UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


WASHINGTON, DC 20549










FORM 10-K





ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934





For the fiscal year ended December 31, 2010





Commission file number0-26168





CAREADVANTAGE, INC.


(Exact name of registrant as specified in its charter)


Delaware

22-3326528(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification Number)





485-A Route 1 South, Iselin, New Jersey

08830(Address of principal executive offices)

(Zip Code)





Registrant’s telephone number, including area code:  (732) 362-5000





Securities registered pursuant to Section 12(b) of the Act:  None


Securities registered pursuant to Section 12(g) of the Act:  Common Stock, par value $.001 per share





Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes ̈ Noþ





Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.  Yes ̈ Noþ





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 12 months (or 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. Yesþ  No ̈





Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes   ̈  No    ̈   (Not Applicable)





Indicate by check mark if disclosures of delinquent filers pursuant to Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ





Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. (See definition of “accelerated filer”, “large accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act).  (check one):  Large accelerated filer ̈  Accelerated filer ̈ Non-accelerated filer ̈  Smaller reporting companyþ





Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).Yes ̈ Noþ





The aggregate market value of the registrant’s outstanding voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter:  $451,427.22





The number of shares of the registrant’s common stock outstanding as of March 9, 2011:  145,250,442





Documents Incorporated by Reference


None










This Annual Report of CareAdvantage, Inc. (“CareAdvantage” or the “Company”) on Form 10-K contains forward-looking statements within the meaning of The Private Securities Litigation Reform Act of 1995.  Readers of this report should be aware of the speculative nature of “forward-looking statements”.  Statements that are not historical in nature, including the words “anticipate”, “estimate”, “should”, “expect”, “believe”, “intend”, and similar expressions, are based on current expectations, estimates and projections about (among other things) the industry and the markets in which the Company and its subsidiaries operate; they are not guarantees of future performance.  Whether actual results will conform to expectations and predictions is subject to known and unknown risks and uncertainties, including risks and uncertainties discussed in this Form 10-K, particularly relating to revenues from performance-based services and re-negotiations of existing and new contracts with customers, general economic, market or business conditions; changes in our competitive position or competitive actions by other companies; changes in laws or regulations or policies of federal and state regulators and agencies; and other circumstances beyond the Company’s control.  Consequently, all of the forward-looking statements made in this document are qualified by these cautionary statements, and there can be no assurance that the actual results anticipated will be realized, or if substantially realized, will have the expected consequences on the Company’s business or operations.  For a more complete discussion of these and other risk factors, see Item 1A of Part I of this report.  Except as required by applicable laws, we do not intend to publish updates or revisions of forward-looking statements it makes to reflect new information, future events or otherwise.





Except as expressly provided otherwise, the terms “CareAdvantage” and Company” as used in this report refers to CareAdvantage, Inc. and the terms “we”, “us” and “our” refer collectively to CareAdvantage, Inc. and its consolidated subsidiaries.





PART I





ITEM 1.        BUSINESS





Introduction and Background





CareAdvantage, Inc. (“CareAdvantage” or the “Company”) and its direct and indirect subsidiaries, CareAdvantage Health Systems, Inc. (“CAHS”) and Contemporary HealthCare Management, Inc. (“CHCM”), are in the business of providing healthcare consulting services, data warehousing and analytic services designed to enable integrated health care delivery systems, healthcare plans, employee benefit consultants, other care management organizations, self-insured employers and unions to reduce the costs, while improving the quality of medical services provided to the healthcare participants. The services include care management program enhancement services, executive and clinical management services, training programs, risk stratification and predictive modeling. The Company operates in one business segment.





As part of offering its healthcare consulting services, the Company has developed RightPath® Navigator (“RPNavigator”), a proprietary tool to help its customers better understand and forecast resource consumption, risk, and costs associated with their respective populations. In providing its services, the Company licenses RPNavigator to its customers and provides consulting services in connection with that licensing. The tool uses 3M Company’ (“3M”) Clinical Risk Groups (“CRGs”), a classification methodology that groups members according to risk related to the individual’s clinical history and demographic information. RPNavigator, offers customers:





·
actionable financial and utilization data analytics;




·
clinical analyses of health status and medical cost trends;




·
identification of key management and quality opportunities;




·
enhanced group-/segment-specific reporting;




·
transparent methodology;




·
measurement of internal and external vendors; and




·
reduced dependence on internal resources to develop and produce required reports to accomplish these tasks.





With respect to RPNavigator license fees, most of the Company’s customers that license RPNavigator are required, as part of their agreements with the Company, to receive consulting services from the Company. All contracts provide for licensing of RPNavigator and consulting services at a fixed monthly or annual fee, a per member per month fee, or a combination of both. The Company earns the revenue from licensing and consulting services on a monthly basis and recognizes revenue from both sources on a monthly basis at either a fixed monthly fee, a per member per month fee or a combination of both. Additionally, the Company provides separate consulting services on a fee for service basis. Revenue for these consulting services is recognized as the services are provided.





2




Prior to January 1, 2003, the Company provided certain health care cost containment services, including utilization review, case management and disease management and independent reviews.  The Company provided these services principally to Horizon Blue Cross and Blue Shield of New Jersey, formerly known as Blue Cross Blue Shield of New Jersey, Inc. (“Horizon BCBSNJ”), which at the time was a major stockholder of the Company, and another Blue Cross Blue Shield organization.  During 2002, the Company ceased providing these services to the other Blue Cross Blue Shield organization, and as of December 31, 2002, to Horizon BCBSNJ on account of Horizon BCBSNJ’s termination of the Services Agreement as of that date.  As a result, beginning January 1, 2003, the Company ceased offering these services to new customers, since it no longer maintained the employees and infrastructure necessary to support their delivery.





Management believes that the Company must continue refining its current product offerings in order to continue adding value to existing and potential customers. Management intends to continue to evaluate its product offerings in light of anticipated changes in the health care industry, as well as the availability and timeliness of competent resources.  To further expand its product offerings, the Company may pursue alternatives to its internal product and service development efforts by entering into strategic alliances and joint ventures.





As previously reported by the Company on the Form 8-K filed on September 2, 2010, Blue Cross and Blue Shield of Texas (“BCBSTX”), a division of Health Care Service Corporation (“HCSC”), terminated the Service and License Agreement between the Company and BCBSTX effective November 30, 2010.  In so doing, HCSC nevertheless indicated a desire to continue to obtain ad hoc reports using the Company’s RPNavigator tool, as well as do business with the Company, and Mr. Mouras has proposed providing HCSC assistance regarding Accountable Care Organizations (“ACOs”) and “Medical Home” (wherein the health plan uses the physician’s office to manage care).  An officer of HCSC has indicated to Mr. Mouras that HCSC continues to be interested in working with the Company regarding ACOs and Medical Home, but it must first develop its strategy for these initiatives.  Accordingly, at present, it is uncertain whether the Company will obtain additional work from HCSC and if so, the timing and extent of any such additional work.  The Company recognized approximately $1,835,000 and $ 1,991,000 of revenues in 2010 and 2009, respectively, from BCBSTX.





The Company’s executive offices are located at 485-A Route 1 South, Metropolitan Corporate Plaza, Iselin, New Jersey 08830 and its telephone number is (732) 362-5000.





Industry Overview: Consumerism, Health Care Expenditures and Managed Care





The American health care market continues to evolve within the environmental emphases on consumer choice, coverage and confidentiality protections, and is still battling the double challenge of accelerating costs and an aging population.  Employer groups are still trying to find a balance, providing health insurance to employees in order to attract the highest quality human capital, while developing strategies to control escalating costs.  In addition to the previous considerations, the latest emphasis is shifting towards the principle of data transparency and exchange of electronic health care information.





Data transparency and exchange have several key characteristics, which include easy accessibility, standardized performance metrics, nationally recognized/MD-approved set of rules governing claim coding/grouping procedures, automated data sharing/integration availability via the Internet, an underlying reward system using chronic disease in lieu of episodic management/efficiency and demonstration of intervention benefits in a credible way.  The Health Information Technology for Economic and Clinical Health Act (“HITECH Act”) and economic stimulus package go a long way toward providing protection for health information while creating standards for transfer/sharing of electronic health information.  In addition is the creation of grants for the adoption of electronic health records (EHR) and health information exchanges.





Healthcare Reform and Centers for Medicare and Medicaid (“CMS”) continue to drive change to healthcare delivery.  The Accountable Care Organizations (“ACO”) delivery model is expected to reduce utilization and improve quality by providing a team approach to patient care.  This focus will require Payers and ACO’s to design programs around outcomes-based performance measures and data management and analytic strategies to ensure appropriate care is being given and that cost savings is a direct result of improving quality.





The above focus of the marketplace points to an increased emphasis on health care quality and cost-benefit.  Tools that provide clear and defensible information that is based on best practice and express results based on the relative severity of disease of the underlying population provide full and accurate disclosure.  The same tools are necessary to identify best practices and test disease management activities and new treatment options.  Using these tools to monitor, measure and report on clinical outcomes is critical to success.





Services and Products




The Company is a management consulting firm specializing in the improvement of health care delivery and quality while reducing unnecessary cost.  The Company has a proven track record for detecting and reducing unnecessary utilization while optimizing program performance and quality of care.  Program performance and quality of care are measured not only on the basis of reduced costs but also using the context of a population’s relative disease burden/severity, the rate at which it has progressed and the degree to which the interventions of particular providers and programs have had an impact on that  progression rate.





3





CareAdvantage clients include health plans, employers, hospital systems, providers, state governments and other purchaser groups.  For the past 15 years, the Company has worked with many leading health plans to develop effective, affordable and timely data-driven strategies that improve case, disease and utilization, as well as operations and network management.  These strategies have helped CareAdvantage clients to more effectively:





·
Identify and quantify disease burden and associated risk with their entire population and sub-populations;


·
Improve member care quality through the defensible evaluation of health care providers and facilities;


·
Facilitate provider cooperation and collaboration based on case mix and severity-adjusted data;


·
Forecast resource consumption based on disease burden; and


·
Optimize allocation of resources.





Recently, the Company has also assisted health plan clients with respect to further validating the value that they bring to purchasers and have had a demonstrable impact on sales retention and attraction of new sales.  The RPNavigator suite of services that the Company offers our state government customers provides opportunities in transparency, improving quality, controlling costs and providing information to consumers and healthcare policymakers to make informed decisions.





In addition, this expertise has been applied to help employers assess the efficiency and effectiveness of their present health care insurers, carriers and supporting vendors.  CareAdvantage achieves this by empowering employers with the information, skills and guidance necessary to facilitate future purchasing decisions and optimize managerial and administrative practices.





In order to deliver these solutions, CareAdvantage utilizes experienced health plan executives and medical directors as well as a wide range of care management operations, clinical data analysis and information technology (IT) subject-matter experts.  It is this vast array of experience that enables CareAdvantage to benefit clients with objective and quantifiable insight to develop the strategies and tactical initiatives that combine care management processes with a deep understanding of medical and health care insurance-related best practices.





Operations




The Company utilizes a multi-disciplinary team approach in providing its management, data analysis and consulting services.  The Company, through its employees and independent contractors, assesses care management operations, systems resources, integration and outcomes.  Typically, assessment occurs on the client’s site, through interviews and data analysis.  At the center of CareAdvantage’s data-driven analyses is RPNavigator, the next generation software solution.  RPNavigator categorizes and quantifies a population’s disease burden and provides a clear picture of the health status and severity associated with its clients’ member populations.  RPNavigator’s underlying infrastructure incorporates classification methodologies from 3M Health Information Systems along with various analytical techniques to stratify the population and describe the individual member’s associated risks in intuitive ways.  It also enables the valid assessment of existing health care quality and cost as well as projection of future risk from a resource consumption, disease progression and mortality perspective. RPNavigator includes a data mining tool (RPN3) that employs multi-dimensional “cubes” (data structures) for online analytic processing.  RPN3 references the same data set within RPNavigator and allows power users additional flexibility in querying that data.




4





RPNavigator utilizes this information to stratify its clients’ members, groups and providers through the use of a wide range of clinical and demographic descriptors to quantify their risk as well as evaluate the impact of key interventions and programs.  These descriptors and the underlying logic increase the associated transparency of the resulting analyses and support the new direction of the industry.   Among the benefits of this solution is the ability of CareAdvantage clients to:





·
Access meaningful information via an Internet-based portal;


·
Track population and member-related changes in disease status and severity over time;


·
Compare client sub-populations;


·
Profile provider using case mix and severity-adjusted techniques;


·
Select and prioritize members who would best benefit from care management interventions;


·
Understand adverse selection associated with existing and/or newly-obtained business as well as understand the impact of a plan’s overall turnover in terms of stayers and leavers; and


·
Reduce the dependence on internal resources to develop and produce required reports to accomplish these tasks.





There are several related efforts that result in additional sources of income for CareAdvantage, including:




·
Developing new standardized analyses on a client-specific basis to meet a particular need for that client;


·
Undertaking broader analytic consulting projects, using the methodology and logic within RPNavigator, on behalf of clients that need CareAdvantage’s expertise in analyzing and interpreting the data;


·
Offering experienced health care executives for care management program leadership, internal physician review services, and mentoring of less experienced health plan staff (“Executive and Clinical Management Services”).





CareAdvantage also supports its clients through the provision of a wide range of consulting services to develop and implement the right solutions.  These solutions provide the health care industry with strategies and tactical initiatives for effectively managing health care consumption, reducing costs and improving the quality and cost benefit of care.





For its services, the Company is compensated either (i) on a fee-for-service basis; (ii) per member per month (PMPM); or (iii) on the basis of a combination of both fee-for-service and PMPM.





Customers and Marketing





The Company currently provides its services to Blue Cross Blue Shield (“BCBS”) organizations and other health plans, employers, organized labor, other health care purchasers and the State of Utah Department of Health pursuant to one or a combination of the compensation arrangements described above.





The Company markets its services to the health insurance industry, health service organizations, hospitals, insurance carriers, state governments, employers and unions.





Two customers, BCBS organizations, accounted for approximately 53% and 18% of license fees and services revenue for the year ended December 31, 2010.  As stated above, BCBSTX, one of these customers, which accounted for 53% and 49% of the license fees and services revenue for in each of 2010 and 2009, respectively, terminated the BCBSTX Agreement effective November 30, 2010.




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’s services. There are also a number of organizations developing a variety of approaches that are in competition with the Company’s products and services.  Some of the Company’s competitors have substantially greater financial resources and employ substantially greater numbers of personnel.





The Company intends to compete by offering what it believes to be the most comprehensive approach in the marketplace to address the medical cost and quality of care issues.  Further, it believes that its competitive position is enhanced by its ability to develop tailored programs for large clients.




5





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 made 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.  Its exposure in this regard is substantially reduced since it ceased providing utilization review and case management services as of December 31, 2002.  Nonetheless, until the applicable statutes of limitations have run, the Company retains exposure for past activities as well as on account of its continued internal physician review services offered as part of its Executive and Clinical Management Services.





The Company’s operations in a particular state are typically subject to certification by the appropriate state agency.  The Company has received or has filed the necessary application for such certification where required.  In addition, various state and federal laws regulate the relationships between providers of health care services and physicians and other clinicians, including employment or service contracts, investment relationships and referrals for certain designated health services.  These laws include the fraud and abuse provisions of the Medicare or Medicaid statutes, which prohibit the solicitation, payment, receipt or offering of any direct or indirect remuneration for the referral of Medicare or Medicaid patients or for the ordering or providing of Medicare or Medicaid covered services, items or equipment.  Violations of these provisions may result in civil or criminal penalties for individuals or entities including exclusion from participation in the Medicare and Medicaid programs.  Several states have adopted similar laws that cover patients in private programs as well as government programs.  Because the anti-fraud and abuse laws have been broadly interpreted, they may limit the manner in which the Company can acquire businesses and market its services to, and contract for services with, other health care providers.





The Company’s management believes that its present operations are in compliance with all applicable laws and regulations and that it maintains sufficient comprehensive general liability and professional liability insurance coverage to mitigate claims to which the Company may be subject in the future. The Company is unable to predict what, if any, government regulations affecting its business may be enacted in the future or how existing or future regulations may be interpreted.  To maintain future compliance, it may be necessary for the Company to modify its services, products, structure or marketing methods.  This could increase the cost of compliance or otherwise adversely affect the Company’s operations, products, profitability or business prospects.





