SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
Annual Report pursuant to Section 13 or 15 (d) of the
Securities Exchange Act of 1934
For the Fiscal Year Ended December 31, 1999
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:
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 [ X ] 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. [ ]
The Registrant's revenues for its most recent fiscal year were $16,410,000
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of February 3, 2000 (assuming solely for purposes of this
calculation that all directors and executive officers of the Registrant are
affiliates) was $3,399,769
The number of shares of common stock outstanding as of February 3, 2000 was
82,789,883.
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
1
<PAGE>
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, and independent reviews. 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. ("PMDX"), a publicly traded New York corporation. During
the Company's 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") from
PMDX. 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.
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.
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., formerly known as Blue Cross 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 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
2
<PAGE>
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).
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.
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 numbers. 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
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.
The Company's executive offices are located at 485-C Route 1 South, Metropolitan
Corporate Plaza, Iselin, New Jersey 08830 and its telephone number is (732)
602-7000.
Industry Overview: Consumerism, Health Care Expenditures and Managed Care
The American health care market continues to evolve with an emphasis on consumer
choice, patient rights, and confidentiality protections, against a backdrop of
accelerating costs and an aging population. Employer groups balance concern
about the costs of providing health insurance to their employees with the need
to maintain a competitive human resource position in a tight labor market.
Employers, the traditional customers of commercial health insurance companies,
continue to seek strategies to reduce costs while assuring access and
satisfaction. Among the strategies is a fundamental shift: some employers are
abandoning the middleman role and enabling their employees to make their own
benefit decisions. Although this will not occur immediately, some of the
barriers, such as restricted access to comparative information, are being
eliminated. Additionally, some employers may seek to distance themselves from
the potential legal liabilities emerging in the health benefits industry.
Over the next decade the health insurance market will become increasingly one of
defined contribution, not defined benefit, and employees will enjoy selection
among multiple health insurance products. Among health insurers, premium
3
<PAGE>
price differences will become less significant; quality of provider networks
will be assumed and relatively non-differentiating; and service will separate
winners from losers.
Concurrently, the health care providers, especially physicians and integrated
delivery systems, are increasingly cautious about entering into risk
arrangements, while expressing renewed vigor in taking charge of their destiny.
The larger entities among them have made, and continue to make, substantial
investments in information technology with increasingly sophisticated managerial
accounting systems to support the management of their services, arrayed by
product line. By virtue of their market position, provider systems lack the
capital, claims systems, marketing strength and geographic scope to compete with
health insurers.
Increasingly, the market will force providers and insurers to develop
operational and administrative efficiencies in their many shared functions.
Among these shared functions is care management, the core capability of
CareAdvantage.
Services and Products
The Company offers care management services to the health insurance industry in
order to assure that members receive appropriate health and medical care. The
services include focused utilization management and specialty case management
services. These health care management services adhere to American Accreditation
Healthcare Commission/URAC standards.
The Company possesses substantial resources in core areas of information
management, member and provider profiling and outreach services, including
provider network management and specialty case management, and makes them
available to its clients in specific packages.
Focused Utilization Management and Independent Review
The Company transforms the client's utilization management program from an
administrative exercise to a program that uses focused profiling to identify
inappropriate variations in medical practices, as well as clinical review
criteria and highly credible physician advisors to actively engage attending
physicians in treatment decisions. These proactive utilization management
methods enable the Company's clients to achieve utilization performance
approaching or exceeding that of well-managed health maintenance organizations.
Increasingly, health insurers are required by state regulation to offer
independent review of decisions that are appealed and affect the care of
members. The Company performs such independent reviews on behalf of two Blue
Cross Blue Shield Plans.
Specialty Case Management
Specialty case management services apply fundamental principles of case
management to identify those members most in need of coordination of care, with
potential for improving the clinical outcomes, and with the opportunity to
optimize their health insurance benefit while avoiding unnecessary costs. The
Company's proprietary method, RightPath(TM), enables its case managers to
systematically select those members most in need, to apply standard, validated
approaches to members with common clinical conditions, and to measure outcomes.
Care coordination, both outpatient and inpatient, 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. Additionally, only members who give
consent are enrolled in the program. Currently the Company achieves consent
rates in excess of 80%.
Case management also seeks to support the attending physician in managing the
care of patients with chronic diseases on an on-going basis. Case conferences
with matched medical specialists are used to optimize attending physician
collaboration.
4
<PAGE>
Operations
The Company utilizes a multi-disciplinary team approach to ensure effective cost
medical management services. The Company, through its employees 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.
The Company currently maintains a contracted network of more than 140
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.
(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.
Customers and Marketing
The Company currently provides its services to five Blue Cross 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 more
than 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. The Company has a service agreement with Horizan BCBSNJ which
expires on June 30, 2000 and accounted for approximately 80% of revenue for
1999. Although the precise terms of a contract renewal have not yet been agreed
upon, the Company has been informed by Horizon BCBSNJ that Horizon BCBSNJ will
continue to contract with the Company for care management services for the
indemnity portion of the business at least until January 1, 2001. The indemnity
portion of the business accounts for approximately 90% of the total Horizon
BCBSNJ contract revenues on an annual basis.
The Company markets its services to group health insurance companies throughout
the United States.
5
<PAGE>
Typically, the Company will enter into a service agreement with a client
pursuant to which the Company provides its utilization management and specialty
case management services. The Company's services for an insurer generally cover
all insureds under an indemnity or PPO insurance plan and/or members of a health
maintenance organization plan affiliated with the insurer. 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.
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, 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. Some 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 services,
including 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 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.")
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
6
<PAGE>
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
At December 31, 1999, the Company employed a total of 167 full-time employees,
including 11 full-time physicians. Of this total, 132 employees are engaged in
clinical activities including on-site nurse reviewers and contract
administrators. The 35 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.
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 Metropolitan 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 Vermont
pursuant to an informal arrangement with its customer there, Blue Cross Blue
Shield of Vermont.
Item 3. Legal Proceedings
a) Robert T. Caruso v. 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
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 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.
7
<PAGE>
b) In December 1999 the Company was 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 have
informally agreed to settle their various claims. However, until such agreements
have been made definitive, there can be no assurance that such claims have been
settled. 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.
c) 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 damages for
Allied's breach; Allied counter claimed against the Company seeking damages on
account of certain agreements that the Company entered into with certain Blue
Cross plans. The Allied and the Company have informally agreed to settle their
respective claims, without cost to the Company. However, until such agreement
has been made definitive, there can be no assurance that such claims have been
settled
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 quarter of calendar year ended December 31, 1999.
PART II
Item 5. Market 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.
1999 1998
---- ----
Quarter Ended High Low High Low
- - ------------- ---- --- ---- ---
March 31, $.25 $.03 $.25 $.23
June 30, $.45 $.14 $.27 $.21
September 30, $.45 $.27 $.24 $.10
December 31, $.31 $.13 $.10 $.02
(b) Holders: As of March 14, 2000 there were approximately 3,725 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.
8
<PAGE>
Item 6. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Cautionary Statements
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 statements 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. Many of these
statements involve known and unknown risks, uncertainties and contingencies,
many of which are beyond our control, which could cause actual results and
outcomes to differ materially from those expressed in this 10-KSB. Although we
believe that our plans, intentions and expectations reflected in these
forward-looking statements are reasonable, we can give no assurance that our
plans, intentions or expectations will be achieved.
The following discussion contains cautionary statements regarding our 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, we are not committed to addressing or updating each
factor in future filings or communications regarding the our 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 our past, as well as current, forward-looking statements
about future results.
Company Risk
We have had a history of losses. For fiscal years prior to 1997, we experienced
significant operating losses on a consolidated basis. In addition, we
experienced a loss of $1,275,000 for the year ended December 31, 1999. At
December 31, 1999, we had working capital of approximately $264,000,
stockholders equity of approximately $2,194,000, and an accumulated deficit of
approximately $19,950,000.
We face aggressive competition because new competitors can enter our field
easily and because customers could decide to perform the functions or services
that we provide internally. New competitors can enter our field easily. Many of
our customers may decide to perform functions or services internally, which we
previously provided. Also, some of our providers may decide to compete against
us by marketing products and services to our customers.
Because of increased merger and acquisition activity we may face stronger
competition in the future. Our industry, as well as our customers' industries
(i.e., health insurers and HMOs) have experienced significant merger and
acquisition activity. Merger and acquisition activity may create stronger
competitors or result in decreased opportunities. Strong competition or
competition that intensifies in any market will adversely affect our ability to
retain or increase customers, or maintain or increase revenue growth, pricing
flexibility, or control over medical cost trends and marketing expenses.
We could incur significant additional costs as a result of litigation based on
the adverse medical consequences of our recommendations. We provide cost
containment services for health care organizations. Our services include:
o utilization review, which is the review of the appropriateness of a
particular medical event such as a hospital admission, a particular medical
procedure or an additional day of inpatient care;
o case management services, which provide alternative plans for patient
treatment and examine how the attending physician is managing the care of
patients with chronic diseases on an ongoing basis;
o outpatient care coordination, which allows patients to access services such
as home health care, rehabilitation and infusion therapy services; and
o disease management services, which provide patients with expert consensus
on the most appropriate treatment alternatives for patients at different
disease stages.
