SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended January 31, 1999
COMMISSION FILE NUMBER 0-26168
CAREADVANTAGE, INC.
(Exact name of Small Business Issuer as Specified in Its Charter)
DELAWARE 52-1849794
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
485-C Route 1 South, Iselin, New Jersey 08830
(Address of Principal Executive Offices)
Issuer's Telephone Number, Including Area Code: (732) 602-7000
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes X No__
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: 82,189,883
Transitional Small Business Disclosure Format
Yes X No__
This is Page 1 of 14 Pages.
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CAREADVANTAGE, INC
CONSOLIDATED BALANCE SHEET
January 31, October 31,
1999 1998
ASSETS Unaudited
------------ ------------
Current assets:
Cash and cash equivalents $ 2,924,000 $ 3,745,000
Accounts receivable for services:
Stockholder 1,044,000 1,080,000
Other 438,000 667,000
Other current assets 373,000 75,000
------------ ------------
Total current assets 4,779,000 5,567,000
Property and equipment, at cost less
accumulated depreciation 1,231,000 1,374,000
Intangible assets 1,681,000 1,768,000
Other assets 86,000 91,000
------------ ------------
Total Assets $ 7,777,000 $ 8,800,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (CAPITAL DEFICIENCY)
Current liabilities:
Current portion of capital lease
obligation $ 268,000 $ 422,000
Accounts payable 45,000 163,000
Due to stockholder 1,153,000 1,153,000
Due to customer 902,000 902,000
Accrued salaries and employee benefits 674,000 1,211,000
Accrued expenses and other current
liabilities (Note E) 408,000 455,000
Deferred revenue, current 184,000 184,000
------------ ------------
Total current liabilities 3,634,000 4,490,000
Due to stockholder, less current portion 334,000 710,000
Deferred revenue and other liabilities,
less current portion 72,000 116,000
------------ ------------
Total Liabilities 4,040,000 5,316,000
------------ ------------
Stockholders' equity (capital deficiency):
Preferred stock-par value $.10 per share;
authorized 10,000,000 shares; none issued
Common stock-par value $.001 per share;
authorized 90,000,000 shares; issued
and outstanding 82,189,883 82,000 82,000
Additional capital 22,020,000 22,009,000
Accumulated deficit (18,365,000) (18,607,000)
------------ ------------
Total Stockholders' Equity 3,737,000 3,484,000
------------ ------------
Total Liabilities and Stockholders' Equity $ 7,777,000 $ 8,800,000
============ ============
The accompanying notes are an integral part of these statements.
2
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CAREADVANTAGE, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
Three Months Ended
January 31,
----------------------------
1999 1998
---- ----
Net revenues $ 4,056,000 $ 4,002,000
Costs of services 2,009,000 2,027,000
------------ -----------
Gross margin 2,047,000 1,975,000
------------ -----------
Operating expenses:
Selling, general and administration 1,626,000 1,536,000
Depreciation and amortization 189,000 128,000
------------ -----------
Total operating expenses 1,815,000 1,664,000
------------ -----------
Operating income 232,000 311,000
Net interest (income)/expense (10,000) 73,000
------------ -----------
Net income $ 242,000 $ 238,000
============ ===========
Net income per share of common
stock -- basic and diluted $ .00 $ .00
============ ===========
Weighted average number of common
shares outstanding -- diluted 82,550,000 74,390,000
============ ===========
The accompanying notes are an integral part of these statements.
