SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
Amendment No. 1
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 1996
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)
NEW YORK 14-1647239
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
PARK WEST/HURLEY AVENUE EXTENSION, KINGSTON, NY 12401
(Address of principal executive offices) (Zip Code)
(914) 338-4110
(Registrant's telephone number, including area code)
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 report(s), and (2) has
been subject to such filing requirements for the past 90 days.
YES NO X
The 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.
Page 1 of 22 Pages
Exhibit Index on Page 20
THE WELLCARE MANAGEMENT GROUP, INC. AND SUBSIDIARIES
INDEX TO FORM 10-Q
Page
Part I - Consolidated Financial Information
Item 1 Financial Statements
Consolidated Balance Sheets
at March 31, 1996 and
December 31, 1995 3
Consolidated Statements of Operations
for the Three Months Ended
March 31, 1996 and 1995 4
Consolidated Statements of Cash Flows
for the Three Months Ended
March 31, 1996 and 1995 5
Consolidated Statements of Shareholders' Equity
for the Three Months Ended March 31, 1996 6
Notes to Consolidated Financial Statements 7
Item 2 Management's Discussion and Analysis
of Financial Condition and
Results of Operations 13
Part II - Other Information
Item 1 Legal Proceedings 17
Item 2 Changes in Securities 17
Item 3 Defaults Upon Senior Securities 17
Item 4 Submission of Matters to a
Vote of Security Holders 17
Item 5 Other Information 17
Item 6 Exhibits and Reports on Form 8-K 18
Signatures 19
Index to Exhibits 20<PAGE>
<TABLE>
<CAPTION>
THE WELLCARE MANAGEMENT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
March 31, December 31,
1996 1995
(Unaudited)
ASSETS
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents $14,862 $5,456
Short-term investments -
available for sale 1,253 1,261
Accounts receivable
(net of allowance for doubtful
accounts of $1,300 in 1996 and
$1,166 in 1995) 12,692 13,941
Due from affiliates - net 45 50
Advances to participating providers 2,436 3,078
Other receivables (net of allowance
for doubtful accounts of $744 in
1996 and $744 in 1995) 5,921 4,645
Prepaid expenses and other current
assets (net of allowance for
doubtful accounts of $855 in 1996
and $534 in 1995) 7,090 5,109
TOTAL CURRENT ASSETS 44,299 33,540
PROPERTY AND EQUIPMENT
(net of accumulated depreciation
and amortization of $4,070 in 1996
and $3,711 in 1995) 12,843 12,993
OTHER ASSETS:
Restricted cash 8,241 8,241
Notes receivable (net allowance
for doubtful accounts of $4,275
in 1996 and $4,596 in 1995) 1,299 1,389
Preoperational costs (net of
accumulated amortization of
$574 in 1996 and $349 in 1995) 3,121 3,232
Other non-current assets (net of
allowance for doubtful accounts
of $348 in 1996 and 1995) and
accumulated amortization of $371
in 1996 and $301 in 1995) 4,522 3,817
Due from affiliates 160 173
Goodwill (net of accumulated
amortization of $1,230 in
1996 and $1,066 in 1995) 8,500 8,626
TOTAL $82,985 $72,011
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $977 $1,547
Medical costs payable 10,796 14,030
Accounts payable 1,168 702
Accrued expenses 1,320 1,453
Other current liabilities 229 15
Unearned income 3,475 3,060
TOTAL CURRENT LIABILITIES 17,965 20,807
LONG-TERM LIABILITIES:
Long-term debt 32,936 19,209
Other liabilities 2 191
TOTAL LIABILITIES 50,903 40,207
COMMITMENTS AND CONTINGENCIES - -
SHAREHOLDERS' EQUITY:
Class A Common Stock ($.01 par
value; 1,594,247 and 1,599,109
shares authorized, 1,479,257
and 1,484,119 shares issued
and outstanding at March 31, 1996
and December 31, 1995 , respectively) 15 15
Common Stock ($.01 par value; 20,000,000
shares authorized, 4,832,985 and
4,807,725 shares issued at March 31,
1996 and December 31, 1995,
respectively) 48 48
Additional paid-in capital 26,624 26,371
Retained earnings 1,261 1,233
Statutory reserve 4,360 4,360
32,308 32,027
Unrealized gain (loss) on
short-term investments (2) 5
Less:
Notes receivable from shareholders 17 17
Treasury stock (at cost; 14,066 and
14,266 shares of Common Stock at
March 31, 1996 and December 31,
1995, respectively) 207 211
TOTAL SHAREHOLDERS' EQUITY 32,082 31,804
TOTAL $82,985 $72,011
See accompanying notes to consolidated financial statements.