We base our recommendations on patient benefit plan coverage on judgments and
established protocols as to the appropriateness of the proposed medical
treatment. Our judgments and established protocols are based on data gathered
9
<PAGE>
through case studies on the treatment and care of patients over a number of
years. As a result, we may be liable for adverse medical consequences of our
recommendations. We could become subject to claims for the costs of services
denied and malpractice claims arising from the acts or omissions of health care
professionals. Although we do not believe that we engage in the practice of
medicine or that we deliver medical services directly, we may become subject to
litigation or liability. Although we maintain comprehensive general liability
and professional liability insurance coverage, including coverage for liability
in connection with the performance of medical utilization review services, we
cannot be certain that coverage will be adequate in the event we become subject
to a claim.
We depend on effective information systems to deliver products and services to
customers. We depend on effective information systems, and have linked our
computer systems with our customers' computer systems in order to conduct and
deliver our products and services. Our 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. Our
failure to maintain effective and efficient information systems could cause loss
of existing customers, difficulty in attracting new customers, customer
disputes, regulatory problems and increases in administrative expenses.
Because our products depend on the integrity of our data, if the information
contained in our databases were found or perceived to be inaccurate, or if the
information is generally perceived to be unreliable, we may not be able to
maintain commercial acceptance. We rely on data collected through case studies
and other confidential criteria to make cost containment decisions. Many of the
products that are part of our knowledge and information-related business rely on
the integrity of the data on which they are based. If the information contained
in our databases were found or perceived to be inaccurate, or if the information
is generally perceived to be unreliable we may not be able to maintain
commercial acceptance of our database-related products.
To succeed, we must maintain the confidential nature of criteria that we have
acquired or developed for the delivery of health care services in medical
specialty areas. The success of our knowledge and information-related business
depends on our ability to maintain the ownership rights to our products. We rely
on agreements with customers, confidentiality agreements with employees, trade
secrets, trademarks and patents to protect our ownership rights. These legal
protections and precautions may not prevent misappropriation of our intellectual
property. In addition, substantial litigation regarding intellectual property
rights exists in the software industry, and we expect software products to be
increasingly subject to third-party infringement claims as the number of
products and competitors in our industry segment grows.
Industry Risk
Because the managed care industry has received significant negative publicity
there has been increased activity, regulation and review of industry practices.
The managed care industry frequently receives significant negative publicity.
The negative publicity has contributed to increased legislative activity,
regulation and review of industry practices. Legislative activity, regulation
and review may adversely affect our ability to market products or services, may
require us to change products and services, and may increase the regulatory
burdens under which we operate.
Our failure to comply with, or the costs of complying with, government
regulation could affect our ability to grow by denying licensing or restricting
payment for services. Our operations are subject to extensive and frequently
changing federal, state and local laws and regulation concerning licensing,
conduct of operations, acquisitions of business operating in our industry, the
employment of physicians and other licensed professionals and payment for
services. These various types of regulatory activity could restrict our growth
through acquisition or otherwise, by limiting or denying licensing or by
limiting the payment for services provided.
Existing laws and regulations may be revised and new laws and regulations could
be adopted or become applicable to us. We may not be able to recover these
increased costs of compliance from our customers and future changes in
applicable laws and regulations could affect our business and financial
conditions.
10
<PAGE>
Investment Risk
The market price of our shares has been extremely volatile. The market prices of
our securities has 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.
Two shareholders own over 90% of the outstanding shares of our common stock. Our
two largest stockholders, Horizon BCBSNJ and CW Ventures, beneficially own more
than 90% of the outstanding shares of our common stock. An agreement between our
largest stockholders and us states that Horizon BCBSNJ and CW Ventures have
agreed to vote their shares in us with respect to the election of our board of
directors for:
o two designees of CW Ventures;
o two designees of Horizon BCBSNJNJ;
o one member of our management acceptable to CW Ventures and Horizon
BCBSNJNJ; and
o one non-employee outside director acceptable to CW Ventures and Horizon
BCBSNJNJ.
The Stockholders Agreement prevents us from taking certain material actions
without the consent of Horizon BCBSNJ and/or CW Ventures. 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, the matter would be approved or
defeated, as the case may be, depending on the vote of the stockholders.
Because our common stock is traded in the over-the-counter market in "pink
sheets" or the "OTC Bulletin Board" our stock is illiquid. Our common stock is
traded in the over-the-counter market in so-called "pink sheets" or, if
available, the "OTC Bulletin Board." As a result, an investor may find it more
difficult to dispose of, or to obtain accurate quotations as to the value of,
our common stock. Because our common stock is subject to federal securities
rules affecting penny stock, the market liquidity for our common stock is
adversely affected. There is limited public float in our common stock as the
result of the ownership of 91.65% of the common stock by two stockholders.
Our common stock could become subject to additional sales practice requirements
for low priced securities. Our common stock could become subject to Rule 15g-9
under the Securities Exchange Act of 1934, which imposes additional sales
practice requirements on broker-dealers that sell our shares of common stock to
persons other than established customers and "accredited investors" or
individuals with net worth in excess of $1,000,000 or annual incomes exceeding
$200,000 or $300,000 together with their spouses.
The rule:
o requires a broker-dealer to make a special suitability determination for
the purchaser and have received the purchaser's written consent to the
transaction prior to sale. Consequently, the rule may affect the ability of
broker-dealers to sell our securities and may affect the ability of our
shareholders to sell any of our securities in the secondary market;
o generally define a "penny stock" to be any non-Nasdaq equity security that
has a market price less than $5.00 per share or with an exercise price of
less than $5.00 per share, subject to certain exceptions;
o requires broker dealers to deliver, prior to a transaction in a penny
stock, 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. In addition, the rule requires that broker dealers deliver to
customers monthly statements that disclose recent price information for the
penny stock held in the account and information on the limited market in penny
stocks.
11
<PAGE>
Overview
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
CareAdvantage submitted a proposal to Blue Cross Blue Shield of Michigan
("BCBSM") in June 1999 in response to an RFP issued by BCBSM for vendor partners
to provide comprehensive care management programs to over 3 million BCBSM
members enrolled in traditional and PPO products. The RFP was issued in
accordance with BCBSM's Health Care Management Strategy which envisions offering
a seamless array of health care and use management programs nationwide and
improvement of the quality of care and member health. The Company was advised
during the first quarter of calendar year 2000 that BCBSM is performing due
diligence on the Company in connection with comprehensive care management
services, and the Company is cooperating with BCBSM. BCBSM's actions are not a
commitment by BCBSM to enter into a contract with CareAdvantage at this time.
Change in Fiscal Year
On June 8, 1999, the Company changed its fiscal year from one ending October 31
to a calendar year ending December 31.
Results of Operations--12 Months Ended December 31, 1999 Compared to 12 Months
Ended October 31, 1998
Revenues:
<TABLE>
<CAPTION>
Year Ended
----------
December 31,1999 October 31, 1998
---------------- ----------------
Amount Percent Amount Percent
------ ------- ------ -------
<S> <C> <C> <C> <C>
Revenues from fixed-fee arrangements $16,179,000 99% $16,821,000 89%
Revenues from performance-based arrangements 218,000 1% 2,064,000 11%
Consulting revenues 13,000 0% 18,000 0%
------ ---- ----------- ---
Total revenues $16,410,000 100% $18,903,000 100%
=========== ==== =========== ====
</TABLE>
Total revenues for the years ended December 31, 1999 and October 31, 1998 were
approximately $16,410,000 and $18,903,000, respectively. The decrease in
revenues of approximately $2,500,000 was primarily attributable to: (i) excess
performance revenues of approximately $1,300,000 from BCBSRI in 1998 and (ii)
decreased fixed compensation revenue of approximately $1,300,000 from the
Company's contract with Allied Health, which has been terminated.
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 has worked
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 to a fixed fee basis. Management believes its
estimated performance-based revenues contained in reported revenues for the
twelve months ended December 31, 1999 are accurate based upon the data available
to management. However, information received by the
12
<PAGE>
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 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 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.
Cost of services:
Cost of services for the fiscal years ended December 31, 1999 and October 31,
1998 were approximately $8,955,000 and $7,903,000, respectively. The increase in
the cost of services of approximately $1,052,000 is largely due to increases in
personnel costs of approximately $1,112,000, information and communication costs
of approximately $117,000, primarily offset by decreases in professional and
consulting costs of approximately $59,000 and depreciation and amortization
costs of approximately $103,000. The increase in personnel costs is primarily
attributed to increases in hiring of clinical personnel relating to expanded
business opportunities during 1999.
Operating expenses
Selling, general and administrative:
Selling, general and administrative costs during the calendar year ended
December 31, 1999 were $7,931,000 compared to $6,952,000 in the fiscal year
ended October 31, 1998. The increase in selling, general and administrative
costs of approximately $979,000 is largely due to increases in personnel costs
of approximately $557,000, including severance costs of approximately $290,000,
travel costs of approximately $67,000, information and communication costs of
approximately $274,000, other general & administrative costs of approximately
$94,000 and approximately $344,000 due to a write-off of software development
costs, primarily offset by a decrease in professional and consulting costs of
approximately $331,000. The Company experienced increased marketing and sales
costs during the period ended December 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 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 December 31, 1999
aggregated $1,277,000, of which $435,000 is included in cost of services,
compared to $1,143,000 for the fiscal year ended October 31, 1998, of which
$538,000 is included in cost of services. Depreciation and amortization for the
year ended December 31, 1999 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
$518,000 relating to other intangible assets and depreciation of property and
equipment of approximately $637,000.
