SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
COMMISSION FILE NUMBER 0-26168
CAREADVANTAGE, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 52-1849794
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification Number)
485-C Route 1 South, Iselin, New Jersey 08830
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (732) 602-7000
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes _X_ No___
82,189,883
Number of shares of Common Stock outstanding as of November 10, 1999
Transitional Small Business Disclosure Format
Yes___ No_X_
<PAGE>
CareAdvantage, Inc. and Subsidiaries
Form 10-QSB
For the nine months ended September 30, 1999
I N D E X
---------
Part I - Financial Information
Item 1. Financial Statements
o Condensed Consolidated Balance Sheets -
September 30, 1999 (Unaudited) and December 31, 1998 (Audited)...2
o Condensed Consolidated Statements of Operations (Unaudited) -
Three and Nine months ended September 30, 1999 and
October 31, 1998.................................................3
o Condensed Consolidated Statements of Cash Flows (Unaudited) -
Nine months ended September 30, 1999 and October 31, 1998........4
o Notes to Condensed Consolidated Financial Statements.............5
(Unaudited)
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations...................8
Part II - Other Information
Item 1. Legal Proceedings..............................................14
Item 2. Changes in Securities..........................................14
Item 3. Defaults Upon Senior Securities............................... 14
Item 4. Submission of Matters to a Vote of Security Holders............14
Item 5. Other Information .............................................15
Item 6. Exhibits and Reports on Form 8-K...............................15
Signature.................................................................16
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
<TABLE>
<CAPTION>
CAREADVANTAGE, INC
CONSOLIDATED BALANCE SHEETS
September 30, December 31,
1999 1998
ASSETS Unaudited Audited
--------- -------
<S> <C> <C>
Current assets:
Cash and cash equivalents $1,786,000 $3,354,000
Accounts receivable for services:
Stockholder 1,094,000 1,080,000
Other 158,000 315,000
Other current assets 187,000 159,000
------- -------
Total current assets 3,225,000 4,908,000
Property and equipment, at cost less accumulated depreciation 916,000 1,279,000
Intangible assets 1,565,000 1,695,000
Other assets 263,000 243,000
------- -------
Total Assets $5,969,000 $8,125,000
=========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of capital lease obligation $ 0 $ 319,000
Accounts payable 174,000 193,000
Due to stockholder 927,000 1,153,000
Due to customer 902,000 902,000
Accrued salaries and employee benefits 807,000 959,000
Accrued expenses and other current liabilities 163,000 483,000
Deferred revenue, current 141,000 184,000
------- ---------
Total current liabilities 3,114,000 4,193,000
Due to stockholder, less current portion 0 429,000
Deferred revenue and other liabilities, less current portion 0 87,000
-- ----------
Total Liabilities 3,114,000 4,709,000
--------- ---------
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 103,600,000 shares; issued
and outstanding 82,189,883 and 82,189,883 82,000 82,000
Additional capital 22,052,000 22,009,000
Accumulated deficit (19,279,000) (18,675,000)
------------ -------------
Total Stockholders' Equity 2,855,000 3,416,000
--------- -------------
Total Liabilities and Stockholders' Equity $ 5,969,000 $ 8,125,000
=========== =============
</TABLE>
The accompanying notes are an integral part of these statements.
