UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K/A
Amendment No. 1
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1995
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________ to _______________
Commission File No. 0-21684
THE WELLCARE MANAGEMENT GROUP, INC.
(Exact name of Registrant as specified in its charter)
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NEW YORK 14-1647239
(State of other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
PARK WEST/HURLEY AVENUE EXTENSION, KINGSTON, NEW YORK 12401
(Address of principal executive offices) (Zip Code)
(914) 338-4110
(Registrant's telephone number, including area code)
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Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.01 PAR VALUE
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [_] NO [X]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of this 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. [X]
The aggregate market value of the voting stock (Common Stock, $.01 par
value) held by non-affiliates of the Registrant on May 1, 1996 was $54,794,988
based on the closing sales price of the Common Stock on such date.
The aggregate number of Registrant's shares outstanding on May 1, 1996 was
4,832,985 shares of Common Stock, $.01 par value and 1,479,257 shares of Class A
Common Stock, $.01 par value.
DOCUMENTS INCORPORATED BY REFERENCE
NONE
Page 1 of 255 Pages
Exhibit Index on Page 74
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<PAGE>
PART I
ITEM 1. BUSINESS
General
The WellCare Management Group, Inc. ("WellCare" or the "Company") is a
managed health care holding company whose wholly-owned subsidiary, WellCare of
New York, Inc. ("WCNY"), is a direct contract independent practice association
network ("IPA/Network") mixed model health maintenance organization ("HMO").
WCNY is the dominant HMO in the Hudson River Valley region. WellCare of
Connecticut, Inc. ("WCCT"), a wholly-owned subsidiary of WellCare, is modeled on
WCNY and received licensure to operate an HMO in the State of Connecticut in
March 1995.
WCNY and WCCT ("the WellCare HMOs") provide comprehensive health care
services to members in a service area that extends from New York City north
through the Hudson River Valley to the Capital Region and Southern Adirondacks,
west into the Mohawk River Valley and Southern Tier and east into contiguous
areas of Connecticut through a provider network consisting of approximately 660
primary care physicians, 3,000 specialists and 60 hospitals. At December 31,
1995, enrollment in the WellCare HMOs was approximately 100,000 members enrolled
from approximately 2,500 employer groups, compared to approximately 82,500
members at December 31, 1994, enrolled from approximately 1,900 employer groups.
No employer group accounts for more than 5% of the members of the WellCare HMOs.
Through another wholly-owned subsidiary, WellCare also provides specialty
benefit programs and related administrative services to employer and other
groups which utilize health care services.
The Managed Care Industry
Health care costs in the United States have escalated dramatically from
$324 billion in 1982 to an estimated $938 billion in 1994, or approximately 14%
of the gross national product. As a result, employers, insurers, governmental
entities and health care providers have sought effective cost containment
measures, contributing to the development of the managed care industry. Further,
the inability of a significant portion of the population to obtain health care
coverage has resulted in health care reform measures proposed both at the
federal and state levels, many of which focus on managed care as a means for
providing quality health care services on a cost-effective basis.
An HMO provides or arranges for the provision of comprehensive health care
services, including physician and hospital care, to a voluntarily enrolled
population for a fixed, prepaid premium. Except in cases of medical emergency,
the member receives care from participating primary care physicians who, in
turn, refer the members to participating specialists and hospitals as required.
HMOs provide management controls designed to encourage efficient and economic
utilization of health care services. These controls include monitoring physician
services, the level of hospital admissions and the lengths of hospital stay, and
promoting the use of non-hospital based medical services.
<PAGE>
Initially, managed care was provided primarily through HMOs, but has
expanded to the provision of an increasing variety of products and services,
including preferred provider organizations ("PPO") utilization review services,
third party claims administrators and specialty benefit programs, which are
marketed to self-insured employer plans, unions, indemnity insurers and other
groups.
A number of government-sponsored health care programs have begun to
encourage the enrollment of their beneficiaries into managed care plans,
particularly HMOs, as a means of controlling escalating health care costs. The
largest of these programs are Medicaid and Medicare, which service the poor and
the elderly, respectively.
Medicaid. The Medicaid program, sponsored by individual state governments,
provides health care services to low income individuals in the United States,
receiving significant financial support from the federal government. In 1991,
approximately $14 billion was spent on Medicaid programs in New York State,
which increased by approximately 36% to approximately $19 billion in 1994. Due
to significant medical cost inflation, state governments are increasingly
contracting with managed care companies, including HMOs, to provide health care
services to their Medicaid recipients. In contracting with private managed care
companies, Medicaid shifts most of the financial risk of health care service
delivery to the HMO and allows the Medicaid program to benefit from the
cost-efficiency practices of the managed care industry. Several states,
including Connecticut, currently require and others, including New York (subject
to federal approval), are considering mandating that all Medicaid beneficiaries
enroll with managed care companies to receive medical services. Currently, only
approximately 25% of the 2.6 million eligible Medicaid recipients in New York
State are enrolled in HMO plans.
Medicare. Medicare is a federal government-sponsored entitlement program
administered by the Health Care Financing Administration ("HCFA"), which
provides health care coverage to approximately 33 million individuals primarily
over 65 years of age. In 1994, Medicare accounted for approximately $162
billion, or 14.0%, of the total federal budget. Due to the aging of the
population and medical cost inflation, it is estimated that government
expenditures related to Medicare will grow by approximately 10.4% per year, to
approximately $265 billion by the year 2000. The federal government, through
HCFA, has contracted with HMOs since 1985, and, currently, approximately 3.2
million Medicare beneficiaries are enrolled in HMOs, primarily pursuant to
full-risk contracts. In contracting with HMOs pursuant to a full-risk contract,
HCFA bases its payment rates on approximately 95% of the average Medicare
medical costs by age, sex, county and institutional status. In addition to the
approximately 5% cost savings, the financial risk and most of the administrative
burden of health care service delivery are shifted to the HMO, and the
administrative cost efficiency practices of managed care are integrated into the
Medicare program.
Recent consolidation of the industry has resulted in fewer HMOs with larger
membership bases. Additionally, national enrollment in HMOs has steadily
increased from approximately 10.2 million members in 1981 to approximately 51.1
million members in 1994.
<PAGE>
Business Strategy
WellCare's strategy has been to provide high quality, low cost HMO products
and other managed care products and services. WCNY's membership has grown by
approximately 250% since 1991 with the Company successfully increasing
penetration in its core service area and expanding its service area, primarily
into contiguous markets. WellCare believes it can continue to expand its HMO
membership and deliver effective managed care by continuing to focus on the
following strategies:
Maintaining low premiums through containment of health care costs. The
Company's success depends to a significant degree upon its ability to control
health care costs. Primary care physicians are integral to health care cost
containment as they control to a significant degree member utilization of
hospitals, specialists and other health care providers. WellCare has worked to
develop a network in which virtually all primary care physicians are paid on a
capitation basis. WellCare directly capitates regional health care alliances
(the "Alliances") and non-Alliance primary care physicians with a fixed monthly
payment for each HMO member selecting an Alliance primary care physician or
non-Alliance primary care physician, designed to cover the costs of
substantially all health care services provided to the member, notwithstanding
the amount of medical care rendered. WellCare assists the primary care
physicians in efficiently managing their practices by providing them with
outcome studies, utilization and other statistical data, quality assurance
reviews, and managed care educational programs. WellCare is committed to
continuously improving its capitation and other fee arrangements and to
facilitating optimal health care utilization in order to ensure high-quality,
low-cost service. As part of this commitment, since 1994 WellCare has been
capitating certain specialty services, including physical therapy and podiatry.
Expanding service areas. WellCare traditionally has concentrated on
expanding in secondary markets where price competition is less intense than in
major metropolitan areas and where widespread name recognition is easier to
achieve. The Company's ability to work closely with physicians, which it
believes leads to more efficient cost containment, is well suited to secondary
markets. Accordingly, WellCare will continue to focus on such contiguous markets
as well as other growth areas, including certain primary markets. WCNY is
currently approved to operate in 24 counties in New York State, including four
of the five counties of New York City. Approval for expansion into Westchester
County is anticipated to be received by the end of the third quarter of 1996.
Additionally, WellCare expanded its HMO operations into Connecticut through
WCCT.
Providing members access to a broad range of quality physicians. WellCare
recognizes that expansion and retention of its HMO membership is dependent to a
significant degree upon providing access to a broad range of quality health care
providers and intends to continue expanding as well as improving its health care
provider network in its core service area and proposed areas for expansion. The
provider network of the WellCare HMOs currently consists of approximately 660
primary care physicians and 3,000 specialists, over 90% of whom are
board-certified. WellCare's widespread name recognition in its core service area
facilitates recruitment of participating physicians and, during 1995,
approximately 140 additional primary care physicians and 900 specialists joined
WellCare's network. In 1995, approximately 92% of WellCare's members eligible
for reenrollment elected to remain in the HMO, which WellCare believes is partly
attributable to its broad range of quality physicians.
<PAGE>
Adding new benefit programs and initiating new products and services. In
1995, WellCare received approval from HCFA to offer a full-risk Medicare product
in eight counties of WCNY's service area, and WCNY's Medicaid coverage program
received regulatory approvals to expand into an additional six counties,
including four counties in New York City. To meet the needs of employer groups
and exploit new opportunities in managed care, WellCare is continuing to expand
and initiate complementary managed care products and services. WellCare offers a
broad PPO network to provide vision care, mental health, pharmacy and primary
care benefit programs as stand-alone products. WellCare offers third party
administrator services. WellCare also offers a point-of-service product for its
HMO members.
Making acquisitions and developing strategic partnerships. In March, 1995,
WellCare acquired Managed Care Administrators, Inc. ("MCA") for a purchase price
of $500,000 in cash and the assumption of certain liabilities. MCA is a company
that engaged in managing a network of primary care physicians in New York City
providing medical care to in excess of 6,750 Medicaid beneficiaries. WellCare
has also entered into an agreement with the ExcelCare System, Inc., a New York
not-for-profit health care provider network organized by hospitals in
Westchester and Putnam Counties in New York and Fairfield County in Connecticut,
to make its Westchester County provider network, including approximately 800 New
York-based physicians and five hospitals, available to WCNY. WellCare intends to
continue to pursue ventures it believes will complement its existing products
and/or markets.
Investments in technology and infrastructure. WellCare believes that
investments in technology and infrastructure are critical for future HMO
membership growth. In 1995, WellCare established a new information center
employing the latest technology and, in late 1994, implemented an IBM RISC
System/6000 relational database system to provide enhanced reporting and
analytical capabilities.
The WellCare HMOs
The WellCare HMOs, provide comprehensive health care services to their
members for a fixed monthly premium, plus a co-payment by the member to the
physician for each office visit and a dispensing fee to the pharmacy for each
prescription filled. The basic benefits a member receives consist of primary and
specialty physician care, inpatient and outpatient hospital services, emergency
and preventive health care, laboratory and radiology services, ambulance
services, eye care, physical and rehabilitative therapy services, mental health
care, and alcohol and substance abuse counseling. For an increased monthly
premium, members have the option to receive prescription drugs, and extended
mental and vision care.
WellCare arranges for the provision of other health care services by
contracting with hospitals which are paid on a diagnostic related group ("DRG")
basis under New York State law rather than by length of hospital stay (although
New York HMOs are permitted to negotiate lower DRG or per diem rates with
regulatory approval), and with other health care providers, generally on a
discounted fee-for-service basis or, in the case of certain primary care and
specialty services, on a capitated fee basis.
<PAGE>
Members are allowed to select any primary care physician or practice
participating in the WellCare HMO network and are allowed to switch from one
primary care physician or practice to another within the network. All medical
care received by the member, including specialist and hospital care, is
coordinated by the primary care physician. Hospitalization for members requiring
non-emergency treatment generally takes place in hospitals which either are
under contract or have arrangements with the WellCare HMOs; emergency treatment
may be obtained in any hospital.
Premiums are generally fixed for a twelve-month period under contracts with
each subscriber group. WellCare considers a variety of factors in determining
HMO premiums, including anticipated health care utilization rates, projected
medical expenses, community rating requirements (applicable in both New York and
Connecticut) and competitive conditions. Premiums are subject to state
regulation (See "Business - Government Regulation").
Membership
WellCare HMOs
At December 31, 1995, the WellCare HMOs provided managed care services to
approximately 100,000 members enrolled from approximately 2,500 employer groups.
The five largest employer groups accounted for approximately 11% of total
membership, with no one group accounting for more than 5% of such membership.
The membership of the WellCare HMOs is comprised of the following:
o Members enrolled through subscribing private or public sector
employers or unions, and members unaffiliated with subscriber groups
enrolling individually (collectively, "commercial members");
o Recipients of public aid whose eligibility is determined by the New
York State Department of Social Services ("Medicaid members");
o Medicare beneficiaries covered under full-risk program ("Medicare
beneficiaries"); and
o Medicare beneficiaries receiving HMO supplemental coverage ("Medicare
supplement members").
Presently, WCCT has received approval to offer coverage to only commercial
members.
When a subscriber group agrees to offer the WellCare HMOs to its employees,
enrollment is voluntary by the individual, who must be accepted for enrollment
regardless of health status. Employers generally pay all or part of the monthly
health care premiums for their employees, deducting the portion not so paid from
the employee's salary. Upon leaving a subscriber group, an individual may elect
to continue as an HMO member by paying a monthly premium.
Individuals may be enrolled as Medicaid members in WCNY only if they are
eligible recipients of public aid. Medicaid members are enrolled on an
individual basis pursuant to agreements with county social services departments
and approval by the New York State Department of Social
<PAGE>
Services (the "DSS") and must be enrolled regardless of health status.
Twenty-five percent of the premiums for Medicaid members is funded by the
applicable county, 25% by the State of New York and the balance by the federal
government. The agreements contain extensive provisions regarding the required
medical services, are entered into annually and may be terminated by the county
departments for cause or upon 90 days' notice in the event of unavailability of
state funds to pay for continued services to Medicaid members. In the event the
contracts are terminated or not renewed, the Company's operating results would
be adversely affected.
Effective September 1, 1995, HCFA awarded a full-risk Medicare contract to
WCNY. Medicare beneficiaries are enrolled pursuant to annual contracts with the
federal government under which WCNY provides health care services. These
contracts provide for the federal government to pay WCNY a fixed monthly premium
per member equal to approximately 95% of the average medical costs by age, sex,
county and institutional status. Premiums are subject to periodic unilateral
revision by the federal government. The Medicare beneficiaries pay no monthly
premiums or deductibles, although there are co-payments for office visits or
prescriptions and there is an annual limit of $500 on prescription charges per
member. Medicare members are able to disenroll for any reason at any time.
Medicare supplement members may enroll in WCNY on a group basis through
their present or past employers to supplement medical coverage received from
Medicare. Under the supplemental coverage, in return for a fixed monthly
premium, WellCare pays the cost of most medical services not covered by
Medicare, provided the Medicare beneficiary uses the HMO provider network for
such services, other than for emergency care.
Plans Managed by WellCare
The following table reflects the growth in membership and employer groups
for plans managed by WellCare during the five years ended December 31, 1995:
At December 31,
---------------------------------------------
1991 1992 1993 1994 1995
---- ---- ---- ---- ----
Commercial Members (1) 36,587 44,456 60,112 71,119 78,910
Medicaid Members 3,218 5,660 8,941 10,010 19,112
Medicare Members (2) 626 801 1,147 1,365 2,032
Total Members 40,431 50,917 70,200 82,494 100,054
Number of Employer Groups 1,077 1,261 1,500 1,900 2,500
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(1) Includes HMO commercial members and members enrolled under non-HMO
specialty programs.
(2) Includes Medicare beneficiaries and Medicare supplement members.
<PAGE>
Medical Cost Control
The Company's success depends to a significant degree upon its ability to
control health care costs. WellCare controls such costs through (I) capitation
arrangements with the Alliances and with non-Alliance primary care physicians,
(ii) discounted fee-for-service arrangements with specialists and other health
care providers (other than hospitals which in New York State are paid on a DRG
basis, although HMOs may negotiate lower DRG or per diem rates), (iii)
capitation arrangements with providers of certain specialty services, (iv)
health care utilization review programs, and (v) co-payments by members for
office visits and other services. Notwithstanding such cost control measures,
certain factors, such as regulatory changes, epidemics and natural disasters,
which impact health care costs, are beyond the Company's control and may
adversely affect its operations.