Health Information Security and Privacy Practices





The Health Insurance Portability and Accountability Act of 1996, as amended, (“HIPAA”) is a federal law that affects the use, disclosure, transmission and storage of individually identifiable health information, referred to as “protected health information.” HIPAA was enacted for the purpose of, among other things, protecting the privacy and security of protected health information. As directed by HIPAA, the Department of Health and Human Services (“DHHS”) must promulgate standards or rules for certain electronic health transactions, code sets, data security, unique identification numbers and privacy of protected health information. DHHS has issued some of these rules in final form, while others remain in development. HIPAA and the standards promulgated by DHHS apply to certain health plans, healthcare clearinghouses and healthcare providers (referred to as “covered entities”), which includes some of our customers.  The HITECH Act, which was enacted as part of the American Recovery and Reinvestment Act of 2009, requires hospitals and health care systems to make investments in their clinical information systems.  Additionally, the HITECH Act significantly expanded HIPAA by extending the security standards of HIPAA to “business associates” of covered entities.  Under the HITECH Act, business associates are required to establish administrative, physical and technical safeguards and are subject to direct penalties for violations.  Our activities frequently entail us acting in the capacity of a business associate to the customers that we serve, and therefore we are covered by the patient privacy and security standards of HIPAA and subject to oversight by DHHS.   We believe that we have taken all necessary steps to comply with HIPAA, as it applies to us as a business associate, but it is important to note that DHHS could, at any time in the future, adopt new rules or modify existing rules in a manner that could require us to change our systems or operations.





See the “Risk Factors” section in Item 1A herein for more information regarding the impact of privacy and security regulation on our Company.




6





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.





In March 2010, President Obama signed into law the Patient Protection and Affordable Care Act of 2010 (the Affordable Care Act”) and the Health Care and Education Reconciliation Act of 2010 (the “Reconciliation Act”), which deleted and modified a number of tax and revenue provisions in the Affordable Care Act.  The Affordable Care Act and the Reconciliation Act are collectively referred to as the “Reform Legislation.”  These pieces of legislation are the most sweeping health system changes since the passage of Medicare in 1965.     In general, the Reform Legislation seeks to reduce healthcare costs and decrease the number of uninsured legal U.S. residents by, among other things, requiring individuals to carry, and certain employers to offer, health insurance or be subject to penalties. The Reform Legislation also imposes new regulations on health insurers, including guaranteed coverage requirements, prohibitions on certain annual and all lifetime limits on amounts paid on behalf of or to plan members, increased restrictions on rescinding coverage, establishment of minimum medical loss ratio requirements, a requirement to cover certain preventive services on a first dollar basis, the establishment of state insurance exchanges and essential benefit packages, and greater limitations on how health insurers price certain of their products.




Many of the provisions of the Reform Legislation that expand insurance coverage will not become effective until 2014, and many provisions require regulations and interpretive guidance to be issued before they will be fully implemented.  Some provisions do not apply to health plans that were in place when the Reform Legislation was enacted and have not been substantially changed since.  In addition, it is difficult to foresee how individuals and businesses will respond to the choices available to them under the Reform Legislation. Furthermore, the Reform Legislation will result in future state legislative and regulatory changes, which we are unable to predict at this time, in order for states to comply with certain provisions of the Reform Legislation and to participate in grants and other incentive opportunities.  On January 19, 2011, the House of Representatives voted in favor of repealing the Reform Legislation, however, a few weeks later, the Senate defeated a repeal of the Reform Legislation.  In addition, a number of states have filed lawsuits challenging the constitutionality of certain provisions of the Reform Legislation.  As of February 22, 2011, two federal courts have ruled that the requirement for individuals to carry insurance is unconstitutional, while three other courts have upheld this provision, suggesting that an extended appellate process is likely.  Accordingly, although we do not currently anticipate any significant adverse effects on the Company as a direct result of the application of the Reform Legislation to our business, we are unable to predict what the indirect impacts of the Reform Legislation will be on our business through the effects on our customers that are health care industry participants.





See the “Risk Factors” section in Item 1A herein for more information regarding the impact of the recently enacted health care law.





Employees





At December 31, 2010, we employed a total of 11 employees, of which 10 were employed on a full-time basis.  Of the full-time employees, seven employees are engaged in servicing its clients and three are administrative support, finance and human resources personnel.  None of the Company’s employees are party to any collective bargaining agreements.





ITEM 1A.       RISK FACTORS





Company Risk





The Company has a history of lossesand we may not be able to continue as a going concern.At December 31, 2010, the Company had working capital of approximately $230,000, stockholders’ deficit of approximately $39,000 and an accumulated deficit of approximately $24,630,000.  At December 31, 2009, the Company had working capital of approximately $417,000, stockholders’ equity of approximately $164,000 and an accumulated deficit of approximately $24,399,000.  The losses in recent years were attributable in large part to legal fees incurred in protecting the Company’s intellectual property, rent for space in excess of the Company’s needs and the difficulty in obtaining revenue from a new product.     We may not be able to increase profitability on a quarterly or an annual basis in the future.  If we experience net losses in future periods, we may not be able to timely satisfy our obligations.  The Company has sustained recurring losses and decreasing operating cash flows, and, accordingly the Company’s independent registered public accounting firm has issued a report included herein, that contains an explanatory paragraph expressing substantial doubt about the Company’s ability to continue as a going concern.  The Company’s recurring losses and the decreasing operating cash flows raise substantial doubt about its ability to continue as a going concern.  The accompanying financial statements do not include any adjustments that might result from the outcome of this uncertainty




7





We face aggressive competition because new competitors can enter our field easily.The Company faces intense competition in a highly fragmented market of managed care services and new competitors can enter our field easily.  We believe our ability to compete will depend in part upon our ability to:





·
continue upgrading technology to leading edge;


·
respond effectively to technological changes;


·
focus development efforts on data available in electronic health record environment; and


·
meet the increasingly sophisticated needs of our customers.





Increased competition may result in price reductions, reduced gross margins, and loss of market share, any of which could have a material adverse effect on our results of operations. In addition, pricing, gross margin, and market share could be negatively impacted further as a greater number of available products in the marketplace increases the likelihood that product and service offerings in our markets become more fungible and price sensitive.





Due to increased merger and acquisition activity, we may face stronger competition in the future.Our industry, as well as many of our customers’ industries (i.e., health insurers and HMOs), have experienced significant merger and acquisition activity.  Merger and acquisition activity may result in decreased opportunities to provide our services.  The acquisition of a customer could reduce our revenue and have a negative impact on our results of operation and financial condition. A smaller overall market for our products and services could also result in lower revenue and margins.




Revenue from a limited number of customers comprises a significant portion of our total revenue, and one of these customershas terminated its agreement with us.  Two customers, both BCBS organizations, accounted for approximately 53% and 18% of license fees and service revenue for the year ended December 31, 2010.  BCBSTX, one of these customers, which accounted for 53% and 49% of the license fees and services revenue for in each of 2010 and 2009, respectively, terminated its agreement with the Company as of November 30, 2010 Management is currently in discussions with HCSC, BCBSTX’s parent, for other uses of RPNavigator; but HCSC has advised the Company that it must first develop its strategy for these other uses.  Accordingly, at present it is uncertain whether the Company will obtain additional work from HCSC and if so, the timing and extent of any such additional work is also uncertain.  If the Company does not replace the revenue that will be lost upon the termination of the BCBSTX Agreement by establishing a new relationship with HCSC and its subsidiaries and/or obtaining other business from its pipeline of other prospective clients, the Company will be required to significantly reduce its operations to match its remaining revenues.   If the Company cannot expand its product offerings and otherwise mitigate the effect of the loss of the BCBSTX Agreement the Company may need to pursue other alternatives to enable it to fund continuing operations, including, but not limited to, exploring strategic arrangements, which may include a merger, asset sale, joint venture or another comparable transaction, loans, salary deferrals, staff reductions or other cost cutting mechanisms, or raising additional capital by private placements of equity or debt securities or through the establishment of other funding facilities.  None of these potential alternatives may be available to the Company, or may only be available on unfavorable terms.  The Company does not currently have in place a credit facility with a bank or other financial institution.  If the Companyis not successful with these measures, the Company will continue to operate at a loss and will be required to wind up its operations, sell its assets, restructure the business, or liquidate.





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.





Our RPNavigator tool is dependent upon third-party risk stratification software.  The Company currently has a license from 3M to use its Clinical Risk Grouping SoftwareTM, which license expires on April 1, 2015, and renews automatically thereafter for successive one-year terms unless terminated by either party by written notice at least one year in advance.  In the event that 3M terminates its license at the end of the term, the Company would be required to license other third-party risk stratification software and would be required to reconfigure RPNavigator to accommodate such other software. Moreover, although risk stratification software is available from other third parties, including Johns Hopkins University and/or its affiliates, the Company believes that the 3M software is more robust than its competitors because it considers the severity of illnesses and diseases.  Because our RPNavigator tool depends on the integrity of third-party-risk stratification software, if the information contained in that software was 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.





The introduction of software products incorporating new technologies and the emergence of new industry standards could render the Company’s existing software products less competitive, obsolete or unmarketable. There can be no assurance that the Company will be successful in developing and marketing new software products that respond to technological changes or evolving industry standards. If the Company is unable, for technological or other reasons, to develop and introduce new software products cost-effectively in a timely manner in response to changing market conditions or customer requirements, the Company’s business, results of operations and financial condition may be adversely affected.





8





Developing or implementing new or updated software products and services may take longer and cost more than expected. The Company relies on a combination of internal development, strategic relationships, and licensing to develop its software products and services. The cost of developing new healthcare information services and technology solutions is inherently difficult to estimate.  If the Company is unable to develop new or updated software products and services cost-effectively on a timely basis and implement them without significant disruptions to the existing systems and processes of the Company’s customers, the Company may lose potential sales and harm its relationships with current or potential customers.





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.





Recently enacted health care reform legislation could adversely impact us.On March 21, 2010, the U.S. House of Representatives passed the Affordable Care Act, which was signed into law by President Obama on March 23, 2010.  Also, on March 25, 2010, both houses of the U.S. Congress passed the Reconciliation Act, which strikes out and modifies a number of tax and revenue provisions in the Affordable Care Act.  The Affordable Care Act and the Reconciliation Act are collectively referred to as the “Reform Legislation.” As stated previously in this report, these pieces of legislation are the most sweeping health system changes since the passage of Medicare in 1965.  The Reconciliation Act was signed into law by the President.on March 30, 2010.  Just after President Obama signed the Affordable Care Act into law, Senator Jim DeMint introduced Senate Bill 3152, which, if adopted, would have repealed the health care reform law.  Representatives Steve King of Iowa and Michelle Bachman of Minnesota also introduced bills in the House to repeal the Reform Legislation.   None of these three bills were considered by either body.  On January 19, 2011, however, the House of Representatives voted in favor of a bill called “Repealing the Job-Killing Health care Law Act” (H.R. 2), which repealed the Affordable Care Act and the health-care related text of the Reconciliation Act.  However, a few weeks later, the Senate defeated a repeal of the Reform Legislation, and President Obama has stated that he would veto any such bill.  Additionally, more than 26 states have filed lawsuits challenging the constitutionality of the health care reform law   As of February 22, 2011, two federal courts have ruled that the requirement for individuals to carry insurance is unconstitutional, while three other courts have upheld this provision, suggesting that an extended appellate process is likely.  Thus, the status of the health care reform law is at present very uncertain and the Company cannot predict if or how efforts to repeal the Reform Legislation, or any of these lawsuits, will impact the new legislation.





Federal and state laws that protect patient health information may increase our costs and limit our ability to collect and use that information.    There is substantial state and federal regulation of the confidentiality of patient health information and the circumstances under which such information may be used by, disclosed to, or processed by us as a consequence of our contacts with various health plans and healthcare providers. Although compliance with these laws and regulations is presently the principal responsibility of the health plan, hospital, physician or other healthcare provider, regulations governing patient confidentiality rights are dynamic and rapidly evolving.  As such, laws and regulations could be modified so that they could directly apply to us.  Also, changes to the laws and regulations that would require us to change our systems and our methods may be made in the future, which could require significant expenditure of capital and decrease future business prospects.  Furthermore, additional federal and state legislation governing the dissemination of patient health information may be proposed and adopted, which may also significantly affect our business.  Finally, certain existing laws and regulations require healthcare entities to contractually pass on their obligations to other entities with which they do business; as such, we are indirectly impacted by various additional laws and regulations.





The Company and the healthcare industry generally are impacted by HIPAA, which mandates, among other things, the adoption of standards to enhance the efficiency and simplify the administration of the healthcare system.  HIPAA is a federal law that affects the use, disclosure, transmission and storage of individually identifiable health information referred to as “protected health information.”  These restrictions and requirements are set forth in the Privacy Rule and Security Rule portions of HIPAA.  DHHS must promulgate standards or rules for certain electronic health transactions, code sets, data security, unique identification numbers, and privacy of protected health information.  DHHS has issued some of these rules in final form, while others remain in development. In general, under these rules, we function as a “business associate” to some of our customers (who are considered to be “covered entities” under HIPAA). The two rules relevant to us and our customers—the Privacy Rule, and the Security Rule—are discussed below.  It is important to note that DHHS could, at any time in the future, modify any existing final rule in a manner that could require us to change our systems or operations.




9





The Privacy Rule prohibits a covered entity from using or disclosing an individual’s protected health information unless the use or disclosure is authorized by the individual or is specifically required or permitted under the Privacy Rule.  The Privacy Rule imposes a complex system of requirements on covered entities for complying with the basic standard.  The Privacy Rule directly applies to covered entities which, in most instances, are required to execute a contract with any business associate that performs certain services on the covered entity’s behalf involving the exchange or creation of protected health information. Our health plan customers are covered entities, and to the extent that we are required by our customer contracts to ensure that we comply with various aspects of the Privacy Rule, we believe that we meet the requirements of the Privacy Rule.  The Privacy Rule and other similar state healthcare privacy regulations could materially restrict the ability of healthcare providers and health plans to disclose protected health information from patient records using our products and services, or it could require us to make additional capital expenditures to be in compliance.  Accordingly, the Privacy Rule and state privacy laws may significantly impact our products’ use in the healthcare delivery system and, therefore, decrease our revenue, increase working capital requirements and decrease future business prospects.




The Security Rule applies to the use, disclosure, transmission, storage and destruction of electronic protected health information by covered entities. The Security Rule requires that covered entities must implement administrative, technical and physical security measures to safeguard electronic protected health information.  Also, as with the Privacy Rule, under the Security Rule, covered entities are required to contractually bind their business associates to certain aspects of the Security Rule.  As such, where we function as a business associate to a customer that is a covered entity, we are required to enter into a business associate contract with that customer.  Such agreements must, among other things, provide adequate written assurances:




•
as to how we will use and disclose the protected health information;


•
that we will implement reasonable administrative, physical and technical safeguards to protect such information from misuse;


•
that we will enter into similar agreements with our agents and subcontractors that have access to the information;


•
that we will report security incidents and other inappropriate uses or disclosures of the information; and


•
that we will assist the covered entity with certain of its duties under the Privacy Rule.





With the enactment of the HITECH Act, the Privacy Rule and Security Rule of HIPAA have been modified and expanded.  The HITECH Act applies certain of the HIPAA privacy and security requirements directly to business associates of covered entities.  In other words, we must now directly comply with certain aspects of the Privacy and Security Rules, and are also subject to enforcement for a violation of HIPAA standards.  Significantly, DHHS, as required by the HITECH Act, has issued a regulation setting forth new mandatory federal requirements for both covered entities and business associates regarding notification of breaches of security involving protected health information.




Any failure or perception of failure of our products or services to meet applicable HIPAA standards and related regulatory requirements could expose us to certain notification, penalty and/or enforcement risks and could adversely affect demand for our products and services, and force us to expend significant capital, research and development and other resources to modify our products or services to address the privacy and security requirements of our customers and HIPAA.   The costs of complying with these contractual obligations, new legal and regulatory requirements, and the potential liability associated with the failure to do so could have a material adverse effect of on our business, financial condition and results of operations.