2
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<TABLE>
<CAPTION>
CAREADVANTAGE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended Nine Months Ended
Sept 30, Oct 31, Sept 30, Oct 31,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net revenues $4,184,000 $6,025,000 $12,013,000 $14,900,000
Costs of services 2,339,000 1,940,000 6,585,000 5,876,000
---------- ---------- --------- ---------
Gross margin 1,845,000 4,085,000 5,428,000 9,024,000
--------- --------- --------- ---------
Operating expenses:
Selling, general and administration 1,643,000 2,032,000 5,435,000 5,416,000
Depreciation and amortization 213,000 173,000 629,000 477,000
------- ------- ------- -------
Total operating expenses 1,856,000 2,205,000 6,064,000 5,893,000
--------- --------- --------- ---------
Operating (loss)/income (11,000) 1,880,000 (636,000) 3,131,000
Net interest income/(expense) 14,000 (8,000) 32,000 (122,000)
------- ------- ------ ---------
Net (loss)/income before provision 3,000 1,872,000 (604,000) 3,009,000
for taxes
Provision for taxes 101,000 165,000
----- ---------- --------- ---------
Net (loss)/income 3,000 1,771,000 (604,000) 2,844,000
===== ========= ========= =========
Net (loss)/income
per share of common stock-basic and diluted $.00 $.02 ($.01) $.04
==== ==== ===== ====
Weighted average number
of common shares outstanding 93,700,000 82,190,000 82,190,000 77,857,000
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
3
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<TABLE>
<CAPTION>
CAREADVANTAGE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended
Sept 30, Oct 31,
1999 1998
---- -----
<S> <C> <C>
Cash flows from operating activities:
Net (loss)/profit $(604,000) $2,844,000
Adjustments to reconcile net (loss) /profit
to net cash (used by)/provided from
operating activities:
Depreciation and amortization 961,000 882,000
Compensation due to option issuance 43,000 0
Change in assets and liabilities:
Due to/from customers/stockholders 183,000 (193,000)
Other assets (48,000) 170,000
Accounts payable (19,000) (477,000)
Accrued expenses and other liabilities (472,000) 728,000
Deferred revenue (130,000) (310,000)
--------- ---------
Net cash (used by) /provided from
operating activities (86,000) 3,644,000
-------- ---------
Cash flows from investing activities:
Capital expenditures (468,000) (772,000)
--------- --------
Net cash (used by) investing
activities (468,000) (772,000)
--------- ---------
Cash flows from financing activities:
Principal payments to stockholder (695,000) (0)
Principal payments under long-term debt (319,000) (438,000)
--------- ---------
Net cash (used by) financing
Activities (1,014,000) (438,000)
------------ ---------
Net (decrease)/increase in cash (1,568,000) 2,434,000
Cash - beginning of fiscal year 3,354,000 1,311,000
--------- ---------
Cash - end of period $1,786,000 $3,745,000
========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
4
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CAREADVANTAGE, INC.
NOTES TO THE FINANCIAL STATEMENTS
Note A--Basis of preparation:
Fiscal Year Change:
On June 8, 1999, CareAdvantage, Inc. ("CAI" or the "Company") changed its fiscal
year from one ending October 31 to a calendar year ending December 31. The
Company has not recast data for the comparative periods as such recasting is not
practicable. Additionally, the Company does not experience seasonality in its
results of operations and cash flows and such a restatement is not cost
justified. The Company has prepared its financial statements for the calendar
quarters ended September 30, 1999 compared to the fiscal quarters ended October
31, 1998 (for the most recent three- and nine-month periods). The Company
believes such a comparison to the periods ended October 31, 1998 provides a
reliable basis for comparing changes in its results of operations and cash flows
for the periods ended September 30, 1999.
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
September 30, 1999 and for all periods presented.
Certain information and note disclosures required to be included in the
financial statements prepared in accordance with generally accepted accounting
principles have been omitted. These consolidated financial statements should be
read in conjunction with the consolidated financial statements and notes thereto
included with the Company's October 31, 1998 Annual Report on Form 10-KSB filed
with the Securities and Exchange Commission on January 29, 1999 and the 10-KSB
for the Transition period November 1, 1998 through December 31, 1998 filed on
September 3, 1999.
The results of operations for the period ended September 30, 1999 are not
necessarily indicative of operating results to be expected for the full year.
Note B--Per share data:
Basic net income per share has been computed based on the weighted average
number of shares outstanding during the periods. In the 1998 periods and for the
three months ended September 30, 1999, the dilutive effect of stock options is
included in the calculation of diluted earnings per share using the treasury
stock method. For the nine months ended September 30, 1999, common stock
equivalents are anti-dilutive.
Note C--Contingencies:
Potential uninsured exposure to litigation:
a) The Company has been named as a party in an action entitled ROBERT T. CARUSO
v. CARE ADVANTAGE, INC., JOHN J.PETILLO, VINCENT M. ACHILLARE, LAWRENCE A.
WHIPPLE, AND HORIZON BLUE CROSS BLUE SHIELD OF NEW JERSEY, INC. ET AL., which
was filed in Superior Court of New Jersey on August 12, 1998. Messrs. Petillo,
Achillare and Whipple were officers of the Company and may have claims for
indemnification for expenses and for any judgments against them in this case.
