SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1997
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 of other jurisdiction (I.R.S. Employer
of 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 reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
The number of the Registrant's share outstanding on August 1, 1997
was 5,082,448 shares of Common Stock, $.01 par value, and
1,229,794 shares of Class A Common Stock, $.01 par value.
Page 1 of 41 Pages
Exhibit Index on Page 27
<PAGE>
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
June 30, 1997 and December 31, 1996 3
Consolidated Statements of Operations
for the Three Months and Six Months Ended
June 30, 1997 and 1996 5
Consolidated Statements of Cash Flows
for the Six Months Ended
June 30, 1997 and 1996 6
Consolidated Statements of Shareholders'
Equity for the Six Months Ended
June 30, 1997 8
Notes to Consolidated Financial Statements 10
Item 2 Management's Discussion and Analysis
of Financial Condition and
Results of Operations 18
PART II - OTHER INFORMATION
Item 1 Legal Proceedings 22
Item 2 Changes in Securities 23
Item 3 Defaults Upon Senior Securities 23
Item 4 Submission of Matters to a
Vote of Security Holders 24
Item 5 Other Information 25
Item 6 Exhibits and Reports on Form 8-K 25
Signatures 26
Index to Exhibits 27
<PAGE>
THE WELLCARE MANAGEMENT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
June 30, December 31,
1997 1996
---------- -----------
ASSETS (Unaudited)
CURRENT ASSETS:
Cash $ 5,160 $ 7,869
Short-term investments -
available for sale 432 919
Accounts receivable (net
of allowance for doubtful
accounts of $3,103 in 1997
and $1,902 in 1996) 7,546 8,133
Notes receivable (net of
allowance for doubtful
accounts of $2,673 in 1997
and $2,032 in 1996) 519 351
Advances to participating providers 2,180 2,320
Other receivables (net of allowances
for doubtful accounts of $5,597 in
1997 and $4,995 in 1996) 3,913 4,874
Taxes receivable 713 6,969
Deferred tax asset 3,932 3,932
Prepaid expenses and other
current assets 285 400
-------- --------
TOTAL CURRENT ASSETS 24,680 35,767
PROPERTY AND EQUIPMENT (net of
accumulated depreciation and
amortization of $5,900 in 1997
and $5,157 in 1996) 11,558 12,261
OTHER ASSETS:
Restricted cash 6,667 6,667
Notes receivable (net of allowance
for doubtful accounts of $2,672
in 1997 and $,3,313 in 1996) 938 1,104
Preoperational costs (net of
accumulated amortization of
$1,904 in 1997 and $1,237 in 1996) 2,097 2,764
Other non-current assets (net of
allowance for doubtful accounts
of $1,752 in 1997 and $1,516 in 1996
and accumulated amortization of
$725 in 1997 and $585 in 1996) 3,861 4,749
Goodwill (net of accumulated
amortization of $2,024 in 1997
and $1,702 in 1996) 7,705 8,028
-------- --------
TOTAL ASSETS $57,506 $71,340
======== ========
<PAGE>
June 30, December 31,
1997 1996
---------- -----------
(Unaudited)
LIABILITIES AND SHAREHOLDERS'
EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 693 $ 702
Medical costs payable 12,389 15,965
NY State demographic pool 2,360 -
Accounts payable 587 1,002
Accrued expenses 2,305 2,678
Unearned income 5,662 4,248
--------- --------
TOTAL CURRENT LIABILITIES 23,996 24,595
LONG-TERM LIABILITIES -
Long-term debt 26,117 26,471
-------- - --------
TOTAL LIABILITIES 50,113 51,066
--------- --------
COMMITMENTS AND CONTINGENCIES - -
SHAREHOLDERS' EQUITY
Class A Common Stock ($.01 par
value; 1,344,784 and 1,484,482
shares authorized; 1,229,794
and 1,369,492 shares issued
and outstanding at
June 30, 1997 and December 31,
1996, respectively) 12 14
Common Stock ($.01 par value;
20,000,000 shares authorized,
5,082,448 and 4,942,750 shares
issued at June 30, 1997 and
December 31, 1996 respectively) 51 49
Additional paid-in capital 26,624 26,624
(Accumulated deficit) (25,018) (12,121)
Statutory reserve 5,932 5,932
-------- --------
7,601 20,498
Unrealized gain/(loss) on
short-term investments 5 (11)
Less:
Notes receivable from shareholders 6 6
Treasury stock (at cost; 14,066
shares of Common Stock
at June 30, 1997 and
December 31, 1996, respectively) 207 207
-------- --------
TOTAL SHAREHOLDERS' EQUITY 7,393 20,274
-------- --------
TOTAL LIABILITIES & SHAREHOLDERS'
EQUITY $57,506 $71,340
======== ========
See accompanying notes to consolidated financial statements.
THE WELLCARE MANAGEMENT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(Unaudited)
Three Months Six Months
Ended June 30, Ended June 30,
1997 1996 1997 1996
-------- -------- -------- ---------
REVENUE:
Premiums earned $36,614 $39,712 $70,444 $79,763
Administration fee income (2) 597 (22) 1,363
Interest and investment
income 229 354 555 714
Other income - net 135 469 277 791
-------- -------- -------- --------
TOTAL REVENUE 36,976 41,132 71,254 82,631
-------- -------- -------- --------
EXPENSES:
Medical expenses 28,735 35,855 65,581 68,393
General and administrative
expenses 6,815 8,777 15,867 16,279
Depreciation and
amortization expense 933 802 1,879 1,620
Interest expense 388 559 824 1,109
Expenses to affiliates-net - 28 - 73
-------- -------- -------- --------
TOTAL EXPENSES 36,871 46,021 84,151 87,474
-------- -------- -------- --------
INCOME/(LOSS) BEFORE
INCOME TAXES 105 (4,889) (12,897) (4,843)
BENEFIT FOR INCOME TAXES - (1,955) - (1,937)
------- -------- -------- --------
NET INCOME/(LOSS) $ 105 ($2,934) ($12,897) ($2,906)
======== ======== ======== ========
Primary earnings/(loss) $0.02 ($0.47) ($2.05) ($0.46)
per share ======== ======== ======== ========
Weighted average common
shares outstanding 6,298 6,298 6,298 6,294
======== ======== ======== ========
Fully diluted earnings/
(loss) per common share $ 0.01 ($0.47) ($2.05) ($0.46)
======== ======== ======== ========
Weighted average common
shares outstanding 8,227 6,298 6,298 6,294
======== ======== ======== ========
See accompanying noted to consolidated financial statements.