Interest income/ expense:
Interest income for the fiscal years ended December 31, 1999 and October 31,
1998 was $104,000 and $110,000, respectively. Interest expense during the fiscal
year ended December 31, 1999 was $61,000 compared with interest expense of
$305,000 for the year ended October 31, 1998. The decrease in net interest
expense of approximately $244,000 is largely due to decreased interest costs
under the IBM master lease agreement of approximately $73,000, decreased
interest costs related to the CW Note of approximately $107,000 (for a more
detailed explanation of the CW Note, see "Notes to Financial Statements -
Introduction and Background") and decreased interest costs under the Horizon
BCBSNJ Note of
13
<PAGE>
approximately $64,000 (for a more detailed explanation of the Horizon BCBSNJ
Note, see "Financial Condition-Liquidity and Capital Resources" below).
Financial Condition
Liquidity and Capital Resources:
At December 31, 1999, the Company had cash of $1,615,000 and a working capital
surplus of approximately $264,000. At December 31, 1998, the Company's cash
balance was $3,354,000 and the working capital surplus was approximately
$715,000. The decrease in working capital surplus of approximately $451,000 is
largely due to decreased operating income for the twelve months ended December
31, 1999..
Net cash provided from operating activities amounted to approximately $244,000
and $4,415,000 for the fiscal years ended December 31, 1999 and October 31,
1998, respectively. This decrease in cash is largely due to the decreased
operating income generated during the calendar year ended December 31, 1999.
Net cash used by investing activities amounted to approximately $775,000 and
$1,133,000 for the fiscal years ended December 31, 1999 and October 31, 1998,
respectively. This decrease of approximately $358,000 is due to decreased
capital expenditures during the current calendar year.
Net cash used by financing activities amounted to approximately $1,208,000 and
$575,000 for the fiscal years ended December 31, 1999 and October 31, 1998,
respectively. This increase of approximately $633,000 is primarily due to
payments related to the Horizon BCBSNJ Note during the calendar year ended
December 31, 1999.
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 a bank (as further described below) will provide
adequate capital resources to support the Company's anticipated cash needs for
calendar year ending December 31, 2000.
Pursuant to the BCBSNJ Note, the Company owes $693,000 to Horizon BCBSNJ as of
December 31, 1999. The Company has an agreement with Horizon BCBSNJ to suspend
payments on the note due to Horizon BCBSNJ through August 2000. The Company is
to resume making payments on September 1, 2000 in equal monthly installments to
repay the debt by March 31, 2001. 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 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 June 30, 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 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. As of December 31, 1999 the $250,000 irrevocable
letter of credit is still outstanding under the credit facility.
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.
14
<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, 1999 are as follows:
<TABLE>
<CAPTION>
Name Age Positions with the Company
- - ---- --- --------------------------
<S> <C> <C>
William J. Marino (1)(3) 56 Chairman of the Board of Directors
Robert J. Pures (2)(3) 54 Director
Barry Weinberg (1)(3) 61 Director
David McDonnell (1) (2)(3) 57 Director
Walter Channing, Jr. (2)(3) 59 Director
David G. Noone(3) 46 Director and Chief Executive Officer
Richard W. Freeman 52 President and Chief Operating Officer
Dennis Mouras 43 Executive Vice President, Marketing and Sales
David G. DeBoskey(4) 34 Senior Vice President, Finance and Accounting
<FN>
(1) Member of Compensation Committee
(2) Member of Audit Committee
(3) Re-elected to the Board of Directors of the Company at the Company's Annual
Meeting held on July 7, 1999. (4) Mr. DeBoskey resigned his employment with
the Company as of March 23, 2000.
(4) Mr. DeBoskey resigned his employment with the Company as of March 23, 2000.
</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 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; one member
will be management of the Company acceptable to CW Ventures and Horizon BCBSNJ,
and one member will be a non-employee who is acceptable to CW Ventures and
Horizon BCBSNJ (See "Description of Business - Introduction and Background"
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.
15
<PAGE>
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 and
member of the compensation committee of TeamStaff, 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 several privately owned companies and is a general partner of CW Partners.
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 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.
David Noone has been a director of the Company and CEO since January 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.
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.
Dennis Mouras has served as Executive Vice President of Marketing and Sales of
the Company since April 1999. Prior to that, Mr. Mouras served as President of
Intracorp, Inc. from January 1997 to January 1999, and as President and General
Manager of CIGNA Healthcare of Colorado from October 1994 to January 1997.
David G. DeBoskey has served as Senior Vice President of the Company since
October 1999, and from November 1997 to October 1999 as Vice President of
Finance and Accounting of the Company, 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
Accountant for two New Jersey hospitals. Mr. DeBoskey resigned his employment
with the Company as of March 23, 2000.
Compliance with Section 16(a) of the Securities Exchange Act of 1934:
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
16
<PAGE>
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. The
members of the Board inadvertently failed to file their Forms 3 on a timely
basis, but have all made this filing by February 22, 1999 with the exception of
Dennis Mouras, who made this filing on June 21, 1999. Based solely on review of
the copies of such forms furnished to the Company, the Company believes that
during fiscal 1999 its officers, directors and ten percent (10%) beneficial
owners complied with all other 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.
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,
1999, 1998, and 1997, 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 $100,000, during such periods.
<TABLE>
Summary Compensation Table
<CAPTION>
Long Term
Annual Compensation Compensation
----------------------------------------------- ------------
Securities
Salary Bonus Other Annual Underlying All Other
Name and Principle Year Ended Compensation(2) Options/SARS Compensation
Position December,31 ($) ($) ($) (#) ($)
-------- ----------- --- --- --- --- ---
<S> <C> <C> <C> <C> <C> <C>
David G. Noone 1999 295,385 -0- -0- 3,600,000 4,800(1)
Chief Executive Officer 1998 -0- -0- -0- -0- -0-
1997 -0- -0- -0- -0- -0-
Richard W. Freeman, M.D. 1999 275,009 55,723 -0- 2,541,000 4,800(1)
President & 1998 270,162 -0- -0- -0- 4,917(1)
Chief Operating Officer 1997 261,000 35,000 25,000 -0- 4,750(1)
Dennis Mouras 1999 155,769 -0- 41,538 500,000 -0-
Executive Vice President, 1998 -0- -0- -0- -0- -0-
Marketing Sales 1997 -0- -0- -0- -0- -0-
David DeBoskey(3) 1999 107,269 -0- -0- 610,000 2,718(1)
Senior Vice President 1998 87,654 25,000 -0- -0- 2,608(1)
Finance & Accounting 1997 75,769 12,500 -0- -0- 1,894(1)
Stephen D. Deutsch, M.D.(4) 1999 300,000 20,000 22,937 813,000 -0-
Senior Vice President and 1998 300,000 -0- -0- -0- -0-
National Director of CAHS 1997 267,000 92,308 -0- -0- -0-
- - -----------------------------------------------------------
<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, and in the Case of Mr. Mouras, advance commissions,
that were paid.
(3) Mr. DeBoskey resigned his employment with the Company effective March 23,
2000.
(4) Dr. Deutsch's employment with the Company was terminated without cause on
October 15, 1999.
</FN>
</TABLE>
17
<PAGE>
Compensation Plans
Stock Option Plan:
The Board of Directors initially adopted the Stock Option Plan ("Stock Option
Plan") on June 6, 1996, and the stockholders approved the plan on August 23,
1996. Effective January 8, 1999 and January 26, 1999, the Board of Directors
approved amendments to the plan to update the plan and to increase the number of
shares and certain other benefits available under the plan. The stockholders
approved the amendments to the plan on July 7, 1999.
The Stock Option Plan 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; (iv)
the exercise price, which in the case of incentive stock options 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. Under the Stock Option
Plan, as amended, an aggregate of 18,648,000 shares of Common Stock (equal to
18% of the Company's authorized number of shares of Common Stock) is reserved
for issuance.
All options granted under the Stock Option Plan generally 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 generally shall have three months from the date
of termination to exercise such option to the extent the option was exercisable
at such date. In the event of termination of employment due to death or
disability of the option grantee, generally such person (or such person's legal
representative) shall have twelve months from such date to exercise such option
to the extent the option was exercisable at the date of termination.
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, materially change
the requirements of eligibility to such plan or materially increase the benefits
accruing to participants under such plan.