We believe our business practices and software offerings are consistent with the Privacy Rule and Security Rule, as modified by the HITECH Act. However, DHHS continues to publish change notices to the existing rules and propose new rules.  There is no certainty that we will be able to respond to all such rules in a timely manner and our inability to do so could adversely affect our business.




A breach of security may cause the Company’s customers to curtail or stop using the Company’s services.   Accidental or willful security breaches or other unauthorized access by third parties to the Company’s information systems, the existence of computer viruses in the Company’s data or software and misappropriation of the Company’s proprietary information could expose the Company to a risk of information loss, litigation and other possible liabilities which may have a material adverse effect on the Company’s business, financial condition and results of operations. If security measures are breached because of third-party action, employee error, malfeasance or otherwise, or if design flaws in the Company’s software are exposed and exploited, and, as a result, a third party obtains unauthorized access to any customer data, the Company’s relationships with its customers and its reputation will be damaged, the Company’s business may suffer and the Company could incur significant liability.  Because techniques used to obtain unauthorized access or to sabotage systems change frequently and generally are not recognized until launched against a target, the Company may be unable to anticipate these techniques or to implement adequate preventative measures.




10




Investment Risks





The market price of the Company’s Common Stock has been extremely volatile.The market price of the Company’s Common Stock 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.





Because the Common Stock is traded in the over-the-counter market in the OTC Bulletin Board, our stock is illiquid. The Company’s Common Stock is not listed on any exchange.  Rather, shares of Common Stock are traded through The NASDAQ Stock Market’s Over-the-Counter Bulletin Board, or “OTC Bulletin Board,” in the over-the-counter market.  The OTC Bulletin Board is a regulated quotation service that displays real-time quotes, last-sale prices and volume information in over-the-counter equity securities.  It is a quotation medium for subscribing members, not an issuer listing service, and should not be confused with national stock exchanges such as The NASDAQ Stock Market.  As a result, an investor may find it more difficult to dispose, 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.





The Common Stock is subject to additional sales practice requirements for low priced securities.The Company’s Common Stock is currently subject to Rule 15g-9 under the Securities Exchange Act of 1934, which imposes additional sales practice requirements on broker-dealers that sell shares of the 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:


·
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 the Company’s Common Stock and may affect the ability of the Company’s shareholders to sell any of their shares of Common Stock in the secondary market;





·
generally defines a “penny stock” to be any non-NASDAQ equity security that has a market price less than $5.00 per share or an exercise price of less than $5.00 per share, subject to certain exceptions;





·
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.  Because of these regulations, broker-dealers may encounter difficulties in their attempt to sell shares of the Company’s Common Stock, which may affect the ability of selling shareholders or other holders to sell their shares in the secondary market and have the effect of reducing the level of trading activity in the secondary market.  These additional sales practice and disclosure requirements could impede the sale of the Common Stock.  In addition, this rule may decrease the liquidity of the Company’s Common Stock, with a corresponding decrease in the price of our securities.





ITEM 1B.        UNRESOLVED STAFF COMMENTS





None.





ITEM 2.           PROPERTIES





The Company’s executive offices and operations are located in Woodbridge Corporate Plaza in Iselin, New Jersey.   The Company, through its subsidiary, CAHS, had executed a six-year lease for this facility commencing June 15, 1995, which was extended during 2000 for 10 additional years.  The Company guaranteed CAHS’ obligations under the lease.  The extended lease provided for an annual base rent of approximately $668,000 with annual escalations based on increases in real estate taxes and operating expenses.





On January 10, 2005, the Company, through CAHS, entered into a Second Amendment to Lease Agreement commencing January 1, 2005 to provide for the reduction in base rent and the waiver of escalations based on increases in real estate taxes and operating expenses, and to provide the landlord with the option to recapture up to 50% of the leased premises at any time.  (The landlord was granted the recapture option because when the Company ceased providing services to Horizon BCBSNJ, the Company no longer needed this space.)  The expiration date of the lease, March 31, 2011, remained unchanged by this Second Amendment.





11




As of March 26, 2008, the Company and landlord entered into a Third Amendment of Lease which provided that the reduction in base rent and the waiver of escalations based on increases in real estate taxes and operating expenses be deemed to be amortized on a straight line basis over the period commencing January 1, 2005 and ending March 31, 2011.





Effective May 1, 2009 and September 1, 2009, the Company signed sublease agreements with the same subtenant (the “Subtenant”) for approximately 3,700 and 600 square feet, respectively, of its office space, which called for monthly rental payments of approximately $7,000 and $1,200, respectively, to the Company from the Subtenant.  The term of each sublease ran 23 and 19 months, respectively, through March 31, 2011.  The sublease income does not cover the costs of the primary lease for the related space.  Consequently, in accordance with the accounting guidance, during the year ended December 31, 2009, the Company recognized a combined loss of approximately $90,000, which was included in selling, general and administrative expense.  The subleases were terminated in connection with the entry by the Company into a new lease with the landlord, discussed below.




On January 18, 2010, the Company received delivery of an executed new Office Lease with its current landlord for 6,189 square feet of space in Building A at Woodbridge Corporate Plaza, 485 Route One South, Iselin, New Jersey, the same office park in which the Company previously maintained its offices in Building C.  The new lease (“New Lease”) was made as of December 28, 2009, and its term commenced on April 15, 2010, the date the landlord delivered the new space to the Company.  The New Lease has a term of seventy-six full calendar months commencing May 1, 2010 (each a “Lease Month”), and a monthly base rent for Lease Months 1 to 12 of $22,512.49, and for Lease Months 13 to 76 of $14,441.00.  (The rent for the partial calendar month of April 2010 is a prorated portion of the base rent for the first Lease Month).  In addition to the base rent, the Company is obligated to pay separately metered electric charges, and commencing January 1, 2011, a ratable portion of increases from 2010 in real estate taxes, operating expenses and certain utility charges.  The New Lease provides the Company a credit of $10,057.13 against the monthly base rent for Lease Months 1, 2, 7 and 14.  In addition, the New Lease provides the Company an additional credit of $8,379.67 per month for the first 12 Lease Months.  The New Lease does not initially provide for a security deposit; however, the Company was required to deliver to the landlord no later than January 15, 2011, the sum of $10,000 to be held as a security deposit.  Finally, the landlord will perform, at its expense, certain work in readying the leased premises for the Company’s occupancy.





In connection with entering into the New Lease, the landlord and CAHS entered into a Surrender Agreement, delivered on January 18, 2010, and made as of December 28, 2009, pursuant to which the landlord agreed to terminate the prior lease as of March 31, 2010 (or the day before the commencement date of the New Lease, if later) (the “Surrender Date”), which prior lease would have otherwise expired on March 31, 2011.  As of the date the New Lease commenced, the security deposit of $167,027 under the prior lease was forfeited to the landlord.





Pursuant to the Surrender Agreement, (i) CAHS released the landlord from all claims arising out of the prior lease, and (ii) upon CAHS’s delivery of the premises to the landlord in accordance with the Surrender Agreement, and CAHS’s timely payment of rent and other expenses owed to the Landlord under the prior lease through the Surrender Date, the landlord released CAHS of all claims arising out of the prior lease.  Pursuant to the Surrender Agreement, the sublease agreements with the Subtenant were terminated effective as of the Surrender Date, and the Subtenant is currently leasing the subleased space directly from the landlord.





As a result of the New Lease, the Company recorded a loss of approximately $224,000 for the year ended December 31, 2010, which included the forfeiture of the security deposit under the prior lease as described above.





At December 31, 2010, the Company had deferred rent of approximately $316,000, representing the difference between the negotiated lease payment obligation and the rent expense on a straight-line basis over the term of the lease.




ITEM 3.          LEGAL PROCEEDINGS





Alan Fontes v. CareAdvantage, Inc., pending in Superior Court of New Jersey, Chancery Division, Monmouth County, was commenced in June 2004 by a former employee of the Company seeking compensation under various legal theories.  In October 2005, the court dismissed the claim under all theories except express contract.  The Company believes that Mr. Fontes’s claim is without merit and is contesting the matter vigorously.  Moreover, the Company filed a counterclaim for damages against Mr. Fontes claiming Mr. Fontes induced another employee to quit his employment with the Company and in October 2005, pursuant to court order, amended its counterclaim to seek equitable relief and damages against Mr. Fontes and Integrated eCare Solutions, LLC, claiming Mr. Fontes misappropriated and used certain Company property.  This matter is presently being tried before a chancery judge; the evidentiary portion of the trial concluded in fall 2010; and the attorneys are scheduled to appear before the court in May 2011 to argue proposed findings of fact and conclusions of law.





12


In March 2010, the Company commenced an action in United States District Court, District of New Jersey, against Rosario Noto, a former employee of the Company and a member of Integrated eCare Solutions, LLC, alleging Noto’s breach of his employee confidentiality agreement, breach of his implied covenant of good faith and fair dealing and unfair competition.  Noto has denied liability and asserted certain affirmative defenses.  This action is in the preliminary stages of discovery.




ITEM 4.          [REMOVED AND RESERVED]





13




PART II


ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES


Market Information





The Company’s Common Stock has traded in the over-the-counter market since June 12, 1995 and is currently quoted on the OTC Bulletin Board under the symbol “CADV”.  The following table shows the range of the high and low 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.


2010


2009Quarter Ended

High


Low


High


LowMarch 31,

$
.017


$
.005


$
.004


$
.001June 30,

$
.012


$
.006


$
.004


$
.001September 30,

$
.033


$
.005


$
.014


$
.003December 31,

$
.010


$
.006


$
.022


$
.008





Holders





As of March 9, 2011, there were approximately 2,401 holders of record of the Company’s Common Stock.  No shares of the Company’s preferred stock have been issued.





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, out of funds legally available for dividends, and is dependent on several factors, including the Company’s earnings and capital needs.





Securities Authorized for Issuance Under Equity Compensation Plans





Pursuant to the SEC’s Regulation S-K Compliance and Disclosure Interpretation 106.01, the information regarding the Corporation’s equity compensation plans required by this Item pursuant to Item 201(d) of Regulation S-K is located in Item 12 of Part III of this annual report and is incorporated herein by reference.





Issuer Purchases of Equity Securities





No shares of the Common Stock were purchased by or on behalf of the Company and its affiliates (as defined by Exchange Act Rule 10b-18) during the fourth quarter of 2010.


ITEM 6.
SELECTED FINANCIAL DATA


The Company is a smaller reporting company and is not required to provide the information contemplated by this item.




ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
 Executive Overview





The Company and its direct and indirect subsidiaries, CAHS and CHCM, are in the business of providing healthcare consulting services, data warehousing and analytic services designed to enable integrated health care delivery systems, healthcare plans, employee benefit consultants, other care management organizations, self insured employers and unions to reduce the costs, while improving the quality, of medical services provided to the healthcare participants. The services include care management program enhancement services, executive and clinical management services, and training programs, risk stratification and predictive modeling. The Company operates in one business segment.




14





As part of offering its healthcare consulting services, the Company has developed RightPath® Navigator (“RPNavigator”), a proprietary tool to help its customers better understand and forecast resource consumption, risk, and costs associated with their respective populations. In providing its services, the Company licenses RPNavigator to its customers and provides consulting services in connection with that licensing. The Company recognizes revenue as services are performed or ratably under contract terms. For a further discussion of considerations relating to this business, see “Liquidity, Financial Condition and Going Concern”.





Management believes that the Company must continue refining its current product offerings in order to continue adding value to existing and potential customers.  Management needs to continue to evaluate its product offerings in light of anticipated changes in the health care industry, as well as the availability and timeliness of competent resources.  To further expand its product offerings, the Company may pursue alternatives to its internal product and service development efforts by entering into strategic alliances and joint ventures.





The financial statements have been prepared and presented assuming the Company will continue as a going concern.  For the years ended December 31, 2010 and 2009, the Company incurred net (loss)/income of ($231,000) and $180,000, respectively, and it has an accumulated deficit as of December 31, 2010 of $24,630,000. Additionally, the Company had $457,000 of cash and cash equivalents at December 31, 2010, compared to $510,000 at December 31, 2010, and working capital of approximately $230,000 and a capital deficit of $39,000 at December 31, 2010, compared to a negative working capital of approximately $417,000 and a stockholders’ equity of $164,000 at December 31, 2009.  These factors, combined with the notice of termination of the BCBSTX Agreement discussed in “Liquidity, Financial Condition and Going Concern” under the caption ‘Significant Development” and in Note [A][3] in the notes to the Company’s consolidated financial statements included elsewhere in this report, raise substantial doubt regarding the Company’s ability to continue as a going concern.  The unaudited consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.





Critical Accounting Policies





The Company’s financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America.  The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Estimates and assumptions about future events and their effects cannot be determined with certainty. These estimates may change as new events occur, as additional information is obtained and as the Company’s operating environment changes. These changes have historically been minor and have been included in the consolidated financial statements as soon as they became known. In addition, management is periodically faced with uncertainties, the outcomes of which are not within the Company’s control and will not be known for prolonged periods of time. Actual results may differ from these estimates under different assumptions or conditions.





Certain accounting policies have a significant impact on amounts reported in financial statements.  The Company’s most critical accounting policies are discussed in Note B to the audited financial statements presented herein and relate to revenue recognition and equity-based compensation.  Management continuously monitors the Company’s application of these policies to its operations and makes changes as necessary.





A critical accounting policy is one that is both important to the portrayal of the Company’s financial condition or results of operations and requires significant judgment or a complex estimation process. The Company believes the following fit that definition:





Revenue recognition





With respect to RPNavigator license fees, most of the Company’s customers that license RPNavigator are required, as part of their agreements with the Company, to receive consulting services from the Company.  All contracts provide for licensing of RPNavigator and consulting services at a fixed monthly or annual fee, a per member per month fee, or a combination of both. The Company recognizes revenue from licensing RPNavigator and consulting services ratably as such services are performed.  Additionally, the Company provides separate consulting services on a fee for service basis. Revenue for these consulting services is recognized as the services are provided.





Accounting for stock-based compensation





The Company accounts for stock-based compensation in accordance with ASC Topic 718,  “Share Based Payment”, which requires that all equity-based payments, including grants of stock options, be recognized in the statement of operations as compensation expense, based on their fair values at the date of grant. Under the provisions of ASC Topic 718, the estimated fair value of options granted under the Company’s Employee Stock Option Plan and Director Stock Option Plan are recognized as compensation expense over the service period which is generally the same as the option-vesting period.





For the purposes of determining estimated fair value under ASC Topic 718, the Company has computed the fair values of all equity-based compensation using the Black-Scholes option pricing model. This model requires the Company to make certain estimates and assumptions. The Company calculated expected volatility based on the Company’s historical stock volatility. The computation of expected life is determined based on historical experience of similar awards, giving consideration to the contractual terms of the stock-based awards, vesting schedules and expectations of future employee behavior. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant. Under ASC Topic 718, forfeitures are estimated at the time of valuation and reduce expense ratably over the vesting period. This estimate is adjusted periodically based on the extent to which the actual forfeitures differ, or are expected to differ, from the previous estimate.





15





Recent Accounting Pronouncements





In October 2009, the FASB issued Accounting Standards Update No. 2009-13, “Multiple Deliverable Revenue Arrangements” (ASU 2009-13).  ASU 2009-13 replaces EITF 00-21, and clarifies the criteria for separating revenue between multiple deliverables.  This statement is effective for new revenue arrangements or materially modified arrangements in periods subsequent to adoption.  The accounting guidance was effective for fiscal years beginning on or after June 15, 2010, but early adoption was allowed.  The Company anticipates the adoption of this pronouncement will not have any impact on the Company’s financial position and results of operations.





Results of Operations—12 Months Ended December 31, 2010, Compared to 12 Months Ended December 31, 2009





The following discussion compares the Company’s results of operations for the 12 months ended December 31, 2010, with those for the 12 months ended December 31, 2009.  The Company’s consolidated financial statements and notes thereto included elsewhere in this report contain detailed information that should be reviewed in conjunction with the following discussion.