<PAGE>
THE WELLCARE MANAGEMENT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
Six Months Ended June 30,
-------------------------
1997 1996
---- ----
CASH FLOWS FROM
OPERATING ACTIVITIES:
Net loss ($12,897) ($2,906)
Adjustments to reconcile net loss
to net cash used in operating
activities:
Depreciation and amortization 1,879 1,620
Increase in deferred taxes - (305)
Loss on sale of assets and others 100 -
Changes in assets and liabilities:
Decrease in accounts
receivable - net 587 2,047
Decrease in medical costs payable (3,576) (669)
Increase in NY State demographic pool 2,360 -
Decrease in accounts receivable-non-
current-net 454 -
Decrease (increase) in other
receivables 1,304 (3,447)
Decrease (increase) in accounts payable,
accrued expenses and other current
liabilities (789) 945
Decrease (increase) in taxes receivable 6,256 (3,425)
Decrease (increase) in prepaid expenses
and other 114 (556)
Increase in unearned income 1,415 31
Decrease in advances to
participating providers 141 1,055
Decrease (increase) in other non-current
assets - excluding preoperational costs
and accounts and other receivables 90 (874)
Other - net (134) (323)
------- --------
NET CASH USED IN OPERATING ACTIVITIES (2,696) (6,807)
------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment (150) (282)
Decrease in notes receivable (2) (70)
Sale of investments 486 4,010
Purchase of investments - (6,500)
Increase in preoperational costs - (154)
Other investing activities 16 (10)
------- --------
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES 350 (3,006)
------- --------
<PAGE>
Six Months Ended June 30,
-------------------------
1997 1996
---- ----
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of notes payable and
long-term debt (363) (10,447)
Proceeds from notes payable and
long-term debt - 21,239
Proceeds from exercise of stock options - 252
Proceeds from issuance of stock and
treasury stock - net - 5
------- --------
NET CASH (USED IN) PROVIDED BY
FINANCING ACTIVITIES (363) 11,049
------- --------
NET (DECREASE) INCREASE IN CASH (2,709) 1,236
CASH, BEGINNING OF PERIOD 7,869 5,456
------- --------
CASH, END OF PERIOD $5,160 $6,692
======= ========
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION:
Income taxes paid $ - $1,792
Interest paid 547 1,161
See accompanying notes to consolidated financial statements.
<PAGE>
THE WELLCARE MANAGEMENT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For the Six Months Ended June 30, 1997
(in thousands)
(Unaudited)
Class A Additional
Common Common Paid-In (Accumulated Statutory
Stock Stock Capital Deficit) Reserve
Balance, $14 $49 $26,624 ($12,121) $5,932
DEC 31, 1996
Net change of
valuation
allowance of
short-term
investments
Net (loss) ($13,002)
BALANCE,
MARCH 31, 1997 $14 $49 $26,624 ($25,123) $5,932
Conversion of
Class A
Common Stock
to Common
Stock ($2) $ 2
Net change of
valuation
allowance
of short-term
investments
Net income $105
BALANCE,
JUNE 30, 1997 $12 $51 $26,624 ($25,018) $5,932
<PAGE>
THE WELLCARE MANAGEMENT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For the Six Months Ended June 30, 1997
(in thousands)
(Unaudited)
Unrealized Total
Gain/(Loss) Notes Share-
On Short-term Receivables- Treasury holders'
Investments Shareholders Stock Equity
BALANCE, ($11) ($6) ($207) $20,274
DEC 31, 1996
Net change of
valuation
allowance on
short-term
investments $12 $12
Net (loss) ($13,002)
BALANCE,
MARCH 31, 1997 $1 ($6) ($207) $ 7,284
Conversion of
Class A Common
to Common Stock
Net change of
valuation
allowance
on short-term
investments $4 $ 4
Net income $ 105
BALANCE.
JUNE 30, 1997 $ 5 ($6) ($207) $ 7,393
<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, 1996. In the opinion of management,
the accompanying unaudited interim financial statements contain
all adjustments necessary to present fairly the financial position
at June 30, 1997, 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, 1997. Certain amounts
in the 1996 financial statements have been reclassified to conform
to the 1997 presentation.
2. MEDICAL EXPENSE
a. In March 1997, the Company received a notice from The New
York State Insurance Department ("NYSID") relating to NYSID's
audit of the New York State market stabilization pool for the
audit years 1993, 1994 and 1995. On April 16, 1997, NYSID advised
the Company of a preliminary assessment, which would have required
a payment of $1.7 million by the Company. Based on this
preliminary assessment, the Company charged medical expense $4.3
million in the quarter ended March 31, 1997. This included the
Company's calculation of the projected impact of the 1993-1995
audit, as well as the potential impact on the 1996 and first
quarter 1997 medical expense. In July 1997, the Company and NYSID
agreed upon a minimum and maximum amount due for the 1993-1995
audit and 1996. As a result, the Company reduced medical expense
by $1.1 million in the quarter ended June 30, 1997 to reflect this
revised assessment. The Company believes that an additional
reduction from the maximum is possible and is continuing its
negotiations with NYSID. No further reduction in medical expenses
has been recorded for this potential additional reduction.
b. In 1994, two entities which were predecessors to the
regional health care delivery networks with which WellCare of New
York, Inc. ("WCNY") contracted 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 WCNY and certain providers, which payments might otherwise
have been made by WCNY. Additionally, these entities paid
approximately $1,833,000 directly to WCNY in payment of 1993
provider deficits which would otherwise have been due to WCNY
directly from the providers. As originally reported in its 1994
consolidated financial statements, WCNY recorded the $1,833,000
received as a reduction of medical expense, and WCNY did not
record as medical expense the $2,879,000 paid directly to the
providers by these entities.
Subsequently, in 1996, the Company's accounting personnel were
informed that Edward A. Ullmann, the Company's then Chairman of
the Board, Chief Executive Officer and President of the Company,
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
$4,712,000 referred to above.
The Company subsequently restated its 1994 consolidated financial
statements to reflect the higher medical expenses and established
a medical expense accrual. As there were no specific accounts
payable by WCNY, this accrual is being reduced concurrently with
the pay down of the bank loans, with a simultaneous reduction in
medical expense. A reduction of medical expense of approximately
$435,000 and $1,307,000 was recorded in the first six months of
1997 and 1996, respectively. The remaining principal balance of
the outstanding loan, which is in default, is approximately
$116,000 at August 13, 1997. The Company's ability to reduce
future medical expense by the remaining $116,000 is contingent on
this amount being paid.
c. The Alliances commenced operations in the fourth quarter of
1994. Based on information provided to the Company by the
Alliances, the Alliances have operated at a deficit since
inception (the deficit is approximately $17 million at December
31, 1996, based on unaudited information). The deficit is the
result of medical expense obligations assumed from WellCare upon
the formation of the Alliances, actual and estimated but not
incurred medical losses in excess of the amounts initially
estimated and operating losses. The Alliances have financed the
deficits through a combination of borrowings from the Buyer and
the Investor defined in Note 3; lags inherent in the receipt,
adjudication and payment of claims; and the deferral of claim
payments to providers. 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.
On August 1, 1996, the Alliances implemented a fee withhold
program, as permitted under the contracts with its 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, together with general changes in the
management of the Alliances, and the introduction of new provider
reimbursement schedule should enable the Alliances to maintain
their operations and reduce their accumulated deficits in 1997 and
substantially eliminate them in 1998.
The Company had been advised by counsel that it would have no
financial liability to providers with whom the Alliances had
contracted for 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 medical care to members on the financial terms similar
to those in the Alliances' agreement 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
financial 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 beyond the negotiated
contractual increases. Effective September 1, 1996, the Company
entered into a letter of understanding with the Alliances to
restructure its capitation arrangement. The Company also agreed,
in the second quarter of 1996, to record charges to medical
expenses based on the instructions of NYSID, for $3.7 million,
which amounts had previously been the responsibility of the
Alliances. Under this understanding, the Company reassumed risk
for certain previously capitated services with a corresponding
reduction in rates. Subsequently, during the second quarter of
1997, the Company renegotiated and modified the terms of the
capitation agreement, as provided for in the contract, to reflect
regulatory decreases/increases in premium rates and to reflect
utilization trends that affect both the Company and the Alliances.
3. 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 the assets of WCMM for cash of $.6 million and a
note receivable of $5.1 million. The buyer ("Buyer") which was
newly formed, to acquire WCMM, is in the business of managing
medical practices and providing related consultative services, and
entered into agreements to manage the Alliances referred to in
Note 10a. The Company also received a five-year option to acquire
the Buyer, which option was canceled in 1996. The note receivable
bears interest at a rate equal to prime plus 2% (10.5% at June 30,
1997) with interest payable monthly through July 31, 1996 and,
thereafter, principal and interest monthly through July 31, 2000.