3
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CAREADVANTAGE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
Three Months Ended
January 31,
----------------------------
1999 1998
---- ----
Cash flows from operating activities:
Net income $ 242,000 $ 238,000
Adjustments to reconcile net income
to net cash provided from (used by)
operating activities:
Depreciation and amortization 309,000 262,000
Compensation due to option issuance 11,000 0
Change in assets and liabilities:
Due to/from customers/stockholders 265,000 (99,000)
Other assets (293,000) (0)
Accounts payable (118,000) 289,000
Accrued expenses and other liabilities (584,000) (260,000)
Deferred revenue (44,000) 342,000
----------- -----------
Net cash provided from (used by)
operating activities (212,000) 772,000
----------- -----------
Cash flows from investing activities:
Capital expenditures (79,000) (361,000)
----------- -----------
Net cash provided from (used by) investing
activities (79,000) (361,000)
----------- -----------
Cash flows from financing activities:
Principal payments to stockholder (376,000) (0)
Principal payments under long-term debt (154,000) (138,000)
----------- -----------
Net cash provided from (used by) financing
Activities (530,000) (138,000)
Net increase (decrease) in cash (821,000) 273,000
Cash - beginning of fiscal year 3,745,000 1,038,000
----------- -----------
Cash - end of period $ 2,924,000 $ 1,311,000
=========== ===========
The accompanying notes are an integral part of these statements.
4
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CAREADVANTAGE, INC.
NOTES TO THE FINANCIAL STATEMENTS
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 services
organizations in the Northeastern United States.
Note A--Basis of preparation:
The consolidated financial statements have been prepared by the Company and have
not been audited by the Company's independent auditors. The accompanying
financial statements include all adjustments (which include only normal
recurring adjustments) which in the opinion of management are necessary to
present fairly the financial position, results of operations and cash flows at
January 31, 1999 and for all periods presented.
Certain information and note disclosures required to be included in the
financial statements prepared in accordance with generally accepted accounting
principles have been omitted. These consolidated financial statements should be
read in conjunction with the consolidated financial statements and notes thereto
included with the Company's October 31, 1998 Annual Report on Form 10-KSB filed
with the Securities and Exchange Commission on January 29, 1999. The results of
operations for the period ended January 31, 1999 are not necessarily indicative
of operating results to be expected for the full year.
Note B--Per share data:
Basic net income per share has been computed based on the weighted average
number of shares outstanding during the periods reflected. In fiscal year 1999,
the dilutive effect of stock options is included in the calculation of diluted
earnings per share using the treasury stock method. For fiscal 1998, common
stock equivalents were not included since they were not dilutive.
The Company adopted SFAS No. 128 "Earnings Per Share" and has retroactively
applied the effects thereof for all periods presented. Accordingly, the
presentation of per share information includes calculations of basic and diluted
net income per share. The impact on the per share amounts previously reported
was not significant.
Note C--Contingencies:
[1] Potential uninsured exposure to litigation:
a) The Company has been named as a party in an action entitled Robert T.
Caruso v. Care Advantage, Inc., John J. Petillo, Vincent M. Achillare,
Lawrence A. Whipple, and Horizon Blue Cross Blue Shield of New Jersey,
Inc. et al., which was filed in Superior Court of New Jersey on August 12,
1998. Messrs. Petillo, Achillare and Whipple were officers of the Company
and may have claims for indemnification for expenses and for any judgments
against them in this case. Mr. Caruso was a consultant to the Company. The
complaint alleges breach of contract, fraud, conspiracy, promissory
estoppel and negligent misrepresentation in connection with, among other
things, the termination of Mr. Caruso's consulting arrangement with the
Company. The complaint seeks compensation allegedly due under the
consulting arrangement and other general and, in one count, treble,
damages. The Company received notice from two of its insurance carriers
denying coverage on this matter, but the Company plans to vigorously
contest these coverage decisions. The Company received a written claim for
indemnification from defendants Petillo, Achillare and, subject to their
having acted in good faith, the Company has agreed to indemnify them and
to pay their reasonable defense costs. The Company is unable, at this
stage of the proceeding, to evaluate the merits of this action.