The Company’s total operating revenues for the years ended December 31, 2010 and 2009 were approximately $3,470,000 and $4,069,000, respectively.  The revenue was generated primarily from license and consulting fees earned during these periods. The decrease in revenues of approximately $599,000 was primarily attributable to the termination of certain management services for one customer of approximately $770,000, approximately $109,000 due to termination of services for another customer and one time engagements of approximately $52,000 in 2009 that did not reoccur in 2010, offset by an increase of approximately $32,000 due to a one-time engagement and approximately $300,000 increase in current customer business.  The increase in current customer business is largely due to increased services for one customer and fluctuations in membership for certain customers.





Cost of services:





The Company’s total direct cost of services for the years ended December 31, 2010 and 2009 were approximately $1,165,000 and $1,361,000, respectively.  The Company’s direct cost of services represented approximately 33% of revenues for each of the years ended December 31, 2010 and 2009.  The decrease in the cost of services of approximately $196,000 was primarily due to decreases in personnel costs largely due to employee terminations arising out of Blue Cross Blue Shield of Vermont’s assuming for itself the performance of certain consulting functions that had previously been performed by the Company, decreases in professional costs of approximately $37,000 relating to termination of certain care managements services for one customer and license fees relating to services terminated with another customer, offset by increases of approximately $9,000 in billable travel expenses for one customer.





Operating Cost and Expenses





Selling, general and administrative:





Selling, general and administrative costs for the years ended December 31, 2010 and 2009 were $2,446,000 and $2,440,000, respectively.  The increase in selling, general and administrative costs of approximately $6,000 is largely due to a loss of approximately $224,000 in connection with the entry into the new building lease, increase in travel costs of approximately $10,000, increases of approximately $98,000 in professional costs, largely due to timing of a settlement in 2009 related to a claim for previously expensed legal fees, offset by a loss of approximately $90,000 on certain subleases that occurred in 2009, decreases of approximately $148,000 in facility costs largely due to a new lease, decreases in personnel costs of approximately $50,000, decreases in information and communication costs of approximately $12,000, decreases of approximately $6,000 relating to sale of assets, and decreases of approximately $20,000 in other general and administrative costs.





Depreciation and amortization:





Depreciation and amortization for the year ended December 31, 2010 aggregated $63,000 compared to $65,000 for the year ended December 31, 2009.  The decrease in depreciation and amortization costs is largely due to fully depreciated assets.





Interest expense:





Interest expense for the years ended December 31, 2010 and 2009 was $19,000 and $21,000, respectively.  The decrease in interest expense of approximately $2,000 is largely attributable to decreased interest on equipment capital leases.





16





Net (loss)/ income:





The Company had net a net loss of ($231,000) for the year ended December 31, 2010, compared to net income of $180,000 for the year ended December 31, 2009.  This decrease in net income reflects loss of revenue due to termination of services for two customers, offsetby a decrease in personnel costs due to employee terminations of approximately $168,000.  The Company’s net loss for the twelve month period ended December 31, 2010 includes a loss in connection with the new building lease of approximately $224,000.





Off-Balance Sheet Arrangements





The Company does not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future material effect on the company’s financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital resources or capital reserves.





Liquidity, Financial Condition and Going Concern





At December 31, 2010, the Company had cash of approximately $457,000 and working capital of approximately $230,000.  At December 31, 2009, the Company’s cash balance was $510,000 and working capital was approximately $417,000.





Significant Development:





As stated elsewhere in this annual report, as of November 30, 2010, BCBSTX terminated its services agreement with the Company.  The Company recognized approximately $1,835,000 and $1,991,000 of revenues in 2010 and 2009, respectively, from BCBSTX.  The termination of this services arrangement may have a significant impact on the Company's business.  As discussed above, management is currently in discussions with HCSC, BCBSTX’s parent, for other uses of RPNavigator; but HCSC has advised the Company that it must first develop its strategy for these other uses.  Accordingly, at present it is uncertain whether the Company will obtain additional work from HCSC and if so, the timing and extent of any such additional work is also uncertain.   The Company cannot make any assurances that it will enter into a new relationship with HCSC and its subsidiaries.  If the Company does not replace the revenue that will be lost on account of the termination of the BCBSTX Agreement by establishing a new relationship with HCSC and its subsidiaries and/or obtaining other business from its pipeline of other prospective clients, the Company will need to pursue other alternatives to enable it to fund continuing operations, including, but not limited to, exploring strategic arrangements, which may include a merger, asset sale, joint venture or another comparable transaction, loans, salary deferrals, staff reductions or other cost cutting mechanisms, or raising additional capital by private placements of equity or debt securities or through the establishment of other funding facilities. None of these potential alternatives may be available to the Company, or may only be available on unfavorable terms.  The Company does not currently have in place a credit facility with a bank or other financial institution.  The Company is currently in negotiations with third parties for financing to pay its outstanding obligations and fund future operations, as discussed below under “Subsequent Event,” however, the Company cannot make any assurances that it will be able to secure such financing.





At December 31, 2010, the Company had cash of $457,000 as compared to $510,000 as of December 31, 2009.  The decrease in cash was primarily due to net cash used in operating activities of $28,000 and net cash used in financing activities of $25,000.  The net cash used in operating activities was largely due to the write off of the lease security deposit of $167,000 due to the new building lease, non-cash charges of approximately $68,000 relating to depreciation and stock compensation costs, increases in prepaid expenses and other assets of approximately $22,000, a decrease to deferred rent relating to a new building lease of approximately $24,000, increases in account receivable of approximately $18,000, decreases in accounts payable and other accrued expenses of approximately $44,000 and a net operating loss of $231,000 for the year ended December 31, 2010, which includes a loss in connection with the new building lease of approximately $224,000.





The Company had working capital at December 31, 2010 of approximately $230,000 as compared to working capital of approximately $417,000 at December 31, 2009.  The decrease in working capital was primarily due to the write off of the $167,000 security deposit pursuant to the new building lease agreement and loss from operations.





There were no cash flows from investing activity for the year ended December 31, 2010.





The Company generates most of its revenue from the licensing of RPNavigator and providing consulting services in connection with that licensing. Based on cash on hand at December 31, 2010 and cash flow from operations based on a forecast prepared by management, which took into account executed contracts (including contracts with new customers as well as expanding business with current customers), and a pipeline of prospective clients, management has determined that the Company may not be able to meet its obligations as they become due during the next 12 months, unless it receives the financing discussed below under “Subsequent Event” or other financing. ...  If the Company is not successful with the measures described above under “Significant Development” or below under “Subsequent Event”, including pursuing other alternatives to enable it to fund continuing operations to the point that net revenues are sufficient to offset expenses, the Company will continue to operate at a loss and will be required to wind up its operations, sell its assets, restructure the business, or liquidate, as a result of which there is substantial doubt about its ability to continue as a going concern.  No adjustments have been made to the accompanying financial statements with respect to such uncertainty.  The Company has a history of losses and for the 12 months ended December 31, 2010, it had a net loss of $231,000. Additionally, at December 31, 2010, the Company has an accumulated deficit of $24,630,000, stockholders deficit of $39,000 and cash and cash equivalents of $457,000.





17





Subsequent Event





As previously reported by the Company on the Form 8-K filed on April 15, 2011, the Company entered into a Memorandum of Understanding (“MOU”) with InterComponentWare AG (“ICW AG”) and its subsidiary, InterComponentWare, Inc.(“ICW”) dated April 15, 2011.  The MOU contains both binding and non-binding sections.





A summary of material binding sections is as follows:





The Company will enter into a Professional Services Agreement (“Agreement”) and Statement of Work (“SOW”) to provide two full time equivalent employees to perform care management business process and clinical process consulting services to ICW AG on an as needed basis for the remainder of April 2011, and in the months of May 2011 and June 2011.  The fees to be paid to the Company will be $40,000 due April 18, 2011, $80,000 on May 1, 2011 and $80,000 on June 1, 2011, plus applicable travel expenses.  The Agreement will provide that ICW AG will own all right, title and interest in all work product prepared, created, reduced to practice or developed by or on behalf of the Company or its employees in performing the consulting services under the Agreement, and the Company will assign all right, title and interest to the work product.  Work product will not include anything prepared, created, reduced to practice or developed by or on behalf of the Company or its employees, alone or jointly with ICW AG personnel or other persons that relates to the Company’s RPNavigator software. Upon mutual agreement of the parties, additional due diligence by ICW AG relating to the Company, and contingent upon the execution of a contract for RPNavigator by Geisinger Health Plan by June 30, 2011, the Agreement may be extended for an additional term of three months at the same rates and capacity as described above.





ICW AG will purchase a license to the Company’s Care Management Specifications (“Specifications”) and 12 of the Company’s Care Management Plans under a worldwide perpetual, royalty free license for a payment of $175,000, plus annual maintenance fees to update the Care Management Plans.  Of the $175,000, ICW AG will pay $125,000 upon the execution of the MOU and receipt of the Specifications and the remaining payment of $50,000 will be paid 30 days from the execution of the MOU and receipt of the 12 Care Management Plans.  The remaining terms will be defined in a separate license agreement.





The Company and ICW will enter into a Reseller Agreement to allow ICW to resell RPNavigator software.  The Reseller Agreement will provide for a source code escrow, pursuant to which the Company will deposit with an intellectual property management company, at ICW’s expense,  the latest version of the Company’s source code, its documentation and related materials for the RPNavigator software.  The source code may be released to ICW in the event the Company (i) files a petition for bankruptcy, (ii) is forced into an involuntary bankruptcy, (iii) is acquired by another company, (iv) the Company ceases operations, and (v) the Company defaults on a loan from ICW during the period of the loan (as discussed below) (each of the foregoing events is a “Trigger Event”).   Upon the occurrence of a Trigger Event, ICW will have a right to the release of the source code as follows:




·
During the term of the Reseller Agreement and in the absence of any loan agreement entered into between the parties, ICW can receive the source code to install, support, maintain and allow customers to use RPNavigator for any executed license or subscription agreements entered into prior to the date of a Trigger Event or subsequent license or subscription agreements entered into after the Trigger Event with any active prospects that are memorialized in writing by the parties up to the date of the Trigger Event, and ICW will pay a monthly fee per unique member to the Company during the term of any such licenses or subscription agreements; and




·
During the term of any loan agreement between the Company and ICW and thereafter, ICW will have the right to use the source code to install, support, maintain and allow customers to use RPNavigator for any executed license or subscription agreements entered into the date of a Trigger Event or subsequent license or subscription agreements entered into after the Trigger Event with any active prospects that are memorialized in writing by the parties up to the date of the Trigger Event, and no additional payments to the Company will be required to be made.





A summary of the material non-binding sections of the MOU are as follows:





ICW AG will consider a loan to the Company for up to $700,000 for a period of 24 months, subject to the results of the SOW deliveries under the Agreement, market conditions and final approval of the supervisory board of ICW AG.  The current discussion between the parties has included (i) monthly repayments beginning 13 months after the date of the loan, to be paid in 12 monthly installments of principal and interest through the 24 th  month, with interest beginning to accrue on the first day at a rate of prime plus one percent (1%), and (ii) warrants for no consideration to acquire at least 10% of the outstanding shares of the Company at the time of the loan.





18





If a loan agreement is entered into between the parties, and a Trigger Event occurs during the loan period, ICW AG will have the following options with the respect to the RPNavigator source code: (i) exercise its rights under the escrow agreement discussed above, or (ii) in lieu of exercising its rights under the escrow agreement, pay the Company the sum of the difference between $1.5 million and the sum of all amounts paid or loaned to the Company during the SOW period or the loan period in exchange for a copy of the source code for RPNavigator and the remainder of the Company’s Care Management Plans that were not previously licensed to ICW AG.  Under the second option, ICW AG will have global, unlimited, nonexclusive rights to sell, license, distribute, maintain, modify, enhance and use the software, and the loan indebtedness will be cancelled.





The parties expect to begin negotiating the definitive Agreement and Reseller Agreement over the next few weeks.In the event the Company receives the financing from ICW AG described above, management expects that the Company’s liquidity and financial condition will greatly improve.  However, no assurance can be given that the Company will be able to secure such financing or, even it it does, that the Company will achieve the results anticipated by management.  Further, if the Company cannot secure such financing, as stated above “Significant Development,”  the Company will continue to operate at a loss and will be required to wind up its operations, sell its assets, restructure the business, or liquidate, as a result of which there is substantial doubt about its ability to continue as a going concern.




A copy of the MOU is filed as Exhibit 10.39 to this For 10-K.




ITEM7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK


The Company is a smaller reporting company and is not required to provided the information contemplated by this item.




ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA





The Financial Statements and supplementary data required by this item can be found beginning on page F-1 immediately following the signatures to this annual report and are incorporated herein by reference.





ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE





None.




ITEM 9A.
CONTROLS AND PROCEDURES




Evaluation of Disclosure Controls and Procedures





Senior management maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods provided in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including the Chief Executive Officer, who is also currently the acting Principal Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.  In designing and evaluating the disclosure controls and procedures, senior management has recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and therefore has been required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.





In accordance with Rule 13a-15(b) of the Exchange Act, as of the end of the fiscal year ended December 31, 2010, we carried out an evaluation under the supervision and with the participation of our management, including our Chief Executive Officer, who is also the acting Principal Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act.  Based on that evaluation, our Chief Executive Officer has concluded that our disclosure controls and procedures are, in fact, effective at the reasonable assurance level.





Internal Control Over Financial Reporting





There were no changes in our internal controls over financial reporting during the quarter ended December 31, 2011 that have materially affected, or are reasonably likely to materially affect the Company’s internal controls over financial reporting.




19





As required by Section 404 of the Sarbanes-Oxley Act of 2002, management has performed an evaluation and testing of the Company’s internal control over financial reporting as of December 31, 2010.  Management’s report on the Company’s internal control over financial reporting is included on the page that follows.





Management’s Annual Report on Internal Control Over Financial Reporting





Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, management is responsible for establishing and maintaining adequate internal control over financial reporting and for assessing the effectiveness of our internal control over financial reporting, as defined in Exchange Act Rule 13a-15(f) and 15d-15(f).  Internal control over financial reporting refers to the process designed by, or under the supervision of, our Chief Executive Officer, who is also the acting Principal Financial Officer, to provide reasonable assurance to our management and Board of Directors and Audit Committee regarding the reliability of financial reporting and the fair presentation of published financial statements in accordance with U.S. generally accepted accounting principles, and includes those policies and procedures that:





·
pertain to maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and disposition of our assets;


·
provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles and that our financial decisions are being made only in accordance with authorizations of our management and our Board of Directors; and


·
provide reasonable assurance regarding prevention or timely detection of unauthorized transactions relating to our assets that could have a material impact on our financial statements.





Pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act, reports on internal control over financial reporting issued by management of "smaller reporting companies", as defined by Exchange Act Rule 12b-2, are exempt from the auditor attestation requirements imposed by Section 404(b) of the Sarbanes-Oxley Act of 2002. The Company is a smaller reporting company. Accordingly, this annual report on Form 10-K does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting.





Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.  Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.  A control system, no matter how well designed and operated can provide only reasonable, but not absolute, assurance that the control system’s objectives will be met.  The design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their cost.





Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2010.  In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated Framework (the “COSO Framework”).





Based on this assessment and on the foregoing criteria, management has concluded that, as of December 31, 2010, the Company’s internal control over financial reporting is effective.





Respectfully,/s/ Dennis J. MourasDennis J. Mouras,Chief Executive Officer andActing Principal Financial Officer





20





ITEM 9B.   OTHER INFORMATION





None.





PART III




ITEM 10.    DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE





The Company’s directors, executive officers and control persons as of December 31, 2010 are as follows:


Name

Age

Positions with the CompanyDavid G. Noone (1, 2)

57

Chairman of the Board of DirectorsDennis J. Mouras

54

Chief Executive Officer, President, acting Principal Financial Officer, and DirectorDavid J. McDonnell (1,2)

68

Director





(1)           Member of Compensation Committee.


(2)           Member of Audit Committee.





There are no family relationships between any directors or executive officers of the Company.