<TABLE>
<CAPTION>
Option Grants in Last Fiscal Year
% of Total Options Granted to Employees in Fiscal Year
Options Exercise Price
Name Granted Percentage Per Share Expiration Date
- - ---- ------- ---------- --------- ---------------
<S> <C> <C> <C> <C>
David G. Noone 3,600,000 4.000 % $0.03 January 7, 2009
Richard W. Freeman, M.D. 2,541,000 2.500 % $0.08 January 26, 2009
Dennis Mouras 500,000 .005 % $0.08 January 26, 2009
David G. DeBoskey 610,000 .006 % $0.08 January 26, 2009
Stephan D. Deutsch 813,000 .008 % $0.08 January 26, 2009
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
Aggregated Option Exercises in Last Fiscal Year
and Fiscal Year-End Option Values
Number of Value of
Shares Underlying Unexercised In-the-Money
Unexercised Options at Options at
December 31, 1999 December 31, 1999
Name Exercisable/Unexercisable Exercisable/Unexercisable
------------------------- -------------------------
<S> <C> <C>
David G. Noone 1,200,000/2,400,000 $187,560/$375,120
Richard W. Freeman, M.D. 166,667/2,624,333 $ 0/$410,183
Dennis Mouras 0/500,000 $ 0/$78,150
David G. DeBoskey, CPA 0/610,000 $ 0/$95,343
Stephan D. Deutsch 166,667/896,333 $ 0/$140,097
- - -----------------------------------------------------------------------------
</TABLE>
Calculated on the basis of the closing Bid price on the OTC Bulletin Board of
the Company's Common Stock of $0.1563 on December 31, 1999.
Employment Agreements and Board Appointments
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 10KSB 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 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.
The renewal terms of Mr. Noone's employment agreement are currently subject to
negotiation.
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 10KSB 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.
19
<PAGE>
Mouras Employment Agreement
As of April 19, 1999, the Company entered into an Employment Agreement with
Dennis Mouras (the "Mouras Employment Agreement"), the current Executive Vice
President of Marketing and Sales, which is attached as Exhibit 10.40 in the
Company's Form 10KSB for the period ended December 31, 1999 and is incorporated
by reference herein. The term of the Mouras Employment Agreement commenced April
19, 1999, and continues for a one-year term, after which it renews automatically
for successive one-year terms unless terminated by either party on at least
sixty days notice prior to an anniversary date. Under the Mouras Employment
Agreement, Mr. Mouras is entitled to (a) an annual salary of $225,000, (b)
commissions with respect to any new accounts generally equal to the lesser of
(i) 2.5% of first year collected revenues from such new accounts, or (ii)
$150,000, and (c) other benefits set forth therein. The Mouras Employment
Agreement also contains a non-solicitation restriction for one year after Mr.
Mouras's termination of employment.
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. Dr. Deutsch's
employment with the Company was terminated without cause on October 15, 1999.
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 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, 1999, Mr. McDonnell is
the only director that has been granted any options pursuant to the Directors
Stock Option Plan. Mr. McDonnell was awarded as of January 26, 1999, an option
to purchase 300,000 shares of the Company's Common Stock. The option may be
exercised at $.08 per share, and becomes exercisable as follows: (a) 100,000 of
such shares were immediately exercisable; (b) 66,666 of such shares became
exercisable on January 26, 2000; and (c) the remaining 133,334 of such shares
become exercisable in 24 equal monthly amounts commencing on February 26, 2000
and on the 26th day of the following 23 months. The market price of the Common
Stock on January 26, 1999, the date the option was granted, was $.08 per share.
Directors Stock Option Plan
The Company adopted the Directors Stock Option Plan ("Directors Stock Option
Plan"), on June 6, 1996, and amended it on July 24, 1996. Effective January 26,
1999 the Board of Directors approved amendments to the plan to increase the
number of shares available under the plan and to clarify certain provisions of
the plan. The stockholders approved the amendments to the plan on July 7, 1999.
Pursuant to the terms of the Directors Stock Option Plan, the Board of Directors
may grant non-qualified stock options to non-employee directors (other than
directors appointed by CW Partners or Horizon BCBSNJ) and will determine: (i)
the number of shares of the Company's Common Stock that may be purchased upon
the exercise of such option; (ii) the time or times when the option becomes
exercisable; (iii) the exercise price, and (iv) the duration of the option,
which cannot exceed
20
<PAGE>
ten (10) years. Under the Directors Stock Option Plan, an aggregate of 2% of the
Company's authorized number of shares of Common Stock (equal to 2,072,000 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
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,
materially 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 forth as of March 1, 2000 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.
<TABLE>
<CAPTION>
Beneficial Ownership of Common Stock by
Certain Stockholders and Management
Number of Shares
Name Beneficially Owned (1) Percent of Ownership(2)
- - ---- ---------------------- -----------------------
<S> <C> <C>
Horizon Blue Cross and Blue Shield of
New Jersey, Inc. (3)(4)(5)................................... 37,617,420 45.44
CW Ventures II, L.P.(5)(6)(7)................................... 37,784,087 45.55
William J. Marino(3)............................................ 334 *
Robert J. Pures(3).............................................. 0 0
Walter Channing, Jr.(5)(6)(7)(8)................................ 37,784,087 45.55
Charles Hartman(5)(6)(7)(8)..................................... 37,784,087 45.55
Barry Weinberg(5)(6)(7)(8)...................................... 37,784,087 45.55
David J. McDonnell(9)(11)....................................... 125,000 *
David Noone(10)(11)............................................. 1,400,000 1.67
Richard W. Freeman, M.D (10)(11)................................ 1,312,799 1.56
Dennis Mouras(10)(11)........................................... 0 *
David DeBoskey (10)(11) (12).................................... 254,165 *
Stephan D. Deutsch(10)(13)...................................... 1,233 *
All Directors and executive officers as
a Group (10 persons) (8) (10)(11)............................... 40,497,336 47.07
- - -------------------------------------------------------------
<FN>
* Less than 1%
21
<PAGE>
(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 is terminated by Horizon BCBSNJ, 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.
(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 485-C Route 1 South, Iselin, New Jersey 08830.
(11) 125,000 of Mr. McDonnell's shares of Common Stock, 1,400,000 of Mr. Noone's shares of Common Stock, 1,312,799 of
Dr. Freeman's shares of Common Stock, 254,165 of Mr. DeBoskey's shares of Common Stock, and 3,087,915 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 March 1, 2000 or that will be exercisable within 60 days of such
date.
(12) Mr. DeBoskey resigned his employment with the Company as of March 23, 2000.
(13) Dr. Deutsch's employment with the Company was terminated without cause on October 15, 1999.
</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
22
<PAGE>
HORIZON BCBSNJ Note, see "Description of Business - Introduction and
Background." As of December 31, 1999, Horizon BCBSNJ is the beneficial owner of
37,617,420 shares of Common Stock, constituting 45.44% of the outstanding Common
Stock at December 31, 1999. 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. In addition, two (2) of Horizon 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; and William Marino, a director of the Company and CHCM, is also a
director, President and Chief Executive Officer of Horizon BCBSNJ.
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 - Introduction and Background." In February 1996 the
Company also issued to CW Ventures the CW Warrants. For further description of
the CW Warrants, see "Description of Business - Introduction and Background."
Effective June 30, 1998, the CW Note was automatically converted into 7,799,997
shares of Common Stock. As of December 31, 1999, CW Ventures is the beneficial
owner of 37,784,087 shares of Common Stock, constituting 45.55% 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. is a director of the Company and is also a
General Partner of CW Partners.
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"). The Horizon BCBSNJ Option would have been exercisable in the event the
Company had achieved certain goals for defined periods through February 2000,
which goals were not achieved. The option was granted by CW Ventures to Horizon
BCBSNJ in consideration of Horizon BCBSNJ revising its Services Agreement with
the Company, entering into a joint services agreement between Horizon BCBSNJ,
the Company and an unrelated party, and an agreement to guaranty the Summit Bank
Credit Agreement.
Item 13. Exhibits and Reports on Form 10-KSB
<TABLE>
<CAPTION>
(a) Exhibits
Exhibit No. Description of Exhibit
- - ----------- ----------------------
<S> <C>
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 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).
3.11 Amended and Restated Certificate of Incorporation incorporated by reference
to the Company's Information Statement dated September, 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. 33-89176).
23
<PAGE>
10.1 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(a) 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.
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 exhibit 10.16 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 HORIZON 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.
24
<PAGE>
10.14 First Amendment and Restatement of Services Agreement, dated as of June
13, 1997, among CAHS, Inc., CHCM, the Company and HORIZON 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 HORIZON 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.
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 HORIZON 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 HORIZON 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.
10.21 Consultation Agreement dated October 1, 1997 by and between the Company
and David McDonnell, an independent director of the Company.
10.22 Mutual Release Agreement dated as of January 6, 1998 between the Company
and MEDecision, Inc.
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).
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 dated September 1996.
10.28 Registrant's 1996 Director Stock Option Plan incorporated by reference to
the Company's Information Statement dated September 1996.
10.29 Option Agreement between CW Ventures and HORIZON BCBSNJ incorporated by
reference to exhibit 5 of Schedule 13(d) of HORIZON 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 10KSB for the year ended October 31, 1997.
25
<PAGE>
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 10KSB for the year ended October 31, 1997.
10.32 Employment Agreement between the Company and David Noone, dated January 8, 1999.
10.33 Confidentiality, Invention, and Non-Compete Agreement between the Company
and David Noone, dated as of January 8, 1999.
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.
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").
10.37 Employment Agreement, dated as of March 25, 1997, by and between the
Company and Elaine del Rossi.
10.38 Confidentiality, Invention and Non-Compete Agreement dated as of March 25,
1998 between the Company and Elaine del Rossi.