Mr. Caruso was a consultant to the Company. The complaint alleges breach of
contract, fraud, conspiracy, promissory estoppel and negligent misrepresentation
in connection with, among other things, the termination of Mr. Caruso's
consulting arrangement with the Company. The Plaintiff seeks treble damages for
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 and to pay their reasonable defense costs. The parties to this
litigation are currently taking discovery. Until discovery has been completed,
the Company has insufficient information regarding its potential exposure in
this matter.
5
<PAGE>
b) On or about January 16, 1998, an action entitled MARY DESTEFANO v.CARE
ADVANTAGE, INC., CAROL MANZELLA, and THOMAS P. RILEY (the "DeStefano Action")
was filed in the Superior Court of New Jersey. The complaint alleges that (i)
the plaintiff was terminated from her employment with the Company in retaliation
for her complaints regarding alleged violations of state and federal labor laws
and (ii) the Company violated the New Jersey Wire Tapping and Electronic
Surveillance Control Act. The complaint did not demand an amount of specific
monetary damages. The defendants have denied liability in all respects. On July
7, 1998, the Company was advised by its insurance carrier that it will provide a
defense to all defendants named in the complaint. However, the Company's
insurance carrier has also advised that it will not pay any judgment adverse to
the insured which establishes the act of deliberate dishonesty committed by the
insured with actual dishonest purpose and intent and material to the cause of
the action so adjudicated. Under the terms of the policy, "insured" includes the
Company and its officers and directors. The Company has retained separate
counsel to represent it in the litigation for purposes of this exclusion.
Plaintiff has advised the Company that her damages are believed to exceed
$250,000 and she has also asserted a claim for punitive damages. The Company is
contesting this lawsuit vigorously. The parties to this litigation are currently
taking discovery, and no trial date has been set. Until discovery has been
completed, the Company has insufficient information regarding its potential
exposure in this matter.
Note D - Supplemental Cash Flow Information:
Below is supplemental cash flow information related to the nine months ended
September 30, 1999 and October 31, 1998:
September 30, October 31,
1999 1998
---- ----
Income taxes paid 115,000 113,000
Interest paid 53,000 64,000
Note E - Stock Option Grant and 1996 Stock Option Plan Amendment
On January 8, 1999, the Board of Directors of the Company ("Board") granted
stock options for 3,600,000 shares of Common Stock of the Company to David
Noone, its Chief Executive Officer, in connection with Mr. Noone's employment
agreement. The options have an exercise price of $.03 per share and a term of 10
years. Options for 1,800,000 shares shall become exercisable as follows: (a) 1/3
on December 31, 1999; and (b) the remaining 2/3 shall become exercisable in
equal monthly amounts over the period January 1, 2000, to December 31, 2001.
Options for the remaining 1,800,000 shares originally were to become exercisable
over a period of 3 years commencing January 8, 2000 if certain performance
criteria were met. On February 24, 1999, the Board approved an amendment to
6
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these options. Under the terms of this amendment the options for the remaining
1,800,000 shares shall become exercisable in three equal annual installments on
the fourth, fifth and sixth anniversary of the date of grant subject to
acceleration upon achievement of certain performance targets. The Company
realized compensation costs related to this amendment of approximately $252,000
and is amortizing this cost over the six year vesting period of the options,
unless achievement of performance targets mandates accelerated amortization. In
connection with this grant, the Board amended the Company's 1996 Stock Option
Plan (the "Stock Option Plan") to provide the Board (or a Committee thereof)
with increased discretion in the terms and conditions of stock options it may
award.
On January 26, 1999, the Board granted stock options, constituting an aggregate
of 10,556,000 shares of Common Stock of the Company, to various employees, a
director and a former employee of the Company. The options have an exercise
price of $.08 per share and a term of 10 years subject to earlier termination
upon certain events. A portion of the options vests immediately and the
remainder vests over 3 years. In connection with these grants, 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 (the "Directors Stock Option Plan")
to provide the Board with increased discretion in the terms and conditions of
stock options it may award.
In addition, on January 26, 1999, 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.
On July 7, 1999, the Company's stockholders approved the foregoing amendments to
the Company's Stock Option Plan, the amendments to the Company's Directors Stock
Option Plan and the amendment to the Company's Certificate of Incorporation.
(See Part II, item 4)
7
<PAGE>
CAREADVANTAGE, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
FORWARD LOOKING STATEMENTS:
Certain statements in this Form 10-QSB may constitute "forward-looking
statements" contemplated under the Private Securities Litigation Reform Act of
1995, including those concerning management's plans, intentions and expectations
with respect to future financial performance and future events and the outcome
of pending litigation, particularly relating to revenues from performance-based
services and re-negotiations of existing and new contracts with customers. Such
statements involve known and unknown risks, uncertainties and contingencies,
many of which are beyond the control of the Company, and which could cause
actual results and outcomes to differ materially from those expressed herein.
