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>
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:
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.
3
<PAGE>
THE WELLCARE MANAGEMENT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(Unaudited)
Three Months Ended March 31,
19 June 1905
18 June 1905
(Restated)
REVENUE:
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.
<PAGE>
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:
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.
5
<PAGE>
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, 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
<PAGE>
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,
adjudication,
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:
Three Months Ended March 31,
1996
1995
(Restated)
Revenue:
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.
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 fro 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
disbursments. 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 February 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 fo
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 there
under
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: May 30, 1996
INDEX TO EXHIBITORS
All exhibits listed below are filed with this Quarterly Report of Form 10Q:
Exhibit Number Page
11 Computation of Net Income Per Share 21
of Common Stock
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,
19 June 1905
18 June 1905
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
21