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 following sets forth certain information with respect to each director and executive officer of the Company as of December 31, 2010:





David G. Noone has been a director of the Company since January 1999 and Chairman of the Board since July 30, 2002.  He served as CEO of the Company from January 1999 until February 15, 2001, and was an employee of the Company engaged in identifying and pursuing strategic business combinations from February 15, 2001 to September 2001.  Most recently, Mr. Noone is serving as the Local Census Office Manager, United States Bureau of the Census, Middlebury, Connecticut, where he has been employed since October 2009; previously he had been employed as Executive Director of Village at East Farms, Waterbury, Connecticut, from May 2007 through December 31, 2008.  Prior to his service with the Company, 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.   Mr. Noone’s specific qualifications to serve as a director of the Company include his history with the Company as an executive and a director, his leadership experience and his background with Managed Health Care strategies.





Dennis J. Mouras has served as the Chief Executive Officer and a director of the Company since February 15, 2001.  He has served as President and Chief Operating Officer of the Company since October 30, 2000, and as the Executive Vice President of Marketing and Sales of the Company from April 1999 to October 30, 2000. He has also served as Acting Principal Financial Officer since January 2003.  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.   Currently, Mr. Mouras is also the Vice President and 40% owner of Best View Farm Breeders LLC, Glenmoore, Pennsylvania, which conducts a horse breeding business.  Mr. Mouras’ role as the Chief Executive Officer and acting principal financial officer of the Company, as well as serving in various other capacities as an employee of the Company for the past 11 years, qualifies him to serve as a director of the Company.





David J. McDonnell, currently retired, 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.  Mr. McDonnell’s specific qualifications to serve as a director of the Company include his extensive board experience and employment history in the health care services industry.





21




Audit Committee Financial Expert





The Board of Directors has determined that the Company does not have an “audit committee financial expert” as defined by Item 407 of the SEC’s Regulation S-K.  The Board of Directors believes that the Company’s extremely small size, limited financial resources and limited activity make such a position unnecessary.





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 executive officers and directors, and persons who own more than 10% of a registered class of the Company’s equity securities, to file reports of ownership and changes in ownership with the Securities and Exchange Commission and NASDAQ, copies of which are required by regulation to be furnished to the Company.  Based solely on review of the copies of such reports furnished to the Company, the Company believes that during fiscal year ended December 31, 2010, its executive officers, directors and ten percent (10%) beneficial owners complied with all the Section 16(a) filing requirements.





Code of Ethics





During the past several years, the Company’s resources and operations were substantially curtailed. The Company currently has approximately 10 full-time employees, of which only one is a principal executive and financial officer, and has reduced its overhead expenses in order to operate within the constraints of its limited revenues.  Because of the small staff, the involvement of management and the Board of Directors in the business and operations of the Company, and the internal policies of the Company, the Company has not adopted a separate code of ethics for principal executive and financial officers.  We experience a limited number of financial transactions in our present operations, all of which are approved and executed by our chief executive officer, who is also currently acting as our principal financial officer.   The Board of Directors and management have unequivocally set the tone for integrity and credibility in all aspects of the Company’s operations.  In view of the Company’s very small size and the limited number of personnel who are responsible for its operations, a formal code of ethics is not necessary.   Our Board of Directors periodically revisits this issue to determine if adoption of a code of ethics is appropriate.  In the meantime, our management intends to promote honest and ethical conduct, full and fair disclosure in our reports to the SEC, and compliance with applicable governmental laws and regulations.




ITEM 11.      EXECUTIVE COMPENSATION





Executive Compensation





The following table sets forth the total remuneration for services in all capacities awarded to, earned by, or paid to our Chief Executive Officer and President (the “named executive officer”) for each of the last two completed fiscal years.  No other person who served as an executive officer during 2010 earned total compensation in excess of $100,000 for 2010 (or would have earned in excess of such amount had they been an executive officer as of December 31, 2010).  The Company does not maintain any nonequity incentive compensation plans or nonqualified deferred compensation plans.




Summary Compensation Table


Name and principal

Position

Year

Salary

($)


Bonus

($)


Stock

Awards

($)(2)


Option

awards

($)(2)


All other

Compensation

($)(3)


Total

($)Dennis J. Mouras

2010


400,000



-



-



-



68,779



468,779Chief Executive Officer

2009


400,000



-



-



-



68,779



468,779& President (1)





(1)
Mr. Mouras also serves on the Board of Directors but receives no separate remuneration for such service.


(2)
The Company calculates the value of equity awards using the provisions of ASC Topic 718, “Share Based Payment’.  See Note B to the audited consolidated financial statements presented elsewhere in this annual report regarding assumptions underlying valuation of equity awards.


(3)
Includes Company matching contributions to a 401(k) profit sharing/savings plan in the amount of $7,350 for both 2010 and 2009, $ 649 for both 2010 and 2009 related to imputed income for premiums paid for group term life insurance coverage and $60,780 for both 2010 and 2009 for commuting allowances plus federal and state tax gross-ups therefor.





22





Mouras Employment Agreement





On October 25, 2000, the Company entered into an Employment Agreement with Dennis Mouras (the “Employment Agreement”), the current Chief Executive Officer and President for a one-year term, which 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 Employment Agreement, Mr. Mouras is entitled to (a) an annual salary of $285,000, (b) a grant of incentive stock options on October 26, 2000 pursuant to the Company’s Stock Option Plan for 2,500,000 shares, (c) other benefits, including participating in the Company’s 401(k) plan, life insurance coverage, and medical insurance coverage available to all eligible employees.  The Employment Agreement also contains a non-solicitation restriction for one year after Mr. Mouras’ employment.  The Company amended the Employment Agreement (i) on October 30, 2002, to increase to one year (from six months) the severance that Mr. Mouras would be entitled to receive upon his termination without cause;  (ii) on November 11, 2005, to increase the allowance for commuting paid Mr. Mouras to $3,000 per month from $1,500 per month, grossed-up in each case for federal and state income tax liability;  and (iii) on November 20, 2007, to increase the annual salary payable to Mr. Mouras to $400,000 per year, effective as of the date of the amendment.





Stock Option Plan





The Company’s Restated and Amended Stock Option Plan for key employees was adopted on June 6, 1996 and was approved by the Company’s stockholders.  This plan terminated pursuant to its terms on June 6, 2006.  At December 31, 2010, the named executive officer did not hold any outstanding stock options or other equity awards.





Benefits Upon Termination of Employment





Mr. Mouras’ amended Employment Agreement provides for a severance payment by the Company of 12-months salary in the event his employment is terminated by the Company without cause.  This severance benefit would be paid out over 12 months.  As of December 31, 2010, the total amount of severance benefits that could be paid to Mr. Mouras upon a termination of employment is $400,000.





401(k) Plan





The Company maintains a 401(k) plan for employees who meet the eligibility requirements set forth in the plan.  Pursuant to the plan, the Company provides a 50% matching contribution of the first 6% of each participant’s contribution.  All contributions by the Company must comply with the federal pension laws’ non-discrimination requirements and the terms of the plan.





COMPENSATION OF DIRECTORS





The following table provides information about compensation paid to or earned by the Company’s Directors during 2010 who were not named executive officers.  Mr. Mouras does not receive director compensation.




Name

Fees earned

or paid in

cash

($)


Option

awards

($)(1)


All other

compensation

($)(2)


Total

($)David J. McDonnell

$
4,800



-


$
1,509


$
6,309David G. Noone

$
4,800



-


$
247


$
5,047





(1)
The Company calculates the value of equity awards using the provisions of ASC Topic 718, “Share Based Payment”.  See Note B to the audited consolidated financial statements presented elsewhere in this annual report regarding assumptions underlying valuation of equity awards.  At December 31, 2010, Mr. Noone held options outstanding to purchase 1,250,000 shares of Common Stock.


(2)
Amount reflects reimbursement for out-of-pocket expenses associated with attending meetings of the Board of Directors.





Directors’ Fees





Directors who are not officers of the Company are paid $1,200 for each meeting of the Board of Directors that they attend.  Directors are also reimbursed for their reasonable out-of-pocket expenses for each attended meeting of the Board or any committee thereof.  The Board held four meetings during 2010.




23




Directors Stock Option Plan





Until its termination on June 6, 2006, non-employee directors of the Company were eligible to receive stock options under the Company’s Restated and Amended Directors’ Stock Option Plan (the “Director Plan”).  The Company adopted the Director Plan on June 6, 1996, which was amended on July 24, 1996 and the Director Plan, as amended, was approved by the stockholders on August 23, 1996.  Thereafter, the Director Plan was further amended on January 26, 1999 with the stockholders approving that amendment on July 7, 1999.





The Director Plan contemplated the grant of non-qualified stock options and was administered by the Board of Directors, who had authority to determine: (i) the number of shares of the Company’s Common Stock that could be purchased upon the exercise of options; (ii) the time or times when options became exercisable; (iii) the exercise price; and (iv) the duration of options, which could not exceed 10 years.  The Director Plan reserved an aggregate of 2% of the Company’s authorized number of shares of Common Stock for issuance. On January 19, 2001, the Company increased its authorized shares of Common Stock to 200,000,000 shares, so the number of shares reserved for issuance under the Director Plan was 4,000,000 shares.





All options granted under the Director 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 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.





24





ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS





The following table sets forth as of March 9, 2011 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) the named executive officer, 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.




Beneficial Ownership of Common Stock by


Certain Stockholders and Management


Number of SharesName of Beneficial Owner

Beneficially Owned (1)


Percent of Ownership (2)Principal Holders:Credit Suisse Asset Management, LLC (3) (5)


7,536,204



5.19
%George Neidich (4) (9)


21,777,777



14.99
%Directors and Executive OfficersDavid J. McDonnell (6) (9)


22,150,000



15.12
%David G. Noone (7) (9)


24,150,000



16.49
%Dennis J. Mouras (8) (9)


29,500,100



20.31
%All directors and executive officers as a group (3 persons) (9)


75,800,100



51.30
%





* Less than 1%




(1) Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission, which generally attribute beneficial ownership of securities to persons who possess sole or shared voting or investment power with respect to those securities.   Beneficial ownership includes the right to acquire shares within 60 days (such as through the exercise of stock options).





(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 principal business address of Credit Suisse Asset Management, LLC, is 466 Lexington Avenue, New York, New York 10017.





(4)  The principal business address of George Neidich, is 1600 Tysons Boulevard, 8th Floor, McLean, Virginia 22102.





(5)  Information based on Schedule 13G filed by Credit Suisse Asset Management, LLC on December 22, 2004, with the Securities and Exchange Commission (“SEC”).





(6)  The business address of Mr. McDonnell, a director of the Company, is 301 Aqua Court, Naples, Florida 34102.





(7)  The business address of Mr. Noone, a director of the Company, is 34 Sunset Hill Road, Redding, Connecticut, 06896.





(8)  The business address of Mr. Mouras, Chief Executive Officer and director, is 485-A Route 1 South, Iselin, New Jersey 08830.





(9) 41,667 shares of Mr. Neidich’s Common Stock, 1,250,000 shares of Mr. Noone’s Common Stock, and 1,250,000 shares of the Common Stock owned by all directors and executive officers as a group are issuable upon the exercise of stock options to purchase shares of Common Stock that were exercisable on February 22, 2011 or that will become exercisable within 60 days of such date.




25





Equity Compensation Plans




The following table sets forth the securities authorized for issuance under the Company’s equity compensation plans as of December 31, 2010:


(A)


(B)


(C)Plan category

Number of securities to

be issued upon exercise

of outstanding options,

warrants and rights


Weighted-average

exercise price of,

outstanding options,

warrants and rights


Number of securities

remaining available for

future issuance under

equity compensation plans

(excluding securities

reflected in column (A)Equity compensation plans approved by security holders


9,471,667


$
0.013



-Equity compensation plans not approved by security holders


-


$
-



-Total


9,471,667


$
0.013



-





ITEM13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE


Related Transactions since January 1, 2009





On September 9, 2009, the Company raised $400,000 in capital in a private placement to fund certain expenses that became due and payable, and to help fund working capital.  The private placement consisted of the sale of 80,000,000 shares of Common Stock of the Company to its three directors, Dennis J. Mouras (also the Company’s Chief Executive Officer), David G. Noone, and David J. McDonnell, and its general counsel, George Neidich (the “Investors”) at a purchase price of $0.005 per share, the current market price per share of Common Stock, for an aggregate purchase price of $400,000.  Each Investor purchased 20,000,000 shares of Common Stock for $100,000.





Additionally, during the years ended December 31, 2010 and December 31, 2009, the Company paid legal fees in the amount of $138,000 to George Neidich, the Company’s general counsel and the beneficial owner of 14.99% and 15.21%, respectively, of the Company’s issued and outstanding shares of Common Stock.





Director Independence





The Company’s Board of Directors has determined that David G. Noone and David J. McDonnell are “independent directors” as defined in NASDAQ Marketplace Rule 5605(2) (formerly Rule 4200(a)(15)).





ITEM 14.      PRINCIPAL ACCOUNTANT FEES AND SERVICES





Audit and Non-Audit Fees





The following table shows the fees billed to the Company for the audit and other services provided by the Company’s principal accountant, EisnerAmper LLP, in 2010 and 2009:


Services Performed

2010


2009Audit Fees (1)

$
100,000


$
97,600Audit-Related Fees


-



-Tax Fees (2)


51,280



15,200All Other Fees


-



-Total Fees

$
151,280


$
112,800





(1)           Audit fees represent fees for professional services provided in connection with the audit of the Company’s financial statements and review of the financial statements included in the Company’s 10-K and 10-Q filings, and services that are normally provided in connections with statutory and regulatory filings or engagements.





(2)           Tax fees are fees for professional services performed by EisnerAmper LLP with respect to tax compliance, tax preparation, tax advice and tax planning in 2010 and 2009 and fees for professional services rendered in connection with the filing of prior year amended returns.





26





Pre-Approval of Audit and Non-Audit Services





The Audit Committee currently pre-approves all services provided by our independent registered public accounting firm. All of the above fees for 2010 and 2009 were pre-approved by the audit committee.  No fees in 2010 or 2009 were paid to the independent registered public account firm pursuant to the “de minimis” exception to the foregoing pre-approval policy.





The Audit Committee has considered the nature and amount of fees billed by EisnerAmper LLP and believes that the provision of services for activities unrelated to the audit is compatible with maintaining EisnerAmper LLP’s independence.





PART IV





ITEM 15.        EXHIBITS AND FINANCIAL STATEMENT SCHEDULES





(a)(1), (2) and (c) Financial statements and schedules:





Report of Independent Registered Public Accounting Firm


Consolidated Balance Sheets at December 31, 2010 and 2009


Consolidated Statements of Operation — Years Ended December 31, 2010 and 2009


Consolidated Statements of Changes in Stockholders’ Equity — Years Ended December 31, 2010 and 2009


Consolidated Statements of Cash Flows — Years Ended December 31, 2010 and 2009


Notes to Consolidated Financial Statements for the years ended December 31, 2010 and 2009





(a)(3) and (b) Exhibits required to be filed by Item 601 of Regulation S-K:





The exhibits filed or furnished with this annual report are shown on the Exhibit Index that follows the signatures to this annual report, which index is incorporated herein by reference.





27


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:   April 20, 2011
By:
/s/ Dennis J. MourasDennis J. Mouras, Chief Executive Officer





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: April 20, 2011
By:
/s/ Dennis J. MourasDennis J. Mouras, Chief Executive Officer, Director

and acting Principal Financial Officer and Accounting OfficerDate: April 20, 2011
By:
/s/ David J. McDonnellDavid J. McDonnell, DirectorDate: April 20, 2011
By:
/s/ David G. NooneDavid G. Noone, Director





28




CAREADVANTAGE, INC.


AND SUBSIDIARIES





CONSOLIDATED FINANCIAL


STATEMENTS





DECEMBER 31, 2010 AND 2009





INDEX TO CONSOLIDATED FINANCIAL STATEMENTS




Report of Independent Registered Public Accounting Firm

F-2Consolidated Balance Sheets at December 31, 2010 and 2009

F-3Consolidated Statements of Operations for the years ended December 31, 2010 and 2009

F-4Consolidated Statements of Changes in Stockholders’ (Deficit)/Equity for the years ended December 31, 2010 and 2009

F-5Consolidated Statements of Cash Flows for the years ended December 31, 2010 and 2009

F-6Notes to consolidated financial statements

F-7










REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM





Board of Directors and Stockholders


CareAdvantage, Inc.