</TABLE>
Page 3
<PAGE>
<TABLE>
<CAPTION>
THE WELLCARE MANAGEMENT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(Unaudited)
Three Months Ended March 31,
1996 1995
(Restated)
REVENUE:
<S> <C> <C>
Premiums earned $40,051 $33,840
Administrative fee income 766 185
Income from affiliates 68 63
Interest and investment income 360 208
Other income 322 579
TOTAL REVENUE 41,567 34,875
EXPENSES:
Medical expenses 32,538 26,349
General and administrative expenses 7,502 4,811
Depreciation and amortization expense 818 467
Interest expense 550 254
Expenses paid to affiliates 113 108
Other expenses - net - 47
TOTAL EXPENSES 41,521 32,036
INCOME BEFORE INCOME TAXES 46 2,839
PROVISION FOR INCOME TAXES 18 1,164
NET INCOME $28 $1,675
NET EARNINGS PER SHARE $0.00 $0.27
Weighted average shares of common and
common stock equivalents outstanding 6,289 6,236
See accompanying notes to consolidated financial statements.
</TABLE>
Page 4
<TABLE>
<CAPTION>
THE WELLCARE MANAGEMENT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
Three Months Ended March 31,
1996 1995
(Restated)
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net income $28 $1,675
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 818 467
Increase in deferred taxes 19 51
Loss on sale of assets and others - 26
Changes in assets and liabilities -
net of effects of acquistion:
Decrease (increase) in accounts
receivable - net 1,249 (1,748)
Decrease in medical costs payable (3,234) (2,413)
Decrease (increase) in due to/from
affiliates - net 19 (13)
Increase in other receivables (1,101) (1,070)
Increase in accounts payable,
accrued expenses and other
current liabilities 568 6
Increase in prepaid expenses
and other (1,870) (104)
Increase in unearned income 414 901
Decrease in advances to
participating providers 642 61
(Increase) decrease in other
non-current assets - excluding
preoperational costs and
accounts and other receivables (1,061) 31
Other - net (260) (40)
NET CASH USED IN
OPERATING ACTIVITIES (3,769) (2,170)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment (208) (1,099)
Decrease in notes receivable 83 69
Sale of investments 8 1,109
Purchase of investments - (149)
Increase in preoperational costs (115) (564)
Payments to acquire MCA, net of
cash acquired - (215)
Other investing activities (8) 60
NET CASH USED IN
INVESTING ACTIVITIES (240) (789)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of stock
and treasury stock - net 3 -
Cost of treasury stock purchased - -
Proceeds from exercise of stock options 254 126
Proceeds from notes payable and
long-term debt 20,335 5,873
Repayment of notes payable and
long-term debt (7,177) (1,309)
Other financing activities - 14
NET CASH PROVIDED BY
FINANCING ACTIVITIES 13,415 4,704
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 9,406 1,745
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 5,456 2,293
CASH AND CASH EQUIVALENTS,
END OF PERIOD $14,862 $4,038
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION:
Income taxes paid $398 $226
Interest paid 1,793 1,111
See accompanying notes to consolidated financial statements.
