third Avenue, New
York, New York 10021.
(7) Includes 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.
(11) Effective October 30, 1998, Mr. Riley resigned his position as
President and Chief Executive Officer of the Company,and effective
November 16, 1998, Mr. Riley resigned as a Director.
(12) The business address of such person is 485-C Route 1 South, Iselin, New
Jersey 08830.
(13) 250,000 of Dr. Freeman's shares of Common Stock, 250,000 of Dr.
Deutsch's shares of Common Stock, and 500,000 of the shares of Common
Stock of all directors and executive officers as a group are issuable
upon the exercise of stock options to purchase shares of Common Stock
that are exercisable on July 31, 1999 or that will be exercisable
within 60 days of such date.
(14) Effective April 21, 1999, the Company terminated Ms. del Rossi's
employment without cause.
</FN>
</TABLE>
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 July 31, 1999, Horizon BCBSNJ is the
beneficial owner of 37,617,420 shares of Common Stock, constituting 45.77% of
the outstanding Common Stock at December 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
42
<PAGE>
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. As of July 31, 1999, Horizon BCBSNJ is the beneficial owner of
37,617,420 shares of Common Stock, constituting 45.77% of the outstanding Common
Stock at December 31, 1998. In addition, two (2) of BCBSNJ officers are
directors of the 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 that 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 31, 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.
Effective June 13, 1997, CW Ventures granted to Horizon BCBSNJ an
43
<PAGE>
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 Opinion
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.
44
<PAGE>
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(a) 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).
3.1(b) Amended and Restated Certificate of Incorporation incorporated
by reference to the Company's Information Statement filed on September
6, 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. 33-89
176).
10.1(a) 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(b) 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
Metropolitan 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.
45
<PAGE>
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 exhibit10.16
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.
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.
46
<PAGE>
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 incorporated by reference
to exhibit 10.20 filed with the Company's Form 10-KSB for the fiscal
year ended October 31, 1997.
10.21 Consultation Agreement dated October 1, 1997 by and between the Company
and David McDonnell, an independent director of the Company
incorporated by reference to exhibit 10.21 filed with the Company's
Form 10-KSB for the fiscal year ended October 31, 1997.
10.22 Mutual Release Agreement dated as of January 6, 1998 between the
Company and MEDecision, Inc incorporated by reference to exhibit 10.22
filed with the Company's Form 10-KSB for the fiscal year ended October
31, 1997.
10.23 Separation Agreement dated April 20, 1995 between PMDX and the
Registrant incorporated by reference to exhibit 10.1 filed with the
Company'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 the Company'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 the Company's Registration Statement on Form S-1 (File No.
33-89176).
47
<PAGE>
10.26 Registrant's 1995 Comprehensive Stock Incentive Plan incorporated
by reference to exhibit 4.2 filed with the Company's Registration
Statement on Form S-1 (File No. 33-89176).
10.27 Registrant's 1996 Stock Option Plan incorporated by reference to the
Company's Information Statement filed September 6,1996.
10.28 Registrant's 1996 Director Stock Option Plan incorporated by reference
to the Company's Information Statement filed September 6,1996.
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,
1997.
10.32 Employment Agreement between the Company and David Noone, dated
January 8, 1999 incorporated by reference to exhibit 10.32 filed with
the Company's Form 10-KSB for the fiscal year ended October 31, 1998.
10.33 Confidentiality, Invention, and Non-Compete Agreement between the
Company and David Noone, dated as of January 8, 1999 incorporated by
reference to exhibit 10.33 filed with the Company's Form 10-KSB for the
fiscal year ended October 31, 1998.
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 the
Company Form 10-QSB for the quarter ended July 31, 1998.
10.35 Services Agreement dated as of January 1, 1999, by and between
HealthNow New York, Inc. ("HNNY") and the Company incorporated by
reference to exhibit 10.35 filed with the Company's Form 10-KSB for the
fiscal year ended October 31, 1998.
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") incorporated by reference to exhibit 10.36 filed
with the Company's Form 10-KSB for the fiscal year ended October 31,
1998.
48
<PAGE>
10.37 Employment Agreement, dated as of March 25, 1997, by and between the
Company and Elaine del Rossi incorporated by reference to exhibit 10.37
filed with the Company's Form 10-KSB for the fiscal year ended October
31, 1998.
10.38 Confidentiality, Invention and Non-Compete Agreement dated as of March
25, 1998 between the Company and Elaine del Rossi incorporated by
reference to exhibit 10.38 filed with the Company's Form 10-KSB for the
fiscal year ended October 31, 1998.