We have audited the accompanying consolidated balance sheets of CareAdvantage, Inc. and subsidiaries (the "Company") as of December 31, 2010 and 2009, and the related consolidated statements of operations, changes in stockholders' (deficit)/equity and consolidated cash flows for the years then ended.  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 the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement.  We were not engaged to perform an audit of the Company's internal control over financial reporting.  Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting.  Accordingly we express no such opinion.  An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.





In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of CareAdvantage, Inc. and subsidiaries as of December 31, 2010 and 2009, and the consolidated results of their operations and their consolidated cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.





The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern.  As discussed in Note A to the consolidated financial statements, the Company has had recurring losses from operations, has a capital deficit at December 31, 2010 and has lost a major customer.  These factors raise substantial doubt about the Company's ability to continue as a going concern.  Management's plans in regard to these matters are also discussed in Note A.  The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.





/s/ EisnerAmper, LLP





Edison, New Jersey


April 19, 2011




F-2




CareAdvantage, Inc. and Subsidiaries


Consolidated Balance Sheets




December 31,2010


2009ASSETSCurrent assets:Cash and cash equivalents

$
457,000


$
510,000Accounts receivable


125,000



143,000Prepaid expenses and other current assets


86,000



108,000Security deposits


-



167,000Total current assets


668,000



928,000Property and equipment, at cost, net of accumulated depreciation


47,000



108,000Intangible assets, net of accumulated amortization


-



2,000Total Assets

$
715,000


$
1,038,000LIABILITIES AND STOCKHOLDERS’ (DEFICIT)/EQUITYCurrent liabilities:Accounts payable

$
70,000


$
82,000Accrued compensation and related benefits


64,000



81,000Accrued professional fees


50,000



65,000Other current liabilities


1,000



1,000Deferred revenue


227,000



231,000Capital lease obligation – current


26,000



51,000Total current liabilities


438,000



511,000Long Term Liabilities:Capital Lease Obligation - Long Term


-



23,000Deferred rent


316,000



340,000Total long term liabilities


316,000



363,000Total Liabilities


754,000



874,000Commitments and contingencies (Note H)Stockholders’ (deficit)/equity:Preferred stock - par value $.10 per share; authorized 10,000,000 shares; none issuedCommon stock - par value $.001 per share, authorized 200,000,000 shares; issued 145,250,442 issued and outstanding at December 31, 2010 and 142,554,442 shares issued and outstanding at December 31, 2009


145,000



143,000Additional paid in capital


24, 446,000



24, 420,000Accumulated deficit


(24, 630,000
)


(24, 399,000
)Total stockholders’ (deficit)/equity


(39,000
)


164,000Total Liabilities and Stockholders’ (Deficit)/Equity

$
715,000


$
1,038,000





See notes to consolidated financial statements





F-3


CareAdvantage, Inc. and Subsidiaries
 Consolidated Statements of Operations
 Year EndedDecember 31,2010


2009License fees and service revenue

$
3,470,000


$
4,069,000Cost of services


1,165,000



1,361,000Gross profit


2,305,000



2,708,000Operating expenses:Selling, general and administrative


2,446,000



2,440,000Depreciation and amortization


63,000



65,000Total operating expenses


2,509,000



2,505,000Operating (loss)/income


(204,000
)


203,000Interest expense


(19,000
)


(21,000
)(Loss)/income before provision for income taxes


(223,000
)


182,000Provision for income taxes


8,000



2,000Net (loss)/income

$
(231,000
)

$
180,000Net (loss)/income per share of common stock -Basic and diluted

$
(.00
)

$
.00Weighted average number of common shares outstanding -Basic and diluted


144,806,000



87,431,000
  See notes to consolidated financial statements
  F-4
  CareAdvantage, Inc. and Subsidiaries
 Consolidated Statements of Changes in Stockholders’ (Deficit)/Equity
 
 Common

Stock











Treasury

StockNumber

of

Shares


Par

Value

Amount


Additional

Paid In

Capital


Accumulated

Deficit


Number

of

Shares


Par

Value

Amount


Total

Stockholder’s

(Deficit)/EquityBalance as of January 1, 2009


115,534,262


$
115,000


$
24,138,000


$
(24,370,000
)

$
(53,394,820
)

$
(262,000
)

$
(379,000
)Stock grants


200,000



1,000



















1,000Stock purchase


80,000,000



80,000



320,000















400,000Direct costs related to stock purchase










(48,000
)














(48,000
)Retirement of treasury stock


(53,394,820
)


(53,000
)






(209,000
)


53,394,820



262,000



-Exercise of stock options


215,000







2,000















2,000Stock-based compensation










8,000















8,000Net income for the year ended December 31, 2009














180,000











180,000Balance as of January 1, 2010


142,554,442


$
143,000


$
24,420,000


$
(24,399,000
)

$
0


$
0


$
164,000Stock based compensation










5,000















5,000Exercise of stock options


2,696,000



2,000



21,000















23,000Net loss for the year ended December 31, 2009














(231,000
)










(231,000
)Balance as of December 31, 2010


145,250,442


$
145,000


$
24,446,000


$
(24,630,000
)

$
0


$
0


$
(39,000
)
  See notes to consolidated financial statements
  F-5
  CareAdvantage, Inc. and Subsidiaries
 Consolidated Statements of Cash Flows
  Year EndedDecember312010


2009Cash flows from operating activities:Net (loss)/income

$
(231,000
)

$
180,000Adjustments to reconcile net loss to net cash (used in)/provided by operating activities:Depreciation and amortization


63,000



65,000Stock based compensation


5,000



9,000Write off of security deposit


167,000



-Loss on sublease


-



90,000Gain on settlement of accounts payable


-



(120,000
)Changes in:Accounts receivable


18,000



96,000Prepaid expenses and other assets


22,000



(6,000
)Accounts payable


(12,000
)


(252,000
)Accrued expenses and other liabilities


(32,000
)


23,000Deferred revenue


(4,000
)


198,000Deferred rent and other liabilities


(24,000
)


(154,000
)Net cash (used in)/provided by operating activities


(28,000
)


129,000Cash flows from investing activity:Capital Expenditures


-



(1,000
)Net cash used in investing activities


-



(1,000
)Cash flows from financing activity:Net proceeds from sale of common stock


-



352,000Proceeds from exercise of stock options, net of costs


23,000



2,000Repayment of capital leases


(48,000
)


(60,000
)Net cash (used in)/provided by financing activities


(25,000
)


294,000Net (decrease)/increase in cash and cash equivalents


(53,000
)


422,000Cash and cash equivalents - beginning of year


510,000



88,000Cash and cash equivalents - end of year

$
457,000


$
510,000Supplemental disclosures of cash flow information:Income taxes paid

$
8,000


$
2,000Interest paid

$
19,000


$
21,000
  See notes to consolidated financial statements
  F-6
  CareAdvantage, Inc. and Subsidiaries
 Notes to Consolidated Financial Statements
 
 NOTE A - BUSINESS AND BASIS OF PRESENTATION
 
 [1]
Business:
 
 CareAdvantage, Inc. (the “Company”) and its direct and indirect subsidiaries, CareAdvantage Health Systems, Inc (“CAHS”) and Contemporary HealthCare Management, Inc. (“CHCM”), are in the business of providing healthcare consulting services, data warehousing and analytic services designed to enable integrated health care delivery systems, healthcare plans, employee benefit consultants, other care management organizations, self insured employers and unions to reduce the costs, while improving the quality, of medical services provided to the healthcare participants. The services include care management program enhancement services, executive and clinical management services, training programs, risk stratification and predictive modeling. The Company operates in one business segment.
 
 As part of offering its healthcare consulting services, the Company has developed RightPath® Navigator (“RPNavigator”), a proprietary tool to help its customers better understand and forecast resource consumption, risk, and costs associated with their respective populations. In providing its services, the Company licenses RPNavigator to its customers and provides consulting services in connection with that licensing.
 
 [2]
Basis of Presentation and Going Concern:
 
 The financial statements have been prepared and presented assuming the Company will continue as a going concern. For the years ended December 31, 2010 and 2009, the Company incurred net (loss)/income of ($231,000) and $180,000, respectively, and it has an accumulated deficit as of December 31, 2010 of $24,630,000. Additionally, the Company had $457,000 of cash and cash equivalents at December 31, 2010, compared to $510,000 at December 31, 2010, and working capital of approximately $230,000 and a capital deficit of $39,000 at December 31, 2010, compared to working capital of approximately $417,000 and a stockholders’ equity of $164,000 at December 31, 2009. The Company generates most of its revenue from the licensing of RPNavigator and providing consulting services in connection with that licensing. Based on cash at hand at December 31, 2010 and a forecast prepared by management, which takes into account executed contracts and a pipeline of new buisness from existing and prospective clients, management has determined that the Company may not be able to meet its obligations as they become due during the next twelve months unless the Company obtains the proposed financing discussed in Note [A][5] below or other financing. These factors, combined with the notice of termination of the BCBSTX Agreement discussed in Note [A][3] below, raise substantial doubt regarding the Company’s ability to continue as a going concern. If the Company does not attain management’s plans, the Company will have to curtail operations, which will have a material adverse effect on the Company’s business prospects. If the Company is unable to fund continuing operations, the Company will continue to operate at a loss and will be required to wind up its operations, sell its assets, restructure the business, or liquidate, as a result of which there is substantial doubt about its ability to continue as a going concern. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
 
 The Company has reclassified certain 2009 balances to conform to the current period presentation.
 
 [3]
Termination of Blue Cross and Blue Shield of Texas Agreement:
  As previously reported by the Company on the Form 8-K filed on September 2, 2010, Blue Cross and Blue Shield of Texas (“BCBSTX”), a division of Health Care Service Corporation (“HCSC”), terminated the Service and License Agreement between the Company and BCBSTX effective November 30, 2010. In so doing, HCSC nevertheless indicated a desire to continue to obtain ad hoc reports using the Company’s RPNavigator tool, as well as do business with the Company, and Mr. Mouras has proposed providing HCSC assistance regarding Accountable Care Organizations (“ACOs”) and “Medical Home” (wherein the health plan uses the physician’s office to manage care). An officer o fHCSC has indicated to Mr. Mouras that HCSC continues to be interested in working with the Company regarding ACOs and Medical Home, but it must first develop its strategy for these initiatives. Accordingly, at present, it is uncertain whether the Company will obtain additional work from HCSC and if so, the timing and extent of any such additional work. The Company recognized approximately $1,835,000 and $1,991,000 of revenues in 2010 and 2009, respectively, from BCBSTX.
  F-7
  CareAdvantage, Inc. and Subsidiaries
 Notes to Consolidated Financial Statements
 
 NOTE A – BUSINESS AND BASIS OF PRESENTATION (CONTINUED)
 
 [4]
Recent Accounting Pronouncements:
 
 In October 2009, the FASB issued Accounting Standards Update No. 2009-13, “Multiple Deliverable Revenue Arrangements” (ASU 2009-13). ASU 2009-13 replaces EITF 00-21, and clarifies the criteria for separating revenue between multiple deliverables. This statement is effective for new revenue arrangements or materially modified arrangements in periods subsequent to adoption. The accounting guidance was effective for fiscal years beginning on or after June 15, 2010, but early adoption was allowed. The adoption of this pronouncement did not have any impact on the Company’s financial position and results of operations.
 
 [5]
Subsequent Event - Unaudited:
 
 On April 15, 2011, the Company entered into a Memorandum of Understanding (“MOU”) with InterComponentWare AG (“ICW AG”) and its subsidiary, InterComponentWare, Inc.(“ICW”) dated April 15, 2011. The MOU contains both binding and non-binding sections.
  A summary of material binding sections is as follows:
 
 The Company will enter into a Professional Services Agreement (“Agreement”) and Statement of Work (“SOW”) to provide two full time equivalent employees to perform care management business process and clinical process consulting services to ICW AG on an as needed basis for the remainder of April 2011, and in the months of May 2011 and June 2011. The fees to be paid to the Company will be $40,000 due April 18, 2011, $80,000 on May 1, 2011 and $80,000 on June 1, 2011, plus applicable travel expenses. Upon mutual agreement of the parties, additional due diligence by ICW AG relating to the Company, and contingent upon the execution of a contract for RPNavigator by Geisinger Health Plan by June 30, 2011, the Agreement may be extended for an additional term of three months at the same rates and capacity as described above.
 
 ICW AG will purchase a license to the Company’s Care Management Specifications (“Specifications”) and 12 of the Company’s Care Management Plans under a worldwide perpetual, royalty free license for a payment of $175,000, plus annual maintenance fees to update the Care Management Plans. Of the $175,000, ICW AG will pay $125,000 upon the execution of the MOU and receipt of the Specifications and the remaining payment of $50,000 will be paid 30 days from the execution of the MOU and receipt of the 12 Care Management Plans. The remaining terms will be defined in a separate license agreement.
 
 The Company and ICW will enter into a Reseller Agreement to allow ICW to resell RPNavigator software. The Reseller Agreement will provide for a source code escrow, pursuant to which the Company will deposit with an intellectual property management company, at ICW’s expense, the latest version of the Company’s source code, its documentation and related materials for the RPNavigator software. The source code may be released to ICW in the event the Company (i) files a petition for bankruptcy, (ii) is forced into an involuntary bankruptcy, (iii) is acquired by another company, (iv) the Company ceases operations, and (v) the Company defaults on a loan from ICW during the period of the loan (as discussed below) (each of the foregoing events is a “Trigger Event”). Upon the occurrence of a Trigger Event, ICW will have a right to the release of the source code as follows:
  ·
During the term of the Reseller Agreement and in the absence of any loan agreement entered into between the parties, ICW can receive the source code to install, support, maintain and allow customers to use RPNavigator for any executed license or subscription agreements entered into prior to the date of a Trigger Event or subsequent license or subscription agreements entered into after the Trigger Event with any active prospects that are memorialized in writing by the parties up to the date of the Trigger Event, and ICW will pay a monthly fee per unique member to the Company during the term of any such licenses or subscription agreements; and
 
 ·
During the term of any loan agreement between the Company and ICW and thereafter, ICW will have the right to use the source code to install, support, maintain and allow customers to use RPNavigator for any executed license or subscription agreements entered into the date of a Trigger Event or subsequent license or subscription agreements entered into after the Trigger Event with any active prospects that are memorialized in writing by the parties up to the date of the Trigger Event, and no additional payments to the Company will be required to be made.
  F-8
 
 A summary of the material non-binding sections of the MOU are as follows:
 
 ICW AG will consider a loan to the Company for up to $700,000 for a period of 24 months, subject to the results of the SOW deliveries under the Agreement, market conditions and final approval of the supervisory board of ICW AG. The current discussion between the parties has included (i) monthly repayments beginning 13 months after the date of the loan, to be paid in 12 monthly installments of principal and interest through the 24 th month, with interest beginning to accrue on the first day at a rate of prime plus one percent (1%), and (ii) warrants for no consideration to acquire at least 10% of the outstanding shares of the Company at the time of the loan.
 
 If a loan agreement is entered into between the parties, and a Trigger Event occurs during the loan period, ICW AG will have the following options with the respect to the RPNavigator source code: (i) exercise its rights under the escrow agreement discussed above, or (ii) in lieu of exercising its rights under the escrow agreement, pay the Company the sum of the difference between $1.5 million and the sum of all amounts paid or loaned to the Company during the SOW period or the loan period in exchange for a copy of the source code for RPNavigator and the remainder of the Company’s Care Management Plans that were not previously licensed to ICW AG. Under the second option, ICW AG will have global, unlimited, nonexclusive rights to sell, license, distribute, maintain, modify, enhance and use the software, and the loan indebtedness will be cancelled.
 
 The parties expect to begin negotiating the definitive Agreement and Reseller Agreement over the next few weeks.
 
 No assurance can be given that the Company will be able to secure the financing from ICW AG or, even it it does, that the Company’s ability to continue as a going concern will improve.
 
 NOTE B – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
 [1]
Principles of consolidation:
 
 The consolidated financial statements include the accounts of the Company, and its wholly owned subsidiary, CAHS and CAHS’s wholly owned subsidiary, CHCM. Intercompany accounts and transactions have been eliminated in consolidation.
 