10.39 Employment Agreement, effective as of April 28, 1998, by and among Stephan
D. Deutsch, M.D., the Company and CAHS.
10.40 Employment Agreement, effective as of April 19, 1999, between Dennis M.
Mouras, and the Company.
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
</TABLE>
26
<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: March 30, 2000 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: March 30, 2000 By: /s/ David Noone
-------------- ---------------
David Noone, Chief Executive Officer, Director
(Principal Executive Officer)
Date: March 30, 2000 By: /s/ Richard Freeman
-------------- ---------------------
Richard Freeman, President & Chief Operating
Officer(Principal Financial and Accounting
Officer)
Date: March 30, 2000 By: /s/ William J. Marino
-------------- ----------------------
William J. Marino, Director
Date: March 30, 2000 By: /s/ Robert J. Pures
-------------- --------------------
Robert J. Pures, Director
Date: March 30, 2000 By: /s/ Barry Weinberg
-------------- -------------------
Barry Weinberg, Director
Date: March 30, 2000 By /s/ Walter Channing, Jr.
-------------- --------------------------
Walter Channing, Jr., Director
Date: March 30, 2000 By: /s/ David McDonnell
-------------- -------------------
David McDonnell, Director
27
<PAGE>
<PAGE>
Index to Consolidated Financial Statements
Independent auditors' report F-2
Balance sheets as of December 31, 1999 and 1998 F-3
Statements of operations for the year ended
December 31, 1999, the two-month period
ended December 31, 1998 and the year ended
October 31, 1998 F-4
Statements of stockholders' equity for the
year ended December 31, 1999, the two-month
period ended December 31, 1998 and the year
ended October 31, 1998 F-5
Statements of cash flows for the year ended
December 31, 1999, the two-month period
ended December 31, 1998 and the year ended
October 31, 1998 F-6
Notes to financial statements F-7
<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, 1999 and 1998 and the related
consolidated statements of operations, stockholders' equity and cash flows for
the year ended December 31, 1999, the two months ended December 31, 1998 and the
year ended October 31, 1998. 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, 1999 and 1998, and the
consolidated results of their operations and their cash flows for the periods
indicated in conformity with generally accepted accounting principles.
Richard A. Eisner & Company, LLP
New York, New York
February 4, 2000
F-2
<PAGE>
CAREADVANTAGE, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31,
------------------
1999 1998
---- ----
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,615,000 $ 3,354,000
Accounts receivable for services:
Stockholder 1,135,000 1,080,000
Other 173,000 315,000
Other current assets 220,000 159,000
------------- ------------
Total current assets 3,143,000 4,908,000
Property and equipment, at cost less
accumulated depreciation 845,000 1,279,000
Intangible assets 1,283,000 1,695,000
Other assets 102,000 243,000
------------- ------------
$ 5,373,000 $ 8,125,000
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Capital lease obligation $ 319,000
Accounts payable $ 313,000 193,000
Due to stockholder 393,000 1,153,000
Due to customer 902,000 902,000
Accrued compensation and
related benefits 841,000 959,000
Accrued expenses and
other current liabilities 332,000 483,000
Deferred revenue, current 98,000 184,000
------------- ------------
Total current liabilities 2,879,000 4,193,000
Due to stockholder, less current portion 300,000 429,000
Deferred revenue, less current portion 87,000
------------- ------------
3,179,000 4,709,000
------------- ------------
</TABLE>
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 103,600,000
shares; issued and outstanding
82,189,883 shares 82,000 82,000
Additional capital 22,062,000 22,009,000
Accumulated deficit (19,950,000) (18,675,000)
------------- ------------
2,194,000 3,416,000
------------- ------------
$ 5,373,000 $ 8,125,000
============= ============
See notes to financial statements
F-3
<PAGE>
CAREADVANTAGE, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
Consolidated Statements of Operations
Two Months
Year Ended Ended Year Ended
December 31, December 31, October 31,
1999 1998 1998
------------ ------------ ------------
<S> <C> <C> <C>
Net revenues $ 16,410,000 $ 2,742,000 $ 18,903,000
Cost of services 8,955,000 1,414,000 7,903,000
--------------- -------------- ---------------
Gross profit 7,455,000 1,328,000 11,000,000
--------------- -------------- ---------------
Operating expenses:
Selling general and administrative 7,931,000 1,279,000 6,952,000
Depreciation and amortization 842,000 125,000 605,000
--------------- -------------- ---------------
Total operating expenses 8,773,000 1,404,000 7,557,000
--------------- -------------- ---------------
Operating income (loss) (1,318,000) (76,000) 3,443,000
Interest income (expense), net 43,000 8,000 (195,000)
--------------- -------------- ---------------
Income (loss) before provision for income tax (1,275,000) (68,000) 3,248,000
Provision for income tax 165,000
Net income (loss) $(1,275,000) $ (68,000) $ 3,083,000
=============== ============== ============
Net income (loss) per share of common
stock - basic and diluted $(.02) $(.00) $.04
=============== ============== ============
Weighted average number of common shares
outstanding - basic and diluted 82,190,000 82,190,000 76,990,000
=============== ============== ============
</TABLE>
See notes to financial statements
F-4
<PAGE>
CAREADVANTAGE, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
Consolidated Statements of Stockholders' Equity
Common Stock
------------------
Number Par
of Value Additional Accumulated Stockholders'
Shares Amount Capital Deficit Equity
------ ------ ---------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Balance as of November 1, 1997 $74,389,886 $ 74,000 $ 19,640,000 $ (21,690,000) $ (1,976,000)
Exchange of CW Ventures note for common
stock 7,799,997 8,000 2,369,000 2,377,000
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
Issuance of compensatory stock options 53,000 53,000
Net loss for the year ended December 31, 1999 (1,275,000) (1,275,000)
----------- ---------- ------------- -------------- -----------
Balance as of December 31, 1999 82,189,883 $ 82,000 $ 22,062,000 $ (19,950,000) $ 2,194,000
=========== ========== ============= ============== ===========
</TABLE>
See notes to financial statements
F-5
<PAGE>
CAREADVANTAGE, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
Consolidated Statements of Cash Flows
Two Months
Year Ended Ended Year Ended
December 31, December 31, October 31,
1999 1998 1998
------------ ------------ -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (1,275,000) $ (68,000) $ 3,083,000
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 1,277,000 215,000 1,143,000
Write off of software development cost 344,000
Compensatory stock options 53,000
Changes in:
Accounts receivable stockholder (55,000) (33,000)
Accounts receivable other 142,000 352,000 (259,000)
Other current assets 80,000 (236,000) 170,000
Accounts payable 120,000 30,000 (188,000)
Accrued compensation and related benefits (252,000) 648,000
Accrued expenses and other current liabilities (269,000) 28,000 (180,000)
Deferred revenue (173,000) (29,000) 31,000
--------------- ---------- -------------
Net cash provided by operating activities 244,000 40,000 4,415,000
--------------- ---------- -------------
Cash flows from investing activities:
Capital expenditures (775,000) (47,000) (1,133,000)
--------------- --------------- -------------
Cash flows from financing activities:
Principal payments under long-term debt (319,000) (103,000) (575,000)
Principal payments under note payable, stockholder (889,000) (281,000)
--------------- --------------- -------------
Net cash used in financing activities (1,208,000) (384,000) (575,000)
--------------- --------------- -------------
Net increase (decrease) in cash and cash equivalents (1,739,000) (391,000) 2,707,000
Cash and cash equivalents - beginning of period 3,354,000 3,745,000 1,038,000
--------------- --------------- -------------
Cash and cash equivalents - end of period $ 1,615,000 $ 3,354,000 $ 3,745,000
=============== =============== =============
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 $ 61,000 $ 27,000 $ 85,000
Income taxes paid $ 56,000 $ 115,000
</TABLE>
See notes to financial statements F-6
<PAGE>
CAREADVANTAGE, INC. AND SUBSIDIARIES
Notes to Financial Statements
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 ("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 has a service agreement with Horizon BCBSNJ which expires on June
30, 2000 and accounted for approximately 80% of revenue for 1999. Although the
precise terms of a contract renewal have not yet been agreed upon, the Company
has been informed by Horizon BCBSNJ that Horizon BCBSNJ will continue to
contract with the Company for care management services for the indemnity portion
of the business at least until January 1, 2001. The indemnity portion of the
business accounts for approximately 90% of the total Horizon BCBSNJ contract
revenues on an annual 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 nonemployee 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>
CAREADVANTAGE, INC. AND SUBSIDIARIES
Notes to Financial Statements
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 year ended October 31, 1998. No revenue has been recognized
from this contract since 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 $435,000 and $538,000 for the years
ended December 31, 1999 and October 31, 1998, respectively and approximately
$90,000 for the two months ended December 31, 1998.