10.39 Employment Agreement, effective as of April 28, 1998, by and among
Stephan D. Deutsch, M.D., the Company and CAHS incorporated by
reference to exhibit 10.39 filed with the Company's Form 10-KSB for the
fiscal year ended October 31, 1998.
16 Letter regarding change in accountants, incorporated by reference
to exhibit 16.1 filed on the Company Form 8-K dated June 6, 1996.
27 Financial Data Schedule
--------------------------------------------
49
<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: September 2, 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: September 2, 1999 By: /s/ David Noone
------------------ ------------------------------------
David Noone, Chief Executive Officer,
Director
(Principal Executive Officer)
Date: September 2, 1999 By: /s/ David G. DeBoskey
------------------- ------------------------------------
David G. DeBoskey, Vice President
Finance
(Principal Financial and Accounting
Officer)
Date: September 2, 1999 By: /s/ William J. Marino
-------------------- ------------------------------------
William J. Marino, Director
Date: September 2, 1999 By: /s/ Robert J. Pures
--------------------- ------------------------------------
Robert J. Pures, Director
Date: September 2, 1999 By: /s/ Barry Weinberg
-------------------- ------------------------------------
Barry Weinberg, Director
Date: September 2, 1999 By /s/ Walter Channing, Jr.
-------------------- ------------------------------------
Walter Channing, Jr., Director
Date: September 2, 1999 By: /s/ David McDonnell
-------------------- ------------------------------------
David McDonnell, Director
50
<PAGE>
CAREADVANTAGE, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
Contents Page
Consolidated Financial Statements
<S> <C>
Independent auditors' report F-2
Balance sheets as of December 31, 1998 and October 31, 1998 F-3
Statements of operations for the two-month periods ended December 31, 1998
and 1997 (unaudited) and the years ended October 31, 1998 and 1997 F-4
Statements of stockholders' equity (capital deficiency) for the two-month period
ended December 31, 1998 and the years ended October 31, 1998 and 1997 F-5
Statements of cash flows for the two-month periods ended December 31, 1998
and 1997 (unaudited) and the years ended October 31, 1998 and 1997 F-6
Notes to financial statements F-7
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Stockholders and Board of Directors
CareAdvantage, Inc.
New York, New York
We have audited the accompanying consolidated balance sheets of CareAdvantage,
Inc. and subsidiaries as of December 31, 1998 and October 31, 1998 and the
related consolidated statements of operations, stockholders' equity (capital
deficiency) and cash flows for the two months ended December 31, 1998 and for
the years ended October 31, 1998 and 1997. 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 of December 31, 1998 and October 31,
1998, and the consolidated results of their operations and their cash flows for
the periods indicated in conformity with generally accepted accounting
principles.
/s/ Richard A. Eisner & Company, LLP
------------------------------------
Richard A. Eisner & Company, LLP
New York, New York
July 30, 1999
F-2
<PAGE>
CAREADVANTAGE, INC. AND SUBSIDIARIES
See notes to financial statements
Consolidated Balance Sheets
<TABLE>
<CAPTION>
<S> <C> <C>
December 31, October 31,
1998 1998
ASSETS
Current assets:
Cash and cash equivalents $3,354,000 $ 3,745,000
Accounts receivable for services:
Stockholder 1,080,000 1,080,000
Other 315,000 667,000
Other current assets 159,000 75,000
--------- ---------
Total current assets 4,908,000 5,567,000
Property and equipment, at cost less accumulated depreciation 1,279,000 1,374,000
Intangible assets 1,695,000 1,768,000
Other assets 243,000 91,000
--------- ---------
$8,125,000 $ 8,800,000
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Capital lease obligation $ 319,000 $ 422,000
Accounts payable 193,000 163,000
Due to stockholder 1,153,000 1,153,000
Due to customer 902,000 902,000
Accrued payroll and related benefits 959,000 1,211,000
Accrued expenses and other current liabilities 483,000 455,000
Deferred revenue, current 184,000 184,000
--------- ---------
Total current liabilities 4,193,000 4,490,000
Due to stockholder, less current portion 429,000 710,000
Deferred revenue and other liabilities, less current portion 87,000 116,000
-------- --------
4,709,000 5,316,000
Commitments and contingencies
Stockholders' equity:
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 82,000 82,000
Additional capital 22,009,000 22,009,000
Accumulated deficit (18,675,000) (18,607,000)
----------- ----------
3,416,000 3,484,000
$8,125,000 $ 8,800,000
========= =========
</TABLE>
F-3
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Operations
Two Months Ended