Physician Arrangements
Prior to the fourth quarter of 1994, WCNY contracted directly with primary
care physicians and specialists, with substantially all primary care physicians
having been capitated with a fixed monthly payment for each HMO member selecting
the physician. A portion of the monthly capitation fee was paid directly to the
primary care physician, with the balance allocated to risk sharing accounts
covering (I) payments to specialists and supplemental providers to whom the HMO
members were referred by the primary care physician, (ii) outpatient referrals
in excess of certain minimum amounts, inpatient hospital expenses, certain high
risk medical conditions and pharmaceutical expenses, and (iii) catastrophic
events, in which WellCare shared the risk. Specialists were generally paid on a
discounted fee-for-service basis. The Company believed its capitation
arrangements held the primary care physicians individually accountable for all
deficits in their respective risk-sharing accounts, although the Company for
financial reporting purposes, expensed all deficits incurred until such deficits
are reimbursed to the Company.
Effective October 1, 1994, WCNY modified its arrangements with a majority
of its primary care physicians and specialists by contracting with regional
health care delivery networks (the "Alliances") to provide health care services
to the Plan's commercial and Medicaid members. Each Alliance is a professional
corporation that has contracted with individual primary care physicians and
specialists to provide health care services. At inception, there were four
Alliances with different equity owners; by December 31, 1995, the four Alliances
were combined into two Alliances. The Company's initial agreement with each of
the Alliances for the period October 1, 1994 through September 30, 1995,
required payment to the Alliances based on a percentage of premium revenue for
effected members. As part of this change in capitation arrangements, the
risk-sharing accounts of Alliance primary care physicians who formerly had been
capitated by WCNY were settled and outstanding deficits paid to WCNY in the
fourth quarter of 1994, thereby reducing WCNY's medical expenses during such
quarter. Effective October 1, 1995, the Company entered into a three year
agreement with each of the Alliances at specified per member per month ("PMPM")
rates, providing for increases of approximately 1% for the period October 1,
1995 through December 31, 1995; approximately 6% effective January 1, 1996;
approximately 1% effective January 1, 1997; and an additional 3% effective
January 1, 1998. Such rates were established through arms-length negotiation
with the Alliances.
<PAGE>
WCNY's multi-year contract with each Alliance provides the Alliance with a
fixed monthly fee for each HMO member selecting a primary care physician
affiliated with such Alliance, designed to cover the costs of all health care
services provided to the HMO member. As an HMO, WCNY is able to negotiate
favorable fees with certain hospitals and retains a portion of the Alliance's
monthly capitation fee to process and pay all inpatient hospital and pharmacy
fees, although the Alliance is ultimately responsible for such expenses.
Each Alliance, in turn, capitates each Alliance primary care physician from
the monthly payments received from WCNY with a fixed monthly payment for each
HMO member designating them/his/her as their primary care provider, retaining
and allocating the balance to a group risk pool for payment to specialists.
Specialists are compensated on a fee-for-service basis by the Alliances which
disperse payments to these specialists. To the extent the risk pools are
insufficient to cover the specialists' fees, the amounts paid to the specialists
as a group can be proportionately reduced, up to a maximum of 30%. To the extent
the risk pools are still insufficient to cover the specialists' fee after the
maximum reduction, a portion of the capitation payments to primary care
physicians can be withheld to cover the specialists' fees after the reduction.
Primary care physicians and specialists are furnished with periodic utilization
reports and the Alliances' accounts are reconciled on a quarterly basis.
WCNY is ultimately responsible for all medical care provided to its members
notwithstanding its Alliance arrangements, and intends to remain integrally
involved in assisting primary care physicians to efficiently manage their
practices by providing them with outcome studies and other statistical data,
quality assurance reviews, utilization and other managed care educational
programs.
At December 31, 1995, Alliance physicians provided medical care to in
excess of 80% of WCNY's members; the balance are serviced by primary care
physicians who are directly capitated by WCNY under the prior arrangement. WCNY
also has individual contracts with substantially all physicians in the
Alliances. However, there can be no assurance that physicians that join an
existing or new Alliance will contract directly with WCNY, or that WCNY will be
able to renew its three year contracts with the Alliances on terms it deems
satisfactory.
WCCT contracts directly with some of its physician network. A significant
number of all primary care physicians and specialists are contracted through an
IPA or a PHO mechanism that contracts directly with WCCT.
Hospital and Other Provider Arrangements
Third party reimbursement for most inpatient hospital care in New York
State is currently required to be paid on a diagnostic related group (DRG)
basis, pursuant to which hospital charges established by the State are based on
the diagnosis of the patient's condition, generally notwithstanding the length
of hospitalization. New York HMOs have been permitted, subject to regulatory
approval, to negotiate lower DRG or per diem rates with hospitals. To the extent
DRG rates apply, a member's length of hospital stay does not affect WCNY's costs
and hospital costs can best be controlled through controlling hospital
admissions and the utilization of the most effective treatment methods.
Reimbursement for hospital care in Connecticut is generally based on a per diem
<PAGE>
system. When a per diem contract is in effect, utilization management monitored
by the case management function reduces medical costs to WellCare by minimizing
the length of hospital stay as well as maximizing the utilization of the most
effective treatment methods. WellCare currently contracts with 50 hospitals and
has arrangements with 13 additional hospitals. Pursuant to the contracts, the
hospital is paid for all authorized inpatient and outpatient services and all
emergency room services provided to WellCare's members. In addition, WellCare
requires the hospital to participate in utilization review and quality assurance
programs. WellCare's contracts with hospitals are terminable upon 120 days'
prior notice by either party.
In order to obtain high quality services at cost-effective rates, WCNY has
contracted with other providers for, among other things, mental health,
diagnostic services, physical therapy, outpatient surgery, laboratory services
and home health care, on either a capitated or negotiated fee basis. The Company
also has individual contracts with approximately 330 pharmacies principally in
its core service area.
Utilization Review
Utilization of health care services by members and physicians is monitored
under WellCare's health care utilization review programs. In cases of excessive
utilization, WellCare counsels the member with respect to possible unnecessary
or duplicate services or medications. In addition, under the direction of local
physicians, health care service utilization data are analyzed and, through
periodic meetings with physicians, the Company identifies areas in which the
physician's utilization rates differ significantly from the rates of other
physicians and suggests methods for improvement.
Educational Programs
WellCare believes that educating its members and health care providers with
respect to health care is a critical component in health care cost containment
and periodically sponsors programs on health care. In addition, WellCare
maintains a videotape library that it makes available to its primary care
physicians for viewing by HMO members to acquaint them with treatment protocols
and other medical information. The Company's bimonthly newsletter to its members
contains, among other items, information on preventive health care.
WellCare, through WellCare University (a division of WellCare) is
establishing classroom facilities at its headquarters to conduct seminars and
other educational programs for physicians constituting part of its network.
WellCare University also conducts a number of ongoing studies related to the
managed care industry. WellCare also publishes newsletters which it distributes
to its physicians and supplemental health care providers, and sponsors and
arranges conferences, lectures and symposiums for physicians on different
aspects of physician treatment as well as the conduct and benefits of managed
care programs.
<PAGE>
Quality of Care Programs
WellCare's quality of care programs, consisting of quality of care audits,
periodic peer reviews and outcome studies, assist the Company in controlling
costs by identifying cost-effective treatment procedures (See "Business-Quality
Assurance").
Co-Payments
To promote member participation in controlling health care costs, the
WellCare HMOs require co-payments by its members for office visits and other
services. These co-payments are made by the member directly to the physician or
other provider and range from $3 to $15 for office visits, and $25 or $35 for
emergency room treatment. WCCT is additionally approved for a $20 co-payment for
office visits and a $50 co-payment for emergency room treatment. Certain plans
also require members to pay deductibles for inpatient hospital services.
Other Products and Services
The Company has initiated services both independent of and supplemental to
its HMO benefit programs.
Specialty Care Benefit Programs
WellCare offers prescription drug, dental and expanded vision and other
specialty care benefit programs as stand-alone products to self-insured employer
and other groups through its third party claims administrator ("TPA") services.
The Company provides TPA services independently and as part of its
specialty care benefit programs offered to employer and other groups. In
addition, WellCare has established a "PPO" network, using principally its HMO
provider network, to provide vision care and pharmacy benefit programs as
stand-alone products for self-insured employer and other groups.
Point-of-Service Product
WCNY offers a point-of-service ("POS") product to its members, allowing
them to select providers outside WCNY's provider network. When a member uses a
POS product, the member is required to make a higher co-payment and is subject
to pay a higher deductible.
Physician Practice Management
Through June 30, 1995, WellCare, through its wholly-owned subsidiary
WellCare Medical Management, Inc. ("WCMM"), performed management and
administrative services for physician practices. In June 1995, WellCare sold
WCMM to a newly formed entity. (See Management's Discussion and Analysis of
Financial Condition and Results of Operations - Sale of WellCare Medical
Management, Inc.)
<PAGE>
Marketing
WellCare's internal marketing staff consists of 49 sales representatives,
26 of whom market WellCare's benefit plans to commercial groups, 8 to Medicaid
recipients, 13 Medicare beneficiaries and 2 who market WellCare's specialty
benefits plans an other products and services. The Company also utilizes
independent brokers for referrals.
Marketing to commercial groups is generally a two-step process in which
presentations are made to the employer and then to the individual employees if
the Company's benefit plan is selected. During a designated period (usually one
month annually), employees select their desired health coverage. New employees,
however, make their choice when employment commences. The marketing process is
continuous as contracts with employers are renewable annually, employees are
permitted to change plans annually and employer groups experience employee
turnover.
Marketing the Company's Medicaid program is more complicated since the
names of public aid recipients generally are not disclosed by the DSS. The
Company actively solicits public aid recipients by sending its sales
representatives directly to welfare offices, churches and community centers to
make direct contact with eligible Medicaid recipients.
Marketing of the Company's full-risk Medicare program involves a labor
intensive one-on-one process. Marketing efforts focus on informational
presentations/seminars, community outreach programs and telemarketing
activities.
WellCare markets its supplemental coverage plan for Medicare beneficiaries
through existing employer groups who provide continued benefit programs to
retirees, accompanied by on-site meetings and direct mailings to such retirees.
Quality Assurance
WellCare requires all physicians in its provider network to participate in
its quality assurance and utilization review programs. In 1995, WellCare
received One-Year Accreditation from the National Committee of Quality
Assurance. WellCare's quality assurance program is designed not only to maintain
but to continually improve the delivery of proper medical care and includes:
o Quality of care audits, which identify issues affecting HMO members,
including physician availability, physician treatment patterns and the
structure and content of medical records;
o Periodic peer reviews, which evaluate the quality and appropriateness
of medical care provided by a particular physician and review, among
other things, diagnoses, tests, prescription drug usage and the
utilization level of the physician by the HMO members;
o Utilization reviews and outcome studies, which evaluate statistical
information with respect to services used by members and prescribed by
participating physicians and
<PAGE>
include such topics as preventive care services, prescription drugs,
physician visits, emergency room use, hospital admissions and
referrals made by primary care physicians to specialists; and
o A physician committee infrastructure to oversee medical policy and the
quality assurance program.
The quality assurance program utilizes computerized claims information and
medical records which are maintained by the physicians and to which WCNY has
access. In addition, participating hospitals maintain quality assurance programs
which may provide information to WellCare. As required by state law, WellCare
has established a grievance procedure for HMO members and providers to formally
register complaints with the Company. These complaints are then investigated and
resolved pursuant to the grievance procedure established by the Company.
Competition
The managed care industry is highly competitive principally on the basis of
price, the size and quality of the provider network, benefits provided and
quality of service. Although WCNY is a dominant HMO in the Hudson River Valley
region of its service area, it has expanded or is in the process of expanding
into new geographic areas, including New York City, Westchester County and
Connecticut, where there are other HMOs which have more members and greater
financial resources than the Company. The Company also competes with commercial
health insurance companies and not-for-profit health service plans, including
Blue Cross and Blue Shield.
Management Information System
The control of health care cost and the tracking and timely processing of
claims are critical to the Company's operations. The AMISYS management
information system utilized by WellCare and widely used in the HMO industry
provides detailed information by employer groups, providers and hospitals, and
expense data relating to membership. This information is used to identify
utilization patterns and potential areas for cost savings. Additionally, the IBM
RISC System/6000 relational database system, implemented in late 1994, provides
WellCare with significantly enhanced reporting and analytical capabilities.
WellCare believes its management information systems, with planned enhancements,
can accommodate its anticipated growth for the foreseeable future.
Government Regulation
State Regulation
The WellCare HMOs are subject to extensive state regulation. Applicable
state statutes and regulations require the WellCare HMOs to file periodic
reports with the relevant state agencies, and contain requirements relating to
the operation of their HMOs, the rates and benefits applicable to their products
and their financial condition and practices. In addition, state regulations
require the WellCare HMOs to maintain restricted cash or available cash
reserves, net worth positions and restrict their abilities to make dividend
payments, loans or other transfers of cash to the Company.
<PAGE>
State regulatory authorities exercise oversight regarding the provider networks,
medical care delivery and quality assurance programs, contract forms and
financial condition of the WellCare HMOs. The WellCare HMOs are also subject to
periodic examination by the relevant state regulatory authorities.
Applicable New York statutes and regulations require the prior approval of
the New York Commissioner of Health and the New York Superintendent of Insurance
for any change of control of WCNY or the Company. A similar law in Connecticut
requires the approval of the Insurance Commissioner of Connecticut for any
change in control of the Company or WCCT. Prior approval would be required for
any person to acquire the power to vote 10% or more of the combined voting power
of the Class A Common Stock and Common Stock of the Company. Under New York law,
transactions between a holding company and a controlled HMO must be fair and
equitable. Any transaction that involves five percent or more of WCNY's assets
requires notice to the Commissioner and the Superintendent, and any transaction
that involves 10% or more of WCNY's assets requires prior approval.
New York State has required all third party payors to pay hospitals for
most inpatient hospital charges on a DRG basis, that is, the rates have been
fixed by the State according to a predetermined schedule based on the diagnosis
and not the length of stay. HMOs, subject to regulatory approval, have been
permitted to negotiate lower DRG or per diem rates. Certain surcharges are
applicable to the established DRG rates in New York for individuals covered by
commercial indemnity insurers and self-funded groups. WCNY is not currently
subject to any surcharge on the DRG rates due to a statutory exception for HMO
members and an exception based on its participation in the Medicaid programs. In
April 1995, the United States Supreme Court upheld New York State's practice of
imposing surcharges on the DRG rates. However, the current legislation mandating
the DRG basis is scheduled to sunset in the near future. Hospital charges in
Connecticut are based on a per diem per patient system rather than a DRG system.
Eligible HMOs are permitted to directly negotiate for a different rate and
method of reimbursement with a Connecticut hospital.
WellCare's TPA services and PPO (in New York State) currently are not
subject to state regulation, but there can be no assurance that this status will
continue. Connecticut regulations require PPOs to make certain notification
filings.
Federal Regulation
The WellCare HMOs are not federally qualified and neither they nor
WellCare's managed health care operations currently are subject to federal
regulation other than those operations relating to Medicaid and Medicare
products.
The Company's full-risk Medicare product is subject to regulation by HCFA,
a branch of the United States Department of Health and Human Services.
Enrollment under a full-risk Medicare program cannot exceed 50% of an HMO's
total members. Such regulation covers, among other things, quality of care,
limitations on enrollment and compliance with requirements established by peer
review organizations contracting with HCFA.
<PAGE>
The Company's Medicaid contracts are subject to both federal and state
regulation regarding services to be provided to Medicaid enrollees, payment for
those services and other aspects of the Medicaid program.
Discussions are being held at the federal level as to possible reductions
in federal funding for Medicaid and Medicare, which would have a material
adverse effect on the Company's expansion program.