Although the Company believes that its plans, intentions and expectations
reflected in such forward looking statements are reasonable, it can give no
assurance that such plans, intentions or expectations will be achieved. Certain
risk factors exist, such as the ability to generate new business, the Company's
inability to prevent its customers from terminating existing contracts by
invoking standard termination clauses, as well as other inherent contractual
risks, which are beyond the control of the Company, could have a material
adverse impact on the Company or prevent the Company from achieving the growth
or obtaining the results discussed. For a more complete discussion of these and
other risk factors, please see "Cautionary Statements in Item 6 of the Company's
Form 10-KSB for the fiscal year ended October 31, 1998 filed with the Securities
and Exchange Commission on January 29, 1999 and the 10-KSB for the Transition
period November 1, 1998 through December 31, 1998 filed on September 3, 1999.
GENERAL OVERVIEW:
The Company is a holding company which, through its 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 provide optimal levels of care 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 Blue Cross/Blue Shield health services
organizations in the Northeastern United States.
RESULTS OF OPERATIONS:
The following discussion compares the Company's results of operations for the
three and nine months ended September 30, 1999, with those for the three and
nine months ended October 31, 1998.
Three Months Ended September 30,1999, Compared to Three Months Ended October
31, 1998
Revenues:
The Company's total operating revenues for the three-month periods ended
September 30, 1999 and October 31, 1998 were approximately $4,184,000 and
$6,025,000, respectively. This represents a decrease of approximately $1,841,000
for the three-month period ended September 30, 1999 from the corresponding
period of the prior fiscal year. The decrease for the three months ended
September 30, 1999 is largely due to decreased revenue of approximately $470,000
on account of the termination of the Allied Health Group, Inc. agreement, and
decreased revenue of approximately $1,435,000 from the Company's major customers
related to the realization of one-time performance revenues during the prior
fiscal year.
The Company's ability to increase revenues and gross margins is dependent upon
its ability to enter into additional contracts with new customers and/or expand
the services provided to existing customers. Although the Company is pursuing an
aggressive marketing and sales campaign to increase its revenues, including a
proposal to Michigan Blue Cross and Blue Shield ("Michigan BCBS") to assume
responsibility for its entire care management program, there can be no assurance
that the Company will enter into an agreement with Michigan BCBS or otherwise be
successful in increasing its revenues.
8
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Cost of services:
The Company's total direct cost of services for the three-month periods ended
September 30, 1999 and October 31, 1998 was approximately $2,339,000 and
$1,940,000, respectively. This represents an increase of approximately $399,000
for the three-month period ended September 30, 1999 over the corresponding
period of the prior fiscal year. This increase in the cost of services for the
three-month period ended September 30, 1999 was primarily due to increases in
personnel costs related to additional hiring of operational staff to support
increased membership.
Operating expenses:
Selling, general, and administrative:
The Company's total selling, general, and administrative costs for the
three-month periods ended September 30, 1999 and October 31, 1998 were
approximately $1,643,000 and $2,032,000, respectively. This represents an
decrease of approximately $389,000 for the three-month period ended September
30, 1999 over the corresponding period of the prior fiscal year. This decrease
for the three-month period ended September 30, 1999 is largely due to decreases
in personnel costs of approximately $243,000, professional and consulting costs
of approximately $107,000, and other general and administrative costs of
approximately $181,000 of which a decrease of approximately $40,000 for fees and
licenses is included, offset by an increase in information and communication
costs of approximately $142,000. Management has taken and intends to take
additional steps to reduce general and administrative costs. There is no
assurance, however, that the Company will be successful in reducing general and
administrative costs by any significant amount.
Depreciation and amortization:
The Company's total depreciation and amortization costs for the three-month
periods ended September 30, 1999 and October 31, 1998 were approximately
$307,000 and $308,000, respectively. Approximately $94,000 and $135,000 were
included in cost of services for such periods.