December 31, Year Ended October 31,
<S> <C> <C> <C> <C>
1998 1997 1998 1997
(unaudited)
Net revenues $2,742,000 $ 2,644,000 $ 18,903,000 $ 14,077,000
Cost of services 1,414,000 1,319,000 7,903,000 7,937,000
--------- --------- ---------- ---------
Gross profit 1,328,000 1,325,000 11,000,000 6,140,000
--------- --------- ---------- ---------
Operating expenses:
Selling general and administrative 1,251,000 944,000 6,842,000 5,278,000
Depreciation and amortization 125,000 85,000 605,000 484,000
--------- --------- --------- ---------
Total operating expenses 1,376,000 1,029,000 7,447,000 5,762,000
--------- --------- --------- ---------
Operating income (48,000) 296,000 3,553,000 378,000
Interest expense 20,000 61,000 305,000 371,000
--------- --------- --------- ---------
Income (loss) before provision for income tax (68,000) 235,000 3,248,000 7,000
Provision for income tax 12,000 165,000
--------- --------- --------- ---------
Net income (loss) $ (68,000) $ 223,000 $ 3,083,000 $ 7,000
========= ======== ========= =======
Net income (loss) per share of common
stock - basic and diluted $(.00) $.00 $.04 $.00
===== ==== ==== ====
Weighted average number of common shares
outstanding - basic and diluted 82,190,000 74,390,000 76,990,000 74,390,000
========== ========== ========== ==========
</TABLE>
See notes to financial statements
F-4
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Stockholders' Equity (Capital Deficiency)
Common Stock
<S> <C> <C> <C> <C> <C>
Stockholders'
Number Par Equity
of Value Additional Accumulated (Capital
Shares Amount Capital Deficit Deficiency)
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 0
50,156,559 50,000 (50,000)
Net income for the year ended October31,
1997 7,000 7,000
----------- ------- ------------ ---------- -----------
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 2,377,000
7,799,997 8,000 2,369,000
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
Net loss for the two-month period ended
December 31, 1998 (68,000) (68,000)
----------- ------- ----------- ------------ ------------
Balance as of December 31, 1998 82,189,883 $82,000 $ 22,009,000 $(18,675,000) $ 3,416,000
=========== ======= =========== ============ ============
</TABLE>
F-5
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Cash Flows
Two Months Ended
December 31, Year Ended October 31,
<S> <C> <C> <C> <C>
1998 1997 1998 1997
(unaudited)
Cash flows from operating activities:
Net income $ (68,000) $ 223,000 $ 3,083,000 $ 7,000
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 215,000 175,000 1,143,000 1,033,000
Changes in:
Due to/from stockholder (33,000) (1,117,000)
Due to/from customer 352,000 (267,000) (259,000)
Other assets (236,000) 23,000 170,000 (127,000)
Accounts payable 30,000 219,000 (188,000) (218,000)
Accrued expenses and other current liabilities (224,000) (294,000) 468,000 417,000
Deferred revenue (29,000) 298,000 31,000 1,122,000
--------- -------- -------- ---------
Net cash provided by operating activities 40,000 377,000 4,415,000 1,117,000
------ ------- --------- ---------
Cash flows from investing activities:
Capital expenditures (47,000) (182,000) (1,133,000) (623,000)
------- -------- ---------- ---------
Cash flows from financing activities:
Principal payments under long-term debt (103,000) (91,000) (575,000) (623,000)
Principal payments under note payable, stockholder (281,000)
--------
Net cash used in financing activities (384,000) (91,000) (575,000) (623,000)
-------- -------- --------- ---------
Net increase (decrease) in cash and cash equivalents (391,000) 104,000 2,707,000 (129,000)
Cash and equivalents - beginning of year 3,745,000 1,038,000 1,038,000 1,167,000
--------- --------- --------- ---------
Cash and equivalents - end of year $ 3,354,000 $ 1,142,000 $ 3,745,000 $ 1,038,000
========= ========= ========= =========
Noncash operating activity:
Reclassification of deferred revenue to 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 $27,000 $ 19,000 $ 85,000 $ 152,000
Income taxes paid $ 115,000
</TABLE>
F-6
<PAGE>
CAREADVANTAGE, INC. AND SUBSIDIARIES
Notes to Financial Statements
December 31, 1998 and October 31, 1998
(Information with respectto December 31, 1997 and the two months then ended is
unaudited)
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 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 50,156,559 additional shares of common stock
resulting in an increase of both Horizon BCBSNJ and CW Ventures equity to 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.
On June 8, 1999, the Company changed its fiscal year from one ending October 31
to a calendar year ending December 31.
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's wholly owned subsidiary, CHCM.
Significant intercompany accounts and transactions have been eliminated in
consolidation.