[4] Per share data:
Net income per share has been computed based on the weighted average number of
shares outstanding during the periods. The 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>
CAREADVANTAGE, INC. AND SUBSIDIARIES
Notes to Financial Statements
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
[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 requires 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 80% (Horizon BCBSNJ)
and 10% of net revenues for the year ended December 31, 1999 and approximately
67% (Horizon BCBSNJ) and 17% of net revenues for the year ended October 31,
1998. 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. The
loss of either 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 to 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>
CAREADVANTAGE, INC. AND SUBSIDIARIES
Notes to Financial Statements
NOTE C - INTANGIBLE ASSETS
Intangible assets net of accumulated amortization consist of the following:
December 31,
------------
1999 1998
---- ----
Service agreement $ 713,000 $ 835,000
License fees 58,000 167,000
Software development cost 512,000 693,000
---------------- ----------------
$ 1,283,000 $ 1,695,000
================ ================
[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 year agreement commencing November 1, 1994 for
products and services (the "License Agreement") with a software development
company which required an advance payment of $1,000,000. Pursuant to the License
Agreement, the Company was granted a license for 100 users under a non-exclusive
five year license for the use of certain existing software. In March 1999, the
Company upgraded the software and extended the term through February 2001 at a
cost of $100,000.
[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 $412,000 and
$135,000 for the years ended December 31, 1999 and October 31, 1998,
respectively and approximately $50,000 for the two-month period ended December
31, 1998.
F-10
<PAGE>
CAREADVANTAGE, INC. AND SUBSIDIARIES
Notes to Financial Statements
NOTE D - PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
December 31,
------------
1999 1998
---- ----
<S> <C> <C>
Computer equipment $ 1,330,000 $ 1,300,000
Furniture and fixtures 472,000 466,000
Office machines and telephone equipment 297,000 231,000
Leasehold improvements 218,000 118,000
Equipment under capital lease, consisting of:
Computer equipment 860,000 860,000
Telephone equipment 156,000 156,000
Leasehold improvements 309,000 309,000
----------------- --------------
3,642,000 3,440,000
Less accumulated depreciation and amortization (2,797,000) (2,161,000)
----------------- --------------
$ 845,000 $ 1,279,000
=============== ==============
</TABLE>
Amortization in connection with equipment under capital leases amounted to
$170,000 and $321,000 for the years ended December 31, 1999 and October 31,
1998, respectively and $50,000 for the two-month period ended December 31, 1998.
NOTE E - CAPITAL LEASE OBLIGATION
The Company has satisfied its lease obligation during the year ended December
31, 1999. The Company's obligations under the agreement were guaranteed by
Horizon BCBSNJ. The present value of minimum lease payments under capital leases
as of December 31, 1998 was $319,000.
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 Jun 30, 2000.
The Company has an agreement with Horizon BCBSNJ to suspend payments through
August 2000. Interest will continue to accrue at the five-year U.S. Treasury
yield, adjusted quarterly. Commencing September 1, 2000 the Company is to resume
making equal monthly installments of principal and interest to repay the debt by
March 31, 2001.
F-11
<PAGE>
CAREADVANTAGE, INC. AND SUBSIDIARIES
Notes to Financial Statements
NOTE G - STOCKHOLDERS' EQUITY
[1] Issuance of common stock:
On June 30, 1998, the Company became contractually obligated to issue and did
issue 7,799,997 shares of common stock to CW Ventures upon conversion of the CW
Note. The offer and sale of these shares have not been 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, 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 is 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 1996 Stock Option Plan as amended, (the "Stock Option Plan") is administered
by the Board of Directors of the Company. Pursuant to the terms of the 1996
Amended 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 years. Under the Stock Option Plan,
an aggregate of 18% of the Company's authorized number of shares of common stock
or 18,648,000 shares has been reserved for issuance.
The Board of Directors initially adopted the Stock Option Plan on June 6, 1996,
and the stockholders approved the plan on August 23, 1996. Effective January 8,
1999 and January 26, 1999, the board of directors approved amendments to the
plan to update the plan and to increased the number of shares and certain other
benefits available under the plan. Among other things, the amendments increased
the number of shares available for issuance under the plan by 9,648,000 shares,
permit the extension of the exercise periods of options upon the termination of
employment or the death or disability of a plan participant, provide that
nonqualified options may be issued with an exercise price less than 100% of the
fair market value, permit the payment of the exercise price by any lawful method
authorized by the Board of Directors, and remove certain restrictions on the
authority of the Board of Directors to amend the plan without stockholder
approval. The stockholders approved the amendments to the plan on July 7, 1999.
The 1996 Director Stock Option Plan as amended (the "Director Stock Option
Plan") is also administered by the Board of Directors of the Company. Pursuant
to the terms of the 1996 Amended Director Plan, the Board may select nonemployee
individual directors to be granted options. Each such option grant shall be (i)
at an exercise price which can be less than 100% of the fair market value of the
common stock on the date of grant; (ii) immediately exercisable, and (iii) for a
duration of ten years from the date of grant. An aggregate of 2,072,000 shares
has been reserved for issuance pursuant to the Director Stock Option Plan.
The Board of Directors initially adopted the Director Stock Option Plan on June
6, 1996, and the stockholders approved the plan on August 23, 1996. Effective
January 26, 1999, the Board of Directors approved amendments to the plan to
provide the Board of Directors with increased flexibility in the terms and
conditions of stock options it may award. Among other things, the amendments
authorize the Board of Directors to determine the number of shares to be covered
under an option, the term of each option and the vesting of each option; permit
the extension of the exercise periods of options upon the termination of
directorship or the death or disability of a plan participant; eliminate the
requirement that an option grantee sign an option agreement in order for it to
be effective; and remove certain restrictions on the authority of the Board of
Directors to amend the plan without stockholder approval. The stockholders
approved the amendments to the plan on July 7, 1999.
F-12
<PAGE>
CAREADVANTAGE, INC. AND SUBSIDIARIES
Notes to Financial Statements
NOTE G - STOCKHOLDERS' EQUITY (CONTINUED)
[3] Stock option plans: (continued)
The following is a summary of stock option activity during the years
ended December 31, 1999 and October 31, 1998:
<TABLE>
<CAPTION>
1999 1998
---- ----
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
------ --------- ------ --------
<S> <C> <C> <C> <C>
Outstanding at beginning of period 1,420,000 $1.44 1,853,000 $1.50
Granted 15,279,000 0.08
Cancelled (2,250,000) 0.12 (433,000) 1.67
---------- ---------
Outstanding at end of period 14,449,000 0.21 1,420,000 1.44
========== =========
Exercisable at end of period 2,528,000 $0.65 1,170,000 $1.58
========== =========
</TABLE>
No options were granted or cancelled in the two-month period ended December 31,
1998.
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 December 31, 1999 and October 31, 1998 would
have been approximately $(1,559,000) and $3,070,000 or $(.02) and $.04 per
share, respectively. Pro forma net loss for the two months ended December 31,
1998 would have been approximately $70,000.
[4] Warrants:
The Company issued 166,667 warrants in 1996 to CW Ventures in connection with a
bridge financing. The warrants expire in February 2001.
F-13
<PAGE>
CAREADVANTAGE, INC. AND SUBSIDIARIES
Notes to Financial Statements
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>
December 31,
------------
1999 1998
---- ----
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 4,199,000 $ 3,863,000
Accrued liabilities 244,000 192,000
Deferred revenue 33,000 105,000
Alternative minimum tax credit 50,000 50,000
------------- --------------
4,526,000 4,210,000
Deferred tax liabilities:
Excess of book over tax cost basis of fixed
assets and software costs 364,000 474,000
------------- -------------
Net deferred tax asset 4,162,000 3,736,000
Valuation allowance (4,162,000) (3,736,000)
------------- -------------
$ 0 $ 0
============= ==============
</TABLE>
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 $12,350,000 at December 31, 1999 and
approximately $11,362,000 at December 31, 1998, expiring through 2019. 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 amount of the carryforward and
its annual utilization may be reduced upon examination by the Internal Revenue
Service. The valuation allowance on the Company's deferred tax asset increased
approximately $426,000 and $21,000 for the year ended December 31, 1999 and 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>
Year Two Months Year
Ended Ended Ended
----- -----
December 31, October 31,
------------ -----------
1999 1998 1998
---- ---- ----
<S> <C> <C> <C>
Income taxes at federal statutory rate $ (434,000) $ (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 8,000 2,000
Change in valuation reserve 426,000 21,000 (191,000)
-------------- ---------- ----------------
$ 0 $ 0 $ 165,000
=============== =========== ==================
</TABLE>
F-14
<PAGE>
CAREADVANTAGE, INC. AND SUBSIDIARIES
Notes to Financial Statements
NOTE I - COMMITMENTS, CONTINGENCIES AND OTHER MATTERS
[1] Potential uninsured exposure to litigation:
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 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 stage of the proceeding, to evaluate the merits of this action,
but intends to defend the matter vigorously. The Company believes it has
adequately provided for this claim as of December 31, 1999.
F-15
<PAGE>
CAREADVANTAGE, INC. AND SUBSIDIARIES
Notes to Financial Statements
NOTE I - COMMITMENTS, CONTINGENCIES AND OTHER MATTERS (CONTINUED)
[2] 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.
[3] 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]).
In a related matter, the customer has made a third party complaint against the
Company alleging that in the event the customer is required to pay certain funds
to Horizon BCBSNJ, as alleged in a complaint brought by Horizon BCBSNJ against
the customer, that the Company is obligated to pay the customer up to one-half
of such amount on account of an agreement among the customer, Horizon BCBSNJ and
the Company (see Note B[2]).
[4] 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 December 31, 1999 and October 31, 1998 was
$479,000 and $463,000, respectively. Rent expense for each of the two-month
period ended December 31, 1998 was $77,000.