 [2]
Revenue recognition:
 
 With respect to RPNavigator license fees, most of the Company’s customers licensing RPNavigator are required, as part of their agreements with the Company, to receive consulting services from the Company. All contracts provide for licensing of RPNavigator and consulting services at a fixed monthly fee or annual fee, a per member per month fee, or a combination of both. The Company earns the revenue from licensing and consulting services on a monthly basis and recognizes revenue from both services on a monthly basis at either a fixed monthly fee, a per member per month fee or a combination of both. Additionally, the Company provides separate consulting services on a fee for service basis. Revenue for these consulting services is recognized as the services are provided.
 
 [3]
Depreciation and amortization:
 
 Depreciation is computed by the straight-line method, over the estimated useful lives of the assets, which range from three to seven years. Leasehold improvements are amortized using the straight-line method over the remaining term of the related lease or the estimated useful life, whichever is shorter. Amortization of assets recorded under a capital lease is computed using the straight-line method and is included in depreciation expense. (See Note D)
 Intangible assets, principally software development costs, are amortized over the expected useful lives of five to seven years on the straight-line method (see Note C). Amortization expense was $2,000 for both years ended December 31, 2010 and 2009.
 
 [4]
Per share data:
 
 Basic loss per share is computed based on the weighted average number of outstanding shares of common stock. Potentially dilutive securities where the exercise prices were greater than the average market price of the common stock during the period were excluded from the computation of diluted income or loss because they had an anti-dilutive impact is as follows:
 December 31,2010


2009Total Potential Dilutive shares


9,472,000



12,187,000
  F-9
  CareAdvantage, Inc. and Subsidiaries
 Notes to Consolidated Financial Statements
 
 NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
 
 [5]
Concentration of credit risk/Fair value of financial instruments:
 
 Financial instruments that potentially subject the Company to credit risk consist of cash and cash equivalents and accounts receivable. The Company maintains its cash and cash equivalents balances in financial institutions. At times, the amount of cash maintained in a given financial institution may exceed the federally insured limits.
 
 The fair value of the following instruments approximates their carrying values due to the short-term nature of such instruments: cash and cash equivalents; accounts receivable; accounts payable; and accrued liabilities.
  [6]
Estimates:
 
 The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions, such as those estimates pertaining to stock based compensation, that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
 
 [7]
Cash and cash equivalents:
 
 The Company considers all highly liquid investments which have maturities of three months or less when acquired, to be cash equivalents.
 
 [8]
Accounts Receivable and Allowance for Doubtful Accounts:
 
 The Company shows accounts receivable amounts at their net realizable value, which reflects the invoiced amounts. The Company does not currently maintain an allowance for doubtful accounts based on management’s consideration of historical collection experience and the characteristics of existing accounts. The Company has not had any accounts receivable allowances or write-offs for the accounting periods presented.
 
 [9]
Major customers:
 
 Two customers, BCBS organizations, accounted for approximately 53% and 18%, respectively, of license fees and service revenue for the year ended December 31, 2010 and approximately 0% and 81% of accounts receivable, respectively. The same two customers accounted for approximately 49% and 24%, respectively, of license fees and service revenue for the year ended December 31, 2009.
  [10]
Stock-based compensation:
 
 The Company recognizes stock-based compensation for all equity-based payments, including grants of stock options, in the statement of operations as a compensation expense, based on their fair value at the date of the grant. The estimated fair value of options granted under the Company's Employee Stock Option Plan and Director Stock Option Plan are recognized as compensation expense over the option-vesting period; all outstanding stock options are fully exercisable.
  F-10
  CareAdvantage, Inc. and Subsidiaries
 Notes to Consolidated Financial Statements
  NOTE C – INTANGIBLE ASSETS
 
 Intangible assets, net of accumulated amortization consist of the following at December 31, 2010 and 2009:
 
 December 31,2010


2009Trademark

$
3,000


$
3,000Software development cost


304,000



304,000307,000



307,000Less accumulated amortization


(307,000
)


(305,000
)$
-


$
2,000
 
 [1]
Trademark:
 
 The trademark fees of $3,000 are associated with RPNavigator.
 
 [2]
Software development costs:
 
 Software development costs are capitalized beginning when project technological feasibility is established and concluding when the product is ready for release.
 
 NOTE D - PROPERTY AND EQUIPMENT
 
 Property and equipment consist of the following at December 31, 2010 and 2009:
 
 December 31,2010


2009Computer equipment

$
717,000


$
717,000Furniture and fixtures


1,000



1,000Office machines and telephone equipment


64,000



64,000Leasehold improvements


2,000



2,000784,000



784,000Less accumulated depreciation and amortization


(737,000
)


(676,000
)$
47,000


$
108,000
 
 Property and equipment, principally computer equipment costs, are depreciated over the expected useful lives of three to five years on the straight-line method. Depreciation expense was $61,000 and $63,000 for years ended December 31, 2010 and 2009, respectively. The above includes capital lease equipment with a net book value of approximately $47,000 and $104,000 at December 31, 2010 and 2009, respectively.
  F-11
  CareAdvantage, Inc. and Subsidiaries
 Notes to Consolidated Financial Statements
 
 NOTE E – CAPITAL LEASES
 
 Future payments as of December 31, 2010 on the capital lease equipment are as follows:
 
 Year

LeaseEnding December 31,

Obligation2011


40,00040,000Less: amounts representing interest


14,000Present value of minimum lease payments


26,000Less: current portion of capital lease obligation


26,000Long term portion of capital lease obligation

$
-
 
 NOTE F – STOCKHOLDERS’ EQUITY
 
 [1]
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.
 
 [2]
Stock option plans:
 
 The Stock Option Plan (the “Plan”) was 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. Employees, officers, and other persons selected by the Committee were eligible to receive options under the Plan. On June 6, 2006, pursuant to its terms, the Plan terminated.
 
 All options granted under the Plan are exercisable during the option grantee’s lifetime only by the option holder (or his or her legal representative) and generally only while such option grantee is in the Company’s employ. Unless the Committee otherwise provided, in the event an option grantee’s employment is terminated other than by death or disability, such person would have three months from the date of termination to exercise such option to the extent the option was exercisable at such date, but in no event subsequent to the option’s expiration date. Unless the Committee otherwise provided, in the event of termination of employment due to death or disability of the option grantee, such person (or such person’s legal representative) would have 12 months from such date to exercise such option to the extent the option was exercisable at the date of termination, but in no event subsequent to the option’s expiration date. A grantee may exercise an option by payment of the exercise price via any lawful method authorized by the Committee.
  Pursuant to the terms of the Director Stock Option Plan (the “Director Plan”), the Board of Directors could grant non-qualified stock options to non-employee directors and 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 ten (10) years. Under the Director Plan, an aggregate of 2% of the Company’s authorized number of shares of common stock were reserved for issuance. The Director Plan terminated on June 6, 2006 in accordance with its terms.
 
  F-12
  CareAdvantage, Inc. and Subsidiaries
 Notes to Consolidated Financial Statements
 
 NOTE F - STOCKHOLDERS’ EQUITY (CONTINUED)
 
 All options granted under the Director 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 Plan and Director Plan provides that if at any time after the date of grant of an option, the Company shall, by stock dividend, split up, combination, reclassification or exchange, or through merger or consolidation or otherwise, change its shares of Common Stock into a different number or kind or class of shares or other securities or property, then the number of shares covered by such option and the price per share thereof shall be proportionately adjusted for any such change by the Committee or the Board whose determination thereon shall be conclusive.
  The number of shares available for issuance upon exercise of outstanding options as of December 31, 2010 is 8,322,000 shares of Common Stock under the Plan and 1,150,000 shares of Common Stock under the Director Plan.
 
 The following table summarizes information about stock options at December 31, 2010:
  Options Outstanding

Options ExercisableExercise Price


Number

Outstanding


Weighted

Average

Remaining

Contractual

Life

In Years

Weighted

Average

Exercise

Price

Number

Exercisable

Weighted

Average

Exercise

Price$
.008



1,558,000



3.63





1,558,000$
.010



2,324,000



4.06





2,324,000$
.015



5,590,000



5.38





5,590,0009,472,000





$
0.013


9,472,000

$
0.013
 
 For the year ended December 31, 2010, the Company included approximately $5,000 of equity-based compensation in its operating expenses (Selling, general and administrative) in the Company’s statement of operations. For the year ended December 31, 2009, the Company included approximately $9,000 of equity-based compensation in the statement of operations.
 
 FASB ASC Topic 718 requires cash flows resulting from the tax benefits of tax deductions in excess of the compensation cost recognized for those options (excess tax benefits) to be classified as financing cash flows. The Company did not realize any tax benefits from stock options during the twelve months ended December 31, 2010 and 2009.
 
 As of December 31, 2010, there was no unrecognized compensation cost related to non-vested share-based compensation arrangements granted under existing stock option plans.
  F-13
  CareAdvantage, Inc. and Subsidiaries
 Notes to Consolidated Financial Statments
 
 NOTE F - STOCKHOLDERS’ EQUITY (CONTINUED)
 
 The following table summarizes the activity of the Company’s stock options for the years ended December 31, 2010 and December 31, 2009:
  Weighted


Weighted AverageAverage


Remaining


AggregateExercise


Contractual


IntrinsicShares


Price


Term


ValueNumber of shares under option:Outstanding at December 31, 2008


12,766,000


$
0.013Granted


-


$Exercised


(215,000
)

$
0.010Canceled or expired


(364,000
)

$
0.031Outstanding as of December 31, 2009


12,187,000


$
0.012Exercised


(2,696,000
)

$
0.011Canceled or expired


(19,000
)

$
0.010Outstanding as of December 31, 2010


9,472,000


$
0.013



4.77


$
-Exercisable at December 31, 2010


9,472,000


$
0.013



4.77


$
-Expected to vest after December 31, 2010


-
 
 During the year ended December 31, 2010, the exercise of certain stock options resulted in the issuance of 2,097,000 shares of common stock for proceeds of $23,000. The intrinsic value of the options exercised for the year ended December 31, 2010 was $0.
 
 For the purposes of determining estimated fair value under ASC Topic 718, the Company has computed the fair values of all share-based compensation using the Black-Scholes option pricing mode. The Company calculated expected volatility based on the Company’s historical stock volatility. There were no options granted during the years ended December 31, 2010 and 2009.
 
 Under ASC Topic 718, forfeitures are estimated at the time of valuation and reduce expense ratably over the vesting period. This estimate is adjusted periodically based on the extent to which the actual forfeitures differ, or are expected to differ, from the previous estimate.
  F-14
  CareAdvantage, Inc. and Subsidiaries
 Notes to Consolidated Financial Statments
 
 NOTE G – INCOME TAX
  On January 1, 2007, the Company adopted ASC Topic 740, “Accounting for Uncertainty in Income Taxes – An interpretation of FASB Statement No. 109”. ASC Topic 740 clarifies the accounting for uncertainties in income taxes recognized in a company’s financial statements in accordance with ASC Topic 740 and prescribes a recognition threshold and measurement attributes for financial disclosure of tax positions taken or expected to be taken on a tax return. Additionally, ASC Topic 740 provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. The adoption of ASC Topic 740 did not impact our financial position, results of operations or cash flows for the twelve months ended December 31, 2010 and 2009. We file income tax returns in the U.S. Federal jurisdiction and various state and local jurisdictions. Generally, our federal, state and local jurisdiction income tax returns for 2006 through 2009 remain subject to examination by various tax authorities.
 
 Under the asset and liability method used by the Company as outlined in ASC Topic 740, “Accounting for Income Taxes”, deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the consolidated financial statements’ carrying amounts of existing assets and liabilities and their respective tax bases.
 
 The tax effects of temporary differences that give rise to significant portions of the deferred tax assets at December 31, 2010 are as follows:
 December 31,Noncurrent portion of deferred tax assets/(liabilities):

2010


2009Net operating loss carryforwards

$
5,002,000


$
5,865,000Deferred rent


123,000



133,000Tax/ book basis of fixed assets


307,000



316,000Intangibles


8,000



11,000Stock based compensation


96,000



94,000Alternative minimum tax credit


55,000



55,000Deferred tax assets


5,591,000



6,474,000Valuation allowance


(5,591,000
)


(6,474,000
)$
0


$
0
 
 The Company’s deferred tax asset has been fully reserved, as its future realization cannot be determined. The Company has net federal operating loss carryforwards of approximately $13,668,000 at December 31, 2010, expiring through 2030. 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 and 2004. It is 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 decreased approximately $883,000 for the year ended December 31, 2010 and decreased approximately $2,307,000 for the year ended December 31, 2009, respectively. The Company’s deferred tax asset was reduced due to the expiration of its net federal operating loss carryforward applicable to 1995. The Company has provided 100% valuation allowance since it is more likely than not that the Company will not utilize its NOL’s prior to their expiration. The Company incurred state income tax of approximately $8,000 and $2,000 for the years ended December 31, 2010 and 2009, respectively.
  F-15
  CareAdvantage, Inc. and Subsidiaries
 Notes to Consolidated Financial Statements
 
 NOTE G - INCOME TAX (CONTINUED)
 
 The difference between the federal statutory rate and the Company’s effective tax rate is as follows:
 Year EndedDecember 31,2010


2009Income tax (benefit)/expense at federal statutory rate

$
(76,000
)

$
62,000Permanent differences


2,000



1,000Change in valuation allowance


(883,000
)


(2,307,000
)Tax effect of expired net operating loss carryforwards


964,000



2,243,000State taxes, net of federal benefit


(11,000
)


9,000Other


12,000



(6,000
)$
8,000


$
2,000
 
 NOTE H - COMMITMENTS, CONTINGENCIES AND OTHER MATTERS
  [1]
Contingencies:
 
 A legal action pending in Superior Court of New Jersey was commenced in June 2004 by a former employee of the Company seeking compensation under various legal theories. In October 2005, the court dismissed the claim under all theories except express contract. The Company believes that the plaintiff’s claim is without merit and is contesting the matter vigorously. Moreover, the Company filed a counterclaim for damages against the plaintiff claiming the former employee induced another employee to quit employment with the Company and in October 2005, pursuant to court order, amended its counterclaim to seek equitable relief and damages against the plaintiff and a limited liability company of which the plaintiff is a member, claiming the plaintiff misappropriated and used certain Company property. This matter is presently being tried before a chancery judge; the evidentiary portion of the trial concluded in fall 2010; and the attorneys are scheduled to appear before the court in May 2011 to argue proposed findings of fact and conclusions of law.
  [2]
Operating leases:
 
 The Company’s current lease for the office space, which became effective April 15, 2010 expires in July 31, 2016. Minimum annual lease payments for office space for future years ending December 31 are as follows:
 Year

LeaseEnding

Obligation2011


158,0002012


173,0002013


173,0002014


173,0002015


173,0002016


95,000$
945,000
 
 Rent expense was $192,000 and $426,000 for each of the years ended December 31, 2010 and 2009, respectively.
 
 On January 10, 2005, the Company, through CAHS, entered into a Second Amendment to Lease Agreement commencing January 1, 2005, which amended its original lease, to provide for the reduction in base rent and the waiver of escalations based on increases in real estate taxes and operating expenses, and to provide the landlord with the option to recapture up to 50% of the leased premises at any time. (The landlord was granted the recapture option because when the Company ceased providing services to Horizon BCBSNJ, the Company no longer needed this space.) The expiration date of the lease, March 31, 2011, remained unchanged by this Second Amendment.
  F-16
  CareAdvantage, Inc. and Subsidiaries
 Notes to Consolidated Financial Statements
 
 NOTE H - COMMITMENTS, CONTINGENCIES AND OTHER MATTERS (CONTINUED)
 
 As of March 26, 2008, the Company and landlord entered into a Third Amendment of Lease which provided that the reduction in base rent and the waiver of escalations based on increases in real estate taxes and operating expenses shall be deemed to be amortized on a straight line basis over the period commencing January 1, 2005 and ending March 31, 2011.
 