[2] Termination of employment:
On or about January 16, 1998, an action entitled Mary DeStefano v. Care
Advantage, Inc., Carol Manzella, and Thomas P. Riley (the "DeStefano
Action") was filed in the Superior Court of New Jersey. The complaint
alleges that (i) the plaintiff was terminated from her employment with the
Company in retaliation for her complaints regarding alleged violations of
state and federal labor laws and (ii) the Company violated the New
5
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CAREADVANTAGE, INC.
NOTES TO THE FINANCIAL STATEMENTS
Jersey Wire Tapping and Electronic Surveillance Control Act. The complaint
did not demand an amount of specific monetary damages. The defendants have
denied liability in all respects. On July 7, 1998 the Company was advised
by its insurance carrier that it will provide a defense to all defendants
named in the complaint. However, the Company's insurance carrier has also
advised that it will not pay any judgment adverse to the insured which
establishes the act of deliberate dishonesty committed by the insured with
actual dishonest purpose and intent and material to the cause of the
action so adjudicated. Under the terms of the policy, "insured" includes
the Company and its officers and directors. The Company has retained
separate counsel to represent it in the litigation for purposes of this
exclusion. Plaintiff has advised that her damages are believed to exceed
$250,000 and she has also asserted a claim for punitive damages. The
Company is continuing to contest this lawsuit vigorously. The parties to
this litigation are currently taking discovery, and no trial date has been
set. Until discovery has been completed, the Company has insufficient
information regarding its potential exposure in this matter.
[3] 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 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. On February 17, 1999, the
Company was advised by Allied's counsel that Allied was rescinding the
Notice and requesting the termination of the arbitration proceeding since
there was no longer a dispute. The Company, however, is seeking to
continue the arbitration to recover its loss of benefits under the Joint
Services Agreement during the period of Allied's putative termination.
Note D - Supplemental Cash Flow Information:
Below is supplemental cash flow information related to the three-months ended
January 31, 1999 and 1998:
January 31,
-----------
1999 1998
------- -------
Income Taxes Paid $84,000 $ 0
Interest Paid, IBM capital lease obligations 10,000 27,000
Interest Paid, Horizon BCBS-NJ Note 19,000 0
Note E--Accrued expenses and other current liabilities:
Accrued expenses and other current liabilities consist of the following at
January 31, 1999 and October 31, 1998:
January 31, 1999 October 31, 1998
---------------- ----------------
Accrued Interest $165,000 $173,000
Accrued Professional Fees 133,000 144,000
Other accrued expenses 110,000 138,000
-------- --------
Total $408,000 $455,000
======== ========
6
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CAREADVANTAGE, INC.
NOTES TO THE FINANCIAL STATEMENTS
Note F - Stock Option Grant and 1996 Stock Option Plan Amendment
On January 8, 1999, the Board of Directors of the Company ("Board") granted
stock options for 3,600,000 shares of Common Stock of the Company to David
Noone, its new Chief Executive Officer, in connection with Mr. Noone's
employment agreement. All of the options have an exercise price of $.03 per
share and a term of 10 years. Options for 1,800,000 shares shall become
exercisable as follows: (a) 1/3 on December 31, 1999; and (b) the remaining 2/3
of such shares shall become exercisable in equal monthly amounts over the period
January 1, 2000, to December 31, 2001. Options for the remaining 1,800,000
shares originally were to become exercisable over a period of 3 years commencing
January 8, 2000 if certain performance criteria were met. On February 24, 1999,
the Board approved an amendment to these options. Under the terms of this
amendment the options for the remaining 1,800,000 shares shall become
exercisable in three equal annual installments on the fourth, fifth and sixth
anniversary of the date of grant, subject to acceleration upon achievement of
certain performance targets. The Company will realize compensation costs related
to this amendment of approximately $252,000 and will amortize this cost over six
years. In connection with this grant, and subject to stockholder approval, the
Board amended the Company's 1996 Stock Option Plan (now known as the "Stock
Option Plan") to provide the Board (or a committee thereof) with increased
discretion in the terms and conditions of stock options it may award.