The Buyer has paid interest only through January 1996.
The Company has also advanced $3.1 million to the Buyer ($.3
million in 1997, $2.1 million in 1996 and $.7 million in 1995) for
operating expenses and unpaid interest, which obligations are
documented by notes of $215,000 and $2.1 million and interest
receivable of $.8 million. The note for $215,000 bears interest
at a rate equal to prime plus 2% (10.5% at June 30, 1997) and was
due December 31, 1996. No payments of principal have been made on
this note.
On February 19, 1997, the Buyer executed the promissory note in
the amount of $2.1 million, bearing interest at the rate of prime
plus 2% (10.5% at June 30, 1997), with repayment of the principal
over 36 months, starting upon the occurrence of certain events
explained below. Subsequently, on February 26, 1997, the Buyer
entered into an Option Agreement with a potential investor (the
"Investor"), whereby the Investor agreed to lend the buyer up to
$4,000,000 ($3.5 million of which has been received as of August
13, 1997) and received an option to merge with the Buyer,
exercisable during the period from March 15, 1998 through March
15, 1999. Concurrently, WellCare entered into an agreement with
the Buyer whereby WellCare agreed to forbear on the collection of
principal and interest on the note for $5.1 million, and on the
collection of principal of the $2.1 million note, in exchange for
the right to convert the $5.1 million note into 43% of the Common
Stock of the company resulting from the merger of the Investor and
the Buyer. In the event the Investor merges with the Buyer, the
$2.1 million note would be payable immediately, and the Company
would have a 43% equity interest in the company resulting from the
merger of the Investor and the Buyer. At the earlier of the Buyer
relinquishing its option to merge, or March 14, 1999, the
forbearance will be rescinded and the original payment terms of
the $5.1 million note reinstated. The Buyer would be obligated to
pay monthly interest on the $2.1 million note, with principal
payments over a thirty-six month period to commence upon recession
of the forbearance. The notes are subordinated to the Investor's
and Key Bank's security interest.
In view of the Buyer's operating losses and advances to the
Alliances, the Company had obtained from certain of the Buyer's
equity holders personal guarantees of the original note and
pledges of collateral to secure these guarantees. On April 19,
1997, the Company's Board of Directors agreed to release these
guarantees and related collateral pledged by the guarantors to
secure the guarantees in exchange for the Buyer's stock options
that such guarantors originally received from the Buyer and a
release from the guarantors for any potential claims against
WellCare associated with the transactions. In view of the Buyer's
financial condition and difficulties inherent in the collection of
personal guarantees and realization of collateral, and the Buyer's
default on the payments of the notes, the Company had fully
reserved in 1995 the original $5.1 million note receivable, plus
the $.7 million advanced in 1995. In 1996, the Company had
established a net reserve of $1.9 million for the $215,000 note,
interest accrued on the notes, and advances receivable, net of the
deferred gain on the original sale. In 1997, the Company has
established a reserve of $.3 million for 1997 accrued interest not
paid by the Buyer.
4. PROPERTY AND EQUIPMENT
Property and equipment is recorded at cost net of accumulated
depreciation. Some of the real estate held and used in the day to
day operations of the Company was recently appraised for Key Bank
(see Note 6, Long Term Debt) with respect to the Company's
mortgage obligations which are current. The valuations used by
the Bank are being reviewed by the Company to determine the
appropriateness of the methodologies used and the conclusions
reached. The carrying values of the respective properties at June
30, 1997 exceeded the valuation amounts by approximately $2.8
million.
Management has applied the criteria of FASB's SFAS No. 121 -
"Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of", and believes that the future
operations of the Company and the future cash flows to be
generated from operations will be positive, therefore, no
impairment reserve has been recorded with respect to the
underlying properties. Management will closely monitor the need
for future adjustments to the carrying value.
<PAGE>
5. 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. Available for sale securities are valued at
market. The separate component of shareholders' equity
representing unrealized gains or losses on investments available
for sale was approximately a $5,000 gain at June 30, 1997 and a
$11,000 loss at December 31, 1996.
6. LONG-TERM DEBT
Although the Company is current on all its mortgage obligations,
on July 28, 1997, Key Bank (the "Bank") notified the Company that
it considered the Company not in compliance with the Target Loan
to Value Ratio provided for in two of its mortgages, with
outstanding balances of approximately $4.9 million. According to
the Bank's calculations, the outstanding Loan Amount exceeded the
corresponding Lendable Property Value, as defined, based on recent
appraisals, by approximately $1.7 million. The Bank has requested
that the Company either reduce the outstanding obligation, or
provide additional collateral for $1.7 million. The Bank
indicated that if not cured by August 15, 1997, the Bank will
consider the Company in default of the mortgage notes. A default
would require the Company to pay a higher interest rate on the
outstanding obligations, among other potential penalties. The
Company has requested certain underlying documents from the Bank
with respect to the valuations, and has also asked the Bank for an
extension of time to respond and cure the asserted non-compliance.
The Bank has granted an extension to September 3, 1997. The
Company continues to classify the debts in accordance with their
original terms.
7. SUBORDINATED CONVERTIBLE NOTE
On January 19, 1996, the Company completed a private placement of
a subordinated convertible note in the principal amount of
$20,000,000 (the "Note") due December 21, 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 terms of the Note Purchase Agreement dated January
19, 1996 (the "Agreement"), entered into between the Company and
the Fund, the Company issued a Note dated January 19, 1996, in the
principal amount of $20,000,000 payable to the order of the Fund
or its registered assignees. On February 28, 1997, the Fund and
the Company amended the Agreement and the Note (such amendments
together with the concurrent amendment to the related registration
rights agreement between the parties, the "Amendment").
As of June 30, 1997, the Company is in default of certain
provisions of the Agreement and the Amendment, including the
requirements to maintain a minimum tangible net worth as defined
in the amended Agreement. The Company is seeking to renegotiate
amendments of certain terms which it believes will cure any
default provisions. In anticipation of successful renegotiation,
the Company continues to classify this obligation as long term.
8. INCOME TAXES
At December 31, 1996, the Company recorded a deferred tax asset of
approximately $5.4 million giving recognition to the future tax
benefit of reversing temporary differences and state net
operations loss carryovers ("NOL"). No valuation allowance was
established for the deferred tax asset since realization was
determined by management to be more likely than not based upon the
Company's internal budgets. The maximum utilization period for
the NOL's are fifteen (15) and five (5) years for New York and
Connecticut, respectively.
Continuing operating losses during the first six months of 1997
resulted in additional deferred tax benefits of approximately $5.2
million. Although the Company believes that future profitable
operations will be achieved, the Company has provided a 100%
valuation allowance with respect to these additional deferred tax
assets in view of their size and length of the expected recoupment
period. Management will continue to closely monitor the need for
future adjustments to this valuation allowance.
9. STOCK OPTIONS
The Company's 1993 Incentive and Non-Incentive Stock Option Plan
(the "Plan"), as amended has 820,904 share reserved for issuance,
as of June 30, 1997, upon exercise of options granted or to be
granted.
Options to purchase 627,817 shares of Common Stock at exercise
prices ranging from $4.38 to $24.50 per share were outstanding
under the Plan on June 30, 1997, of which options to purchase
24,500 shares at an exercise price of $4.38 per share had been
granted in the second quarter of 1997. Of the total options
outstanding at June 30, 1997, options to purchase 242,727 shares
were exercisable.
The Company's 1996 Non-Incentive Executive Stock Option Plan
("Non-Incentive Plan") has 650,000 shares reserved for issuance as
of June 30, 1997, upon exercise of options granted or to be
granted. Options to purchase 600,000 shares of Common Stock
(consisting of two grants, one covering 450,000 shares and the
other 150,000 shares), which were granted on December 31, 1996,
were outstanding under the Non-Incentive Plan at June 30, 1997.