F-7
<PAGE>
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.
Effective August 27, 1998, the Company received notice from one of its
customers, that it has decided to resume internal network management that it had
been outsourcing. Revenues for the Company from this contract were approximately
$1,432,000 for the twelve-month period ended October 31, 1998. The Company has
provided approximately $902,000 to cover possible repayment of advances related
to this contract (see Note I[4]).
[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 and approximately $90,000 for each
of the two months ended December 31, 1998 and 1997.
[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 a promissory
note by CAHS in favor of Horizon BCBSNJ dated February 22, 1996 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.
F-8
<PAGE>
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
[4] Per share data: (continued)
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 fiscal year ended October 31, 1998. The
adoption of SFAS 128 did not have any effect on the computation of income (loss)
on the Company's earnings 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 for the year ended October 31, 1998 and approximately
77% (Horizon BCBSNJ) and 11% of net revenues for the year ended October 31,
1997. Two of the Company's customers accounted for approximately 80% (Horizon
BCBSNJ) and 9% of net revenues for the two months ended December 31, 1998 and
approximately 80% (Horizon BCBSNJ) and 9% of net revenues for the two months
ended December 31, 1997. The loss of any one of these customers would have a
material adverse impact on the Company's business.
[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).
F-9
<PAGE>
NOTE C - INTANGIBLE ASSETS
Intangible assets net of accumulated amortization consist of the following:
December 31, October 31,
1998 1998
Service agreement $835,000 $ 855,000
License fees 167,000 200,000
Software development cost 693,000 713,000
------------ -----------
$1,695,000 $ 1,768,000
========= ===========
[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 and approximately
$50,000 and $21,000 for the two-month periods ended December 31, 1998
and 1997, respectively.
F-10
<PAGE>
NOTE D - PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
Property and equipment consist of the following:
<S> <C> <C>
December 31, October 31,
1998 1998
Computer equipment $1,300,000 $ 1,284,000
Furniture and fixtures 466,000 466,000
Office machines and telephone equipment 231,000 231,000
Leasehold improvements 118,000 106,000
Equipment under capital lease, consisting of:
Computer equipment 860,000 860,000
Telephone equipment 156,000 156,000
Leasehold improvements 309,000 309,000
--------- ---------
3,440,000 3,412,000
Less accumulated depreciation and amortization (2,161,000) (2,038,000)
--------- ---------
$1,279,000 $1,374,000
========= =========
</TABLE>
Amortization in connection with equipment under capital leases amounted to
$321,000 and $326,000 for the years ended October 31, 1998 and 1997,
respectively and $50,000 and $49,000 for the two-month periods ended December
31, 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 December 31, 1998 and October 31, 1998, all of which are
due in the ensuing year:
<TABLE>
<CAPTION>
<S> <C> <C>
December 31, October 31,
1998 1998
Balance due $ 330,000 $440,000
Less amount representing interest 11,000 18,000
-------- -------
Present value of minimum lease payments $ 319,000 $422,000
======== =======
</TABLE>
The Company's obligations under the 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>
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 Board of Directors of the Company administers the 1996 Stock Option Plan.
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 Board of Directors of the Company also administers the 1996 Director Stock
Option Plan. 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.
The following is a summary of stock option activity during the years ended
October 31, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C> <C> <C>
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
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>
No options were granted or cancelled in the two-month period ended
December 31, 1998.
F-12
<PAGE>
NOTE G - STOCKHOLDERS' EQUITY (CAPITAL DEFICIENCY) (CONTINUED)
[3] Stock option plans: (continued)
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. Pro forma net income (loss) for the two months ended
December 31, 1998 and 1997 would have been approximately ($70,000) and
$233,000 or $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 canceling the Company's warrant to purchase shares of the vendor's stock.
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:
<TABLE>
<CAPTION>
<S> <C> <C>
December 31, October 31,
1998 1998
Deferred tax assets:
Net operating loss carryforwards $ 3,999,000 $ 3,984,000
Accrued liabilities 56,000 56,000
Deferred revenue 105,000 115,000
Alternative minimum tax credit 50,000 50,000
---------- ----------
4,210,000 4,205,000
Deferred tax liabilities:
Excess of book over tax cost basis of fixed
assets and software costs 474,000 490,000
---------- ----------
Net deferred tax asset 3,736,000 3,715,000
Valuation allowance (3,736,000) (3,715,000)
---------- ----------
$ 0 $ 0
========== ==========
</TABLE>
F-13
<PAGE>
NOTE H - INCOME TAX (CONTINUED)
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 $11,762,000 at December 31, 1998 and
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 Internal Revenue Service may
reduce the amount of the carryforward and its annual utilization upon
examination. The valuation allowance on the Company's deferred tax asset
increased approximately $21,000 for the two months ended December 31, 1998 and
decreased approximately $1,023,000 for the year ended October 31, 1998.