On January 26, 1999, the Board granted stock options, subject to 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. In connection with these
grants, and subject to stockholder approval, the Board amended the Stock Option
Plan to increase the number of shares authorized for issuance from 10% to 18% of
the Company's authorized Common Stock, and it amended the Company's 1996
Directors' Stock Option Plan to provide the Board (or a committee thereof) with
increased discretion in the terms and conditions of stock options it may award.
In addition, subject to stockholder approval, the Board amended the Company's
Certificate of Incorporation to increase the number of shares of the Company's
Common Stock for issuance from 90,000,000 shares to 103,600,000 shares.
7
<PAGE>
CAREADVANTAGE, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION OR PLAN OF OPERATION
Forward-looking statements:
Certain statements in this Form 10-QSB may constitute "forward-looking
statements" contemplated under the Private Securities Litigation Reform Act of
1995, including those concerning management's plans, intentions and expectations
with respect to future financial performance and future events and the outcome
of pending litigation, particularly relating to revenues from performance-based
services and re-negotiations of existing and new contracts with customers. Such
statements involve known and unknown risks, uncertainties and contingencies,
many of which are beyond the control of the Company, and which could cause
actual results and outcomes to differ materially from those expressed herein.
Although the Company believes that its plans, intentions and expectations
reflected in such forward-looking statements are reasonable, it can give no
assurance that such plans, intentions or expectations will be achieved. Certain
risk factors exist, such as the ability to generate new business, the Company's
inability to prevent its customers from terminating existing contracts by
invoking standard termination clauses, as well as other inherent contractual
risks, which are beyond the control of the Company, could have a material
adverse impact on the Company or prevent the Company from achieving the growth
or obtaining the results discussed. For a more complete discussion of these and
other risk factors, please see "Cautionary Statements" in Item 6 of the
Company's Form 10-KSB for the fiscal year ended October 31, 1998 filed with the
Securities and Exchange Commission on January 29, 1999.
Current Development of Business:
New Contract with HealthNow New York Inc.
Effective January 1, 1999 the Company entered into a six-month services
agreement with HealthNow New York Inc. ("HNNY"), which provides health care
coverage to New York residents through its Blue Cross and Blue Shield of Western
New York and Blue Shield of Northeastern New York divisions. Under the terms of
this agreement, which was attached as Exhibit 10.35 in the Company's Form 10-KSB
filed on January 29, 1999 and is incorporated herein by reference, the Company,
through one or more of its subsidiaries, will provide both medical management
performance support and specialty care management performance support services
to HNNY for its approximately 650,000 indemnity and HMO subscribers. The
services agreement, which expires on June 30, 1999, provides for the payment of
fixed compensation. This contract replaces a previous agreement between the
Company and New York Care Plus Insurance Company, Inc. executed on January 1,
1998, which was attached as Exhibit 10.20 to the Company's Form 10-KSB filed on
January 29, 1998.
Certain Transactions:
Stock Options
On January 8, 1999, the Board of Directors of the Company ("Board") granted
stock options for 3,600,000 shares of Common Stock of the Company to David
Noone, its new Chief Executive Officer, in connection with Mr. Noone's
employment agreement. All of the options have an exercise price of $.03 per
share and a term of 10 years. Options for 1,800,000 shares shall become
exercisable as follows: (a) 1/3 on December 31, 1999; and (b) the remaining 2/3
of such shares shall become exercisable in equal monthly amounts over the period
January 1, 2000, to December 31, 2001. Options for the remaining 1,800,000
shares originally were to become exercisable over a period of 3 years commencing
January 8, 2000 if certain performance criteria were met. On February 24, 1999,
the Board approved an amendment to these options. Under the terms of this
amendment the options for the remaining 1,800,000 shares shall become
exercisable in three equal annual installments on the fourth, fifth and sixth
anniversary of the date of grant, subject to acceleration upon achievement of
certain performance targets. The Company will realize compensation costs related
to this amendment of $252,000 and will amortize this cost over six years. In
connection with this grant, and subject to stockholder approval, the Board
amended the Company's 1996 Stock Option Plan (now known as the "Stock Option
Plan") to provide the Board (or a committee thereof) with increased discretion
in the terms and conditions of stock options it may award.