None of the options were exercisable. The option to purchase
450,000 shares has a five-year term and is exercisable at $10.00
per share commencing November 23, 2001 or earlier only upon the
occurrence of any of the following events: (a) the Company's
Common Stock trades for a thirty (30) consecutive day period at or
above $20.00 per share (the "Accelerated Performance Price") or
$17.50 per share in the event of a change of control of the
Company (the "Change of Control Price") or (b) the option holder's
death or disability. The option to purchase 150,000 shares has
identical terms except that the exercise price is $15.00 per
share, the Accelerated Performance Price is $25.00 per share and
the Change of Control Price is $22.50 per share. There were no
options granted in the second quarter of 1997.
The Company has adopted the disclosure-only provisions of the
FASB's SFAS No. 123, "Accounting for Stock Based Compensation"
("SFAS 123"). Accordingly, no compensation cost has been
recognized for grants or stock options.
10. COMMITMENTS AND CONTINGENCIES
a. Effective October 1, 1994, WCNY changed its capitation
arrangement with the majority of its providers from capitating
primary care physicians with attendant risk-sharing to capitating
the Alliances comprised of the specialists and previously-capitated
primary care physicians. The Alliances have operated at
a deficit since inception but have recently instituted measures
designed to reduce these deficits and achieve profitability. The
Alliance could request additional funding beyond the contractual
increases described in Note 1a of "Notes to Consolidated Financial
Statements" of the Company's Annual Report on Form 10-K, from the
Company which management does not believe should be required and,
if requested, by the Alliances does not intend to provide. (As of
August 13, 1997, the Alliances had received a $3.5 million cash
infusion from the Buyer which in turn received a like amount from
the Investor, as discussed in Note 3.)
b. Between April 1, 1996 and June 6, 1996, the Company, its
former President and Chief Executive Officer, and its former Vice
President of Finance and Chief Financial Officer were named as
defendants in twelve separate actions filed in Federal Court (the
"Securities Litigations"). An additional three directors were
also named in one of these actions. Plaintiffs sought to recover
damages allegedly caused the Company's defendants' violations of
federal securities laws with regard to the preparation and
dissemination to the investing public of false and misleading
information concerning the Company's financial condition.
On July 3, 1996, the Securities Litigations were consolidated in
the United States District Court for the Northern District of New
York, and an amended consolidated complaint was served on August
21, 1996, which complaint did not name the three additional
directors. The Company's auditor, however, was named as an
additional defendant. On October 23, 1996, the Company filed a
motion to dismiss the consolidated amended complaint against the
Company as well as the individual defendants. The Company's
auditor likewise filed its own motion to dismiss. By Memorandum
Decision and Order (the "Order"), entered on April 30, 1997, the
Court (i) granted the auditor's motion to dismiss and ordered that
the claims against the auditors be dismissed with prejudice; and
(ii) denied the motion to dismiss brought by the individual
defendants. The Order did not specifically address the Company's
motion to dismiss and on May 14, 1997, the Company moved for
reconsideration of its motion to dismiss and dismissal of all
claims asserted against it. The reconsideration motion is
scheduled to be heard on August 22, 1997, and on September 8, the
Court will also hear arguments for and against the certification
of a class. The parties are currently engaged in the discovery
process of the litigation.
Although management is unable to predict the likelihood of success
on the merits of the consolidated class action, it has instructed
its counsel to vigorously defend its interests. To date, the
Company has indemnified the former Chairman of the Board, Chief
Executive Officer and President and the former Vice President of
Finance and Chief Financial Officer for costs incurred in
defending the Securities Litigations. The Company has insurance
in effect which may, at least in part, offset any costs to be
incurred in these litigations.
c. 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.
11. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of financial instruments, including short-term
investments, advances to participating providers, other
receivables - net, restricted cash, other non-current assets -
net, and accounts payable and accrued expenses, approximate their
fair value.
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 each medical practice.
The Subordinated Convertible Notes was issued in a private
placement on January 19, 1996, and amended with the holder on
February 28, 1997, as described in Note 7. There is no public
market for this instrument or other debt of the Company and
management believes it is not practicable to estimate its fair
value at this time. The carrying amount of other long-term debt,
the majority of which bears interest at floating rates, are
assumed to approximate their fair value.
12. EARNINGS/(LOSS) PER SHARE
Primary earnings/(loss) per common share are computed by dividing
the net income/(loss) by the weighted average number of shares
outstanding during the period. On a fully diluted basis, both net
earnings and the shares outstanding are adjusted to assume the
conversion of the subordinated convertible debt and stock options.
<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, 1996.
Certain statements in this Form 10-Q are forward-looking
statements, and are not based on historical facts but are
management's projections or best estimates. Actual results may
differ from these projections due to risks and uncertainties.
These risks and uncertainties include a variety of factors. The
Company's results of operations depend in large part of accurately
predicting and effectively managing medical costs and other
operating expenses. A variety of factors 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, major epidemics, disasters and numerous
other factors affecting the delivery and cost of health care, such
as major health care providers' inability to maintain their
operations and reduce or eliminate their accumulated deficits, 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 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 other factors
described above) could result in premium revenues not increasing
to thus offset any 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.
The following table provides certain statement of operations data
expressed as a percentage of total revenue and other statistical
data for the periods indicated.
<PAGE>
Three Months Six Months
Ended June 30, Ended June 30,
---------------- --------------
1997 1996 1997 1996
---- ---- ---- ----
Revenue:
Premiums earned 99.0% 96.6% 98.9% 96.5%
Interest and
other income 1.0 3.4 1.1 3.5
TOTAL REVENUE 100.0 100.0 100.0 100.0
Expenses:
Hospital services 19.5 30.4 24.1 24.8
Physician services 56.7 57.3 59.4 56.6
Other medical services 1.5 (0.5) 8.5 1.4
TOTAL MEDICAL SERVICES 77.7 87.2 92.0 82.8
General and administrative 18.4 21.3 22.3 19.7
Depreciation and amortization 2.5 1.9 2.6 2.0
Interest and other expenses 1.1 1.5 1.2 1.4
TOTAL EXPENSES 99.7 111.9 118.1 105.9
Income/(loss) before income taxes 0.3 (11.9) (18.1) (5.9)
Benefits for income taxes - (4.8) - (2.3)
Net income/(loss) 0.3% (7.1)% (18.1)% (3.6)%
STATISTICAL DATA:
HMO member months enrollment 226,234 273,420 460,025 548,734
Medical loss ratio (1) 78.5% 90.3% 93.1% 85.7%
General and administrative
ratio (2) 18.4% 21.3% 22.3% 19.7%
- ------------------------------
(1) Medical expenses as a percentage of premiums earned; reflects
the combined rates of commercial, Medicaid, Full-Risk Medicare
and Medicare supplemental members.
(2) General and administrative expenses as a percentage of total
revenue.
THREE MONTHS ENDED JUNE 30, 1997 COMPARED
TO THREE MONTHS ENDED JUNE 30, 1996
Premiums earned in the second quarter of 1997 decreased by 7.8% or
$3.1 million, to $36.6 million from $39.7 million in the second
quarter of 1996. Commercial premium revenue decreased 30.3% or
approximately $9.3 million, as a result of decreased membership.
Medicaid premium revenue increased 28% or $1.8 million, due to
increased member months of 8.3% or $.5 million, and retroactively
legislated rate increases of $1.3 million which are attributable
to the fourth quarter 1996 and the first quarter of 1997.