Interest expense:
The Company's total net interest income/(expense) for the three-month periods
ended September 30, 1999 and October 31, 1998 was approximately $14,000 and
($8,000), respectively. This represents a decrease of approximately $22,000 in
net interest expense for the three-month periods ended September 30, 1999 from
the corresponding period of the prior fiscal year. The decrease in net interest
expense is largely due to decreased interest costs of approximately $14,000
under the Master Lease Agreement with IBM Credit Corporation ("IBM") and
decreased interest costs of approximately $23,000 related to the Horizon BCBSNJ
Note, offset by decreased interest income of approximately $15,000 from the
Company's short-term investments.
Nine Months Ended September 30, 1999, Compared to Nine Months Ended October 31,
1998
Revenues:
The Company's total operating revenues for the nine-month periods ended
September 30, 1999 and October 31, 1998 were approximately $12,013,000 and
$14,900,000, respectively. This represents a decrease of approximately
$2,887,000 for the nine-month period ended September 30, 1999 over the
corresponding period of the prior fiscal year. The decrease for the nine-month
period ended September 30, 1999 is largely due to decreased revenue of
approximately $1,187,000 related to the termination of the Allied Health Group,
Inc. agreement and decreased revenue of approximately $1,660,000 from the
Company's major customers related to the realization of one-time performance
revenues during the prior fiscal year.
9
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Cost of services:
The Company's total direct cost of services for the nine-month periods ended
September 30, 1999 and October 31, 1998, was approximately $6,585,000 and
$5,876,000, respectively. This represents an increase of approximately $709,000
for the nine-month period ended September 30, 1999 over the corresponding period
of the prior fiscal year. This increase in the cost of services for the
nine-month period ended September 30, 1999 was primarily due to increases in
personnel costs related to additional hiring of operational staff to support
increased membership.
Operating expenses:
Selling, general and administrative:
The Company's total selling, general, and administrative costs for the
nine-month periods ended September 30, 1999 and October 31, 1998 were
approximately $5,435,000 and $5,416,000, respectively. This represents an
increase of approximately $19,000 for the nine-month period ended September 30,
1999 over the corresponding period of the prior fiscal year. This increase for
the nine-month period ended September 30, 1999 is due to increases in personnel
costs of approximately $76,000, travel costs of approximately $80,000, and
information and communication costs of approximately $184,000, offset by
decreases in professional and consulting costs of approximately $284,000,
including approximately $150,000 due to decreased legal fees, and other general
and administrative costs of approximately $37,000. The Company experienced
increased marketing and sales costs during the nine-month period ended September
30, 1999. 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:
The Company's total depreciation and amortization costs for the nine-month
periods ended September 30, 1999 and October 31, 1998 were approximately
$1,004,000 and $882,000, respectively. This increase of approximately $122,000
is largely due to amortization related to internally developed software costs of
approximately $216,000, offset by decreases in amortization related to license
fees of approximately $55,000 and decreased depreciation of approximately
$34,000 related to computer equipment. Approximately $375,000 and $405,000 were
included in costs of services for such periods.
Interest expense:
The Company's net interest income/(expense) for the nine-month periods ended
September 30, 1999 and October 31, 1998 was approximately $32,000 and
($122,000), respectively. This represents a decrease in net interest expense of
approximately $154,000 for the nine-month periods ended September 30, 1999 from
the corresponding period of the prior fiscal year. The decrease in net interest
expense is largely due to decreased interest costs under the Master Lease
Agreement with IBM of approximately $47,000, decreased interest costs of
approximately $67,000 related to the CW Note, which was converted to common
stock on June 30, 1998, and decreased interest costs under the Horizon BCBSNJ
Note of approximately $49,000, offset by increased interest income of
approximately $9,000 from the Company's short-term investments.
LIQUIDITY, FINANCIAL CONDITION AND CAPITAL RESOURCES:
General overview:
At September 30, 1999, the Company had net working capital of approximately
$111,000, stockholders equity of approximately $2,855,000 and an accumulated
deficit since its inception of approximately $19,279,000. By continuing to
provide high quality care cost containment services to its existing customer
base of five BCBS plans, management believes it can continue to market its
products to other BCBS plans. This strategy is particularly significant given
the current health care environment where large third-party payers are merging
in an effort to protect their respective franchises and expand their market
reach. The various BCBS plans throughout the country are no exception to this
10
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phenomenon and the Company believes it can leverage its core competencies to
participate in this consolidating environment.
Management is of the opinion that it must continue to refine its current service
lines in order to continue to add value to existing and potential customers.