</TABLE>
Page 5
<PAGE>
<TABLE>
<CAPTION>
THE WELLCARE MANAGEMENT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
For the Three Months Ended March 31, 1996
(in thousands)
(Unaudited)
Unrealized
Class A Additional Gain (Loss) Notes Total
Common Common Paid-in Retained Statutory on Short-term Receivable Treasury Shareholders'
Stock Stock Capital Earnings Reserve Investments Shareholders' Stock Equity
BALANCE,
<C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
DECEMBER 31, 1995 $15 $48 $26,371 $1,233 $4,360 $5 ($17) ($211) $31,804
Issuance of
treasury stock 1 4 5
Exercise of stock
options 252 252
Net change of
valuation allowance
on short-term investments (7) (7)
Net income 28 28
BALANCE,
March 31, 1996 $15 $48 $26,624 $1,261 $4,360 ($2) ($17) ($207) $32,082
</TABLE>
Page Six
The WellCare Management Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
1. Basis of Presentation:
The accompanying unaudited consolidated financial statements have been
prepared in accordance with the instructions to Form 10-Q and, accordingly,
do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements and should
be read in conjunction with the audited consolidated financial statements
and notes thereto included in the Company's Annual Report on Form 10-K for
the year ended December 31, 1995. In the opinion of management, the
accompanying unaudited interim financial statements contain all adjustments
necessary to present fairly the financial position at March 31, 1996, and
the results of operations and cash flows for the interim periods presented.
Operating results for the interim period are not necessarily indicative of
results that may be expected for the year ending December 31, 1996. Certain
amounts in the 1995 financial statements have been reclassified to conform to
the 1996 presentation.
2. Prior Period Restatement
In the second quarter of 1994, two entities which were predecessors to the
regional health care delivery networks contracted by WellCare of New York,
Inc. ("WCNY") to provide health care services to WCNY's members (the
"Alliances"), 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
$627,000 and $124,000 were recorded in the first quarter of 1996 and 1995,
respectively, as a result of the reductions in the amounts of these bank
loans.
3. Short-Term Investments:
The Company has determined that its short-term investments, consisting
primarily of state and municipal obligations might be sold prior to
maturity to support the Company's investment strategies. Such investments
have, therefore, been classified as available for sale. The basis for
available for sale securities is market value. The separate component of
shareholders' equity representing unrealized losses on investments available
for sale was approximately $2,000 and $5,000 at March 31, 1996 and
December 31, 1995, respectively.
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. In the first
quarter of 1996 additional goodwill in the amount of approximately $38,000
was recognized as a result of the obtaining of additional information which
allowed the Company to more accurately quantify the net realizable value of
certain assets purchased from MCA.
5. Sale of Wellcare Medical Management, Inc.
In June 1995, the Company contributed approximately $5.1 million to 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 a note receivable of $5.1 million. A gain of approximately
$144,000 was deferred pending the repayment of the note. 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 March 31, 1996) with interest payable monthly through July 31,
1996 and, thereafter, principal and interest monthly through July 31,
2000. The Buyer is seeking additional financing, and is contractually
obligated to pay the note receivable from such proceeds. Through May 30,
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 March 31, 1996. In addition, the
Company has elected to reserve other receivables from the Buyer.
6. Income Taxes
The provision for income taxes contains a charge for Federal and State taxes
at an effective rate of 40.0% and 41.0% for the three months ended March 31,
1996 and 1995, respectively.