Medicare premium revenue increased 173.3% or $4.4 million, because
of a 187% increase or $4,8 million in member months, partially
offset by a reduction in average rates of 4.8%, or $.4 million.
Interest and other income decreased by 74.5% or $1.1 million to
$.4 million in the second quarter of 1997. This decrease is
primarily due to reductions in management fees, insurance
reimbursements and interest income.
Medical expenses decreased 19.9% or $7.1 million, to $28.7
million, from $35.9 million in the second quarter of 1996,
representing a 3.1% decrease on a per member per month basis and a
decrease as a percentage of premiums earned (the "medical loss
ratio") from 90.3% in the second quarter of 1996 to 78.5% in the
second quarter of 1997. The decrease was primarily due to reduced
membership; better utilization management; and a $1.1 million
reversal of amounts expensed in the first quarter of 1997,
reflecting a favorable partial resolution, in the second quarter
of 1997, of the amounts due the New York State demographic pool;
offset by increases attributable to a change in product mix. The
second quarter of 1996 included a one-time $3.7 million charge to
reflect the reassuming of the cost of hospital in-patient care
which had previously been assumed by physician alliances.
General and administrative ("G&A") expenses decreased 22.4% or $2
million, to $6.8 million, from $8.8 million in the second quarter
of 1996. The decrease in G&A expenses resulted primarily from a
decrease of $.9 million in extraordinary legal and other
professional services related primarily to the class action
litigation; a decrease of $.4 million in payroll and related
expenses because of reduced staffing levels; and a decrease of
$.3 million in advertising, promotional and printing expenses. It
is anticipated that legal costs will increase during the normal
progression of the class action litigation.
Depreciation expense increased by 16.3% or $.1 million, in the
second quarter of 1997 reflecting the impact of the amortization
of preoperational costs associated with service area and product
line expansion. Interest expense decreased $.2 million because of
the retirement of the Key Bank debt during the fourth quarter of
1996.
SIX MONTHS ENDED JUNE 30, 1997 COMPARED
TO SIX MONTHS ENDED JUNE 30, 1996
Premiums earned in the first six months of 1997 decreased by 11.7%
or $9.3 million, to $70.4 million from $79.7 million in the first
six months of 1996. Commercial premium revenue decreased 28% or
$17.7 million, because of decreased membership. Medicaid premium
revenue remained unchanged with a 5.3% increase in member months
offset by a 4.0% decrease in average rates. Medicare premium
revenue increased 206% or $8 million, because of a 226% increase
in member months, partially offset by a reduction in average rates
of 6.1%, or $.8 million.
Interest and other income decreased by 71.8%, or $2.1 million, to
$.8 million in the first six months of 1997. This decrease is
primarily due to reductions in management fees, insurance
reimbursements and interest income.
Although medical expenses decreased 4.1% or $2.8 million, to $65.6
million in the first six months of 1997, there was a 14.5%
increase on a per member per month basis and an increase as a
percentage of premiums earned (the "medical loss ratio") from
85.7% in the first six months of 1996 to 93.1% in the first six
months of 1997. Decreases were the result of reduced membership
and better utilization management. In addition, the six months in
1996 included a one-time $3.7 million charge to reflect the
reassuming of the cost of hospital in-patient care which had
previously been assumed by physician alliances. Year to date 1997
medical expenses increased because of a $3.2 million charge for
the estimated liability related to the New York State Insurance
Department's audit of the demographic pool payments and
assessments for the years 1993-1996 and the first quarter of 1997;
$2.3 million of adverse development relating to 1996 medical claim
reserves; and a change in product mix.
General and administrative ("G&A") expenses decreased 2.5% or $.4
million, to $15.9 million from $16.3 million in the first six
months of 1996. The decrease in G&A expenses is the net result of
a decrease of $.8 million in extraordinary legal and other
professional services primarily related to class action
litigation; a decrease of $.8 million in advertising, promotional
and printing costs; and an increase of $1.8 million in the
doubtful account reserve for trade accounts receivable. It is
anticipated that legal costs will increase during the normal
progression of the class action litigation.
Depreciation and amortization increased by 16.0% or $.3 million,
in the first six months of 1997 due primarily to amortization of
preoperational costs associated with service area and product line
expansion. Interest and other expenses decreased by 30.3% or $.4
million, in the first six months of 1997 due primarily to
retirement of the Key Bank debt during the fourth quarter of 1996.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities was $2.7 million during the
first six months of 1997, as compared to net cash used by
operations of $6.8 million for the first six months of 1996. The
cash used in operations in the first six months of 1997 resulted
from the Company's cash operating loss of $11.0 million, and a
$1.2 million reduction of medical costs liabilities primarily due
to increased levels of disbursements, offset, in part, by the
collection of tax refunds of $6.3 million and reductions in
receivables of $3.8 million. Cash used for capital expenditures
was approximately $.2 million during the first six months of 1997,
as compared to $.3 million for the same period in 1996.
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 31st of each
year and is maintained throughout the following calendar year. At
June 30, 1997, WellCare has required cash reserves of $6.7 million
and a contingent reserve of $5.9 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.
In June 1997, the Company loaned $3.1 million to WCNY under the
provisions of Section 1307 of the New York State Insurance Law.
The principal and interest are treated as equity capital for
regulatory purposes and are repayable out of the free and
divisible surplus, subject to prior approval of the Superintendent
of Insurance of the State of New York. Additionally, in June 1997
the Company made a capital contribution of $350,000 to WellCare of
Connecticut, Inc.
At June 30, 1997, the Company has working capital of $.7 million,
excluding the $6.7 million cash reserve required by New York State
which is classified as a non-current asset, compared to working
capital of $11.2 million at December 31, 1996; the decrease is
attributed primarily to the losses incurred by the Company during
the six months ended June 30, 1997.
At June 30, 1997, the Company had total mortgage indebtedness of
$6.0 million outstanding on five of its office buildings, of which
approximately $.7 million is due February 1, 1999, approximately
$4.2 million is due on January 1, 2000, approximately $.8 is due
March 1, 2000, and approximately $.3 due on March 1, 2001.
Although the Company is current on all its mortgage obligations,
on July 28, 1997, Key Bank (the "Bank") notified the Company that
it considered the Company not in compliance with the Target Loan
to Value Ratio provided for in two of its mortgages, with
outstanding balances of approximately $4.9 million. According to
the Bank's calculations, the outstanding Loan Amount exceeded the
corresponding Lendable Property Value, as defined, based on recent
appraisals, by approximately $1.7 million. The Bank has requested
that the Company either reduce the outstanding obligation, or
provide additional collateral for $1.7 million. The Bank
indicated that if not cured by August 15, 1997, the Bank will
consider the Company in default of the mortgage notes. A default
would require the Company to pay a higher interest rate on the
outstanding obligations, among other potential penalties. The
Company has requested certain underlying documents from the Bank
with respect to the valuations, and has also asked the Bank for an
extension of time to respond and cure the asserted non-compliance.
The Bank has granted an extension to September 3, 1997. The
Company continues to classify the debts in accordance with their
original terms.
PART II - OTHER INFORMATION
Item 1 LEGAL PROCEEDINGS
Between April 1, 1996 and June 6, 1996, the Company, its former
President and Chief Executive Officer, and its former Vice
President of Finance and Chief Financial Officer were named as
defendants in twelve separate actions filed in Federal Court (the
"Securities Litigations"). An additional three directors were
also named in one of these actions. Plaintiffs sought to recover
damages allegedly caused by the Company's defendants' violations
of federal securities laws with regard to the preparation and
dissemination to the investing public of false and misleading
information concerning the Company's financial condition.