Additionally, the Company intends to broaden its services offered with unique
and complementary cost-containment strategies. Management will evaluate each
service with regard to anticipated changes in the health care industry, the cost
to enter any such line of service as well as the availability of competent
resources. To further expand its line of services, the Company intends to pursue
alternatives to its internal products and service development efforts by
entering into strategic alliances and joint ventures as well as through
acquisitions.
Financial condition:
At September 30, 1999, the Company had cash of approximately $1,786,000 and net
working capital of approximately $111,000. At December 31, 1998, the Company had
cash of approximately $3,354,000 and a net working capital of approximately
$715,000.
Net cash (used by)/provided from operating activities amounted to approximately
($86,000) and $3,644,000 for the nine-month periods ended September 30, 1999 and
October 31, 1998, respectively. The cash used by 1999 operating activities is
largely due to a $604,000 net loss, a decrease in accrued expenses and other
liabilities of approximately $472,000, and a decrease of approximately $130,000
in deferred revenue, offset by non-cash charges of approximately $1,004,000, and
a decrease in customer receivable of approximately $183,000.
Net cash used in investing activities amounted to approximately $468,000 and
$772,000 for the nine-month periods ended September 30, 1999 and October
31,1998, respectively. The decrease in cash used of approximately $304,000 is
due to decreased capital outlays for computer-related equipment and internally
developed software costs incurred during the nine-month period ended September
30, 1999.
Net cash used in financing activities amounted to approximately $1,014,000 and
$438,000 for the nine-month periods ended September 30, 1999 and October 31,
1998, respectively. The increase in cash used of approximately $576,000 is
largely due to increased principal payments to a stockholder/customer of
approximately $695,000 offset by decreased principal payments related to the
Master Lease Agreement with IBM of approximately $119,000.
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, which expires on January 31, 2000
(see discussion below under Capital Resources), will provide adequate capital
resources to support the Company's anticipated cash needs for the next twelve
months.
Capital resources:
Pursuant to the Horizon BCBSNJ Note, the Company owes $887,000 to Horizon BCBSNJ
as of September 30, 1999. The Horizon BCBSNJ Note provides that principal shall
be amortized through equal monthly payments of principal and interest from
October 1, 1998 through June 30, 2000, at which time the principal of the note
is scheduled to be paid in full. The Horizon BCBSNJ Note bears interest at a
five-year U.S. treasury yield, adjusted quarterly. While there can be no
assurances that future operating results will be sufficient to fund this
obligation of the Company, management expects such amounts to be funded through
operations.
The Company has a credit facility with Summit Bank (the "Bank") that provides
for a $1,500,000 working capital revolver to be used for general working capital
needs, which has been extended through January 31, 2000. Horizon BCBSNJ
currently guarantees this obligation for the Company, however, Horizon BCBSNJ
has verbally notified the Company that it will not guarantee this facility after
the January 31, 2000 expiration date. The Company is in the process of seeking a
credit facility from another lender, however, there are no guarantees that the
Company will be successful in securing an additional credit facility after
January 31, 2000. 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
11
<PAGE>
lease. This letter of credit is issued under the Company's credit facility and
the availability is thus reduced by the face amount of the letter of credit. The
remainder of the credit facility is available to the Company.
In connection with management's intention to more effectively streamline its
operations, as well as increased emphasis on developing in-house data management
capabilities and training and educational programs for its clinical staff and
customers, the Company expects to incur additional leasehold improvement,
software and computer hardware costs during the fourth quarter of calendar 1999
of approximately $100,000. Such costs are expected to be financed with the
Company's current cash reserves and future operating cash flows.
YEAR 2000:
POTENTIAL IMPACT OF YEAR 2000 COMPUTER ISSUES OVERVIEW:
The year 2000 computer problem is the inability of computer systems which
store dates by using the last two digits of the year (i.e. "98" for "1998") to
reliably recognize that dates after December 31, 1999 are later than, and not
before, 1999. For instance, the date January 1, 2000, may be mistakenly
interpreted as January 1, 1900, in calculations involving dates on systems that
are non-year 2000 compliant. The Company relies on information technology ("IT")
systems and other systems and facilities such as telephones, building access
control systems and heating and ventilation equipment ("Embedded Systems") to
conduct its business. These systems are potentially vulnerable to year 2000
problems due to their use of date information. The Company also has business
relationships with customers and health care providers and other critical
vendors who are themselves reliant on IT and Embedded Systems to conduct their
businesses.