7. Stock Options
The Company's stock option plan (the "Plan"), as amended, has 456,028 shares
reserved for issuance, as of March 31, 1996, upon exercise of options granted
thereunder, Incentive stock options, as defined in Section 422 of the
Internal Revenue Code, may be granted to employees and non-incentive stock
options may be granted to employees, directors and such other persons as the
Compensation Committee appointed by the Board of Directors (the "Committee")
determines will contribute to the Company's success, at exercise prices equal
to (i) in the case of incentive options, not less than 100% of the fair market
value of the Common Stock on the date of grant, and (ii) in the case of
non-incentive options, not less than 75% of such fair market value. In
addition to selecting the optionee, the Committee determines the number of
shares of Common Stock subject to each option, the term thereof, which may
not exceed ten (10) years, the time or times when the non-incentive option
becomes exercisable and otherwise administers the Plan. Incentive stock
options are exercisable cumulatively at the rate of 25% per year commencing
one (1) year from the date of grant. Incentive options expires six (6) months
after the date of termination of a holders' employment by reason of death,
disability or retirement at or after the age of 65 (or such earlier date as
the option by its terms would have expired) and on the date of termination of
the holder's employment for any other reason.
The Plan also provides for the grant of non-incentive stock options to
outside directors upon their election, re-election or appointment to the
Board of Directors to purchase 3,000 shares of Common Stock at an exercise
price equal to 75% of the fair market value of the Common Stock on the date
of grant. Such options are for a term of five (5) years, are exercisable at
the cumulative rate of 33% per year commencing one (1) year from the date of
grant and expire three (3) months following the date on which such holder
ceases to be a director or such earlier date as the option by its terms would
have expired.
Options to purchase 364,876 shares of Common Stock at exercise prices
ranging from $11.75 to $24.50 per share were outstanding under the Plan on
March 31, 1996, of which options to purchase 14,00 shares at an exercise
price of $21.50 had been granted in the first quarter of 1996. Of the total
options outstanding at March 31, 1996, options to purchase 71,879 shares
were exercisable.
In connection with their employment contracts, the Company's President and
its Chief Financial Officer were granted 15,000 and 5,000 phantom shares,
respectively, payable in cash only. These phantom shares vest, subject
to the executive's continued employment with the Company, 25% per year on
December 31st of each year, commencing December 31, 1994, and are payable in
January 1998 in an amount equal to the product of the number of phantom
shares vested in the executive, and the difference between the closing sales
prices of the Company's Common Stock as reported by the Nasdaq Stock Market
(National Market) at various points in time, as specified in their employment
contracts.
8. Notes Payable and Long-Term Debt
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 Note
accrues interest at the rate of 6% per annum, 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. As of May 14, 1996, the Company was in negotiation with the
holder of this Note to amend certain terms, including the conversion price.
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 borrowings under the Company's $15,000,000 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 periods ending December 31, 1995, and March 31, 1996. The
Company is in the process of renegotiating the line-of-credit with Key Bank.
Management anticipates that the new terms will be finalized prior to June 30,
1996. As of May 30, 1996, the outstanding borrowing on the line was $3.1
million.
In February 1996, the Company's wholly-owned subsidiary, WellCare
Development, Inc., incurred additional mortgage indebtedness on a building
to be used primarily for office space for the Company. The additional
indebtedness, of $335,000, is due on March 1, 2001 with a fixed interest
rate of 8.25%.
9. Commitments and Contingencies
a. The Alliances commenced operations in the fourth quarter of 1994. Based
on information furnished to the Company by the Alliances, the Alliances have
operated at a deficit since inception. This deficit resulted from medical
expense obligations assumed from WellCare by the Alliances upon their
formation, medical expenses for incurred but not reported losses which were
in excess of amounts estimated at the time of their formation, and operating
losses since their formation. The deficit is approximately $16,000,000 at
December 31, 1995 based on unaudited financial results of the Alliances.
The Alliances have financed these deficits through a combination of the lags
inherent in the receipt, ajudication, and payment of claims as well as
further deferral of claim payments and borrowings from Buyer referred to in
note 5. In addition, a $3,000,000 bank line-of-credit was entered into by
the Buyer on December 28, 1995, which was guaranteed by Mr. Ullmann in his
personal capacity. In May 1996, the Alliances committed to the institution
of a fee withhold program, effective July 1, 1996, as permitted under its
contracts with physicians, to withhold payments otherwise payable to referral
physicians by approximately 15% to 22%, depending on the geographic location
of the physician. Management of the Alliances and WellCare believe that
this withhold program will enable, the Alliances to maintain their operations
and reduce their accumulated deficits in 1996 and substantially eliminate
them in 1997.