The difference between the federal statutory rate and the Company's effective
tax rate is as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
December 31, October 31,
1998 1998
Income taxes at federal statutory rate $(23,000) $ 1,104,000
Net operating loss carryforward benefit (913,000)
State income tax, net of federal income tax benefit 110,000
Alternative minimum tax 55,000
Permanent differences 2,000
Change in valuation reserve 21,000 (191,000)
-------- ---------
$ 0 $ 165,000
======= =========
</TABLE>
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. Messrs. Petillo, Achillare
and Whipple were officers of the Company and
F-14
<PAGE>
NOTE I - COMMITMENTS, CONTINGENCIES AND OTHER MATTERS (CONTINUED)
[1] Potential uninsured exposure to litigation: (continued)
b. 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 plaintiff seeks treble and other
damages for an unspecified amount and claims actual damages in the
approximate amount of $1.8-2.0 million. On September 15, 1998 and
October 30, 1998, the Company received notice from two of its
insurance carriers that they have denied coverage on this matter, but
the Company plans to vigorously contest these coverage decisions. The
Company has received written claims for indemnification from Whipple,
Petillo and Achillare. The parties to this litigation are currently
taking discovery, and no trial date has been set. The Company is
unable, at this early stage of the proceeding, to evaluate the merits
of this action, but intends to defend the matter vigorously. No
amounts have been accrued for this claim as of December 31, 1998.
[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 its insurance carrier advised
the Company 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.
F-15
<PAGE>
NOTE I - COMMITMENTS, CONTINGENCIES AND OTHER MATTERS (CONTINUED)
[4] Contract termination:
In November 1998, the Company received written notice from one of its customers
that the customer terminated its contract with the Company. Counsel for the
Company informed the customer that the notice was null and void and of no legal
effect since the agreement did not provide for termination without cause prior
to the end of the term. The Company and the customer have since commenced
binding arbitration. In July 1999, the Company received a second notice from the
customer pursuant to which the customer has purportedly terminated the contract
due to the Company's material breach. The Company vigorously denies that it has
breached the contract and continues to pursue its rights against the customer in
the arbitration proceeding (see Note B[2]).
[5] 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.
[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. Rent expense for each of the two-month periods ended
December 31, 1998 and 1997 was $77,000.
[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, and $31,000 and $25,000 for the two-month periods
ended December 31, 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.
F-16
<PAGE>
NOTE J - CREDIT FACILITY
The Company has a working capital facility 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 December 31 and October 31, 1998,
there were no amounts outstanding under the working capital facility.
NOTE K - STAND BY LETTER OF CREDIT
In September 1998, the Company obtained an irrevocable letter of credit 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; 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. In
addition, exercisability of the Horizon BCBSNJ Option may be accelerated in
certain circumstances, none of which have occurred. The 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 6 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-17
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS AS OF AND FOR THE TWO MONTH PERIODS ENDED DECEMBER 31,
1998, AND 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<CIK> 0000937252
<NAME> CAREADVANTAGE, INC.
<MULTIPLIER> 1
<CURRENCY> 0
<S> <C> <C>
<PERIOD-TYPE> 2-MOS 2-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997
<PERIOD-START> NOV-01-1998 NOV-01-1997
<PERIOD-END> DEC-31-1998 DEC-31-1997
<EXCHANGE-RATE> 1 1
<CASH> 3,354,000 1,142,000
<SECURITIES> 0 0
<RECEIVABLES> 1,395,000 1,723,000
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 4,908,000 3,094,000
<PP&E> 1,279,000 1,411,000
<DEPRECIATION> 0 0
<TOTAL-ASSETS> 8,125,000 6,336,000
<CURRENT-LIABILITIES> 4,193,000 4,265,000
<BONDS> 0 0
0 0
0 0
<COMMON> 82,000 74,000
<OTHER-SE> 3,334,000 (1,815,000)
<TOTAL-LIABILITY-AND-EQUITY> 8,125,000 6,336,000
<SALES> 0 0
<TOTAL-REVENUES> 2,742,000 2,644,000
<CGS> 0 0
<TOTAL-COSTS> 2,790,000 2,348,000
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 20,000 61,000
<INCOME-PRETAX> (68,000) 235,000
<INCOME-TAX> (68,000) 223,000
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (68,000) 223,000
<EPS-BASIC> (.00) .00
<EPS-DILUTED> (.00) .00
</TABLE>