Recent Regulatory Developments
With the failure of Congress to enact any significant health care reform
legislation, the legislatures in many states, including New York and
Connecticut, are considering several programs. There is current legislation to
enhance consumer protection in many states. Comprehensive consumer legislation
is pending before the New York State Legislature. Recently, the State of New
York revised its regulations with respect to IPA's. Prior to this amendment
being passed, an IPA could only contract with one payor. Due to the passage of
this legislation, an IPA can contract with multiple HMOs. Another issue pending
in state legislatures is "any willing provider" legislation. So-called "any
willing provider" initiatives would require an HMO, such as the WellCare HMOs,
to allow any physician meeting its credentialing criteria to join its health
care provider network regardless of geographic need, hospital admitting
privileges and similar factors. In addition, unitary drug pricing and the
movement of Medicaid programs to managed care are also being considered in the
legislatures of New York. Finally, the current legislation mandating the DRG
basis for inpatient hospital charges is scheduled to sunset in the near future.
New York State submitted an application to HCFA in March 1995 for a
demonstration waiver. This demonstration waiver would allow New York State to
mandate managed care for 3.2 million Medicaid beneficiaries by September 1998.
Connecticut has already passed legislation moving its Medicaid programs to
managed care.
ITEM 2. PROPERTIES
WellCare's executive offices are located in two adjacent buildings, at
Hurley Avenue Extension, Kingston, New York, and the Company has offices in
three other buildings in Kingston. It owns these buildings through its
wholly-owned subsidiary, WellCare Development, Inc. These buildings have a
combined space of approximately 75,200 square feet. Also approximately 2,700
square feet of this space has been converted to office suites and is leased to
health care providers at an annual rental of approximately $49,100. The Company
also leases approximately 10,000 square feet in Newburgh, New York, 3,100 square
feet in Albany, New York, 750 square feet in Nyack, New York, 1,250 square feet
in Binghamton, New York, and in 1995, began leasing 10,000 square feet in New
York City, New York at annual rentals of approximately $243,100, $48,800,
$23,100, $15,000, $180,000, respectively. The Company also subleases 4,100
square feet in Newburgh, New York and 2,100 square feet in Kingston, New York to
health care providers at annual rentals of approximately $109,900 and $32,600,
respectively.
In 1994, the Company, through WellCare Development, Inc., purchased four
buildings. Three of the four buildings are located in Kingston, New York and the
fourth is located in Saugerties, New
<PAGE>
York. The buildings located in Kingston, New York provide approximately 40,200
square feet of office space utilized by the Company's communication, information
and member services divisions. The building located in Saugerties, New York
provides approximately 10,000 square feet and has been converted into office
suites leased to health care providers and a laboratory at annual rentals of
approximately $111,500, $31,400 and $9,000, respectively.
ITEM 3. LEGAL PROCEEDINGS
Class Action Litigation
Between April 1, 1996 and May 14, 1996, the Company as well as two of its
officers who also are directors were named as defendants in eight separate
purported class actions filed in the United States District Courts for the
Northern and Southern Districts of New York. The complaints in these actions are
virtually the same, alleging the defendants violated the federal securities laws
by making alleged materially false and misleading statements, or withholding
information, which artificially inflated the market price of the Company's
common stock and caused investors to act in their detriment. A ninth suit filed
during the same period names as defendants the same parties; as well as three
additional directors, two of whom also are officers. Because these actions have
only recently been filed, discovery has not yet begun. Most early litigation
activity will involve plaintiffs' counsel's attempts to achieve consolidation
and support the existence and viability of a class. Accordingly, management is
unable to predict the likelihood of its success on the merits of these cases but
has instructed counsel to defend vigorously. The Company has insurance in effect
which may, at least in part, offset any costs to be incurred in these
litigations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded on The Nasdaq Stock Market, Inc.
("Nasdaq") under the symbol "WELLE." The following table sets forth the closing
high and low sale prices for the Common Stock for each quarter of the last two
calendar years. There is no trading market for the Company's Class A Common
Stock.
1994 High Low
---- ---
First Quarter $ 30 $ 19 1/2
Second Quarter 25 14 3/4
Third Quarter 22 1/4 15 1/2
Fourth Quarter 27 3/4 20 3/4
1995
First Quarter $ 38 $ 24
Second Quarter 37 19 7/8
Third Quarter 24 3/4 19
Fourth Quarter 26 20 1/4
On May 2, 1996, the Company was informed by the staff of Nasdaq of the
intention to de-list the Company's stock due to the Company's failure to file
the Company's Form 10-K for the period ending December 31, 1995, on a timely
basis. The Company was granted a hearing before the Nasdaq Listing
Qualifications Panel (the "Panel") to review the circumstances surrounding the
Company's failure to timely file. On May 22, 1996, the Company received a
determination from the Panel that the Company would continue to be listed on
Nasdaq as long as the Company filed its Form 10-K and 10-Q for the periods
ending December 31, 1995, and March 31, 1996, respectively, by May 31, 1996.
On May 1, 1996, there were approximately 224 and 30 holders of record of
the Company's Common Stock and Class A Common Stock, respectively, which did not
include beneficial owners of shares registered in nominee or street name.
WellCare has not paid cash dividends on its capital stock and does not
anticipate paying any cash dividends on its Common Stock or Class A Common Stock
in the foreseeable future (See
<PAGE>
"Business-Government Regulation" for restrictions on the payment of dividends by
the WellCare HMOs, wholly-owned subsidiaries of the Company).
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following selected financial data have been derived from the Company's
audited consolidated financial statements and should be read in conjunction with
the consolidated financial statements, related notes and other financial
information included elsewhere herein. It should be noted that the selected
financial data for the year ended December 31, 1994 has been restated (See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Prior Period Restatement").
<PAGE>
Statement of Operations Data:
(in thousands, except per share data)
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------------
1995 1994(1) 1993(2) 1992 1991
---- ------- ------- ---- ----
<S> <C> <C> <C> <C> <C>
Revenue:
Premiums earned ........................................................ $144,518 $120,411 $ 72,905 $ 38,692 $ 25,317
Interest and other income .............................................. 8,349 2,171 3,417 2,880 1,913
-------- -------- -------- -------- --------
Total revenue ............................................................ $152,867 122,582 76,322 41,572 27,230
-------- -------- -------- -------- --------
Expenses:
Medical expenses ....................................................... 115,560 98,411 58,471 31,587 25,271
General and administrative expenses .................................... 30,279 15,599 9,641 6,168 3,348
Depreciation and amortization expenses ................................. 2,292 1,611 761 549 335
Interest and other expenses ............................................ 1,947 1,099 1,331 906 734
-------- -------- -------- -------- --------
Total expenses ........................................................... 150,078 116,720 70,204 39,210 29,688
-------- -------- -------- -------- --------
Income (loss) before income taxes, extraordinary credit and
cumulative effect of a change in accounting principle .................. 2,789 5,862 6,118 2,362 (2,458)
Provision for income taxes ............................................... 1,116 2,403 2,533 1,010 59
-------- -------- -------- -------- --------
Income (loss) before extraordinary credit and cumulative effect of a
change in accounting principle ......................................... 1,673 3,459 3,585 1,352 (2,517)
Extraordinary credit: Utilization of tax loss carry forward .............. -- -- -- 863 --
Cumulative effect of a change in accounting principle: Accounting
for income taxes ....................................................... -- -- 1,063 -- --
-------- -------- -------- -------- --------
Net income (loss) ........................................................ $ 1,673 $ 3,459 $ 4,648 $ 2,215 $ (2,517)
======== ======== ======== ======== ========
Earnings (loss) per share:
Income (loss) before extraordinary credit and cumulative effect of
a change in accounting principle ..................................... $ 0.27 $ .056 $ 0.72 $ 0.32 $ (0.71)
Extraordinary credit ................................................... -- -- -- 0.20 --
Cumulative effect of a change in accounting principle .................. -- -- 0.21 -- --
-------- -------- -------- -------- --------
Net income (loss) ...................................................... $ 0.27 $ .056 $ 0.93 $ 0.52 $ (0.71)
======== ======== ======== ======== ========
Weighted average shares outstanding ...................................... 6,250 6,226 5,022 4,257 3,565
</TABLE>
- -----------
Balance Sheet Data:
(in thousands)
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------------------
1995 1994 1993 1992 1991
<S> <C> <C> <C> <C> <C>
Working capital (deficiency)......... $12,733 $ 4,776 $ 9,582 $ (4,873) $ (4,978)
Total assets......................... 72,011 57,793 49,947 16,299 11,449
Long-term debt....................... 19,209 6,336 5,982 5,152 5,780
Total liabilities.................... 40,207 28,486 23,850 15,862 13,825
Shareholders' equity (deficit)(3).... 31,804 29,307 26,097 400 (2,484)
</TABLE>
- -----------
(1) Restated
(2) During 1993, the Company acquired Mid-Hudson Health Plan, Inc. See Note 3
of the "Notes to Consolidated Financial Statements".
(3) In 1992 and 1991, after deducting minority interest in subsidiary.
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the Consolidated Financial Statements and notes thereto included elsewhere
herein.
General Overview
WellCare's principal source of revenue is premiums earned from the WellCare
HMOs, while interest and other income consists of management and administrative
fees, contributions, interest and investment income, reimbursements from certain
third party insurers, rental income and miscellaneous service income. Premium
revenues represent in excess of 94% of the Company's total revenue for the years
ended December 31, 1995, 1994 and 1993 and have grown substantially since the
Company's inception as a result of increases in both HMO membership and premium
rates.
Medical expenses consist of the hospital charges, physician fees and
related health care costs for its members. Medical expenses also include
estimates of medical expenses incurred but not yet reported ("IBNR") to the
Company, based on a number of factors, including hospital admission data and
prior claims experience; adjustments, if necessary, are made to medical expenses
in the period the actual claims costs are ultimately determined. The Company
believes the IBNR estimates in the Consolidated Financial Statements are
adequate; however, there can be no assurance that actual health care claims
costs will not exceed such estimates.
The Company seeks to control medical expenses through capitation
arrangements with the Alliances and with non-Alliance primary care physicians,
and through its quality assurance programs, utilization review and educational
programs on effective managed care for its providers.
Prior to the fourth quarter of 1994, WellCare contracted directly with
primary care physicians and specialists, capitating substantially all primary
care physicians with a fixed monthly payment for each HMO member selecting the
physician, with a portion allocated to risk-sharing accounts. Effective October
1, 1994, WCNY changed its capitation arrangements from capitating primary care
physicians with attendant risk-sharing to capitating newly-established regional
health care delivery networks (the "Alliances") comprised of the specialists and
previously-capitated primary care physicians. The Alliances have operated at a
deficit since inception and have recently instituted measures to reduce these
deficits and achieve profitability. The Alliances could request additional
funding from the Company, although management does not believe that such
additional funding should be required and does not intend to agree to such
additional funding if requested (See Note 17 a of "Notes to Consolidated
Financial Statements" and "Business - Medical Cost Control - Physician
Arrangements").
The Company's results of operations depend in large part on accurately
predicting and effectively managing medical costs and other operating expenses.
A variety of factors and risks, including competition, changes in health care
practices, changes in federal or state laws and regulations or the
interpretations thereof, inflation, provider contract changes, new technologies,
government imposed surcharges, taxes or assessments, reductions in provider
payments by governmental payors (including Medicare, whereby such reductions may
cause providers to seek
<PAGE>
higher payments from private payors), major epidemics, disasters and numerous
other factors affecting the delivery and cost of health care, may in the future
affect the Company's ability to control its medical costs and other operating
expenses. Governmental action (including downward adjustments to premium rates
requested by the Company, which could result in adjusted rates lower than
premium rates then in effect) or business conditions (including intensification
of competition and the other factors described above) could result in premium
revenues not increasing to offset increases in medical costs and other operating
expenses. Once set, premiums are generally fixed for one year periods and,
accordingly, unanticipated costs during such periods cannot be recovered through
higher premiums. The expiration, suspension or termination of contracts to
provide health coverage for governmental entities or other significant customers
would also negatively impact the Company. Due to these factors and risks, no
assurance can be given with respect to the Company's premium levels or its
ability to control its medical costs.
Legislative and regulatory proposals have been made at the federal and
state government levels related to the health care system, including but not
limited to limitations on managed care organizations (including benefit
mandates) and reform of the Medicare and Medicaid programs. Such legislative or
regulatory action could have the effect of reducing the premiums paid to the
Company by governmental programs or increasing the Company's medical costs.
Specifically, pending federal budgetary action could reduce the premiums payable
to the Company under the Medicare program as compared to previously announced
levels; other pending legislation could have the result of reducing the premiums
payable to the Company under state Medicaid programs. The Company is unable to
predict the specific content of any legislation, action or regulation that may
be enacted or when any such legislation or regulation will be adopted.
Therefore, the Company cannot predict the effect of such legislation, action or
regulation on the Company's business.
Prior Period Restatement
In the second quarter of 1994, two entities which were predecessors to the
Alliances (See Notes 1a and 17 of "Notes to Consolidated Financial Statements")
made payments of approximately $2,879,000 to providers in connection with the
close out of the 1993 group risk accounts and to resolve certain disputed
amounts between the Company and certain providers, which payments might
otherwise have been made by the Company. Additionally, these entities paid
approximately $1,833,000 directly to the Company in payment of 1993 provider
deficits which would otherwise have been due to the Company directly from the
providers. As originally reported in its 1994 financial statements, the Company
recorded the $1,833,000 received as a reduction of medical expense, and the
Company did not record as medical expense, the $2,879,000 paid directly to the
providers by these entities.
In March 1996, accounting personnel of the Company were informed that Mr.
Edward A. Ullmann, then Chairman of the Board, Chief Executive Officer and
President of the Company, (Mr. Ullmann resigned as Chairman and Chief Executive
Officer on April 30, 1996), personally had guaranteed in his individual capacity
two loans, each in the amount of $2,700,000, made by banks to these two
entities, the proceeds of which were used to fund the aggregate payments of
approximately $4,712,000 referred to above. After a review of the relevant
circumstances, the Company elected to restate its 1994 financial statements by
recording an additional $4,712,000 in medical expense and establishing an
additional medical expense accrual. Since there are no specific amounts payable
by the Company as a result of these transactions, the additional medical expense
accrual will be accounted for as an offset to medical expense in future periods
as these bank loans are paid down.
<PAGE>
A reduction of medical expense of approximately $1,738,000 was recorded in 1995
as a result of the reductions in the amounts of these bank loans.
Results of Operations
The following table provides certain statement of operations data expressed
as a percentage of total revenue and other statistical data for the years
indicated:
Year Ended December 31,
-----------------------------------
1995 1994 1993
(Restated)
Statement of Operations Data:
Revenue:
Premiums earned 94.5% 98.2% 95.5%
Interest and other income 5.5 1.8 4.5
---------- -------- ---------
Total revenue 100.0 100.0 100.0
Expenses:
Hospital services 20.0 19.2 21.5
Physician services 51.1 53.6 53.4
Other medical services 4.5 7.5 1.7
---------- -------- ---------
Total medical expenses 75.6 80.3 76.6
General and administrative 19.8 12.7 12.6
Depreciation and amortization 1.5 1.3 1.0
Interest and other expenses 1.3 0.9 1.8
---------- -------- ---------
Total expenses 98.2 95.2 92.0
Income before income taxes and cumulative
effect of a change in accounting
principle 1.8 4.8 8.0
Provision for income taxes 0.7 2.0 3.3
---------- -------- ---------
Income before cumulative effect of a
change in accounting principle 1.1 2.8 4.7
Cumulative effect of a change in
accounting principle -- -- 1.4
---------- -------- ---------
Net income 1.1% 2.8% 6.1%
========== ======== =========
Statistical Data:
HMO member months enrollment 1,046,559 918,542 596,281
Medical loss ratio (1) 80.0% 81.7% 80.2%
Administrative ratio (2) 19.8% 12.7% 12.6%
- ----------
(1) Medical expenses as a percentage of premiums earned; reflects the combined
rates for commercial, Medicaid, full-risk Medicare and Medicare
supplemental members.
(2) General and administrative ratio as percentage of total revenue.