The Company has been advised by counsel that it would have no financial
liability to providers for past services rendered in the event the Alliances
were unable to maintain their operations. Further, the Company has direct
contracts with providers which would require the providers to continue to
provide medical care to members on the financial terms similar to those in
the Alliances' agreements with providers, in the event that the Alliances
were unable to maintain their operations. Nevertheless, in the event of
continuing losses or increasing deficits by the Alliances, the Alliances
could request increased capitation rates from the Company.
Management of the Company does not believe that such additional financing or
increased contractual capitation rates should be required by the Alliances and
has no intention to agree to such terms if requested by the Alliances.
b. Class Action Litigation - Between April 1, 1996 and May 30, 1996, the
Company as well as two if its officers who also are directors were named as
defendants in ten separate purported class actions filed in the United States
District Courts for the Northern and Southern Districts of New York, two of
which were filed on May 28, 1996. 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 to their detriment. An
eleventh 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 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.
c. Regulatory Matters - In connection with a comprehensive review of its
arrangements with Alliances and, the financing of Alliances as discussed
further in Notes 2 and 9a, the Company delayed the filing of its Annual Report
on Form 10-K with the Securities and Exchange Commission. Also, the
Department of Insurance of the State of New York accelerated its normal
statutory audit of the Company and is expected to consider the same issues
which were reviewed by the Company, as well as other matters. It is not
possible to predict the actions, if any, which may be taken by these or
other regulatory bodies or the effects of those actions, if any, on the
business operations or financial statements of the Company.
d. Other - The Company is involved in litigation and claims which are
considered normal to the Company's business. In the opinion of management, the
amount of loss that might be sustained, if any, would not have a material
effect on the Company's consolidated financial statements.
10. Fair Value of Financial Instruments
The carrying amounts of financial instruments including cash and cash
equivalents, short-term investments, due from affiliates - net, advances to
participating providers, other receivables - net, restricted cash, other
non-current assets, due from affiliate, accounts payable and accrued expenses
approximate their fair values.
The fair value of notes receivable consisting primarily of advances to
medical practices, is not materially different from the carrying value for
financial statement purposes. In making this determination, the Company used
interest rates based on an estimate of the credit worthiness of the medical
practice.
The carrying amount of long-term debt, the majority of which bears interest
at floating rates, are also assumed to approximate their fair value.
11. Earnings Per Share
Earnings per share calculations are based on a weighted average number of
shares outstanding for the year and give effect to all outstanding stock
options. No material dilutive securities existed at March 31, 1996 or 1995.
<PAGE>
Item 2 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 in the
quarterly report and with the Company's Annual Report on Form 10-K for the
year ended December 31, 1995. As a result of the restatement of prior period
operating results, the medical expense for the three month period ended
March 31, 1995 has been reduced from the previously reported amounts (See
Note 2 of "Notes to Consolidated Financial Statements").
The following table provides certain statement of operations data expressed
as a percentage of total revenue and other statistical data for the periods
indicated:
<TABLE>
Three Months Ended March 31,
1996 1995
(Restated)
Revenue:
<S> <C> <C>
Premium earned 96.4% 97.0%
Interest and other income 3.6 3.0
Total revenue 100.0 100.0
Expenses:
Hospital services 19.1 17.6
Physician services 55.9 53.4
Other medical services 3.3 4.6
Total medical expenses 78.3 75.6
General and administrative 18.0 13.8
Depreciation and amortization 2.0 1.3
Interest and other expenses 1.7 1.2
Total expenses 100.0 91.9
Income before income taxes 0.0 8.1
Provision for income taxes 0.0 3.3
Net Income 0.0% 4.8%
Statistical Data:
HMO member months enrollment 275,314 247,080
Medical loss ratio (1) 81.2% 77.9%
General and administrative ratio (2) 18.0% 13.8%
(1) Medical expense as a percentage of premiums earned; reflects the combined
rates for commercial, Medicaid, full-risk Medicare and Medicare supplement
members.