 Effective May 1, 2009 and September 1, 2009, the Company signed sublease agreements with the same subtenant (the “Subtenant”)for approximately 3,700 and 600 square feet, respectively, of its office space which called for monthly rental payments of approximately $7,000 and $1,200, respectively, to the Company from the Subtenant. The term of the subleases ran 23 and 19 months, respectively, through March 31, 2011. The sublease income did not cover the costs of the primary lease for the related space. Consequently, in accordance with the accounting guidance, during the year ended December 31, 2009, the Company recognized a combined loss of approximately $90,000, which was included in selling, general and administrative expense. The subleases were terminated in connection with the entry by the Company into a new lease with the landlord, discussed below.
 
 On January 18, 2010, the Company received delivery of an executed new Office Lease with its current landlord for 6,189 square feet of space in Building A at Woodbridge Corporate Plaza, 485 Route One South, Iselin, New Jersey, the same office park in which the Company previously maintained its offices in Building C. The new lease (“New Lease”) was made as of December 28, 2009, and its term commenced on April 15, 2010, the date the landlord delivered the new space to the Company. The New Lease has a term of seventy-six full calendar months commencing May 1, 2010 (each a “Lease Month”), and a monthly base rent for Lease Months 1 to 12 of $22,512.49, and for Lease Months 13 to 76 of $14,441.00. (The rent for the partial calendar month of April 2010 is a prorated portion of the base rent for the first Lease Month.) In addition to the base rent, the Company is obligated to pay separately metered electric charges, and commencing January 1, 2011, a ratable portion of increases from 2010 in real estate taxes, operating expenses and certain utility charges. The New Lease provides the Company a credit of $10,057.13 against the monthly base rent for Lease Months 1, 2, 7 and 14. In addition, the New Lease provides the Company an additional credit of $8,379.67 per month for the first 12 Lease Months. The New Lease does not initially provide for a security deposit; however, the Company is required to deliver to the landlord no later than January 15, 2011, the sum of $10,000 to be held as a security deposit. Finally, the landlord performed, at its expense, certain work in readying the leased premises for the Company’s occupancy.
  In connection with entering into the New Lease, the landlord and CAHS, entered into a Surrender Agreement, delivered on January 18, 2010, and made as of December 28, 2009, pursuant to which the landlord agreed to terminate the prior lease as of March 31, 2010 (or the day before the commencement date of the New Lease, if later) (the “Surrender Date”), which existing lease would have otherwise expired on March 31, 2011. As of the date the New Lease commenced, the security deposit of $167,027 under the existing lease was forfeited to the landlord.
  Pursuant to the Surrender Agreement, (i) CAHS released the landlord from all claims arising out of the prior lease, and (ii) upon CAHS’s delivery of the premises (excluding the subleased space) to the landlord in accordance with the Surrender Agreement, and CAHS’s timely payment of rent and other expenses owed to the Landlord under the prior lease through the Surrender Date, the landlord released CAHS of all claims arising out of the prior lease. Pursuant to the Surrender Agreement, the sublease agreements with the Subtenant were terminated effective as of the Surrender Date, and the Subtenant is currently leasing the subleased space directly from the landlord.
  F-17
  CareAdvantage, Inc. and Subsidiaries
 Notes to Consolidated Financial Statements
 
 NOTE H - COMMITMENTS, CONTINGENCIES AND OTHER MATTERS (CONTINUED)
 
 As a result of the New Lease, during the year ended December 31, 2010, the Company recorded a loss of approximately $224,000, which included the forfeiture of the security deposit under the existing lease as described above.
  At December 31, 2010, the Company had deferred rent of approximately $316,000, representing the difference between the negotiated lease payment obligation and the rent expense on a straight-line basis over the term of the lease.
  [3]
Financing:
 
 The Company entered into a finance agreement with Somerset Leasing Corporation to pay for an initial non-refundable fee plus an annual support fee for a software license agreement with Informatica Corporation. Under the finance agreement terms, monthly payments of $4,030 are to be made for a period of 36 months starting February 1, 2011. The following is a schedule of future payments as per terms of the finance agreement:
 
 Year

NoteEnding

Payments2011


44,0002012


48,0002013


48,0002014


4,000$
144,000
 
 [4]
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 $39,000 and $47,000 for the years ended December 31, 2010 and 2009, respectively.
 
 [5]
Employee commitment:
 
 On October 25, 2000, the Company entered into an Employment Agreement with Dennis Mouras (the “Employment Agreement”), the current Chief Executive Officer and President for a one-year term, which 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 Employment Agreement, Mr. Mouras is entitled to (a) an annual salary of $285,000, (b) a grant of incentive stock options on October 26, 2000 pursuant to the Company’s Stock Option Plan for 2,500,000 shares, (c) other benefits, including participating in the Company’s 401(k) plan, life insurance coverage, and medical insurance coverage available to all eligible employees. The Employment Agreement also contains a non-solicitation restriction for one year after Mr. Mouras’ employment. The Company amended the Employment Agreement (i) on October 30, 2002, to increase to one year (from six months) the severance that Mr. Mouras would be entitled to receive upon his termination without cause; (ii) on November 11, 2005, to increase the allowance for commuting paid Mr. Mouras to $3,000 per month from $1,500 per month, grossed-up in each case for federal and state income tax liability; and (iii) on November 20, 2007, to increase the annual salary payable to Mr. Mouras to $400,000 per year, effective as of the date of the amendment.
 
 Note I—Subscription of Common Stock:
 
 On September 9, 2009, the Company raised $400,000 in capital in a private placement to fund certain expenses that became due and payable, and to help fund working capital. The private placement consisted of the sale of 80,000,000 shares of Common Stock of the Company to its three directors, Dennis J. Mouras (also the Company’s Chief Executive Officer), David G. Noone, and David J. McDonnell, and its general counsel, George Neidich (the “Investors”) at a purchase price of $0.005 per share, the current market price per share of Common Stock, for an aggregate purchase price of $400,000. Each Investor purchased 20,000,000 shares of Common Stock for $100,000.
  F-18
  CareAdvantage, Inc. and Subsidiaries
 Notes to Consolidated Financial Statements
 
 NOTE H - COMMITMENTS, CONTINGENCIES AND OTHER MATTERS (CONTINUED)
 
 Note J – Settlement of Accounts Payable:
 
 During the year ended December 31, 2009, the Company settled a claim for approximately $305,000 in legal fees, including fees for legal services provided prior to the period, with a payment of $185,000. This resulted in a $120,000 reduction in legal expenses during the year ended December 31, 2009.
  F-19
 
 EXHIBIT INDEX
 
 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).3.1(a)

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).3.2(a)

Amendment to the Registrant’s Bylaws (incorporated by reference to Exhibit 3.2(a) filed with the Company’s Form 10-KSB for the year ended December 31, 2006).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

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).10.2

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).10.3

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).10.4

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).10.5

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).10.6

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).10.7

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).10.8

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).10.9

Registrant’s 1996 Stock Option Plan (incorporated by reference to the Company's Information Statement dated September 1996).
  
 
 10.10

Registrant’s 1996 Director Stock Option Plan (incorporated by reference to the Company's Information Statement datedSeptember 1996).10.11

Option Agreement between CW Ventures and Horizon BCBSNJ (incorporated by reference to Exhibit 5 of Schedule 13(d) ofHorizon BCBSNJ respecting beneficial ownership of Common Stock of the Company dated June 1997).10.12

Settlement and Release Agreement entered into among Horizon BCBSNJ, the Company, CAHS, and CHCM, EnterpriseHolding Company, Inc. ("EHC") and CW Ventures (incorporated by reference to Exhibit 10(a) filed with the Company’s Form 10-QSB for the quarter ended July 31, 1998).10.13

Employment Agreement, effective as of April 19, 1999, between Dennis M. Mouras, and the Company, (incorporated byreference to Exhibit 10.40 filed with the Company’s Form 10KSB for the year ended December 31, 1999).10.14

Settlement Agreement dated August 9, 2000 among the Company, Horizon Healthcare of New Jersey, Inc. and Allied Specialty Care Services, Inc. (incorporated by reference to Exhibit 10.1 filed with the Company’s Form 10QSB for the quarter ended September 30, 2000).10.15

Satisfaction of Debt Agreement among Horizon Blue Cross Blue Shield of New Jersey, Horizon Healthcare of New Jersey, Inc., CareAdvantage Inc., CareAdvantage Health Systems, Inc. and Contemporary Healthcare Management, Inc. (incorporated by reference to Exhibit 10.1 filed on the Company’s Form 8-K dated December 5, 2000 and filed on December 13, 2000).10.16

Amendment dated March 26, 2001 to Satisfaction of Debt Agreement dated as of November 1, 2000 among Horizon BCBSNJ, Horizon Healthcare of New Jersey, Inc., CareAdvantage, Inc., CareAdvantage Health Systems, Inc. and Contemporary HealthCare Management, Inc (incorporated by reference to Exhibit 10.1 filed with the Company’s Form 10-QSB for the quarter ended March 31, 2001).
  10.17

Service Agreement dated as of January 1, 2000 between Blue Cross Blue Shield of Rhode Island, Coordinated Health Partners, Inc. and CareAdvantage Health Systems, Inc. (incorporated by reference to Exhibit 10.2 filed with the Company’s Form 10-QSB for the quarter ended March 31, 2001).10.18

Amendment dated as of August 9, 2001 to Satisfaction of Debt Agreement dated as of November 1, 2000 among Horizon BCBSNJ, Horizon Healthcare of New Jersey, Inc., CareAdvantage, Inc., CareAdvantage Health Systems, Inc. and Contemporary Healthcare Management, Inc. (incorporated by reference to Exhibit 10.1 filed with the Company’s Form 10-QSB for the quarter ended June 30, 2001).10.19

Settlement Agreement between CareAdvantage, Inc. and Horizon Blue Cross Blue Shield of New Jersey, effective as of October 1, 2004 (incorporated by reference to Exhibit 10.1 filed on the Company’s Form 8-K filed on October 1, 2004).10.20

Second Amendment to Lease Agreement between CareAdvantage Health Systems, Inc. and Corporate Plaza Associates, L.L.C. (incorporated by reference to Exhibit 10.1 filed on the Company’s Form 8-K filed on January 11, 2005).10.21

Services and License Agreement between the Company and Kaiser Foundation Health Plan of the Northwest ("Kaiser"), effective as of January 1, 2005 (incorporated by reference to Exhibit 10.49 filed with the Company’s Form 10KSB for the year ended December 31, 2005. Portions of this exhibit (indicated by asterisks) have been omitted pursuant to a request for confidential treatment pursuant to Rule 24b-2 of the Securities Exchange Act of 1934).10.22

Amendment to Employment Agreement between the Company and Dennis J. Mouras, dated as of November 11, 2005, and Employment Agreement between the Company and Dennis J. Mouras, dated as of October 25, 2000 (incorporated by reference to Exhibit 10.50 filed with the Company’s Form 10-QSB for the quarter ended September 30, 2005).10.23

First Amendment to Services and License Agreement between the Company and Kaiser Foundation Health Plan of the Northwest (“Kaiser”), effective as of January 1, 2006 (incorporated by reference to Exhibit 10.51 filed with the Company’s Form 10KSB for the year ended December 31, 2005. Portions of this exhibit (indicated by asterisks) have been omitted pursuant to a request for confidential treatment pursuant to Rule 24b-2 of the Securities Exchange Act of 1934).
  
 
 10.24

Second Amendment to Services and License Agreement between the Company and Kaiser, effective as of April 1, 2006 (incorporated by reference to Exhibit 10.52 filed with the Company’s Form 10KSB for the year ended December 31, 2005. Portions of this exhibit (indicated by asterisks) have been omitted pursuant to a request for confidential treatment pursuant to Rule 24b-2 of the Securities Exchange Act of 1934).10.25

Services and License Agreement between the Company and Blue Cross Blue Shield of Texas (“BCBSTX”), effective as of August 18, 2003 (incorporated by reference to Exhibit 10.53 filed with the Company’s Form 10-QSB for the quarter ended June 30, 2006. Portions of this exhibit (indicated by asterisks) have been omitted pursuant to a request for confidential treatment pursuant to Rule 24b-2 of the Securities Exchange Act of 1934).10.26

Amendment to Services and License Agreement between the Company and BCBSTX, effective as of June 1, 2006 (incorporated by reference to Exhibit 10.54 filed with the Company’s Form 10-QSB for the quarter ended June 30, 2006. Portions of this exhibit (indicated by asterisks) have been omitted pursuant to a request for confidential treatment pursuant to Rule 24b-2 of the Securities Exchange Act of 1934).10.27

Letter from Kaiser Foundation Health Plan of the Northwest terminating Services and License Agreement (incorporated by reference to Exhibit 10.1 filed on the Company’s Form 8-K filed on October 3, 2006).10.28

Amendment to Employment Agreement between the Company and Dennis J. Mouras, dated as of November 20, 2007 (incorporated by reference to Exhibit 10.1 filed on the Company’s Form 8-K filed on November 26, 2007).
  10.29

Data Services License Agreement between the Registrant and 3M Company dated April 8, 2003, as amended (incorporated by reference to Exhibit 10.57 filed with the Company’s Form 10KSB for the year ended December 31, 2007. Portions of this exhibit (indicated by asterisks) have been omitted pursuant to a request for confidential treatment pursuant to Rule 24b-2 of the Securities Exchange Act of 1934).10.30

Services and License Agreement between the Company and Blue Cross Blue Shield of Vermont made as of September 1, 2004, as amended (incorporated by reference to Exhibit 10.58 filed with the Company’s Form 10KSB for the year ended December 31, 2007. Portions of this exhibit (indicated by asterisks) have been omitted pursuant to a request for confidential treatment pursuant to Rule 24b-2 of the Securities Exchange Act of 1934).10.31

Third Amended and Restated Service Agreement between the Company and Blue Cross Blue Shield of Vermont made as of April 1, 2001, as amended (incorporated by reference to Exhibit 10.59 filed with the Company’s Form 10KSB for the year ended December 31, 2007. Portions of this exhibit (indicated by asterisks) have been omitted pursuant to a request for confidential treatment pursuant to Rule 24b-2 of the Securities Exchange Act of 1934).10.32

Third Amendment of Lease Agreement between CareAdvantage Health Systems, Inc. and SMIII Woodbridge Plaza, LLC dated March 26, 2008 (incorporated by reference to Exhibit 10.60 filed with the Company’s Form 10KSB for the year ended December 31, 2007).10.33

Form of Subscription Agreement for Common Stock of the Company (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed on September 10, 2009).10.34

Office Lease between SMIII Woodbridge Plaza, LLC and the Company, delivered on January 18, 2010 and made as of December 28, 2009 (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed on January 20, 2010).10.35

Surrender Agreement between SMIII Woodbridge Plaza, LLC and CareAdvantage Health Systems, Inc., delivered on January 18, 2010 and made as of December 28, 2009 (incorporated by reference to Exhibit 10.2 to the Company’s Form 8-K filed on January 20, 2010).10.36

Amended and Restated Services and License Agreement between the Company and Blue Cross Blue Shield of Vermont made as of January 1,2010 (incorporated by reference to Exhibit 10.36 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2009). Portions of this exhibit (indicated by asterisks) have been omitted pursuant to a request for confidential treatment pursuant to Rule 24b-2 of the Securities Exchange Act of 1934).
  
 
 10.37

Letter Agreement between the Company and Blue Cross Blue Shield of Vermont made as of December 31, 2009 (incorporated by reference to Exhibit 10.37 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2009). Portions of this exhibit (indicated by asterisks) have been omitted pursuant to a request for confidential treatment pursuant to Rule 24b-2 of the Securities Exchange Act of 1934).10.38

Letter dated August 30, 2010, from Blue Cross and Blue Shield of Texas (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed on September 30, 2010).10.39

Memorandum of Understanding (“MOU”) between the Company, InterComponentWare AG and its subsidiary, InterComponentWare, Inc. dated April 15, 2011. Portions of this exhibit (indicated by asterisks) have been omitted pursuant to a request for confidential treatment pursuant to Rule 24b-2 of the Securities Exchange Act of 1934).*21

Subsidiaries of the Registrant*23.1

Consent of Independent Auditors*31

Certifications pursuant to Rule 13a-14(a), promulgated under the Securities Exchange Act of 1934, as amended, and Section 302 of the Sarbanes-Oxley Act of 2002*32

Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 **
 * filed herewith
 ** furnished herewith