<PAGE>
Year Ended December 31, 1995 Compared to Year Ended December 31, 1994 (Restated)
Premiums earned in 1995 increased 20.0%, or $24.1 million, to $144.5
million from $120.4 million in 1994, attributable to increases in HMO membership
and in premium rates. Total member months increased 13.9% in 1995 to 1,046,559,
accounting for $16.9 million of the increase in premiums earned. Premium rates
increased 6.4% and .7% for commercial and Medicaid members, respectively and
including the premium rates earned for full-risk Medicare members resulted in a
5.4% total weighted average increase and accounted for the $7.2 million balance
of the increase in premiums earned.
Interest and other income increased 284.6%, or $6.2 million, to $8.3
million in 1995 due to increases in WellCare University revenues, management
fees, insurance reimbursements and rental income.
Medical expenses increased 17.4%, or $17.1 million, to $115.6 million in
1995 representing a 3.1% increase on a per member per month basis, but decreased
as a percentage of premiums earned (the "medical loss ratio") from 81.7% in 1994
to 80.0% in 1995. The decrease in the medical loss ratio resulted, in part, from
a 5.4% weighted average increase in premium rates. As a result of a prior period
restatement, medical expenses in 1994 were increased $4.7 million with a
corresponding reduction to medical expenses in 1995 in the amount of $1.7
million.
General and administrative ("G&A") expenses increased 94.1%, or $14.7
million, to $30.3 million in 1995, and increased as a percentage of total
revenue from 12.7% in 1994 to 19.8% in 1995. The increase in G&A expenses
resulted primarily from the reserve established for the note and other
receivables due from the buyer of WellCare Medical Management, Inc. (See Note 5
of "Notes to Consolidated Financial Statements"), increased staffing related to
service area and product line expansion, non-payroll (contracted) services,
marketing and tele-communications related activities, and an increase in the
doubtful account reserve for trade accounts receivable.
Depreciation and amortization by approximately $700,000 to $2.3 million in
1995 as a result of amortization of preoperational costs associated with service
area and product line expansions.
Year Ended December 31, 1994 (Restated) Compared to Year Ended December 31, 1993
Premiums earned in 1994 increased 65.2% to $120.4 million from $72.9
million in 1993, attributable to increases in HMO membership and in premium
rates. Total member months increased by 54.0% in 1994 to 918,542, of which
approximately 22.6% was attributable to a full year of membership for members
transferred by Mid-Hudson Health Plan, ("Mid-Hudson") to WCNY, as compared to
less than full year of membership in 1993, accounting for $39.4 million of the
$47.5 million increase in premiums earned. Premium rates increased 7.6% and 5.6%
for commercial and Medicaid members, respectively, accounting for the $8.1
million balance of the increase in premiums earned.
With respect to other income, income from affiliates decreased by $1.2
million, or 85.6%, in 1994 from 1993, principally, as a result of the
acquisition of Mid-Hudson on December 30, 1993, and the resultant cessation of
management fee revenues from Mid-Hudson. Interest and investment income
increased by $.4 million, or 100.0%, from $.4 million in 1993 to $.8 million in
1994 due
<PAGE>
primarily from the investment to the net proceeds generated from the initial
public offering of the Company's Common Stock in August 1993.
Medical expenses increased 68.3% to $98.4 million in 1994 from $58.5
million in 1993, representing a 9.3% increase on a per member per month basis
and an increase in the medical loss ratio to 81.7% in 1994 from 80.2% in 1993.
As a result of a prior period restatement, medical expenses in 1994 were
increased $4.7 million.
General and administrative (G&A) expenses increased 61.8% to $15.6 million
in 1994 from $9.6 million in 1993, and increased slightly as a percentage of
total revenue to 12.7% in 1994 from 12.6% in 1993. The increase in G & A
expenses resulted primarily from increased marketing efforts and increased
staffing to accommodate the growth of the Company's business, enhancement of
information systems and physician recruitment activities.
Depreciation and amortization increased by $.9 million, or 111.7%, in 1994
from 1993 as a result of amortization of the goodwill originating from the
purchase of the assets and liabilities of Mid-Hudson and depreciation associated
with increased levels of capital expenditures.
Approximately $1.1 million of the net income for 1993 was attributable to
the cumulative effect of the Company's adoption of Financial Accounting
Standards Board Statement No. 109 "Accounting for Income Taxes" effective
January 1, 1993 (See Note 12 of "Notes to Consolidated Financial Statements").
Liquidity and Capital Resources
On January 19, 1996, the Company announced the completion of a private
placement of a 6% subordinated convertible note in the principal amount of
$20,000,000 (the "Note") due December 31, 2002, with The 1818 Fund II, L.P., a
private equity fund managed by Brown Brothers Harriman & Co. The Company has
utilized a part of the net proceeds of this private placement to retire a
portion of the Company's debt. The Company anticipates utilizing the balance of
the proceeds for general corporate purposes as well as a potential replacement
for the Company's credit line. As of May 14, 1996, the Company was in
negotiations with the holder of this Note to amend certain terms, including the
conversion price (See "Certain Relationships and Related Transactions").
The Company's requirements for working capital are principally for funding
geographic and product expansion for HMO operations, maintaining necessary
regulatory reserves, potential acquisitions and strategic partnerships and
marketing and product expansion of other managed care operations.
Net cash used by operating activities in 1995 was approximately $9.3
million compared to net cash provided by operating activities in 1994 of
approximately $1.0 million. The use of cash by operating activities in 1995 was
due primarily to increases of $6.5 million and $3.6 million in trade and other
receivables, respectively. The increase in trade receivables is attributable,
for the most part, to a $5.6 million increase in amounts due from New York State
related to premiums for Medicaid recipients; payment for substantially all of
which has been received to date. The increase in other receivables is primarily
due to receivables associated with contributions made on behalf of WellCare
University. Cash used for capital expenditures was approximately $1.6 million
during 1995 primarily used for expanding and upgrading the Company's information
systems.
<PAGE>
New York State certified HMOs are required to maintain a cash reserve equal
to the greater of 5% of expected annual medical costs or $100,000. Additionally,
WCNY is required to maintain a contingent reserve which must be increased
annually by an amount equal to at least 1% of premiums earned limited, in total,
to a maximum of 5% of premiums earned for the most recent calendar year and
which may be offset by the cash reserve. The cash reserve is calculated at
December 31 of each year and is maintained throughout the following calendar
year. At December 31, 1995, WellCare had required cash reserves of $8.2 million
and a contingent reserve of $4.4 million which was fully offset by the cash
reserve. In the event the contingent reserve exceeds the required cash reserve,
the excess of the contingent reserve over the required cash reserve would be
required to be maintained.
At December 31, 1995, the Company had working capital of $12.7 million,
excluding the $8.2 million cash reserve required by New York State which is
classified as a non-current asset, compared to working capital of $4.7 million,
excluding the $6.6 million cash reserve, at December 31, 1994; the increase was
attributable primarily to borrowing on the line-of-credit which is classified as
a long-term liability. The Company believes that the net proceeds from the Note
referred to above, together with cash on hand, cash generated from operations
and available borrowing will be sufficient to meet the Company's capital
requirements for in excess of twelve months.
In June 1995, Key Bank of New York increased the limit on an unsecured
working capital line-of-credit to $15.0 million, $6.1 million of which was
outstanding at May 14, 1996. The line expires on May 31, 1997. In response to
the Company's late filing of its Annual Report on Form 10- K with the Securities
and Exchange Commission, during April 1996 Key Bank froze all borrowing under
the Company's $15.0 million revolving line of credit pending submission of the
Company's audited financial statements. In addition, Key Bank granted the
Company a waiver of any and all financial covenants for the period ending
December 31, 1995 and March 31, 1996. The Company is in the process of retiring
a portion of the outstanding line and renegotiating the line-of-credit with Key
Bank. It is anticipated that the new terms will be finalized prior to June 30,
1996, (See Notes 11 and 21 of "Notes to Consolidated Financial Statements").
At December 31, 1995, none of the original $2.44 million purchase price for
Mid-Hudson was outstanding. This note was paid in two installments of $500,000
plus accrued interest of 6% per annum on June 30, 1995 and December 31, 1995,
respectively (See Note 3 of "Notes to Consolidated Financial Statements").
At December 31, 1995, the Company had total mortgage indebtedness of $6.1
million outstanding on four of its office buildings, of which approximately
$800,000 is due February 1, 1999, approximately $4.5 million balance on January
1, 2000 and approximately $800,000 is due March 1, 2000. In February 1996, the
Company incurred additional mortgage indebtedness of $335,000 due March 1, 2001.
Between April 1, 1996, and May 14, 1996, the Company, as well as two of its
officers who also are directors, were named as defendants in eight separate
purported class actions filed in the United States District Courts for the
Northern and Southern Districts of New York. The complaints in these actions are
virtually the same, alleging the defendants violated the federal securities
laws. A ninth suit filed during the same period names as defendants the same
parties, as well as three additional directors, two of whom are officers.
Management is unable to predict the likelihood of its success on the merits of
these cases, but has instructed counsel to defend vigorously. The Company
<PAGE>
has insurance in effect which may, at least in part, offset any costs to be
incurred in these litigations.
Sale of WellCare Medical Management, Inc.
In June 1995, the Company contributed approximately $5.1 million of its
then wholly-owned subsidiary, WellCare Medical Management, Inc. ("WCMM") which
was engaged in managing physician practices, and then sold WCMM for cash of $.6
million and note receivable of $5.1 million. A gain of approximately $144,000
was deferred pending the repayment of the note. The buyer ("Buyer") was newly
formed to acquire WCMM and, as of May 14, 1996, approximately 11% of the Buyer's
equity was directly or indirectly held by current or recent directors, officers
or employees of WellCare. The Buyer is in the business of managing medical
practices and providing related consultative services. The Buyer has entered
into agreements to manage the Alliances (See Notes 1a, 2 and 17 of "Notes to
Consolidated Financial Statements"). The Company has a five year option to
acquire the Buyer at any time at a price determined by a formula based on the
Buyer's results of operations. The Company is in the process of renegotiating
the terms of this option.
The note receivable bears interest at a rate equal to prime plus 2% (10.5%
at December 31, 1995) with interest payable monthly through July 31, 1996 and,
thereafter, principal and interest monthly through July 31, 2000. All required
interest through December 31, 1995 has been paid. The Buyer is seeking
additional financing, and is contractually obligated to pay the note receivable
from such proceeds. Through May 14, 1996 such financing has not taken place. In
view of the Buyer's operating losses and advances to the Alliances, the Company
has obtained from certain of the Buyer's equity holders personal guarantees of
the notes and pledges of collateral to secure these guarantees. Nevertheless, in
view of the Buyer's financial condition and difficulties inherent in the
collection of personal guarantees and realization of collateral, the Company has
elected to fully reserve the note receivable at December 31, 1995. In addition,
the Company has elected to fully reserve other receivables from the Buyer
amounting to $744,000.
Inflation
Medical costs have been rising at a higher rate than that for consumer
goods as a whole. The Company believes its premium increases, capitation
arrangements and other cost control measures mitigate, but do not wholly offset,
the effects of medical cost inflation on its operations and its inability to
increase premiums could negatively impact the Company's future earnings.
Accounting Changes
Recent pronouncements of the Financial Accounting Standards Board ("FASB"),
which are not required to be adopted at this date, include Statements of
Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123") and SFAS No. 121. "Accounting for Impairment of
Long-Lived Assets to be Disposed Of ("SFAS 121"), which are effective for fiscal
years beginning after December 15, 1995. The adoption of SFAS 123 and SFAS 121
is not expected to have a material impact on the Company's consolidated
financial position or results of operations.
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Index to Financial Statements and Schedules elsewhere herein.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not Applicable.
(Remainder of page intentionally left blank.)
<PAGE>
PART III
ITEM 10. EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of the Company are as follows:
Name Age Position
---- --- --------
Robert W. Morey, Jr. ..... 59 Chairman of the Board, Chief Executive Officer
(was appointed April 30, 1996) (1)
Edward A. Ullmann......... 44 President (with the function of chief operating
officer) (1)
Robert E. Goff............ 43 Executive Vice President and Director (4)
G. William Strein......... 52 President of WellCare Administration, Inc. and
Director
Marystephanie Corsones.... 46 Vice President of Finance, Chief Financial
Officer, Treasurer and Director (2) (4)
Peter G. Kraft............ 35 Vice President of Marketing
Charles E. Crew, Jr....... 43 Director (2) (3)
Mark D. Dean, D.D.S....... 55 Vice Chairman of the Board (2) (3) (4)
John E. Ott, M.D. ........ 59 Director (1)
Lawrence C. Tucker ....... 53 Director (2) (3)
Eileen H. Wilson ......... 50 Director (4)
Daniel M. Zeichner, M.D... 48 Director
(1) Member, Executive Committee
(2) Member, Audit Committee
(3) Member, Compensation Committee
(4) Member, Development Committee
Robert W. Morey, Jr., became Chairman of the Board, Chief Executive Officer
and a director of the Company on April 30,1996. Mr. Morey previously has served
as President and Chairman of R.W. Morey, Inc., a management firm founded by Mr.
Morey in 1972 which was engaged in, among others things, financial counseling
and reinsurance underwriting of catastrophic health coverage for the managed
care industry. Mr. Morey was engaged in corporate banking, investment banking
and the institutional brokerage business from 1962 to 1972. Mr. Morey received a
B.A. in Economics from Yale University in 1958 and an M.B.A. from Harvard
Graduate School of Business in 1962.
Mr. Morey also was founding investor in many HMOs, some of which are public
companies traded on the New York Stock Exchange or The Nasdaq Stock Market. Mr.
Morey is also the controlling principal of Moors & Cabot, Inc., a retail stock
brokerage headquartered in Boston.
Edward A. Ullmann, the founder of the Company, has served as its Chairman,
President and Chief Executive Officer since WellCare's formation in August 1983,
and President with the function of chief operating officer since April 30, 1996.
Mr. Ullmann previously served as Director of Administration for Ulster County
Mental Health Services, was a county legislator, and was a practicing
pharmacist. Mr. Ullmann received a B.S. from Albany College of Pharmacy, Union
<PAGE>
University in 1973, an M.P.A. from the Maxwell School at Syracuse University in
1979, and is a 1981 graduate of the National HMO Management Fellowship Program,
Georgetown University. Mr. Ullmann is Chairman of the New York State HMO
Conference's Medicaid Committee, serves on the Managed Care Study Group of the
New York State Council on Health Care Financing and serves on the editorial
advisory board of Medical Interface, a national managed care magazine. Mr.
Ullmann is the brother of Mr. Kraft, WellCare's Vice President of Marketing.
Robert E. Goff joined the Company in 1985 as Executive Director of the
WellCare HMO, and became Executive Vice President of the Company in 1992. Mr.
Goff was Vice President of Good Samaritan Hospital from 1983 to 1985, and Vice
President of Northern Metropolitan Hospital Association from 1980 to 1983. He
received a B.S. in Business Administration from Northeastern University in 1976
and an M.B.A. from Babson College in 1978. Mr. Goff has been a director of the
Company since March 1991.
G. William Strein joined the Company in 1985 as Vice President of Planning
and Development, and since 1989 has served as President and Chief Executive
Officer of WellCare Administration, Inc., a wholly-owned subsidiary of the
Company responsible for WellCare's specialty benefit programs, new product
development and quality assurance. From 1979 to 1985, Mr. Strein served as
Administrative Director for various health care programs. Mr. Strein received a
B.S. in Pharmacy from the University of Illinois in 1968, an M.S. from the
University of Illinois in 1972, and an M.S.P.H. in public health from the
University of North Carolina in 1979. Mr. Strein has been a director of the
Company since January 1989.
Marystephanie Corsones joined the Company as Finance Director in July 1993,
was appointed its Chief Financial Officer, Vice President of Finance in May 1994
and was elected to the Board in November 1994. Ms. Corsones has more than 10
years of experience in international finance and taxation. Prior to joining
WellCare, Ms. Corsones was senior director of U.S. International Operations at
Coopers & Lybrand in Paris, France, for more than five years. Ms. Corsones
received an M.B.A in Finance and Economics from the University of Washington.