On January 26, 1999, the Board granted stock options, subject to 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
8
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CAREADVANTAGE, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION OR PLAN OF OPERATION
termination upon certain events. A portion of the options vest immediately and
the remainder vest over 3 years. In connection with these grants, and subject to
stockholder approval, the Board amended the Stock Option Plan to increase the
number of shares authorized for issuance from 10% to 18% of the Company's
authorized Common Stock, and it amended the Company's Directors' Stock Option
Plan to provide the Board (or a committee thereof) with increased discretion in
the terms and conditions of stock options it may award.
Proposed Amendment of Certificate of Incorporation
Subject to stockholder approval, as of January 26, 1999, the Board amended the
Company's Certificate of Incorporation, as amended, to increase the number of
authorized shares of the Company's Common Stock from 90,000,000 shares to
103,600,000 shares.
General Overview
At January 31, 1999, the Company had a working capital surplus of approximately
$1,145,000, stockholders equity of approximately $3,737,000 and an accumulated
deficit of approximately $18,365,000 since inception. By continuing to provide
high quality care cost containment services to its existing customer base of
four BCBS plans, management believes it can continue to market its products to
other BCBS plans. This strategy is particularly significant given the current
health care environment where large third-party payers are merging in an effort
to protect their respective franchises and expand their market reach. The
various BCBS plans throughout the country are no exception to this phenomenon
and the Company believes it can leverage its core competencies to participate in
this consolidating environment.
Management is of the opinion that it must continue to refine its current service
lines in order to continue to add value to existing and potential customers.
Additionally, the Company intends to broaden its services offered with unique
and complementary cost-containment strategies. Management will evaluate each
service with regard to anticipated changes in the health care industry, the cost
to enter any such line of service as well as the availability of competent
resources. To further expand its line of services, the Company intends to pursue
alternatives to its internal products and service development efforts by
entering into strategic alliances and joint ventures as well as through
acquisitions.
Three Months Ended January 31, 1999 Compared With Three Months Ended January 31,
1998
Net revenues: Three Months Ended
------------------
January 31, 1999 January 31, 1998
---------------- ----------------
Amount Percent Amount Percent
------ ------- ------ -------
Revenues from fixed fee
arrangements $3,992,000 98% $3,803,000 95%
Revenues from performance-
based arrangements 62,000 2% 196,000 5%
Other revenues 2,000 0% 3,000 0%
---------- --- ---------- ---
Total revenues $4,056,000 100% $4,002,000 100%
========== === ========== ===
9
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CAREADVANTAGE, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION OR PLAN OF OPERATION
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 behind 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 three months
ended January 31, 1999 are accurate based upon the data available to management.
However, information received by the Company after the filing of this Form
10-QSB could result in an adjustment of its estimates of performance-based
revenues (which would be reflected in subsequent quarters, if necessary).
Revenues:
Net revenues for the three-month periods ended January 31, 1999 and 1998 were
approximately $4,056,000 and $4,002,000, respectively, representing an increase
of approximately $54,000. This increase is largely due to increased revenue from
the Company's major customers as a result of the re-negotiation of their
contracts.
Revenues from at-risk performance-based service contracts generally tend to
follow a pattern whereby significant revenues are generated during the initial
term of the contract, as savings opportunities are the greatest. Revenues
decline thereafter, as the opportunity for additional savings diminishes. As a
result, the Company's ability to increase revenues and gross margins is
dependent upon its ability to enter into additional contracts with new customers
and/or expand the services provided to existing customers.