STATE OF READINESS:
The Company's IT systems are largely centralized, with substantially all
systems maintained in the Company's corporate headquarters in Iselin, New
Jersey, the Company has developed its own standards for systems which include
both purchased and internally-developed software. The Company's IT hardware
infrastructure is built mainly around mid-range computers and IBM PC-compatible
servers and desktop systems. The Company's principal means of ensuring year 2000
readiness for purchased software has been the replacement, upgrade or repair of
non-compliant systems. This replacement process would have been undertaken for
business reasons irrespective of the year 2000 problem; however, it would, more
than likely, have been implemented over a longer period of time. The Company's
internally-developed software was either designed to be year 2000 ready from
inception or is in the process of being modified to be year 2000 ready.
Substantially all of the Company's mid-range IT hardware has been remediated to
a state of year 2000 readiness, with the remainder scheduled to be remediated by
the end of the fourth calendar quarter of 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 calendar year 1999. The Company leases most of
the office space in which its reliance on Embedded Systems presents a potential
problem and is currently working with the respective lessors to identify and
correct any potential year 2000 problems related to these Embedded Systems. The
Company believes that its year 2000 projects generally are on schedule.
12
<PAGE>
EXTERNAL RELATIONSHIPS:
The Company also faces the risk that one or more of its critical suppliers or
customers ("External Relationships") will not be able to interact with the
Company due to the third party's inability to resolve its own year 2000 issues,
including those associated with its own External Relationships. The Company is
attempting to determine the overall year 2000 readiness of its External
Relationships. In the case of significant customers and mission critical
suppliers such as banks, telecommunications providers and other utilities and IT
vendors, the Company is engaged in discussions with the third parties and is
attempting to obtain detailed information as to those parties' year 2000 plans
and state of readiness. The Company, however, does not have sufficient
information at the current time to predict whether its External Relationships
will be year 2000 ready.
YEAR 2000 COSTS:
Total costs incurred solely for remediation of potential year 2000 problems are
currently estimated to be approximately $100,000 in calendar year 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 capitalizes certain costs that
extend the useful life of such assets and expense costs that do not extend the
assets life. Year 2000 readiness is critical to the Company. The Company has
re-deployed some resources from non-critical system enhancements to address year
2000 issues. Due to the importance of IT systems to the Company's business,
management has deferred non-critical systems enhancements to become year 2000
ready. The Company does not expect these redeployments and deferrals to have a
material impact on the Company's financial condition or results of operations.
RISKS AND CONTINGENCY/RECOVERY PLANNING:
If the Company's year 2000 issues were unresolved, the most reasonably likely
worst case scenario would include, among other possibilities, the inability to
accurately and timely authorize and process benefits and medical stays,
accurately bill customers, assess claims exposure, determine liquidity
requirements, report accurate data to management, stockholders, customers,
regulators and others, business interruptions or shut downs, financial losses,
reputational harm, loss of significant customers, increased scrutiny by
regulators and litigation related to year 2000 issues. The Company is attempting
to limit the potential impact of the year 2000 by monitoring the progress of its
own year 2000 project and those of its critical External Relationships and by
developing contingency/recovery plans. The Company cannot guarantee that it will
be able to resolve all of its year 2000 issues. Any critical unresolved year
2000 issues at the Company or its External Relationships, however, could have a
material adverse effect on the Company's results of operations, liquidity or
financial condition. The Company has developed, or is developing,
contingency/recovery plans aimed at ensuring the continuity of critical business
functions before and after December 31, 1999. As part of that process, the
Company has substantially completed the development of manual work alternatives
to automated processes which will both ensure business continuity and provide a
ready source of input to affected systems when they are returned to an
operational status. These manual alternatives presume, however, that basic
infrastructure such as electrical power and telephone service, as well as
purchased systems which are advertised to be year 2000 ready by their
manufacturers (primarily personal computers and productivity software) will
remain unaffected by the year 2000 problem.
13
<PAGE>
CAREADVANTAGE, INC.
PART II--OTHER INFORMATION
Item 1. Legal Proceedings
On October 19, 1999, the Company was advised that it may be impleaded as a
third-party defendant in a lawsuit entitled HORIZON HEALTHCARE OF NEW JERSEY,
INC. vs. ALLIED SPECIALTY CARE SERVICES, INC., pending in the United States
District Court for the District of New Jersey. This lawsuit seeks damages
arising out of an agreement between Horizon Healthcare of New Jersey, Inc.