Peter G. Kraft joined the Company in 1984 as an Enrollment Representative,
served as Senior Enrollment Representative from 1985 to 1986, Associate
Marketing Director from 1986 to 1989, Regional Sales Manager from 1989 to 1991,
and was appointed Vice President of Marketing in 1991. Mr. Kraft received an
A.S. from SUNY at Cobleskill in 1980 and is a 1993 graduate of the Managed Care
Training Program at the University of Missouri, Kansas City. Mr. Kraft is the
brother of Mr. Ullmann, WellCare's President.
Charles E. Crew, Jr. has been a director of the Company since September
1987. Mr. Crew has been employed with General Electric since 1977, having served
as General Manager of the Mid-Western Region Plastic Sales Division since 1987.
Mark D. Dean, D.D.S. has been a director of the Company since May 1984,
presently serves as Vice Chairman of the Board, and is Dental Director for the
WellCare benefit programs. Dr. Dean has been a dentist in private practice since
1966.
John E. Ott, M.D. is the former Chief Executive Officer of The George
Washington University Health Plan, a member of the American College of Physician
Executives, and a Diplomate of the American Board of Medical Management. Dr. Ott
currently serves on the Standards and
<PAGE>
Ethics Committee of the Group Health Association of America ("GHAA"). Dr. Ott is
a former President of the American Academy of Clinical Toxicology and
Co-Chairman of the Medical Director Committee for the Maryland Association of
HMOs. He is also board certified in Pediatrics and Medical Toxicology. Dr. Ott
received his B.S. and M.D. degrees at the University of Pittsburgh, and
completed a pediatric residency and fellowship in clinical genetics and
biophysics at the University of Colorado Medical Center.
Lawrence C. Tucker co-founded and co-manages The 1818 Fund, L.P. and The
1818 Fund II, L.P. (The "Funds"), private equity investing partnerships with
committed capital of $800 million. He joined Brown Brothers Harriman & Co. ("BBH
& Co."), a general partner of the Funds, in 1966; was named a general partner of
the firm in 1979; and is the senior partner supervising the firm's corporate
financial advisory practice which is concerned primarily with mergers,
acquisitions, corporate restructurings and private equity investing through the
Funds. Mr. Tucker is a member of BBH & Co.'s Steering Committee. He also serves
as a director of WorldCom, Inc., Blenheim Group PLC, and Riverwood International
Corporation. Mr. Tucker was born in Winston-Salem, North Carolina and received a
B.S. degree in engineering from Georgia Institute of Technology in 1964 and an
M.B.A. from the Wharton School of the University of Pennsylvania in 1966.
Eileen H. Wilson became a director of the Company in September 1993. Ms.
Wilson is President of Eileen Wilson Associates, a Rochester consulting firm
specializing in management development and training for the managed care
industry and has more than 13 years experience in the insurance industry and 14
years in the managed care industry.
Daniel M. Zeichner, M.D. has been a director of the Company since May 1984.
Dr. Zeichner is a board certified plastic and reconstructive surgeon and has
been in private practice since 1982.
All directors hold office until their successors are elected and qualified.
The Board is divided into three classes. As a result of this classification of
directors, one class of directors is elected each year for a three-year term.
The terms of the Class III Directors, Messrs. Crew, Goff and Ullmann, expire in
1996. The terms of Messrs. Dean and Zeichner and Ms. Wilson, Class I Directors,
expire in 1997. The terms of Ms. Corsones and Mr. Strein, Class II Directors,
expire in 1998. Mr. Ott, appointed to the Board in September 1995 to fill the
vacancy created by the death of Mr. Francis Casey, is also a Class II Director
whose term expires in 1996. The nominee for this position on the Board will be
subject to approval at the next annual meeting of the shareholders and will
serve a term to expire in 1998.
On January 19, 1996, the Company entered into a Note Purchase Agreement
(the "Agreement") for the private placement of a 6% subordinated convertible
note in the principal amount of $20,000,000 due December 31, 2002 (the "Note")
with the 1818 Fund II, L.P. (The "Fund"), a private equity fund managed by BBH &
Co. Pursuant to the terms of the Agreement, as of such date, the Company caused
one (1) vacancy to be created on its Board of Directors and appointed Lawrence
C. Tucker, as a designee of the Fund, as a director. Mr. Tucker's directorship
does not have any classification. His term expires in 1996 and is subject to
re-election at the 1996 Annual Meeting of Shareholders for a term to expire in
1998. (See "Certain Relationships and Related Transactions").
Officers are elected annually and serve at the pleasure of the Board of
Directors, subject to rights, if any, under contracts of employment.
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth a summary of the compensation for 1995
earned by the Company's Chief Executive Officer and by each other executive
officer whose compensation during such year exceeded $100,000, as well as
similar summary information for such individuals for 1994 and 1993:
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Long-Term
Compensation
----------------------------
Annual Compensation Awards
------------------------------------------- -----------
Common Stock All Other
Name and Salary Bonus Other Annual Underlying Compensation
Principal Position Year ($) ($) Compensation ($) Options (#) ($)
- ------------------ ---- -------- -------- ---------------- ------------ --------------
<S> <C> <C> <C> <C> <C> <C>
EDWARD A. ULLMANN(7) 1995 $187,061 $103,902(2) -- 10,000(3) $ 8,605(5)(6)
President with the function 1994 180,000 124,764 -- 25,000(4) 6,007(5)(6)
of chief operating officer 1993 138,241 125,046 -- -- 5,005(5)(6)
ROBERT GOFF 1995 $114,315 $ 23,513(2) -- 1,000(3) $ 3,580(6)
Executive Director and 1994 110,000 40,331 -- -- 3,000(6)
Executive Vice President 1993 103,065 36,430 -- 10,000(3) 1,690(6)
G. WILLIAM STREIN 1995 $ 86,019 $ 24,234(2) -- -- $ 2,714(6)
President, 1994 82,000 36,191 -- -- 2,475(6)
WellCare Administration, 1993 72,304 22,671 -- 10,000(3) 1,728(6)
Inc.
PATRICK ARLANTICO(1) 1995 $ 79,604 $ 19,666(2) -- 2,000(3) --
Senior Vice President 1994 75,000 30,506 -- 2,000(3) --
1993 57,759 30,577 -- 10,000(3) --
</TABLE>
- --------
(1) Mr. Arlantico has resigned his position as Senior Vice President with the
company effective March 1, 1996.
(2) Represents the fair market value of Treasury Stock issued as bonuses in
lieu of cash. Also, includes cash bonuses of $30,921 and $320 for Messrs.
Ullmann and Arlantico, respectively.
(3) Represents options to purchase Common Stock.
(4) Consists of options to purchase 10,000 shares of Common Stock and phantom
shares with respect to 15,000 shares of Common Stock. Phantom shares vest,
subject to Mr. Ullmann's continued employment with the Company, 25% per
year on December 31st of each year, commencing December 31, 1994, and are
payable in cash only in January 1998 in an amount equal to the product of
(A) and (B), where (A) equals the total number of phantom shares vested in
the executive, and (B) equals the sum of (i), (ii), (iii), and (iv) equal
to the following:
Difference between the closing sales price of the
Common Stock, as reported by The Nasdaq Stock Market
(National Market) on December 31,
(i) 1994 and 1993
(ii) 1995 and 1994
(iii) 1996 and 1995
(iv) 1997 and 1996
(5) Includes $3,985, $3,007 and $1,802 paid by WellCare in 1995, 1994 and 1993,
respectively, for a $1,000,000 life insurance policy on Mr. Ullmann's life,
50% of which is payable to WellCare and the balance to Mr. Ullmann's wife.
(6) Consists (or with respect to Mr. Ullmann, included $4,620, $3,000 and
$3,203 in 1995, 1994 and 1993, respectively) of matching contributions made
by the Company pursuant to the Company's 401(k) Plan.
(7) Effective April 30, 1996, Mr. Ullmann resigned as Chairman and Chief
Executive Officer, but, continues as President with functions of chief
operating officer.
<PAGE>
The following table sets forth certain information concerning options
granted in 1995 to the individuals names in the Summary Compensation Table:
OPTION GRANTS IN 1995
Individual Grants
<TABLE>
<CAPTION>
Potential
Realizable Value
Number of % of Total at Assumed Annual
Securities Options Exercise Rates of Stock Price
Underlying Granted to or Base Appreciation for
Options Employees Price Expiration Option Term
Name Granted (#) In 1995 ($/Share) Date 5% ($) 10%($)
- ---- ----------- ---------- -------- ---- ------ ------
<S> <C> <C> <C> <C> <C> <C>
Edward A. Ullmann 10,000(1) 9.5% $24.50 01/01/2000 $ 16,500 $ 69,800
Robert E. Goff 1,000(1) 0.9% $19.75 08/10/2000 $ 7,200 $ 12,690
Patrick P. Arlantico 2,000(1) 1.9% $19.75 08/10/2000 $ 14,400 $ 25,380
</TABLE>
- ----------
(1) Exercisable at the cumulative annual rate of 25% of the total number for
shares underlying the option commencing one year from the date of grant.
The following table presents certain information concerning options
exercised during 1995 and the value of unexercised options held at December 31,
1995 by the individuals named in the Summary Compensation Table:
OPTION EXERCISES IN 1995 AND OPTION VALUES AT DECEMBER 31, 1995
<TABLE>
<CAPTION>
Number of Value (2) of Unexercised
Unexercised Options In-the-Money Options
Shares at December 31, 1995 (#) at December 31, 1995 ($)
Acquired Value(1) Exercisable(E)/ Exercisable(E)/
Name on Exercise (#) Realized ($) Unexercisable(U) Unexercisable(U)
- ---- --------------- ------------ ---------------- -----------------
<S> <C> <C> <C> <C>
Edward A. Ullmann -- $ -- 10,000(U) $ 10,000
Robert E. Goff 4,000 $ 51,250 2,500(E) $ 31,875(E)
7,500(U) 95,625(U)
G. William Strein 1,500 $ 22,875 2,500(E) $ 31,875(E)
7,500(U) 95,625(U)
Patrick P. Arlantico -- $ -- 2,500(E) $ 31,875(E)
9,500(U) 110,125(U)
</TABLE>
- ----------
(1) Values are calculated by subtracting the exercise or base price from the
closing sales price of the Common Stock on the date the option was
exercised.
(2) Values are calculated by subtracting the exercise or base price from the
closing sales price of the Common Stock on December 31, 1995 of $21.50 per
share.
<PAGE>
In 1996, the Board approved a one-time lump sum cash bonus for Mr. Ullmann
and Ms.Corsones. The amounts of the bonuses, paid in 1996, are $164,850 (or
$100,000 after the application of appropriate payroll withholdings) and $50,000
(gross, or before the application of withholdings) for Mr. Ullmann and Ms.
Corsones, respectively.
Employment Agreements
Mr. Ullmann is employed under an agreement with the Company effective
January 1, 1994 which expires December 31, 1997, and which was subsequently
amended as of January 1, 1996. The agreement provides for a base salary of
$225,000 for 1996, with annual increases of four percent, plus an annual bonus
equal to two percent (2%) of the Company's net (after tax) profit up to a
maximum of $200,000 per annum, and such additional bonus as the Board of
Directors may determine. In January 1996, the Board of Directors granted an
additional bonus to Mr. Ullmann in the amount of $164,850 (or $100,000 after the
application of appropriate payroll withholdings). Under the agreement, Mr.
Ullmann is entitled to receive incentive or non-incentive options to purchase
10,000 shares of the Company's Common Stock on January 1st of each year during
his term of employment at an exercise price (a) with respect to an incentive
option, not less than 110% of the fair market value of the Common Stock on the
date of grant, and (b) with respect to a non-incentive option, not less than 75%
of the fair market value of the Common Stock on the date of grant. The options
will be exercisable cumulatively at the rate of 25% of the underlying shares
each year commencing one year from the date of grant. The agreement further
provides for a grant of 15,000 phantom shares, the terms of which are described
above in the "Executive Compensation" table under footnote (9).
Under the agreement, WellCare maintains a $1,000,000 term life insurance
policy on the life of Mr. Ullmann, 50% of which is payable to WellCare and the
balance to Mr. Ullmann's wife, and also provides Mr. Ullmann with a Company
automobile. In the event of termination for any reason, Mr. Ullmann is entitled
to continued salary and insurance benefits for one year. The agreement also
provides for a one-time, lump sum severance payment in the amount of $500,000 in
the event of termination of employment prompted by the Company, and as a result
of a change of ownership or Board composition of over twenty-five percent (25%).
Mr. Goff is employed under an agreement with the Company effective January
1, 1994 which expires December 31, 1996, and provides for a base salary of
$118,976 for 1996, with annual increases of four percent (4%), and such
additional bonus as the Board of Directors or the Company's President may
determine. Under the agreement, WellCare provides Mr. Goff with a Company
automobile. In the event of termination for any reason, Mr. Goff is entitled to
continued salary and insurance benefits for 90 days and a severance payment
equal to two weeks' salary for every year of service with the Company in excess
of six years.
Mr. Strein is employed under an agreement with the Company effective July
1, 1993 which expires June 30, 1996, and provides for an annualized base salary
of $92,610 for 1996, with annual increases of five percent (5%), and such
additional bonus as the Board of Directors or the Company's President may
determine. Under the agreement, WellCare provides Mr. Strein with a Company
automobile. In the event of termination for any reason, Mr. Strein is entitled
to continued salary and insurance benefits for 90 days and a severance payment
equal to two weeks' salary for every year of service with the Company in excess
of six years.
<PAGE>
Ms. Corsones is employed under an agreement with the Company effective May
23, 1994 which expires May 22, 1998, and which was subsequently amended as of
January 1, 1996. The agreement provides for a base salary of $125,000 for 1996,
with annual increases of four percent (4%) on January 1st of each of the
remaining contract years, plus an annual bonus equal to one percent (1%) of the
annual net (after tax) profit of the Company up to $100,000 and such additional
bonus as the Board of Directors or the Company's President may determine. In
January 1996, the Board of Directors granted an additional bonus to Ms. Corsones
in the amount of $50,000. Under the agreement, Ms. Corsones is entitled to
receive incentive or non-incentive options to purchase 2,000 shares of Common
Stock on January 1st of each year during her term of employment at an exercise
price (a) with respect to an incentive option, at the fair market value of the
Common Stock on the date of grant, and (b) with respect to a non-incentive
option, not less than 75% of the fair market value of the Common Stock on the
date of grant. The options will be exercisable at the rate of 25% of the
underlying shares each year commencing one year from the date of grant. The
agreement further provides for the grant of 5,000 phantom shares, the terms of
which are described above in the "Executive Compensation" table under footnote
(9).
Under the agreement, WellCare provides Ms. Corsones with a Company
automobile. Additionally, the Company is required to make contributions in the
amounts of $14,000 per annum for a period of seven years into a tax deferred
annuity with a retirement benefit of $500,000 at age 65. In the event of
termination for any reason, Ms. Corsones is entitled to continued salary and
insurance benefits for one year. However, in the event of termination prompted
by the Company, and as a result of a change of ownership or Board composition of
over twenty-five percent (25%), Ms. Corsones is entitled to a one-time lump sum
severance payment in the amount of $250,000.
Mr. Kraft is employed under an agreement with the Company effective January
1, 1995 which expires December 31, 1998, and provides for a base salary of
$72,800 for 1996, with annual increases of four percent (4%), an annual bonus
equal to a minimum of 30% of his base salary for achieving or exceeding the
annual enrollment target goal established by the Board and such additional bonus
as the Board of Directors or the Company's President may determine. Under the
agreement, WellCare provides Mr. Kraft with a Company automobile. In the event
of termination for any reason, Mr. Kraft is entitled to continued salary and
insurance benefits for six months.
Director Compensation
All directors, who are not employees of the Company, receive a fee of $500
for each meeting of the Board of Directors attended, plus reimbursement of their
expenses, and an additional $300 for each meeting of the Compensation Committee,
Audit Committee or Development Committee attended. The Vice Chairman of the
Board and the Chairman of the Audit and Compensation Committees receive a fixed
annual stipend of $12,000 each.