F-16
<PAGE>
CAREADVANTAGE, INC. AND SUBSIDIARIES
Notes to Financial Statements
NOTE I - COMMITMENTS, CONTINGENCIES AND OTHER MATTERS (CONTINUED)
[5] Employee benefit plans:
The Company administers a profit-sharing/savings plan pursuant to Section 401(k)
of the Internal Revenue Code. 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 $186,000 and $163,000 for the years
ended December 31, 1999 and October 31, 1998, respectively, and $31,000 for the
two-month period ended December 31, 1998.
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 LIBOR rate, plus 45 basis points with an
option to convert to a base prime rate. The facility expires June 30, 2000. As
of December 31, 1999, there were no amounts outstanding under the working
capital facility, except a letter of credit in favor of a vendor (see Note K).
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"). The Horizon BCBSNJ Option would have been exercisable in the event the
Company had achieved certain goals for defined periods through February 2000,
which goals were not achieved. The option was granted by CW Ventures to Horizon
BCBSNJ in consideration of Horizon BCBSNJ revising its Services Agreement with
the Company, entering into a joint services agreement between Horizon BCBSNJ,
the Company and an unrelated party, and an 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.
F-17
EMPLOYMENT AGREEMENT
AGREEMENT dated as of April 19, 1999 ("Commencement Date) by and between
CareAdvantage, Inc. ("Company") and Dennis J. Mouras ("Employee").
1. Employment. Company agrees to employ Employee, and Employee agrees to be so
employed, in the capacity of Senior Vice President for Marketing and Sales at
the Company's headquarters, and shall have the duties customary to such office
and such ancillary and other duties as the President and Chief Operating Officer
shall reasonably determine.
2.Time and Efforts. Employee shall diligently and conscientiously devote his
full and exclusive time and attention and best efforts in discharging his duties
as Senior Vice President for Marketing and Sales.
3. Compensation.
3.1 Salary. Commencing upon the Commencement Date, the Company shall
pay Employee compensation for his services at an annual rate of $225,000. This
amount shall be paid in bi-weekly installments. The Company shall deduct from
all compensation due the Employee applicable payroll taxes, withholding taxes
and other required amounts.
3.2 Commissions. As additional compensation, the Company agrees to pay
Employee sales commissions with respect to contracts for new clients entered
into during Employee's employment ("New Contracts") (excluding any contract that
may be entered into between the Company and the New York City Health and
Hospitals Corporation) in an amount equal to two and one-half (2.5%) percent of
collected revenues with respect to the first year such New Contracts remain in
effect. In addition, in the event (i) the Company collects revenues on account
of a New Contract with respect to such contract's second year, (ii) such
collected revenues exceed the collected revenues with respect to the first year,
and (iii) a portion of such collected revenues are attributable to (A) a
population not serviced by the Company during the entirety of such first year,
or (B) a product not provided by the Company during the entirety of the first
year, then the Company agrees to pay you commissions with respect to the second
year in an amount equal to two and one-half (2.5%) percent of the smaller of (1)
such portion of collected revenues attributable to such new population or
product, or (2) the amount by which collected revenues for the second year
exceed collected revenues for the first year. Notwithstanding anything herein to
the contrary, the Company shall not pay Employee aggregate commissions in excess
of $150,000 with respect to any New Contract; provided, however, the Company
shall not pay Employee aggregate commissions in excess of $100,000 with respect
to any contract that may be entered into between the Company and Michigan Blue
Cross and Blue Shield. The Company shall pay commissions due to the Employee
monthly, with commissions on account of any month to be paid the month following
the month in which the Company collects revenues. The Company shall deduct from
all commissions due the Employee applicable payroll taxes, withholding taxes and
other required amounts.
4. Stock Options and Fringe Benefits. The Company shall provide the Employee
with the stock options and fringe benefits as described in Exhibit A.
5. Expense Reimbursement. The Company shall reimburse Employee for all
reasonable and necessary expenses incurred in carrying out his duties under this
Agreement. Employee shall present to the Company from time to time an itemized
account of such expenses in any form required by the Company.
6. Term. Except as otherwise provided, this Agreement shall be for a one-year
term ending on the anniversary of the Commencement Date and shall renew for
successive one-year terms unless at least sixty (60) days prior to an
anniversary of the Commencement Date either party gives notice to the contrary.
<PAGE>
7. Termination Without Cause.
(a) The Company may without cause terminate this Agreement at any time
by notifying the Employee of such termination. In such event, the Employee shall
continue to render his services and shall be paid salary and commissions in
accordance with Sections 3.1 and 3.2 respectively up to the date of termination.
Thereafter, (i) the Employee shall receive no salary under Section 3.1; and (ii)
the Employee shall be entitled to receive commissions provided by Section 3.2 on
account of sales closed prior to his termination. In the event the Employee is
terminated without cause following a "change of control" of the Company, then
the preceding sentence shall be applied by substituting for clause (i) the
following: "(i) the Employee shall receive salary in accordance with Section 3.1
for six (6) months following the date of termination; and". For purposes of this
section, "change of control" shall mean any of the following events: (a) the
Company sells substantially all of its assets (regardless of whether this
Agreement is assigned in connection with such sale); (b) at least 50 percent of
the vote or 50 percent of the value of the Company's stock is sold, exchanged,
or otherwise disposed of, in one transaction; or (c) there is a merger or
consolidation of the Company in a transaction in which the Company's
stockholders receive 50 percent or less of the outstanding vote or value in the
new or continuing Company.
(b) The Employee may without cause terminate this Agreement by giving
sixty (60) days' written notice to the Company. In such event, the Employee
shall continue to render his services and shall be paid salary and commissions
in accordance with Sections 3.1 and 3.2 respectively up to the date of
termination. Thereafter, (i) the Employee shall receive no salary under Section
3.1; and (ii) the Employee shall receive no commissions with respect to revenues
collected by the Company during the month in which the date of termination
occurs or thereafter.
8. Termination With Cause. The Company may for cause terminate this Agreement at
any time by notifying the Employee of such termination and the cause therefor,
which cause may include, but not be limited, to death and disability. In such
event, Section 7 shall not apply, and the Employee shall receive no salary under
Section 3.1 after the date of termination; and, in the event such termination is
for a reason other than death or disability, the Employee shall receive no
commissions with respect to revenues collected by the Company during the month
in which the date of termination occurs or thereafter.
9. Confidentiality, Invention and Non-Solicitation Agreement. Simultaneously
with the execution of this Agreement, the parties shall execute the agreement
entitled "Confidentiality, Invention and Non-Solicitation Agreement."
10. Notices. All notices required or permitted to be given under this Agreement
shall be given by certified mail, return receipt requested, to the parties at
the following addresses or to such other addresses as either may designate in
writing to the other party.
If to Company:
President & Chief Operating Officer
CareAdvantage, Inc.
485-C Route 1 South
Iselin, New Jersey 08830
If to Employee:
35 South Second Street
Surf City, New Jersey 08008
11. Governing Law. This Agreement shall be construed and enforced in accordance
with the laws of the state of New Jersey.
12. Amendments. This Agreement may be amended only in writing, signed by both
parties.
13. Non-Waiver. A delay or failure by either party to exercise a right under
this Agreement, or a partial or single exercise of that right, shall not
constitute a waiver of that or any other right.
14. Binding Effect. The provisions of this Agreement, which shall replace all
other letters and agreements between Employee and Company regarding the subject
matter hereof, shall be binding upon and inure to the benefit of both parties
and their respective successors and assigns.
IN WITNESS WHEREOF, Company has by its appropriate officers, signed and
affixed its seal and Employee has signed and sealed this Agreement.
CAREADVANTAGE, INC. DENNIS J. MOURAS
By: /S/ Richard W. Freeman /S/ Dennis J. Mouras
--------------------------- -------------------------
<PAGE>
EXHIBIT A
STOCK OPTIONS AND FRINGE BENEFITS
1. Stock Options. Subject to approval by the Company's Board of Directors (or an
appropriate committee thereof), Employee shall be granted incentive stock
options in the Company to purchase 800,000 shares of the Company's Common Stock
on such terms and conditions as the Company's Board of Directors (or an
appropriate committee thereof) may determine in its sole discretion.
2. Fringe Benefits. The Employee shall be entitled to the following fringe
benefits:
(a) vacation leave in the amount of 20 days per year, accruing at the rate of
1.67 days per month;
(b) other leave (sick leave, personal time, and holidays) in the amount and on
the same terms and conditions as provided to other employees of the
Company;
(c) medical insurance, life insurance, and participation in the Company's
401(k) plan on the same terms and conditions as these benefits are provided
to other employees of the Company; and
(d) disability insurance (long- and short-term) on the same terms and
conditions as provided to senior management of the Company; and
(e) in the event Employee relocates to New Jersey prior to April 19, 2000, a
relocation allowance in the amount of $35,000, payable upon Employee's
change of his principal residence from Malvern, Pennsylvania to New Jersey.
The Company shall deduct from such $35,000 applicable payroll taxes,
withholding taxes and other required amounts.
<PAGE>
CAREADVANTAGE, INC.