Cost of services:
Cost of services for the three-month periods ended January 31, 1999 and 1998
were approximately $2,009,000 and $2,027,000, respectively, representing a
decrease of approximately $18,000. This decrease in the cost of services was due
to decreases of approximately $76,000 in professional costs, travel costs of
approximately $10,000, and other costs of approximately $7,000 offset by
increases in personnel costs of approximately $75,000.
Operating expenses:
Selling, general and administrative:
Selling, general and administrative costs for the three-month period ended
January 31, 1999 and 1998 were approximately $1,626,000 and $1,536,000,
respectively. The increase in selling, general and administrative costs of
approximately $90,000 is largely due to increases in personnel costs of
approximately $30,000, facility costs of approximately $6,000, travel costs of
approximately $4,000, information and communication costs of approximately
$10,000 and promotional and advertising costs of approximately $101,000,
primarily offset by decreases in professional and consulting costs of
approximately $61,000. The Company experienced increased marketing and sales
costs during the period ended January 31, 1999. 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 reduction in costs may be offset to
some extent, by anticipated increases in selling, marketing and service
development costs. There is no assurance, however, that the Company will be
successful in reducing general and administrative costs by any significant
amount.
Depreciation and amortization:
Depreciation and amortization costs for the three-month periods ended January
31, 1999 and 1998 were approximately $324,000 and $263,000 respectively, of
which approximately $135,000 and $135,000 were included in costs of services
respectively.
10
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CAREADVANTAGE, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION OR PLAN OF OPERATION
Interest expense:
Net interest (income)/expense for the three months ended January 31, 1999 and
1998 was approximately ($10,000) and $73,000, respectively, representing a
decrease of approximately $83,000. The decrease in net interest expense is
largely due to decreased interest costs under the Master Lease Agreement (the
"Master Lease Agreement") with IBM Credit Corporation ("IBM") of approximately
$17,000, decreased interest costs related to the 8% Exchangeable Note in the
original principal amount of $2,000,000, maturing on June 30, 1998 issued by the
Company to CW Ventures II, L.P. (the "CW Note") of approximately $40,000, and
decreased interest costs under the Horizon Blue Cross and Blue Shield of New
Jersey, Inc. Note (the "Horizon BCBSNJ Note") of approximately $3,000. In
addition, the Company realized increased interest income of approximately
$23,000 from the Company's short-term investments.
Liquidity and capital resources:
At January 31, 1999, the Company had cash of approximately $2,924,000 and a
working capital surplus of approximately $1,145,000. At October 31, 1998, the
Company had cash of approximately $3,745,000 and a working capital surplus of
approximately $1,077,000. The increase in working capital surplus of
approximately $68,000 is largely due to increased operating income generated
during the three-month period ended January 31, 1999.
Net cash provided/(used) from operating activities amounted to approximately
($212,000) and $772,000 for the three-month periods ended January 31, 1999 and
1998, respectively. This cash usage for 1999 operating activities is largely due
to an accounts payable decrease of approximately $118,000, a decrease in accrued
expenses and other liabilities of $584,000 and decrease of approximately $44,000
in deferred revenue, an increase in other assets of approximately $293,000
largely due to clinical software license purchases and prepaid recruiting fees
offset by an increase in customer receivables of approximately $265,000 and
noncash charges of approximately $320,000.
Net cash used in investing activities amounted to approximately ($79,000) and
($361,000) for the three-month periods ended January 31, 1999 and 1998,
respectively. The decrease in cash used of approximately ($282,000) is due to
decreased capital outlays for computer-related equipment incurred during the
three-month period ended January 31, 1999.
Net cash used in financing activities amounted to approximately ($530,000) and
($138,000) for the three-month periods ended January 31, 1999 and 1998,
respectively. The increase in cash (used) of approximately ($392,000) is largely
due to increased principal payments to stockholder of approximately ($376,000)
and increased principal payments related to the Master Lease Agreement with IBM
of approximately ($16,000).