Immediately following the election, re-election or appointment of an
outside director, the Stock Option Committee grants to each outside director a
non-incentive option to purchase 3,000 shares of Common Stock (pro-rated in the
case of an appointment as a director) at an exercise price equal to 75% of the
fair market value of the Common Stock on the date of grant. Each option is for a
term of five years from the date of grant, provided, however, that all options
terminate three months after each outside director ceases to serve as a director
of the Company. Each option is generally exercisable at the annual rate of 1,000
shares commencing one year from the date of grant.
<PAGE>
In June 1995, Mr. Casey was granted an option to purchase 3,000 shares of
the Company's Common Stock as a result of his election to the Board at the
annual meeting of shareholders. In September 1995, Dr. John Ott was granted an
option to purchase 2,740 shares of the Company's Common Stock as a result of his
appointment to the Board to fill the vacancy created by Mr. Casey's death.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
The following table sets forth as of May 1, 1996 certain information with
regard to the beneficial ownership of the Common Stock of the Company as of the
date hereof by (1) each stockholder who is known by the Company to beneficially
own in excess of 5% of the outstanding shares of Common Stock or Class A Common
Stock, (2) each director, (3) each of the executive officers named in the
Summary Compensation Table and (4) all executive officers and directors as a
group.
<TABLE>
<CAPTION>
Percent of Total
------------------ Percent
Class A Class A of Total
Name Common Common(12) Common Common Vote
---- ------ ---------- ------ ------ ----
<S> <C> <C> <C> <C> <C>
Robert W. Morey(1) 281,956 503,201 19.1 10.4 16.9
Edward A. Ullmann(2)(3) 750,110 24,114 50.7 * 38.3
The 1818 Fund II, LP(4)(5) -- 689,655 * 12.5 3.4
Brown Brothers Harriman & Co.(4)(5) -- 689,655 * 12.5 3.4
T. Michael Long(4)(5) -- 689,655 * 12.5 3.4
Robert E. Goff 29,168 50,251 2.0 1.0 1.7
G. William Strein(6) 14,585 42,927 * * *
Patrick P. Arlantico(7)(8) 9,723 7,592 * * *
Marystephanie Corsones -- 1,818 * * *
Charles E Crew, Jr 43,752 50,194 3.0 1.0 2.5
Mark D. Dean(9)(10) 121,534 186,006 8.2 3.9 7.1
John E. Ott -- 300 * * *
Lawrence C. Tucker(4)(5) -- 689,655 * 12.5 3.4
Eileen H. Wilson -- 610 * * *
Daniel M. Zeichner(11) 38,891 63,721 2.6 1.3 2.3
All executive officers and directors * * *
as a group (12 persons)(2)(5)(6)
(7)(10)(11) 1,293,581 1,635,362 87.4 29.5 71.7
</TABLE>
* Less than 1%
(1) Address is 55 Main Street, Tiburon, California 94920.
(2) Address is Park West/Hurley Avenue Extension, Kingston, New York 12401.
(3) Includes 11,045 shares of Common Stock owned by a not-for-profit
corporation of which Mr. Ullmann is President. Mr. Ullmann disclaims
beneficial ownership of the shares owned by the not-for-profit corporation.
(4) Address is 59 Wall Street, New York, New York 10005
<PAGE>
(5) On January 19, 1996, the Company issued to the 1818 Fund II, LP (the
"Fund"), a 6.0% Subordinated Convertible Note in the principal amount of
$20,000,000 due December 31, 2002 (the "Note"), entitling the holder
thereof to convert such Note into 689,655 shares of the Company's Common
Stock. Brown Brothers Harriman & Co. ("BBH & Co."), a general partner of
the Fund, have designated Messrs. L. Michael Long and Lawrence C. Tucker,
either individually or jointly, as the sole and exclusive partners of BBH &
Co. having voting and investment power with respect to the Note, and the
Common Stock issuable upon conversion of the Note. Giving effect to the
conversion of the Note, the Fund beneficially owns 689,655 shares of Common
Stock. By virtue of BBH & Co.'s relationship with the Fund, BBH & Co. may
be deemed to beneficially own 689,655 shares of Common Stock. By virtue of
the resolution adopted by BBH & Co. designating Messrs. Long and Tucker,
either individually or jointly, as the sole and exclusive partners of BBH &
Co. having voting and investment power with respect to the Note, and the
Common Stock issuable upon conver- sion of the Note, Messrs. Long and
Tucker may each be deemed to beneficially own 689,655 shares of Common
Stock.
(6) Includes 15,000 shares of Common Stock owned by Mr. Strein's wife. Mr.
Strein disclaims beneficial ownership of the shares owned by his wife..
(7) Includes 2,431 shares of Common Stock owned by Mr. Arlantico's wife. Mr.
Arlantico disclaims beneficial ownership of the shares owned by his wife..
(8) Mr. Arlantico resigned from his position as Senior Vice President with the
Company effective March 1, 1996.
(9) Address is 62 Riverview, Port Ewen, New York 12466.
(10) Includes 68,059 shares of Class A Common Stock and 118,172 shares of Common
Stock owned by Pine Street Dental Associates, P.C., a retirement plan in
which Dr. Dean has a 48% interest, 4,862 shares of Class A Common Stock and
14,584 shares of Common Stock owned by Dr. Dean's wife and 6,362 shares of
Common Stock owned by Dr. Dean's son. Dr. Dean disclaims beneficial
ownership of the shares owned by his wife and son.
(11) Includes 4,862 shares of Common Stock in Dr. Zeichner's Defined
Contribution Pension Plan and 5,262 shares of Common Stock owned by Dr.
Zeichner's wife. Dr. Zeichner disclaims beneficial ownership of the shares
owned by his wife.
(12) Includes shares of Common Stock from stock options exercisable on or before
June 30, 1996 as follows: Exercise Number Name Price of Shares
Exercised Number
Name Price of Shares
---- ----- ---------
Edward A. Ullmann $23.50 5,000
Edward A. Ullmann 24.50 2,500
Robert E. Goff 11.75 0
G. William Strein 11.75 0
Marystephanie Corsones 11.75 500
Marystephanie Corsones 17.25 750
Marystephanie Corsones 24.50 500
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On January 19, 1996, the Company entered into an agreement for the private
placement of a 6% subordinated convertible note in the principal amount of
$20,000,000 (the "Note") due December 31, 2002, with The 1818 Fund II, L.P. (the
"Fund"), a private equity fund managed by Brown Brothers Harriman & Co. ("BBH &
Co.").
Pursuant to the Note dated January 19, 1996, in the principal amount of
$20,000,000 issued by the Company and payable to the order of the Fund or its
registered assignees, the Note accrues interest at an interest rate of six
percent (6%) per annum, which interest is payable quarterly by the Company. The
principal amount of the Note is payable in one amount on December 31, 2002. The
Note is subject to certain mandatory redemption at the option of the holder of
the Note upon certain changes in control of the Company. In addition, the Note
is subject to certain optional redemptions at the option of the Company after
the fourth anniversary of the date of the Note. By its terms, the Note is
subordinated to all senior indebtedness of the Company. The holder of the Note
has the right to convert the then outstanding principal amount of the Note into
that number of shares of common stock of the Company at a conversion price of
Twenty-Nine Dollars ($29.00) per share, subject to adjustment. Under the Note,
the conversion price granted to the holder of the Note is adjusted, inter alia,
if the Company issues shares of its common stock or options, warrants or other
rights to acquire shares of common stock of the Company at a price per share
less than the then current market price.
Pursuant to the terms of the Note Purchase Agreement dated January 19, 1996
(the "Agreement") entered into between the Company and the Fund, as of such
date, the Company has caused one (1) vacancy to be created on its Board of
Directors and has caused Lawrence C. Tucker, as a designee of the Fund, to be
appointed to the Board. Mr. Tucker's directorship does not have any
classification. In addition, under the terms of the Agreement, at the next
annual meeting of the shareholders of the Company and at each subsequent annual
meeting of the shareholders of the Registrant where Class II Directors are to be
elected, provided the Fund owns at least three percent (3%) of the common stock
outstanding of the Company (after giving affect to the issuance of the shares
issuable upon conversion of the Note), the Fund has the contractual right to
nominate that number of directors, but in no event less than one (1) director or
more than two (2) directors, equal to the Fund's proportionate share of the
total number of common stock then outstanding of the Company, upon giving effect
to the conversion of the Note; provided, however, that if the Fund owns three
percent (3%) or more but less than five percent (5%) of the common stock
outstanding of the Company (after giving effect to the issuance of the shares
issuable upon conversion of the Note), the foregoing right will be limited to
the nomination of one (1) director. Such directors will be classified as Class
II Directors. The two (2) principal shareholders of the Company, Edward A.
Ullmann and Robert W. Morey, Jr., have agreed in the Agreement to vote their
shares of the Company in favor of the nominees of the Fund. Pursuant to the
Agreement, the Fund may purchase shares of common stock of the Company (in
addition to the shares, issuable upon conversion of the Note), provided that
such purchases do not, in total, exceed Ten Million Dollars ($10,000,000).
Finally, provided the Fund holds at least fifty percent (50%) of the shares
issued or issuable upon conversion of the Note, the Fund, under certain
conditions, may sell shares issuable upon conversion of the Note in certain
private placements of common stock by the Company.
Pursuant to the terms of the Registration Rights Agreement dated January
19, 1996 between the Company and the Fund, the holder of the Note and the holder
of the shares issued upon conversion of the Note have been granted two (2)
demand registration rights and unlimited incidental
<PAGE>
registration rights. The Company is also required, within eighteen (18) months
of January 19, 1996, to file with the Securities and Exchange Commission, an
"evergreen" shelf registration statement with respect to the Note and any shares
issued upon conversion of the Note. As of May 14, 1996, the Company was in
negotiation with the holder of this Note to amend certain terms, including the
conversion price.
WellCare has an agreement with Park West Entertainment, Inc. ("Park West"),
a corporation wholly-owned by Mr. Ullmann, pursuant to which Park West provides
catering, conferencing and related administrative services in return for fixed
monthly fee. In 1993, 1994 and 1995, Park West received aggregate fees of
approximately $211,000, $276,000 and $276,000 respectively, collectively from
WellCare, and its subsidiaries. On December 31, 1994, WellCare and its
subsidiaries consolidated certain amounts due from Park West. As a result, Park
West owed WellCare, and its subsidiaries, approximately $198,000, evidenced by
promissory notes bearing interest at a rate of 7.5% per annum and payable in
monthly installments over a five year period commencing January 1, 1995. During
1995, Park West incurred additional amounts due to the Company of approximately
$60,000. This additional debt along with the outstanding balance of the December
31, 1994 promissory notes were refinanced. As a result, promissory notes of
approximately $223,000 at 7.5% per annum, payable in monthly installments and
due by December 31, 1999, were outstanding at December 31, 1995. The Company
believes that the interest rate charged to Park West is comparable to that which
could be obtained by Park West from an unaffiliated party.
In June 1995, the Company sold WCMM, its then wholly-owned subsidiary, to a
newly formed corporation for cash of $.6 million and a note receivable of $5.1
million (See Note 5 of "Notes to Consolidated Financial Statements"). As of May
14, 1996, approximately 11% of the Buyer's equity was directly or indirectly
held by current or recent directors, officers or employees of the Company. The
Buyer ("Buyer") is seeking additional financing, and is contractually obligated
to pay the note receivable from such proceeds. In view of the Buyer's operating
losses, the Company has obtained from certain of the Buyer's equity holders
personal guarantees of the notes and pledges of collateral to service these
guarantees. As of May 14, 1996, Dr. Dean, a director of the Company, guaranteed
$1.0 million of the $5.1 note receivable. Dr. Dean also owns (directly and
indirectly) 4.3% of Buyer's equity. Mr. Goff, Executive Vice President and a
director of the Company, guaranteed $.5 million of the $5.1 note receivable. Mr.
Goff owns 2.5% of Buyer's equity. Mr. Kraft, Vice President of Marketing of the
Company, guaranteed $.25 million of the $5.1 note receivable. Mr. Kraft owns .5%
of the Buyer's equity. Mr. Strein, President of WellCare Administration, Inc.
and a director of the Company, guaranteed $.25 million of the $5.1 note
receivable (See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Liquidity and Capital Resources").
In addition, a $3 million bank line of credit was entered into by the Buyer
on December 28, 1995, which was guaranteed by Mr. Ullmann in his personal
capacity.
WCNY has an agreement with Alliances to provide medical care of its members
(See Notes 1a and 17 of "Notes to Consolidated Financial Statements"). Mr.
Ullmann has personally guaranteed in his individual capacity loans to two
entities which were predecessors to the Alliances (See Note 2 of "Notes to
Consolidated Financial Statements"). Each loan was in the amount of $2.7
million.
On December 4, 1995, WellCare entered into a Note Agreement with Cost
Management Technologies, Inc. ("CMT"), whereby WellCare agreed to loan CMT
$320,000, at a fixed interest rate of six percent (6%) per annum. The loan was
originally due on March 2, 1996. The term of the
<PAGE>
loan was extended through June 30, 1996. The Company is in the process of
re-negotiating the terms of this Note Agreement. As of May 14, 1996, Mr. Morey
owned 60.9% of the equity of CMT.
(Remainder of page intentionally left blank.)
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
AND REPORTS ON FORM 8-K
(a) List of Documents Filed as Part of this Report.
1. Financial Statements
Independent Auditors' Report
Consolidated Balance Sheets as of December 31, 1995 and 1994
Consolidated Statements of Operations for the years ended December 31,
1995, 1994 and 1993
Consolidated Statements of Cash Flows for the years ended December 31,
1995, 1994 and 1993
Consolidated Statements of Shareholders' Equity for the years ended
December 31, 1995, 1994 and 1993
Notes to Consolidated Financial Statements
2. Schedules
Schedule I - Condensed Financial Information of Registrant
Schedule II - Valuation and Qualifying Accounts
3. Exhibits Required by Item 601 of Regulation S-K
See Index to Exhibits.
(b) Reports on Form 8-K. None.
(c) Exhibits.
See Index to Exhibits.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized, on the 30th day of
May, 1996.
The WellCare Management Group, Inc.
By: /s/ Robert W. Morey, Jr.
---------------------------------------------------
Robert W. Morey, Jr., Chairman of the Board
and Chief Executive Officer (was appointed 4/30/96)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed by the following persons on behalf of the Registrant and,
in the capacities indicated on May 30, 1996.
Signature Title
--------- -----
/s/ Robert W. Morey, Jr. Chairman of the Board, Chief Executive
- --------------------------------------- Officer and Director (Principal
Robert W. Morey (was appointed 4/30/96) Executive Officer)
/s/ Edward A. Ullmann Director
- ---------------------------------------
Edward A. Ullmann
/s/ Marystephanie Corsones Chief Financial Officer and Director
- --------------------------------------- (Principal Financial and Accounting
Marystephanie Corsones Officer)
/s/ Charles E. Crew, Jr. Director
- ---------------------------------------
Charles E. Crew, Jr.
/s/ Mark D. Dean, D.D.S. Director
- ---------------------------------------
Mark D. Dean, D.D.S.
/s/ Robert E. Goff Director
- ---------------------------------------
Robert E. Goff
/s/ John E. Ott, M.D. Director
- ---------------------------------------
John E. Ott, M.D.
/s/ G. William Strein Director
- ---------------------------------------
G. William Strein
Director
- ---------------------------------------
Lawrence C. Tucker
/s/ Eileen H. Wilson Director
- ---------------------------------------
Eileen H. Wilson
/s/ Daniel M. Zeichner, M.D. Director
- ---------------------------------------
Daniel M. Zeichner, M.D.
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Consolidated Financial Statements of the Company: Page
----
Report of Deloitte & Touche LLP, Independent Auditors F-2
Consolidated Balance Sheets as of December 31, 1995 and 1994 F-3
Consolidated Statements of Operations for the years ended
December 31, 1995, 1994 and 1993 F-4
Consolidated Statements of Cash Flows for the years ended
December 31, 1995, 1994 and 1993 F-5
Consolidated Statements of Shareholders' Equity for the years
ended December 31, 1995, 1994 and 1993 F-6
Notes to Consolidated Financial Statements F-7
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
The WellCare Management Group, Inc.