On July 3, 1996, the Securities Litigations were consolidated in
the United States District Court for the Northern District of New
York, and an amended consolidated complaint was served on August
21, 1996, which complaint did not name the three additional
directors. The Company's auditor, however, was named as an
additional defendant. On October 23, 1996, the Company filed a
motion to dismiss the consolidated amended complaint against the
Company as well as the individual defendants. The Company's
auditor likewise filed its own motion to dismiss. By Memorandum
Decision and Order (the "Order"), entered on April 30, 1997, the
Court (i) granted the auditor's motion to dismiss and ordered that
the claims against the auditors be dismissed with prejudice; and
(ii) denied the motion to dismiss brought by the individual
defendants. The Order did not specifically address the Company's
motion to dismiss and on May 14, 1997, the Company moved for
reconsideration of its motion to dismiss and dismissal of all
claims asserted against it. The reconsideration motion is
scheduled to be heard on August 22, 1997, and on September 8, the
Court will also hear arguments for and against the certification
of a class. The parties are currently engaged in the discovery
process of the litigation.
Although management is unable to predict the likelihood of success
on the merits of the consolidated class action, it has instructed
its counsel to vigorously defend its interests. 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
As of June 30 1997, the Company is in default of certain
provisions of the Note Purchase Agreement, and its Amendment,
between the Company and The 1818 Fund II, L.P. (See Note 7 under
Item 1), including the requirement to maintain a minimum tangible
net worth as defined in the amended Agreement. The Company is
seeking to renegotiate amendments of certain terms which it
believes will cure any default provisions. In anticipation of
successful renegotiation, the Company continues to classify this
obligation as long-term.
At March 31, 1997, the Company was not in compliance with certain
of the financial covenants of its line-of-credit with Key Bank.
There were no borrowings outstanding at March 31, 1997. On May
14, 1997 both parties agreed to terminate the line-of-credit.
Although the Company is current on its mortgage obligations, on
July 28, 1997, Key Bank (the "Bank") notified the Company that it
considered the Company not in compliance with the Target Loan to
Value Ratio provided for in two of its mortgages, with outstanding
balances of approximately $4.9 million (see Note 6 under Item 1).
The Bank has requested that the Company either reduce the
outstanding obligation, or provide additional collateral, in the
amount of approximately $1.7 million, by August 15, 1997. The
Bank has granted an extension to September 3, 1997. The Company
is evaluating the Bank's request and continues to classify the
debts in accordance with their original terms.
<PAGE>
Item 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On June 10, 1997, the shareholders of the Company held their
Annual Meeting of Shareholders in Kingston, New York. The holders
of 4,947,852 shares of Common Stock and 1,350,324 shares of Class
A Common Stock (constituting a majority of the aggregate 6,298,176
shares of Common Stock and Class A Common Stock entitled to vote
at the meeting) were present or represented by proxy, and
accordingly, a quorum was present and matters were voted upon as
follows, each share of Common Stock having one vote and each share
of Class A Common Stock having ten votes:
1. To authorize an amendment to Article VII of the Company's
Restated Certificate of Incorporation to eliminate the
classified structure of the Board of Directors.
VOTES VOTES VOTES BROKER
FOR AGAINST ABSTAINED NON-VOTES
13,665,766 119,352 14,772 1,886,303
2. To approve amendments to the Company's 1993 Incentive and
Non-Incentive Stock Option Plan (the "Option Plan") to: (i)
change the administration of the Option Plan to a committee
of three (3) or more "Non-Employee Directors" as defined by
the securities laws and regulations; (ii) eliminate the
formula award for granting of non-incentive stock options to
outside directors of the Company; (iii) increase the maximum
aggregate number of shares with respect to stock options to
be granted to any one individual within any one calendar
year to 200,000 shares; (iv) change the vesting of incentive
and non-incentive stock options; (v) establish a cashless
exercise election; (vi) extend the termination of incentive
stock options upon the termination of employment, disability
or death of the option holders; and (vii) revise the
provisions relating to the amendment or termination of the
Option Plan.
Approval of 1993
Option Plan Amendments:
VOTES VOTES VOTES BROKER
FOR AGAINST ABSTAINED NON-VOTES
14,299,369 983,859 14,695 388,570
3. To approve the adoption of the Company's 1996 Non-Incentive
Executive Stock Option Plan.
VOTES VOTES VOTES BROKER
FOR AGAINST ABSTAINED NON-VOTES
14,254,726 1,026,947 16,250 388,570
<PAGE>
4. To ratify the reappointment of Deloitte & Touche LLP as
independent auditors of the Company for the year ending
December 31, 1997.
VOTES VOTES VOTES BROKER
FOR AGAINST ABSTAINED NON-VOTES
15,043,831 253,360 189,302 0
Item 5 OTHER INFORMATION
Item 6 EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 10.59 Copy of Loan and Security Agreement dated April
1, 1997 between Catskill Medical Associates,
P.C., WellCare of New York, Inc. and Registrant
Exhibit 10.60 Copy of letter of Understanding dated June 30,
1997 between Primergy, Inc. and Registrant
Exhibit 10.61 Copy of Memorandum dated July 23, 1997 between
Primergy, Inc. and Registrant
Exhibit 11 Computation of Net Income Per Share of Common
Stock
Exhibit 27 Financial Data Schedule
(b) Reports on Form 8-K
Not Applicable
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1932, 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, Jr.
Robert W. Morey, Jr.
Chairman of the Board and Chief Executive Officer
By: /s/ Howard B. Lorch
Howard B. Lorch
Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
Date: August 14, 1997
<PAGE>
INDEX TO EXHIBITS
All exhibits below are filed with this Quarterly Report of Form
10-Q:
EXHIBIT NUMBER
- --------------
10.59 Copy of Loan and Security Agreement dated April
1, 1997 between Catskill Medical Associates,
P.C., WellCare of New York, Inc. and Registrant
10.60 Copy of Letter of Understanding dated June 30,
1997 between Primergy, Inc. and Registrant
10.61 Copy of Memorandum dated July 23, 1997 between
Primergy, Inc. and Registrant
11 Computation of Net Income Per Share of Common
Stock
27 Financial Data Schedule
<PAGE>
LOAN AND SECURITY AGREEMENT
LOAN AND SECURITY AGREEMENT (this "Agreement"), dated as of
April 1, 1997, made by CATSKILL MEDICAL ASSOCIATES, P.C., a New
York corporation (the "Borrower"), having its principal office at
140 Pine Street, Kingston, New York 12401, in favor of THE
WELLCARE MANAGEMENT GROUP, INC., a New York corporation ("WCMG"),
having its principal office at Park West/Hurley Avenue Extension,
Kingston, New York 12401, and WELLCARE OF NEW YORK, INC., a New
York corporation ("WCNY"), having its principal office at 130
Meadow Avenue, Newburgh, New York 12550 (collectively referred to
as the "Lenders", and each may be referred to as a "Lender").
W I T N E S S E T H:
WHEREAS, Borrower owes WCNY the amount of approximately
$2,212,931.94 (the "Indebtedness") through October 31, 1996
relating to advances known as Enhanced Capitation made by WCNY to
the Borrower during the period from January 1, 1996 through
October 31, 1996, and said sum is immediately due and payable from
the Borrower to WCNY; and
WHEREAS, to evidence the Indebtedness due to WCNY, and in
consideration for an additional loan in the amount of $400,000.00
(the "Additional Loan") made or to be made by WCNY to the
Borrower, the Borrower has issued to WCNY a certain Promissory
Note, of even date herewith, in the principal amount of
$2,612,931.94 (the "Promissory Note"); and
WHEREAS, the Lenders desire that the Borrower enter into
this Agreement to secure the Borrower's obligations to the
Lenders, including the Indebtedness and the Additional Loan, all
as evidenced by the Promissory Note.