CONFIDENTIALITY, INVENTION AND NON-SOLICITATION AGREEMENT
I, Dennis J. Mouras, as partial consideration for my employment by
CareAdvantage, Inc. or its subsidiaries and affiliates (including without
limitation CareAdvantage Health Systems, Inc. and Contemporary HealthCare
Management, Inc.) or successors in business (hereinafter individually and
collectively the "Company"), and for the compensation to be paid to me during
the continuance of such employment, enter into this Confidentiality, Invention
and Non-Solicitation Agreement (hereinafter "Agreement") as follows:
1. Non-Interference With Third-Party Rights
1.1 I understand that my employment with the Company is based on (a) my
representation that I am free to undertake employment with the Company and the
duties and obligations imposed under this Agreement without breach of any other
agreement (whether written or oral) or duty to another party, and (b) my
acknowledgment that the Company is entitled to the benefit of my work. I further
understand that the Company has no interest in using any person's patents,
copyrights, trade secrets or trademarks in an unlawful manner. As such, I shall
not misapply proprietary rights that the Company has no rights to use.
2. Confidentiality of Trade Secrets and Business Information
2.1 I acknowledge that during the course of my employment, I may develop and
obtain access to trade secrets and confidential business information of the
Company. Under the law a "trade secret" is a type of intangible property, and
its theft is a crime in most states. A trade secret generally consists of
valuable, secret information or ideas that the Company collects or uses in order
to keep its competitive edge. Examples of trade secrets are system designs,
computer programs and software, proprietary clinical protocols, operating
processes, and any other proprietary technology. "Confidential business
information," which the Company also treats as proprietary, consists of all
other competitively sensitive information kept in confidence by the Company.
Examples of confidential business information are selling and pricing
information and procedures, business and marketing plans, and internal financial
statements.
2.2 I agree to not use or disclose any trade secrets to which I am exposed or
have access to in the course of my employment with the Company, whether such
trade secrets belong to the Company (including trade secrets embodied or
contained in any Employee Developments as defined in Section 4.1) or to third
parties, during my employment and for so long afterward as the pertinent
information or data remain trade secrets, whether or not the trade secrets are
in written or tangible form, except as required and authorized during the
performance of my duties. I further agree to not use or disclose any
confidential business information to which I am exposed or have access to in the
course of my employment with the Company, whether such information belongs to
the Company (including confidential business information embodied or contained
in any Employee Developments as defined in Section 4.1) or to third parties,
during my employment and for so long afterward as the pertinent information or
data remain confidential business information, whether or not the confidential
business information is in written or tangible form, except as required and
authorized during the performance of my duties.
<PAGE>
3. Return of Company Property
3.1 At the request of the Company, and in any event, at the time of termination
of my employment, I will return all records, materials and other physical
objects that pertain to the Company's business or to my employment, including
but not limited to all memoranda, notes, records, drawings, manuals, documents,
papers, computer software and passwords or other identification materials
(including all copies thereof). I will also return to the Company all materials
involving any trade secrets or confidential business information of the Company.
The foregoing obligations apply to all materials relating to the affairs of the
Company or to any of its customers, clients, vendors or agents which may be in
may possession or control.
4. Ownership of Employee Developments
4.1 The Company shall be entitled to own and to control all care management,
medical, technological, operating, and training ideas, processes and materials
that are developed or conceived by me, solely or jointly with others, at any
time during my employment with the Company to the extent that they relate to the
Company's then present business (collectively known as "Employee Developments").
Accordingly, I will promptly disclose and make available to the Company all work
papers, models or other tangible embodiments of such Employee Developments.
Further, I will deliver and assign to the Company all copyrights, inventions,
discoveries, improvements and trade secrets (whether or not patentable),
including all interests in computer programs, arising in connection with my
employment with the Company, and I will take whatever steps may be needed to
give the Company the full and exclusive benefit of them. To the fullest extent
permitted by applicable law, all such inventions and developments shall be
considered work made for hire under applicable law, and I shall assign to the
Company all other rights that I may have in any such inventions and
developments.
5. Non-Solicitation
5.1 I agree that during the period commencing on the date hereof to and
including the first anniversary of the date on which I cease to be employed by
the Company (the "Non-Solicitation Period"), I and any entity in which I have an
equity interest shall not solicit any customer of the Company or any prospective
customer of the Company to provide (i) utilization review of inpatient or
outpatient care, managed care services, or disease management services
(collectively, "Care Management Services"), or (ii) training with respect to
Care Management Services. For purposes of this Section, a "prospective customer
of the Company" includes (A) any entity to which, during the period of my
employment with the Company, the Company has made a proposal to provide Care
Management Services or training with respect to Care Management Services, or (B)
any entity that the Company specifically identifies as a prospective customer,
in good faith, during the term of my employment with the Company; a "prospective
customer" shall not include an entity that would otherwise meet the definition
of Clause (A) where such entity has expressly indicated to the Company (prior to
any solicitation by me or an entity in which I have an equity interest) that it
is not interested in becoming a customer of the Company. Notwithstanding the
foregoing, however, this Section shall not be deemed to prevent me from (a)
investing in securities if such class of securities in which the investment is
so made is listed on a national securities exchange or is issued by a company
registered under Section 12(g) of the Securities Exchange Act of 1934, so long
as such investment holdings do not, in the aggregate, constitute more than 1% of
the voting stock of any company's securities, or (b) making passive investments
in which I do not participate in management. I further agree that during the
Non-Solicitation Period, I shall not seek or accept employment, an affiliation,
a consultancy or any other arrangement with any entity with which Company, at
the time of the termination of my employment, has or is negotiating a business
relationship other than as a vendor to the Company.
5.2 I acknowledge that I have been employed for my special talents. I further
acknowledge that my training, experience and technical skills are of such
breadth that the foregoing obligations will not unreasonably impair my ability
to engage in business activity after the termination of my employment.
<PAGE>
5.3 I agree that I will not, during the Non-Solicitation Period, hire or offer
to hire or entice away or in any other manner persuade or attempt to persuade,
either in my individual capacity or as agent for another, any of Company's
officers, employees, or agents to discontinue their relationship with the
Company. I further agree that I will not, during the Non-Solicitation Period,
contract, solicit or divert or attempt to contact or divert from the Company any
business whatsoever by influencing or attempting to influence any customer or
account of the Company at the time of termination of my employment.
6. Other Terms
6.1 This Agreement shall inure to the benefit of, and shall be binding upon, the
Company and its subsidiaries and affiliates, together with their successors, and
me, together with my executor, administrator, personal representative, heirs and
legatees.
6.2 This Agreement merges with and supersedes all prior and contemporaneous
agreements and understandings (except the Employment Agreement between the
parties executed contemporaneously herewith), whether written or oral, express
or implied, to the extent they contradict or conflict with the provisions
hereof.
6.3 If any term of this Agreement is found to be unlawful or unenforceable in
any respect, the courts shall enforce such term, in whole or in part, and all
other terms of this Agreement to the fullest extent possible.
6.4 Irreparable harm should be presumed if this Agreement is breached in any
way. Damages would be impossible to ascertain, and the faithful observance of
all terms of this Agreement is an essential condition of employment with the
Company. Furthermore, this Agreement is intended to protect the proprietary
rights of the Company in important ways, and even the threat of any misuse of
any proprietary information disclosed to or developed by me under this Agreement
would be extremely harmful because of the importance and value of such material.
In light of these considerations, I agree that upon the Company's request a
court of competent jurisdiction should immediately enjoin any breach of this
Agreement upon proof of such matters as may be required by such court, other
than irreparable harm which should be presumed as aforesaid. In addition, the
Company is released from the requirement to post any bond in connection with a
grant of a temporary or interlocutory relief, to the extent permitted by law.
6.5 My obligations under this Agreement shall remain unaffected by the
termination of my employment with the Company.
6.6 This Agreement shall be governed by and enforced in accordance with the laws
of the State of New Jersey.
CAREADVANTAGE, INC. DENNIS J. MOURAS
By: /s/ Richard W. Freeman /s/ Dennis J. Mouras
---------------------- ----------------------
Richard W. Freeman Dennis J. Mouras
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains financial information
extracted from Form 10KSB for the year ended
December 31, 1999 and is qualified in its entirety
be reference to such financial statements
</LEGEND>
<CIK> 0000937252
<NAME> CareAdvantage
<MULTIPLIER> 1
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> Dec-31-1999
<PERIOD-START> Jan-01-1999
<PERIOD-END> Dec-31-1999
<EXCHANGE-RATE> 1
<CASH> 1,615,000
<SECURITIES> 0
<RECEIVABLES> 1,308,000
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 3,143,000
<PP&E> 845,000
<DEPRECIATION> 0
<TOTAL-ASSETS> 5,373,000
<CURRENT-LIABILITIES> 3,179,000
<BONDS> 0
0
0
<COMMON> 82,000
<OTHER-SE> 2,112,000
<TOTAL-LIABILITY-AND-EQUITY> 5,373,000
<SALES> 0
<TOTAL-REVENUES> 16,410,000
<CGS> 0
<TOTAL-COSTS> 17,728,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 43,000
<INCOME-PRETAX> (1,275,000)
<INCOME-TAX> (1,275,000)
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,275,000)
<EPS-BASIC> (.02)
<EPS-DILUTED> (.02)
</TABLE>