Kingston, New York
We have audited the accompanying consolidated balance sheets of The WellCare
Management Group, Inc. and subsidiaries (the "Company") as of December 31, 1995
and 1994, and the related consolidated statements of operations, shareholders'
equity and cash flows for each of the three years in the period ended December
31, 1995. Our audits also included the financial statement schedules listed in
the Index at Item 14. These consolidated financial statements and financial
statement schedules are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements and financial statement schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion. In our
opinion, such consolidated financial statements present fairly, in all material
respects, the financial position of the Company as of December 31, 1995 and
1994, and the results of its operations and its cash flows for each of the three
years in the period ended December 31, 1995 in conformity with generally
accepted accounting principles. Also, in our opinion, such financial statement
schedules, when considered in relation to the basic consolidated financial
statements taken as a whole, present fairly in all material respects the
information set forth therein.
As discussed in Note 12 to the financial statements, the Company changed its
method of accounting for income taxes in 1993 to conform with Statement of
Financial Accounting Standards No. 109.
As discussed in Note 2 to the financial statements, the accompanying 1994
financial statements have been restated.
As discussed in Notes 17a and 17b, the Company faces several uncertainties
relating to the financial condition of the Alliances and the class action
litigation.
Deloitte & Touche LLP
New York, New York
May 14, 1996
<PAGE>
THE WELLCARE MANAGEMENT GROUP, INC. AND
SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
December 31, December 31,
1995 1994
------------ ------------
(Restated)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 5,456 $ 2,293
Short-term investments - available for sale 1,261 7,657
Accounts receivable (net of allowance for doubtful
accounts of $1,166 in 1995 and $334 in 1994) 13,941 7,275
Due from affiliates - net 50 32
Advances to participating providers 3,078 4,109
Other receivables (net of allowance for doubtful
accounts of $744 in 1995 and $0 in 1994) 4,645 2,429
Prepaid expenses and other current assets (net of
allowance for doubtful accounts of $534 in 1995
and $0 in 1994) 5,109 2,754
-------- --------
TOTAL CURRENT ASSETS 33,540 26,549
-------- --------
PROPERTY AND EQUIPMENT (net of accumulated
depreciation and amortization of $3,711 in 1995
and $2,492 in 1994) 12,993 11,902
-------- --------
OTHER ASSETS:
Restricted cash 8,241 6,584
Notes receivable (net allowance for doubtful
accounts of $4,596 in 1995 and $0 in 1994) 1,389 2,144
Preoperational costs (net of accumulated
amortization of $349 in 1995 and $52 in 1994) 3,232 1,939
Other non-current assets (net of allowance for
doubtful accounts of $348 in 1995 and 1994)
and accumulated amortization of $301 in 1995 and
$166 in 1994) 3,817 1,004
Due from affiliates 173 164
Goodwill (net of accumulated amortization of $1,066 in
1995 and $461 in 1994) 8,626 7,507
-------- --------
TOTAL $ 72,011 $ 57,793
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable $ -- $ 2,154
Current portion of long-term debt 1,547 1,910
Medical costs payable 14,030 13,508
Accounts payable 702 986
Accrued expenses 1,453 947
Other current liabilities 15 255
Unearned income 3,060 2,013
-------- --------
TOTAL CURRENT LIABILITIES 20,807 21,773
LONG-TERM LIABILITIES:
Long-term debt 19,209 6,336
Other liabilities 191 377
-------- --------
TOTAL LIABILITIES 40,207 28,486
-------- --------
COMMITMENTS AND CONTINGENCIES -- --
SHAREHOLDERS' EQUITY:
Class A Common Stock ($.01 par value; 1,599,109 and
1,673,228 shares authorized, 1,484,119 and 1,558,238
shares issued and outstanding at December 31,
1995 and 1994, respectively) 15 16
Common Stock ($.01 par value; 20,000,000 shares
authorized, 4,807,725 and 4,696,198 shares issued at
December 31, 1995 and 1994, respectively) 48 47
Additional paid-in capital 26,371 25,861
Retained earnings 1,233 1,017
Statutory reserve 4,360 2,903
-------- --------
32,027 29,844
Unrealized gain (loss) on short-term investments 5 (104)
Less:
Notes receivable from shareholders 17 38
Treasury stock (at cost; 14,266 and 25,000 shares
of Common Stock at December 31, 1995 and
1994, respectively) 211 395
-------- --------
TOTAL SHAREHOLDERS' EQUITY 31,804 29,307
-------- --------
TOTAL $ 72,011 $ 57,793
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
THE WELLCARE MANAGEMENT GROUP, INC. AND
SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------
1995 1994 1993
---- ---- ----
(Restated)
<S> <C> <C> <C>
REVENUE:
Premiums earned $144,518 $120,411 $ 72,905
Administrative fee income 2,792 710 942
Income from affiliates 239 199 1,384
Interest and investment income 999 812 407
Other income 4,319 450 684
-------- -------- --------
TOTAL REVENUE 152,867 122,582 76,322
-------- -------- --------
EXPENSES:
Medical expenses 115,560 98,411 58,471
General and administrative expenses 30,279 15,599 9,641
Depreciation and amortization expense 2,292 1,611 761
Interest expense 1,447 666 521
Expenses paid to affiliates 421 379 782
Other expenses - net 79 54 28
-------- -------- --------
TOTAL EXPENSES 150,078 116,720 70,204
-------- -------- --------
INCOME BEFORE INCOME TAXES AND
CUMULATIVE EFFECT OF A CHANGE
IN ACCOUNTING PRINCIPLE 2,789 5,862 6,118
PROVISION FOR INCOME TAXES 1,116 2,403 2,533
-------- -------- --------
INCOME BEFORE CUMULATIVE EFFECT OF
A CHANGE IN ACCOUNTING PRINCIPLE 1,673 3,459 3,585
CUMULATIVE EFFECT OF A CHANGE IN
ACCOUNTING PRINCIPLE:
Accounting for income taxes -- -- 1,063
-------- -------- --------
NET INCOME $ 1,673 $ 3,459 $ 4,648
======== ======== ========
EARNINGS PER SHARE:
Income before cumulative effect of a change
in accounting principle $ 0.27 $ 0.56 $ 0.72
Cumulative effect of a change in accounting
principle -- -- 0.21
-------- -------- --------
NET INCOME $ 0.27 $ 0.56 $ 0.93
======== ======== ========
Weighted average shares of common and
common stock equivalents outstanding 6,250 6,226 5,022
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
THE WELLCARE MANAGEMENT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------
1995 1994 1993
---- ---- ----
(Restated)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,673 $ 3,459 $ 4,648
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 2,292 1,611 761
Increase in deferred taxes (1,788) (1,612) (330)
Loss on sale of assets and others 57 23 --
Changes in assets and liabilities - net of effects of acquistion:
Increase in accounts receivable - net (6,545) (1,422) (3,349)
Increase in medical costs payable 522 2,858 2,518
Increase in due to/from affiliates - net (27) (4) (4,572)
Decrease (increase) in accounts receivable - non-current - net -- 610 (101)
Increase in other receivables (3,554) (972) (539)
(Decrease) increase in accounts payable, accrued expenses
and other current liabilities (97) 591 771
(Increase) decrease in prepaid expenses and other (2,131) 503 (382)
Increase in unearned income 1,048 196 980
Increase in restricted cash (1,657) (1,713) (2,641)
Decrease (increase) in advances to participating providers 1,032 (3,040) 508
Decrease (increase) in other non-current assets - excluding
preoperational costs and accounts and other receivables 41 (95) (547)
Other - net (166) (3) (108)
-------- -------- --------
NET CASH (USED IN) PROVIDED BY
OPERATING ACTIVITIES (9,300) 990 (2,383)
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment (1,608) (5,816) (1,068)
Decrease (increase) in notes receivable 466 (162) (1,371)
Sale of investments 12,702 6,954 8,318
Purchase of investments (6,367) (12,463) (10,479)
Increase in preoperational costs (1,589) (1,863) (105)
Payments to acquire MCA, net of cash acquired (215) -- --
Payments to acquire MHP, net of cash acquired -- (1,126) (234)
Escrow deposit in connection with MHP acquisition -- 1,000 (1,000)
Other investing activities 109 (104) --
-------- -------- --------
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES 3,498 (13,580) (5,939)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of stock and treasury stock - net 244 -- 20,692
Cost of treasury stock purchased -- (395) --
Proceeds from exercise of stock options 450 250 --
Proceeds from notes payable and long-term debt 16,545 7,630 2,997
Repayment of notes payable and long-term debt (8,295) (7,153) (2,266)
Other financing activities 21 -- 320
-------- -------- --------
NET CASH PROVIDED BY
FINANCING ACTIVITIES 8,965 332 21,743
-------- -------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 3,163 (12,258) 13,421
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 2,293 14,551 1,130
-------- -------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 5,456 $ 2,293 $ 14,551
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
THE WELLCARE MANAGEMENT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
Years Ended December 31, 1995, 1994, and 1993
(in thousands)
<TABLE>
<CAPTION>
Retained Unrealized
Class A Additional Earnings/ Gain (Loss) Notes Total
Common Common Paid-in (Accumulated Statutory on Short-term Receivable Treasury Shareholders'
Stock Stock Capital Deficit) Reserve Investments Shareholders' Stock Equity
----- ----- ------- -------- ------- ----------- ------------- ----- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1992 $ 19 $ 24 $ 4,939 $ (5,122) $ 935 $ -- $ (395) $ -- $ 400
Shares issued (2) 21 20,673 -- -- -- -- -- 20,692
Payments received on
shareholders' notes - net -- -- -- -- -- -- 357 -- 357
Transfer to statutory reserve -- -- -- (733) 733 -- -- -- 0
Net income -- -- -- 4,648 -- -- -- -- 4,648
---- ----- -------- -------- ------- ------ ------ ------ --------
BALANCE, DECEMBER 31, 1993 17 45 25,612 (1,207) 1,668 -- (38) -- 26,097
Purchase of treasury stock -- -- -- -- -- -- -- (395) (395)
Conversion of Class A Common
shares to Common shares (1) 1 -- -- -- -- -- -- 0
Exercise of stock options -- 1 249 -- -- -- -- -- 250
Valuation allowance on
short-term investments -- -- -- -- -- (104) -- -- (104)
Transfer to statutory reserve -- -- -- (1,235) 1,235 -- -- -- 0
Net income (Restated) -- -- -- 3,459 -- -- -- -- 3,459
---- ----- -------- -------- ------- ------ ------ ------ --------
BALANCE, DECEMBER 31, 1994 16 47 25,861 1,017 2,903 (104) (38) (395) 29,307
Issuance of treasury stock 60 184 244
Conversion of Class A Common
shares to Common shares (1) 1 0
Exercise of stock options 450 450
Transfer to statutory reserve (1,457) 1,457 0
Repayments/reclassification of
shareholders' notes - net 21 21
Net change of valuation
allowance on short-term
investments 109 109
Net income -- -- -- 1,673 -- -- -- -- 1,673
---- ----- -------- -------- ------- ------ ------ ------ --------
BALANCE, DECEMBER 31, 1995 $ 15 $ 48 $ 26,371 $ 1,233 $ 4,360 $ 5 $ (17) $ (211) $ 31,804
==== ===== ======== ======== ======= ====== ====== ====== ========
</TABLE>
<PAGE>
THE WELLCARE MANAGEMENT GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. Description of Operations - The WellCare Management Group, Inc. ("WellCare"
or the "Company") was incorporated in New York State in 1983 to provide
management and supervise all or part of any health service facility, including,
but not limited to, health maintenance organizations.
WellCare of New York, Inc. ("WCNY" or the "Plan"), a wholly-owned
subsidiary, was incorporated in 1985 to develop and operate as a health
maintenance organization ("HMO") in New York State. An HMO is an organization
that accepts contractual responsibility for the delivery of a stated range of
health care services to its enrollees for a predetermined, prepaid fee. WCNY
obtained a certificate of authority from the New York State Department of Health
and commenced operations in March 1987. WCNY operates in 24 counties in the
Hudson River Valley, Mohawk River Valley, Albany, and Leatherstocking regions of
New York State as a direct mixed IPA/Direct Contract model Article 44 HMO. Under
this type of arrangement, agreements are entered into with physician alliances,
individual primary care physicians or physician groups for the provision of all
medical care to WCNY's enrollees for a specified monthly payment ("capitation
fee"). On December 30, 1993, WCNY acquired the net assets of Mid-Hudson Health
Plan, Inc. as described more fully in Note 3.
In July 1995, WCNY received approval from the New York State Department of
Health to expand its service area into the New York City Boroughs of Manhattan,
Queens, Brooklyn and the Bronx and in August 1995, received regulatory approvals
to offer Healthy Choice, WCNY's managed-care program for Medicaid recipients, in
such boroughs.
WCNY provides incentives to its primary care physicians to control health
care expenses through the use of capitation arrangements. Under these capitation
arrangements, primary care physicians are entitled to the surplus to the extent
health care costs incurred are less than the negotiated capitation payments.
Surpluses paid to the primary care physicians are recorded as medical expenses
in the period in which the related health care costs are incurred. Effective
October 1, 1994, WCNY modified its arrangements with a majority of its primary
care physicians and specialists by contracting with regional health care
delivery networks (the "Alliances") to provide health care services to the
Plan's members. Each Alliance is a professional corporation that has contracted
with individual primary care physicians and specialists to provide health care
services. At inception, there were four Alliances with different equity owners;
by December 31, 1995 the four Alliances were combined into two Alliances with
the same equity owner, who is also the controlling shareholder in the Buyer
referred to in Note 5. The Company's initial agreement with each of the
Alliances for the period October 1, 1994 through September 30, 1995 required
payment to the Alliances based on a percentage of premium revenue for effected
<PAGE>
members. Effective October 1, 1995, the Company entered into a three year
agreement with each of the Alliances at specified per member per month ("PMPM")
rates, providing for increases of approximately 1% for the period October 1,
1995 through December 31, 1995, approximately 6% effective January 1, 1996,
approximately 1% effective January 1, 1997, and an additional 3% effective
January 1, 1998. Such rates were established through arms-length negotiation
with the Alliances. As part of this change in capitation arrangements, the
risk-sharing accounts of Alliance primary care physicians who formerly had been
capitated by WCNY were settled and outstanding deficits paid to WCNY in the
fourth quarter of 1994, thereby reducing WCNY's medical expenses during such
quarter.
WellCare Administration, Inc. ("WCA") is a wholly-owned subsidiary
incorporated in 1988 to administer the Company's pharmacy, vision care, dental
care and quality assurance programs, and provide related consulting services.
WellCare Development, Inc. ("WCD") is a wholly-owned subsidiary formed in
1992 to acquire, own and develop real estate. As of December 31, 1992, WellCare
contributed to WCD the Park West Office Complex, which was the principal asset
of UCI Enterprises, a New York tate general partnership in which WellCare had
acquired a 95 percent interest and in which it acquired the remaining 5 percent
interest prior to such contribution.
WellCare Medical Management, Inc. ("WCMM"), formerly a wholly-owned
subsidiary formed in 1990 to provide managerial, administrative and financial
services to physicians, was sold in June 1995 (see Note 5).
WellCare of Connecticut, Inc. ("WCCT"), a wholly-owned subsidiary, was
incorporated in 1994 in the State of Connecticut to develop and operate as an
HMO in the State of Connecticut. WCCT has received final license approval to
commence operations in March 1995 and had no significant revenues in 1995.
WellCare University ("WCU"), a division of WellCare, was formed during
1994. WCU is dedicated to: strategic planning for WellCare and others within the
managed care/health care arena, training for WellCare employees and others
within the managed care/health care arena, research and development of many
aspects of providing medical services, and health care management consulting.