NOW, THEREFORE, in consideration of the premises and to
secure the obligations due to the Lenders, including the
Indebtedness, and to induce WCNY to provide the Additional Loan to
the Borrower, the Borrower hereby agrees with the Lenders for
their benefit as follows:
I. DEFINITIONS
1.1. "COLLATERAL" means all of those present or
future assets, real or personal, of the Borrower, including,
without limitation, the Management Agreements, in which a security
interest is granted hereunder.
1.2. "EVENT OF DEFAULT" means an event of the nature
specified in Article IV hereof.
1.3. "LIABILITY" or "LIABILITIES" means any indebt-
edness of the Borrower to either or both Lenders, including,
without limitation, the Indebtedness and the Additional Loan,
whether now or hereafter existing under the Loan Documents, or
hereafter existing pursuant to any future indebtedness of the
Borrower to either or both Lenders.
1.4. "LOAN DOCUMENTS" mean this Agreement, the
Promissory Note, and a certain Pledge Agreement, of even date
herewith, among Richard Weininger, M.D., the Borrower and the
Lenders, and any amendments to or substitutions for any such
documents.
1.5. "MANAGEMENT AGREEMENTS" mean those certain
Management Agreements listed on Schedule 1 hereto between the
Borrower and Primergy, Inc., a New York corporation, as successor
to WellCare Medical Management, Inc., a wholly-owned subsidiary of
WCMG.
1.6. "UCC" means the Uniform Commercial Code as
adopted and in effect under the laws of the State of New York.
II. COLLATERAL
2.1. SECURITY INTEREST. In order to secure the
payment in full of all Liabilities of the Borrower to the Lenders
and the prompt and faithful performance of all other covenants,
agreements and obligations of the Borrower under the Loan
Documents, the Borrower hereby grants to the Lenders a security
interest in: (i) all of the Borrower's accounts, equipment,
inventory, general intangibles, chattel paper, instruments,
documents and other property and assets (real or personal),
whether presently owned by Borrower or hereafter acquired and
wherever located; (ii) all of the products and proceeds of all of
the foregoing Collateral (including all proceeds of insurance
policies covering the Collateral) as well as all accessions,
additions, substitutions, replacements and increments thereto; and
(iii) all books and records, including, without limitation,
customer lists, credit files, computer programs, print-outs, and
other computer materials and records of Borrower pertaining to any
of the foregoing items described in clauses (i) and (ii).
2.2. ASSIGNMENT OF MANAGEMENT AGREEMENTS. Without
limiting the security interest granted in Section 2.1 hereof, in
order to secure the payment in full of all Liabilities of the
Borrower to the Lenders and the prompt and faithful performance of
all other covenants, agreements and obligations of the Borrower
under the Loan Documents, the Borrower hereby assigns, sets over,
transfers and pledges to the Lenders, and grants to the Lenders a
security interest in, all of Borrower's right, title and interest
in the Management Agreements and all replacements, renewals,
substitutions, and proceeds thereof, together with all rights
therein and all amounts payable thereunder, with full right on the
part of a Lender, in its own name or in the name of the Borrower,
to collect and enforce the Management Agreements by legal action,
proof of debt in bankruptcy or other liquidation proceedings, vote
in any proceeding for the arrangement at any time proposed, or
otherwise.
2.3. UCC TERMS. As used herein, the terms accounts,
equipment, inventory, general intangibles, chattel paper,
instruments, documents and account debtor, shall have the meaning
ascribed to the respective terms in the UCC.
2.4. CONTINUING PERFECTION. Borrower will perform
any and all steps requested by the Lenders to create and maintain
in the Lenders' favor a valid and perfected security interest in
the Collateral, including, without limitation, the execution,
delivery, filing and recording of financing statements and any
other documents necessary, in the opinion of the Lenders, to
protect their interest in the Collateral.
2.5. ATTORNEY-IN-FACT. Borrower authorizes the
Lenders and does hereby make, constitute and appoint the Lenders,
acting either jointly or severally, and any officer or agent of
the Lenders, with full power of substitution, as the Borrower's
true and lawful attorney-in-fact, with power, in its own name or
the name of the Lenders, to: (a) do all acts and things which the
Lenders may deem necessary to perfect and to continue to perfect a
security interest in the liens provided for in this Agreement
including, but not limited to, executing financing statements on
behalf of the Borrower; (b) endorse any instrument of payment in
respect of the Management Agreements; (c) demand, collect, receipt
for, compromise, settle and sue for monies due in respect of the
Management Agreements, whether by legal action, proof of debt in
bankruptcy or other liquidation proceedings, or otherwise; and (d)
do, at the Lenders' option and at the Borrower's expense, all acts
and things which the Lenders determine necessary to protect,
preserve and realize upon the Collateral, all as fully and
effectually as the Lenders might or could do.
2.6. OBLIGATIONS OF LENDERS. Notwithstanding
anything contained in this Agreement to the contrary, the Lenders
shall have no obligations or liabilities by reason of or arising
out of this Agreement, nor shall the Lenders be required or
obligated in any manner to perform any obligations of the Borrower
in connection with the Management Agreements.
III. REPRESENTATIONS, COVENANTS AND WARRANTIES
The Borrower represents, covenants and warrants to the
Lenders as follows:
3.1. GOOD STANDING. The Borrower is a corporation
duly organized, validly existing and in good standing under the
laws of the state of New York.
3.2. TRADE NAMES. There are no trade or fictitious
names under which the Borrower now conducts business or is
registered in any jurisdiction.
3.3. ASSETS. There are no assets of the Borrower
located outside of the County of Ulster, State of New York (other
than goods in transit).
3.4. SALES AND ENCUMBRANCES. Without the prior
written consent of the Lenders, the Borrower shall not: (i) other
than in the ordinary course of business, sell, loan, lease,
assign, transfer, convey or alienate the Collateral or any portion
thereof, or any interest therein; (ii) suffer or permit any
mortgage lien, security interest, encumbrance or charge of any
character upon or against the Collateral (other than the security
interest granted herein); and (iii) cancel or terminate any
contract that is Collateral (including, without limitation, the
Management Agreements) or consent to or accept any cancellation or
termination thereof.
3.5. PAYMENTS UNDER MANAGEMENT AGREEMENTS. Borrower
may not, without the express written consent of the Lenders,
receive and retain for its own account or the account of any other
person, any payments or prepayments of any kind whatsoever under
the Management Agreements; and any such payments and prepayments
actually received by the Borrower shall be held in trust for the
Lenders and not commingled with any other funds of the Borrower,
and shall be delivered forthwith to the Lenders for application to
the Liabilities.
3.6. CORPORATE AUTHORITY. The Borrower has the
corporate power to execute, deliver and carry out this Agreement
and the Loan Documents and its Board of Directors has duly
authorized and approved the terms of this Agreement and the Loan
Documents and the taking of any and all action contemplated herein
by the Borrower.
3.7. NO VIOLATION. The execution of this Agreement
and the Loan Documents, and the performance by the Borrower of its
obligations hereunder and thereunder, do not, at the date of
execution hereof, violate the charter or by-laws of the Borrower,
or violate and/or create a breach or default under any agreement
or undertaking to which the Borrower is a party or by which it is
bound, including, without limitation, any agreement or undertaking
with the Key Bank of New York.
3.8. NO LITIGATION. There are no judgments against
the Borrower as of the date of this Agreement and no material
litigation or administrative proceeding before any governmental
body is presently pending now, or to the knowledge of the
Borrower, threatened, against the Borrower or any of its property.
3.9. GOOD TITLE. On the date of this Agreement, the
Borrower has good and valid title to all of the Collateral, free
and clear of any mortgage, pledge, lien, security interest,
encumbrance, charge or title retention or other security agreement
or arrangement of any character whatsoever, except as set forth on
Exhibit A hereto.