(2) General and administrative ratio as percentage of total revenue.
</TABLE>
Three Months Ended March 31, 1996 Compared to Three Months
Ended March 31, 1995 (Restated)
Premiums earned in the first quarter of 1996 increased by 18.4%, or $6.2
million, to $40.0 million from $33.8 million in the first quarter of 1995. This
increase is attributable to increases in HMO membership and in premium rates.
Total member months increased by 11.4% in the first quarter of 1996 to
275,314, accounting for $3.9 million of the $6.2 million increase in premiums
earned. Premium rates increased 5.6% for commercial members, 2.8% for
Medicaid members and including the premiums rates earned for full-risk
Medicare members resulted in a 6.3% total weighted average increase and
accounted for the $2.3 million balance of the increase in premiums earned.
Interest and other income increased 46.5%, or $.5 million, to $1.5 million
in the first quarter of 1996. This increase is primarily due to increased
management fee revenue.
Medical expenses increased 23.5%, or $6.2 million, to $32.5 million in the
first quarter of 1996, representing a 10.8% increase on a per member per
month basis and increased as a percentage of premiums earned (the "medical
loss ratio") from 77.9% in the first quarter of 1995 to 81.2% in the first
quarter of 1996. This increase is primarily due to an increase in the
contractual capitation rate paid to the Alliances. As a result of the
restatement of prior period operating results, the medical expense for the
three month period ended March 31, 1995, has been reduced from the previously
reported amounts (See Note 2 of "Notes to Consolidated Financial Statements").
Effective October 1, 1994, WCNY changed its capitation arrangements from
capitating primary case 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 17a 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 high payments from
private payor), 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.
General and administrative (G&A) expenses increased 55.9%, or $2.7 million,
to $7.5 million in the first quarter of 1996 and increased as a percentage of
total revenue from 13.8% in the first quarter of 1995 to 18.0% in the first
quarter of 1996. The increase in G&A expenses resulted primarily from
increased staffing related to service area and product line expansion,
marketing and tele-communications activities, non-payroll (contracted)
services and an increase in the doubtful account reserve for trade accounts
receivable.
Depreciation and amortization increased by 75.2%, or $.4 million, in the
first quarter of 1996, due primarily to amortization of preoperational costs
associated with service area and product line expansion.
Interest and other expenses increased by 62.1%, or $.3 million, in the first
quarter of 1996, due primarily to interest expense associated with the
private placement of a subordinated convertible note (See Management's
Discussion and Anaylis of Financial Condition and Results of Operations -
Liquidity and Capitol Resources).
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 Noted to amend certain terms,
including the conversion price.
The Company's requirements for working capital are principally to fund
geographic and product expansion for HMO operations, maintenance of necessary
regulatory reserves, potential acquisitions and strategic partnerships, and
marketing and product expansion of other managed care operations. Management
believes that these requirements can be met through the net proceeds from the
Note, together with cash on hand, cash generated from operations and any
available borrowings.
Net cash used in operating activities was $3.8 million during the first
quarter of 1996 as compared to net cash used by operations of $2.2 million for
the first quarter of 1995. The cash used in operations in the first quarter
of 1996 resulted from a reduction of medical costs liabilities primarily due
to increased levels of disbursements. The cash used in operations in the
first quarter of 1995 resulted from a decrease in the level of medical costs
payable attributable primarily to the prepayment of costs for specialists' care
on a monthly basis under the new contractual capitation arrangements with the
then recently established Alliances. Cash used for capital expenditures was
approximately $.2 million during the first quarter of 1996 as compared to
$1.1 million for the same period in 1995.