("Horizon") and Allied Specialty Care Services, Inc. ("Allied"). One of the
claims made by Horizon is that it is entitled to damages on account of Allied's
agreement to repay certain monies ("Risk Amounts") to Horizon in the event
certain charges for medical claims exceeded certain capitation amounts. Allied's
third-party complaint against the Company seeks to enforce an agreement among
Horizon, Allied and the Company wherein it is claimed that the Company agreed to
pay Allied one-half of any Risk Amounts that Allied "owed" to Horizon, but no
more than certain funds received by the Company on account of such agreement. (A
copy of the agreement among Horizon, Allied and the Company has been filed as
Exhibit 10(e) to Form 10-QSB dated April 30, 1997.) The parties to the lawsuit
and the Company are presently attempting to resolve their disputes through
mediation. However, the can be no assurance that such efforts will be
successful. The Company has previously established a reserve that management
believes is sufficient to satisfy any liability the Company may have on account
of Allied's claim.
For a description of additional legal proceedings, see Note C to the Financial
Statements. With the exception of the legal proceedings described herein and in
Note C to the Financial Statements, there are no material pending legal
proceedings other than ordinary routine litigation incidental to the business of
the Company.
Item 2. Changes in Securities
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
On July 7, 1999, the Company held the Annual Meeting of stockholders. The
purposes of the meeting were (1) to elect six directors, (2) to approve
amendments to the Company's Stock Option Plan, (3) to approve amendments to the
Company's Directors' Stock Option Plan, and (4) to approve an increase in the
total number of authorized shares of Common Stock from 90,000,000 to
103,600,000.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
Matters Voted Upon For Against Not Voting
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------
1. Election of Directors
- ---------------------------------------------------------------------------------------------------------------------
William Marino 75,234,840 0 6,955,043
- ---------------------------------------------------------------------------------------------------------------------
Robert J.Pures 75,234,840 0 6,955,043
- ---------------------------------------------------------------------------------------------------------------------
Barry Weinberg 75,234,840 0 6,955,043
- ---------------------------------------------------------------------------------------------------------------------
David McDonnell 75,234,840 0 6,955,043
- ---------------------------------------------------------------------------------------------------------------------
Walter Channing, Jr. 75,234,840 0 6,955,043
- ---------------------------------------------------------------------------------------------------------------------
David Noone 75,234,840 0 6,955,043
- ---------------------------------------------------------------------------------------------------------------------
2. Amendments to Stock 75,234,840 0 6,955,043
Option Plan
- ---------------------------------------------------------------------------------------------------------------------
3. Amendments to Directors' 75,234,840 0 6,955,043
Stock Option Plan
- ---------------------------------------------------------------------------------------------------------------------
4. Increase in authorized 75,234,840 0 6,955,043
Common Stock
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
14
<PAGE>
Item 5. Other Information
None.
Item 6. Exhibits and reports on Form 8-K
(a) Exhibits
(27) Financial Data Schedule
15
<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
November 12, 1999 /s/ David G. Noone
------------------------
David G. Noone
Chief Executive Officer
November 12, 1999 /s/ David G. DeBoskey
---------------------------
David G. DeBoskey
Chief Financial Officer
16
<PAGE>
Exhibit Index
- -------------
27 Financial Data Schedule
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Form
10QSB for the quarter ended September 30, 1999 and is qualified in its entirety
by reference to such financial statements.
</LEGEND>
<CIK> 0000937252
<NAME> CAREADVANTAGE, INC.
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-1-1999
<PERIOD-END> SEP-30-1999
<EXCHANGE-RATE> 1
<CASH> 1,786,000
<SECURITIES> 0
<RECEIVABLES> 1,252,000
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 3,225,000
<PP&E> 916,000
<DEPRECIATION> 0
<TOTAL-ASSETS> 5,969,000
<CURRENT-LIABILITIES> 3,114,000
<BONDS> 0
0
0
<COMMON> 82,000
<OTHER-SE> 2,773,000
<TOTAL-LIABILITY-AND-EQUITY> 5,969,000
<SALES> 0
<TOTAL-REVENUES> 12,013,000
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 12,564,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 53,000
<INCOME-PRETAX> (604,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (604,000)
<EPS-BASIC> (.01)
<EPS-DILUTED> (.01)
</TABLE>