While there can be no assurances, management believes that its cash on hand,
projected future cash flows from operations and the Company's borrowing capacity
under its credit facility with Summit Bank (see discussion below at Financing)
will provide adequate capital resources to support the Company's anticipated
cash needs for the balance of the fiscal year, which ends on October 31, 1999.
11
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CAREADVANTAGE, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION OR PLAN OF OPERATION
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 if other
companies with which the Company does business fail to timely complete their
Year 2000 modifications, the Company's results of operations and cash flows
could be adversely affected.
Financing:
Amounts payable pursuant to long-term financing arrangements as of January 31,
1999 were approximately $268,000, consisting of capital lease obligations
pursuant to the Master Lease Agreement for the financing of computer and
telephone equipment, installation, software and related system integration
expenses. The term of the Master Lease is four years; it expires in 1999 and
bears interest at 11.39% per annum. Horizon Blue Cross and Blue Shield of New
Jersey, formerly known as Blue Cross and Blue Shield of New Jersey, Inc.
("Horizon BCBSNJ") guarantees the Company's obligations under the Master Lease
Agreement.
Pursuant to the Horizon BCBSNJ Note, the Company owes $1,654,000, including
approximately $167,000 of accrued interest, to Horizon BCBSNJ as of January 31,
1999. The Horizon BCBSNJ Note provides for equal monthly payments of principal
and interest commencing on October 1, 1998 and ending on June 30, 2000, at which
time the principal of the note is payable and due in full. The Horizon BCBSNJ
Note bears interest at a five-year U.S. treasury yield, adjusted quarterly.
While there can be no assurances that future operating results will be
sufficient to fund this obligation of the Company, management expects such
amounts to be funded through operations.
Effective June 30, 1998, the CW Note (plus $377,000 accrued interest) was
automatically converted into 7,799,997 shares of the Company's Common Stock in
accordance with the terms of the CW Note, and the CW Note was then canceled.
The Company has a credit facility with Summit Bank (the "Bank") that provides
for a $1,500,000 working capital revolver to be used for general working capital
needs, which has been extended through September 3, 1999. In September of 1998,
the Bank issued an irrevocable letter of credit in the amount of $250,000 for
the account of the Company in favor of a vendor as security for the Company's
obligation under a non-cancelable operating lease. This letter of credit is
issued under the Company's credit facility and the availability is thus reduced
by the face amount of the letter of credit. The remainder of the credit facility
is available to the Company.
Future financing needs:
In connection with management's decision to more effectively streamline its
operations, as well as increased emphasis on developing in-house data management
capabilities and training and educational programs for its clinical staff and
customers, the Company expects to incur additional leasehold improvement,
software and computer hardware costs during the first and second quarter of
fiscal year 1999 of approximately $300,000. Such costs are expected to be
financed with the Company's current cash reserves and future operating cash
flows.
12
<PAGE>
CAREADVANTAGE, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION OR PLAN OF OPERATION
PART II--OTHER INFORMATION
Item 1. Legal Proceedings
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 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. On February 17, 1999, the
Company was advised by Allied's counsel that Allied was rescinding the
Notice and requesting the termination of the arbitration proceeding since
there was no longer a dispute. The Company, however, is seeking to
continue the arbitration to recover its loss of benefits under the Joint
Services Agreement during the period of Allied's putative termination.
For a description of other legal proceedings, see Note C to the Financial
Statements.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 27--Financial Data Schedule
(b) Reports on Form 8-K--None
13
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
CareAdvantage, Inc.
March 12, 1999 /s/ David G. Noone
----------------------------------
David G. Noone
Chief Executive Officer
March 12, 1999 /s/ David G. DeBoskey
----------------------------------
David G. DeBoskey
Principal Financial and Accounting
Officer
14
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<PERIOD-START> NOV-01-1998
<PERIOD-END> JAN-31-1999
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