Park West Entertainment, Inc. ("PWE") - an affiliated entity, provides
certain conferencing and administrative services. Amounts due from PWE at
December 31, 1995 and 1994 are set forth in the financial statements.
b. Principles of Consolidation - The consolidated financial statements include
the accounts of the Company and all majority owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated.
c. Advances to Participating Providers - Advances to participating medical
providers consist of amounts advanced to providers, principally hospitals, which
are under contract with the Company
<PAGE>
to provide medical services to plan members. Such advances help provide funding
to these providers for claims incurred but not reported or claims in the process
of adjudication.
d. Property and Equipment - Property and equipment is stated at cost, less
accumulated depreciation. Depreciation is computed by the straight-line method
based upon the estimated useful lives of the assets which range from 5 to 39
years.
e. Preoperational Costs - Preoperational costs, which include service area and
product line expansion costs, consist of certain incremental separately
identifiable costs directly associated with building a provider base of network
physicians in service areas in which the Company is applying for licensure and
expanding the Company's Medicare managed care program. Such costs are deferred
until the related licensure approval is received at which time the costs are
amortized on a straight-line basis over a 36-month period. Preoperational costs
are reported net of accumulated amortization. At December 31, 1995 and 1994,
accumulated amortization approximated $349,000 and $53,000, respectively.
f. Revenue Recognition - Management fees received in advance are deferred and
recognized as income over the period in which services are rendered. Premiums
from subscribers are recorded as income in the period that subscribers are
entitled to service. Premiums received in advance are deferred. WCNY subscriber
premiums are determined on an annual basis using community rating principles
required by the New York State Insurance Department. Although the rate filing
request and approval process is performed on an annual basis, under New York
State insurance law, WCNY is allowed to contract with subscribers throughout the
year based upon a "guaranteed" rate which incorporates an estimated community
rate. WCNY is required to remit or collect any difference between the community
rate ultimately approved and the guaranteed rate in the subsequent twelve month
contract period. WCCT subscriber premiums are determined on an annual basis
using community rating principles required by the Connecticut Insurance
Department. Although the rate filing request and approval process is performed
on an annual basis, under Connecticut insurance law WCCT is allowed to contract
with subscribers throughout the year based on a "guaranteed" rate which
incorporates an estimated community rate. WCCT is required to remit or collect
any difference between the community rate ultimately approved and the guaranteed
rate in the subsequent twelve month period. Accounts receivable include
approximately $1,741,000 and $1,133,000 at December 31, 1995 and 1994,
respectively, which represented the excess of subscriber premiums accrued based
on approved community rates over amounts actually billed under guaranteed rates.
Approximately $110,000 of the $1,741,000 and $1,133,000 outstanding at December
31, 1995 and 1994 have been classified as non-current.
Accounts receivable, other receivables, other current assets, notes
receivable and other non-current assets are reported net of reserves for
doubtful accounts of approximately $7,388,000 and $682,000 at December 31, 1995
and 1994, respectively.
g. Reinsurance - WCNY insures excess loss for health care claims under a policy
with a reinsurance company and effective September 1, 1995, reinsures a portion
of its Medicare full risk program with a reinsurance company under a quota share
agreement. Premiums for the policies are reported as medical expense and
insurance recoveries, if any, are recorded as a reduction of
<PAGE>
medical expenses. Under the excess loss reinsurance policy, recoveries are made
for claims of each enrollee or each covered dependent of each enrollee, on an
annual basis, in excess of the deductible established in the policy subject to
certain limitations. For the period from November 1, 1993 through October 31,
1994, the deductible under this policy was $85,000, which increased to $100,000
for the period from November 1, 1994 through October 31, 1995 and $115,000 for
the period from November 1, 1995 through October 31, 1996. Under the quota share
agreement, recoveries are made when claim and administrative expenses exceed
gross revenue received in connection with WCNY's Medicare full risk contract
program.
Reinsurance premiums charged to medical expenses in the accompanying
financial statements amounted to approximately $520,000, $472,000, and $504,000
in 1995, 1994 and 1993, respectively. Reinsurance recoveries of approximately
$577,000, $359,000, and $479,000 in 1995, 1994 and 1993, respectively, have been
recognized as reductions in medical expenses.
Included in other receivables at December 31, 1995 and 1994 were amounts
recoverable from the reinsurer of approximately $633,000 and $571,000,
respectively.
h. Medical Costs Payable and Medical Expenses - Medical expenses for primary
care, hospital inpatient services, outpatient specialty care and pharmacy
services, including those for which advances have been made to providers are
recorded, as expenses in the period in which they are incurred. The liability
for medical costs payable is based upon WCNY's estimate of the total reported
and unreported claims attributable to services rendered during the year. Such
estimates are based upon a comprehensive accounting of all reported claims as
well as an actuarially determined reserve for claims incurred but not reported.
i. Use of Estimates - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions 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. The amounts of incurred but not reported medical expenses, the
reserve for uncollectible receivables, recoveries from third parties for
coordination of benefits, final determinations of medical cost adjustment pools
by New York State, and medical premiums subject to retrospective adjustment,
require the significant use of estimates. Actual results could differ from those
estimates used by management in the preparation of these financial statements.
j. Advertising Costs - Advertising costs, which include costs for certain
marketing materials and development/implementation of public relations and
marketing campaigns, are expensed as incurred. The advertising costs expensed in
1995, 1994 and 1993 were approximately $1,723,000, $1,573,000 and $978,000,
respectively.
k. Cash Flows Statements - For purposes of the statements of cash flows, the
Company considers all highly liquid debt instruments purchased with a maturity
of three months or less to be cash equivalents. The Company considers all other
instruments to be short-term investments. Cash equivalents are carried at cost
which approximates market value.
<PAGE>
l. Short-term Investments - Effective January 1, 1994, the Company adopted
Statement of Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities" ("FAS 115"). The Company has
determined that the securities included in short-term investments, consisting
primarily of state and municipal obligations might be sold prior to maturity to
support its investment strategies. Such investments have, therefore, been
classified as available for sale. The basis for available for sale securities is
market value. At December 31, 1995, the cost of these investments approximated
market value and unrealized holding gains or losses were not material.
m. Goodwill - Goodwill represents the excess of the purchase price over the fair
value of the net assets of acquired entities and is amortized on the
straight-line method over a 15-year period. At December 31, 1995 and 1994,
accumulated amortization approximated $1,066,000 and $461,000, respectively.
The Company evaluates the recoverability of goodwill by monitoring
reenrollment trends of membership acquired as well as the inherent profitability
of such membership as determined in connection with annual rate filings. The
Company has determined that no impairment exists at December 31, 1995.
n. Income Taxes - In 1993, the Company adopted Statement of Financial Accounting
Standards No. 109 "Accounting for Income Taxes" ("FAS 109"), which requires
recognition of deferred tax liabilities and assets for the expected future tax
consequences of events that have been included in the financial statements or
tax returns. Under this method, deferred tax liabilities and assets are
determined based on the difference between the financial statement and tax bases
of assets and liabilities using enacted tax rates in effect for the year in
which the differences are expected to reverse.
o. Long-Lived Assets - In March 1995, the Financial Accounting Standard's Board
("FASB") issued SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of," effective for fiscal years
beginning after December 15, 1995. The Company does not expect the effect on its
consolidated financial condition from the adoption of this statement to be
material.
p. Stock-Based Compensation - In October 1995, the FASB issued SFAS No. 123,
"Accounting for Stock-Based Compensation," which requires adoption of the
disclosure provisions no later than fiscal years beginning after December 15,
1995 and adoption of the measurement and recognition provisions for non-employee
transactions no later than after December 15, 1995. The new standard defines a
fair value method of accounting for the issuance of stock options and other
equity instruments. Under the fair value method, compensation cost is measured
at the grant date based on the fair value of the award and is recognized over
the service period, which is usually the vesting period. Pursuant to SFAS No.
123, companies are encouraged, but not required, to adopt the fair value method
of accounting for employee stock-based transactions. Companies are also
permitted to continue to account for such transactions under Accounting
Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued to
Employees," but would be required to disclose in a note to the financial
statements pro forma net income, and per
<PAGE>
share amounts as if the company had applied the new method of accounting. SFAS
No. 123 also requires increased disclosures for stock-based arrangements
regardless of the method chosen to measure and recognize compensation for
employee stock-based arrangements. The Company has elected to continue to
account for such transactions under APB No. 25 and will disclose the required
pro forma effect on net income and earnings per share.
q. Reclassifications - Certain amounts in the 1993 and 1994 financial statements
have been reclassified to conform to the 1995 presentation.
2. PRIOR PERIOD RESTATEMENT
In the second quarter of 1994, two entities which were predecessors to the
Alliances referred to in Notes 1a and 17, made payments of approximately
$2,879,000 to providers in connection with the close out of the 1993 group risk
accounts and to resolve certain disputed amounts between the Company and certain
providers, which payments might otherwise have been made by the Company.
Additionally, these entities paid approximately $1,833,000 directly to the
Company in payment of 1993 provider deficits which would otherwise have been due
to the Company directly from the providers. As originally reported in its 1994
financial statements, the Company recorded the $1,833,000 received as a
reduction of medical expense, and the Company did not record as medical expense,
the $2,879,000 paid directly to the providers by these entities.
In March 1996, accounting personnel of the Company were informed that Mr.
Edward A. Ullmann, then Chairman of the Board, Chief Executive Officer and
President of the Company, (Mr. Ullmann resigned as Chairman and Chief Executive
Officer on April 30, 1996), personally had guaranteed in his individual capacity
two loans, each in the amount of $2,700,000, made by banks to these two
entities, the proceeds of which were used to fund the aggregate payments of
approximately $4,712,000 referred to above. After a review of the relevant
circumstances, the Company elected to restate its 1994 financial statements by
recording an additional $4,712,000 in medical expense and establishing an
additional medical expense accrual. Since there are no specific amounts payable
by the Company as a result of these transactions, the additional medical expense
accrual will be accounted for as an offset to medical expense in future periods
as these bank loans are paid down. A reduction of medical expense of
approximately $1,738,000 was recorded in 1995 as a result of the reductions in
the amounts of these bank loans.
3. ACQUISITION OF MID-HUDSON HEALTH PLAN, INC.
On December 30, 1993, WCNY acquired the net assets of Mid-Hudson Health
Plan, Inc. ("Mid-Hudson"). The acquisition is being accounted for as a purchase.
Mid-Hudson was a direct contract IPA model not-for-profit HMO based in Kingston,
New York. The Executive Director was a nonvoting Advisory Member of its Board of
Directors and a shareholder and director of WellCare. Under the terms of the
agreement, the total purchase price was $2,440,000, of which $440,000 was paid
at closing and the balance payable in four equal installments of $500,000 every
six months thereafter, plus interest at 6 percent per annum on the outstanding
balance. The excess of the purchase price over the fair value of the net assets
acquired approximated $6,549,000 at December 31, 1993. During 1994 additional
goodwill of approximately
<PAGE>
$1,126,000 was recorded as a result of obtaining necessary additional
information which allowed the Company to adjust the estimate for incurred but
not reported claims at the acquisition date, based on actual Mid-Hudson claims
processed in 1994.
The unaudited consolidated results of operations on a pro forma basis as if
Mid-Hudson had been acquired as of the beginning of 1993 is as follows:
1993
(In Thousands
Except Per Share
Amounts)
----------------
Total revenue $ 90,757
Income before extraordinary credit and cumulative
effect of a change in accounting principle 641
Net income 1,704
Net income per weighted average share of common stock 0.34
The pro forma financial information is presented for informational purposes only
and is not necessarily indicative of the operating results that would have
occurred had the Mid-Hudson acquisition been consummated as of the above dates,
nor are they necessarily indicative of future operating results.
4. ACQUISITION OF MANAGED CARE ADMINISTRATORS, INC.
On March 31, 1995, pursuant to an option for which it had paid $200,000 in
November 1994, the Company acquired the assets and assumed certain liabilities
of Managed Care Administrators, Inc. ("MCA"), a company engaged in managing a
network of primary care physicians who provide health care services to Medicaid
recipients in New York City. The purchase price consisted of $500,000 in cash,
the assumption of certain liabilities and WellCare's agreement to pay an
earn-out not to exceed $1,500,000, whereby MCA is to be paid each calendar year
an amount equal to twenty percent (20%) of the pre-interest, pre-tax net income
generated by the option assets and liabilities. The excess of $668,750,
representing the sum of the $500,000 cash portion of the purchase price and the
unamortized portion of the option at March 31, 1995, over the $1,055,100 fair
value of the net liabilities assumed was approximately $1,724,000 at December
31, 1995.
5. SALE OF WELLCARE MEDICAL MANAGEMENT, INC.
In June 1995, the Company contributed approximately $5.1 million to its
then wholly-
<PAGE>
owned subsidiary, WellCare Medical Management, Inc. ("WCMM") which was engaged
in managing physician practices, and then sold WCMM for cash of $.6 million and
a note receivable of $5.1 million. A gain of approximately $144,000 was deferred
pending the repayment of the note. The buyer ("Buyer") was newly formed to
acquire WCMM and, as of May 14, 1996, approximately 11% of the Buyer's equity
was directly or indirectly held by current or recent directors, officers or
employees of WellCare. The Buyer is in the business of managing medical
practices and providing related consultative services. The Buyer has entered
into agreements to manage the Alliances referred to in Notes 1a, 2 and 17 and
has provided financial support to these Alliances. The Company has a five year
option to acquire the Buyer at any time at a price determined by a formula based
on the Buyer's results of operations. The Company is in the process of
re-negotiating the terms of this option.
The note receivable bears interest at a rate equal to prime plus 2% (10.5%
at December 31, 1995) with interest payable monthly through July 31, 1996 and,
thereafter, principal and interest monthly through July 31, 2000. All required
interest through December 31, 1995 has been paid. The Buyer is seeking
additional financing, and is contractually obligated to pay the note receivable
from such proceeds. Through May 14, 1996 such financing has not taken place. In
view of the Buyer's operating losses and advances to the Alliances, the Company
has obtained from certain of the Buyer's equity holders personal guarantees of
the notes and pledges of collateral to secure these guarantees. Nevertheless, in
view of the Buyer's financial condition and difficulties inherent in the
collection of personal guarantees and realization of collateral, the Company has
elected to fully reserve the note receivable at December 31, 1995. In addition,
the Company has elected to fully reserve other receivables from the Buyer
amounting to $744,000.
6. SHORT-TERM INVESTMENTS
The value of short-term investments is as follows:
1995
Market
Value
-----
Fixed income securities $1,255,325
Equity securities 6,069
----------
Short-term investments $1,261,394
Gross
-----------------------
Amortized Unrealized Unrealized Market
December 31, 1995 Cost Gains Losses Value
---- ----- ------ -----
United States government
and its agencies $ - $ - $ - $ -
States and municipalities 1,254,176 5,778 (4,629) 1,255,325
---------- ------ ------- ----------
Fixed income securities $1,254,176 $5,778 $(4,629) $1,255,325
========== ====== ======= ==========
<PAGE>
Gross
-----------------------
Purchased Unrealized Unrealized Market
Cost Gains Losses Value
---- ----- ------ -----
Equity securities $ 1,858 $ 4,211 $ - $ 6,069
----------- ------- -------- ---------
TOTAL $ 1,256,034 $ 9,989 $(4,629) $1,261,394
=========== ======= ======== ==========
The contractual maturities of fixed income securities at December 31, 1995
are as follows:
Amortized Market
Cost Value
---- -----
Due in one year or less $ 326,165 $ 326,860
Due after one year through five years 928,011 928,465
----------- -----------
Fixed income securities $ 1,254,176 $ 1,255,325
=========== ===========
7. OTHER RECEIVABLES
Other receivables consist at December 31, 1995 and 1994 of the following:
1995 1994
---- ----
New York State Pools receivable $ 796,521 $ 675,678
Contributions receivable on behalf
of WellCare University 1,238,642 -
Receivable from third party insurers 545,454 80,000
Reinsurance receivable 31,741
[TOTAL-LIABILITY-AND-EQUITY] 72,011
[SALES] 144,518
[TOTAL-REVENUES] 152,867
[CGS] 0
[TOTAL-COSTS] 115,560
[OTHER-EXPENSES] 34,518
[LOSS-PROVISION] 6,806
[INTEREST-EXPENSE] 1,447
[INCOME-PRETAX] 2,789
[INCOME-TAX] 1,116
[INCOME-CONTINUING] 1,673
[DISCONTINUED] 0
[EXTRAORDINARY] 0
[CHANGES] 0
[NET-INCOME] 1,673
[EPS-PRIMARY] .27
[EPS-DILUTED] 0
[/TABLE]