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 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 March 31, 1996,
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 March 31, 1996, the Company had working capital of $26.3 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 $12.7
million at December 31, 1995; the increase is attributable primarily to the
net proceeds from the Note which is classified as a long-term liability.
In June 1995, Key Bank of New York increased the limit on an unsecured
working capital line-of-credit to $15.0 million, $3.1 million of which was
outstanding at May 30, 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 statementes. 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.
At March 31, 1996, the Company had total mortgage indebtedness of $6.4
million outstanding on five of its office buildings, of which approximately
$800,000 is due February 1, 1999, approximately $4.4 million balance on
January 1, 2000 and approximately $800,000 is due March 1, 2000. In
Fbruary 1996, the Comapny incurred additional mortgage indebtedness of
$335,000 due on March 1, 2001.
Between April 1, 1996, and May 30, 1996, the Company, as well as two of its
officers who are directors, were named as defendants in ten separate
purported class actions filed in the United State District Courts for the
Northern and Southern Districts of New York, two of which were filed on
May 28, 1996. The complaints in these actions are virtually the same,
alleging the defendants violated the federal securities laws. An eleventh
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 has insurance
in effect which may, at least in part, offset any costs to be incurred in
these litigations.
Inflation
Medical costs have been rising at a higher rate than consumer goods as a
whole. The Company believes its premium increases, capitation arrangements and
other cost controls 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.
<PAGE>
Part II - Other Information
Item 1 Legal Proceedings
Between April 1, 1996 and May 30, 1996, the Company as well as two if its
officers who also are directors were named as defendants in ten separate
purported class actions filed in the United States District Courts for the
Northern and Southern Districts of New York, two of which were filed on
May 28, 1996. 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 to their detriment. An eleventh
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 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 2 Changes in Securities
Not applicable
Item 3 Defaults Upon Senior Securities
Not applicable
Item 4 Submission of Matters to a Vote of Security Holders
Not applicable
Item 5 Other Information
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
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.
On April 30, 1996, Mr. Robert W. Morey, Jr. was appointed Chairman of the
Board, Chief Executive Officer and a director of the Board. Mr. Edward A.
Ullmann remained President and assumed the functions of Chief Operating
Officer as of said date.
Item 6 Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit 11 - Computation of Net Income Per Share of Common Stock
(b) Reports on Form 8-K
The Company filed a Form 8-K on January 19, 1996, disclosing under Item 5
thereunder the private placement of a 6% subordinated convertible note in
the principal amount of $20,000,000 due December 21, 2002, with the 1818
Fund II, L.P., a private equity fund managed by Brown Brothers Harriman & Co.
<PAGE>
SIGNATURES
Pursuant to the requirements 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.
The WellCare Management Group, Inc.
By: /s/ Robert W. Morey
Robert W. Morey
Chairman of the Board and Chief Exeuctive Officer
(was appointed 4/30/96)
By: /s/ Marystephanie Corsones
Marystephanie Corsones
Vice President of Finance and Chief Financial Officer
(Principal Financial and Accounting Officer)
Date: June 14, 1996
INDEX TO EXHIBITS
All exhibits listed below are filed with this Quarterly Report of Form 10-Q/A:
Exhibit Number Page
11 Computation of Net Income Per Share 21
of Common Stock
27 Financial Data Schedule 22
Exhibit 11
THE WELLCARE MANAGEMENT GROUP, INC. AND SUBSIDIARIES
COMPUTATION OF NET INCOME PER SHARE OF COMMON STOCK
(in thousands, except per share data)
(Unaudited)
Three Months
Ended March 31,
1996 1995
Income before income taxes $46 $2,839
Provision for income taxes 18 1,164
Net income $28 $1,675
Weighted average number of common and
common equivalent shares outstanding 6,289 6,236
Earnings per share $0.00 $0.27
/