3.10. CONTRACTS IN FULL FORCE AND EFFECT. On the
date of this Agreement, all of the Borrower's contracts that are
Collateral, including, without limitation, the Management
Agreements, are in full force and effect and to the best of
Borrower's knowledge, binding upon and enforceable against all
parties thereto in accordance with their respective terms. On the
date of this Agreement, no defaults exist under said contracts by
any party thereto.
3.11. PLACE OF OFFICE, RECORDS, INVENTORY AND
EQUIPMENT. Borrower represents that its only office, which is the
only location where it keeps its records concerning its accounts,
the only location of its inventory and equipment and the only
location from which it conducts business, is located at the
address for the Borrower set forth in the first paragraph of this
Agreement.
3.12. CONTROL OF ACCOUNTS. Upon the occurrence of an
Event of Default: (i) the Lenders shall have the right at any time
and from time to time, without notice, to notify account debtors
of the Borrower to make payments to the Lenders; to endorse all
items of payment which may come into its hands payable to the
Borrower; to take control of any cash or non-cash proceeds of
accounts and of any returned or repossessed goods; to compromise,
extend or renew any account or deal with it as it may deem
advisable; to make exchanges, substitutions or surrenders of
Collateral and to notify the postal authorities, after an Event of
Default, to deliver all mail, correspondence or parcels addressed
to the Borrower to the Lenders at such address as the Lenders may
choose; and (ii) Borrower herewith appoints each of the Lenders or
their designees as attorney-in-fact to endorse the Borrower's name
on any checks, notes, acceptances, drafts or any other instrument
or document requiring said endorsement and to sign the Borrower's
name on any invoice or bills of lading relating to any account, or
drafts against its customers, or schedules or confirmatory
assignment on accounts, or notices of assignment, financing
statements under the UCC, and other public records, and in
verification of accounts and in notices to account debtors.
3.13. INSPECTION. The Lenders or their designated
representatives shall have the right, at any time or times during
Borrower's usual business hours, to inspect the Collateral, all
records related thereto (and to make extracts from such records)
and the premises upon which any of the Collateral is located, to
discuss the Borrower's affairs and finances with any person and to
verify in any manner the Lenders deems advisable, the amount,
quality, quantity, value and condition of, or any other matter
relating to, the Collateral.
3.14. DUTY TO UPDATE. In the event that any of the
representations, covenants or warranties of the Borrower contained
herein ceases to be true in any respect, the Borrower shall
immediately inform the Lenders of such situation and provide all
details relating thereto.
3.15. NO CONSENT REQUIRED. The execution of this
Agreement and the Loan Documents, and the performance by the
Borrower of its obligations hereunder and thereunder, do not, at
the date of execution hereof, require the consent, approval or act
of, or the sending of any notice to, any person or entity,
including, without limitation, Key Bank of New York.
IV. EVENTS OF DEFAULT
The occurrence of any of the following shall
constitute an Event of Default:
4.1. NON-PERFORMANCE. Failure on the part of
Borrower to perform any term, covenant or condition contained in
any of the Loan Documents, including, but not limited to, the
payment of any Liability when due.
4.2. MISREPRESENTATION. Any representation, covenant
or warranty made by Borrower in this Agreement, or in any of the
Loan Documents, shall have proved to have been inaccurate in any
material respect as of the date or dates with respect to which it
is deemed to have been made.
4.3. INSOLVENCY. Borrower shall have applied for or
consented to the appointment of a custodian, receiver, trustee or
liquidator of all or a substantial part of its assets; a custodian
shall have been appointed with or without consent of Borrower;
Borrower is generally not paying its debts as they become due; has
made a general assignment for the benefit of creditors; has been
adjudicated insolvent; or has filed a voluntary petition in
bankruptcy, or a petition or an answer seeking reorganization or
an arrangement with creditors or to take advantage of any
insolvency law, or an answer admitting the material allegations of
a petition in any bankruptcy, reorganization or insolvency pro-
ceeding; or taken corporate action for the purpose of effecting
any of the foregoing; or an order, judgment or decree shall have
been entered, without the application, approval or consent of
Borrower by any court of competent jurisdiction approving a
petition seeking reorganization of Borrower, or appointing a
receiver, trustee, custodian or liquidator of Borrower, or a
substantial part of its assets; or a petition in bankruptcy shall
have been filed against Borrower; or if an Order for Relief has
been entered under the Bankruptcy Code for Borrower; or if the
Borrower shall have suspended the transaction of its usual
business.
4.4. JUDGMENT OR LIEN. Entry of a judgment, issuance
of any garnishment, attachment or distraint, the filing of any
lien or of any governmental attachment against any property of
Borrower, except as set forth on Exhibit A hereto.
4.5. ADVERSE CHANGE. The determination by the
Lenders that a Material Default has occurred or that there is a
material adverse change in the business or financial condition of
Borrower. A "Material Default" means any default having a
material adverse effect on the contractual relationship between
the Borrower and third parties.
V. CONSEQUENCE OF EVENT OF DEFAULT
In case any Event of Default shall have occurred, then
and in every such Event of Default, the Lenders may take any or
all of the following actions, at the same time or at different
times:
5.1. ACCELERATION. Declare all amounts owing the
Lenders from the Borrower under the Loan Documents to be forthwith
due and payable, whereupon all such sums shall forthwith become
due and payable, without presentment, demand, protest or other
notice of any kind, all of which are hereby expressly waived by
the Borrower.
5.2. RIGHTS UNDER MANAGEMENT AGREEMENTS. The
Lenders, with or without notice to the Borrower and without demand
of performance or other demand, may forthwith exercise all rights
of the Borrower under the Management Agreements available under
law, and may sell, assign, contract to sell or otherwise dispose
of and deliver the Management Agreements as the Lenders may deem
best, for cash or on credit or for future delivery, and otherwise
to exercise any and all rights afforded to a secured party under
the UCC or other applicable law. The proceeds of any collection,
recovery, receipt, appropriation, realization, disposition or sale
of the Management Agreements shall be applied as follows:
First, to the cost and expenses of every kind
incurred in connection therewith or incidental to the collection
of payments or the care, safekeeping or otherwise of the
Management Agreements or the preparing for the sale, selling and
the like, or in any way relating to the rights of the Lenders
hereunder, including the reasonable attorneys' fees and legal
expenses incurred by the Lenders;
Second, to the satisfaction of the Liabilities;
Third, to the payment of any other amounts
required by applicable law; and
Fourth, to the Borrower to the extent of any
surplus proceeds.
If the payments received by the Lenders under the Management
Agreements, or upon the sale, lease or other disposition of the
Management Agreements and the proceeds thereof are insufficient to
pay all amounts to which the Lenders are legally entitled, the
Borrower will be liable for the deficiency, together with interest
thereon, at the rate prescribed in the Promissory Note, and the
reasonable fees of any attorneys employed by the Lenders to
collect such deficiency, to the extent permitted by applicable
law, the Borrower waives all claims, damages and demands against
the Lenders arising out of the receipt of payments under the
Management Agreements or the sale of the Management Agreements.
5.3. POSSESSION. Except as set forth in Section 5.2
hereof as to the Management Agreements, proceed with or without
judicial process to take possession of all or any part of the
Collateral and the Borrower agrees that upon receipt of notice of
the Lenders' intention to take possession of all or any part of
said Collateral, the Borrower will do everything reasonably
necessary to assemble the Collateral and make the same available
to the Lenders at a place to be designated by the Lenders. The
Borrower hereby waives any and all rights it may have, by statute,
constitution or otherwise to notice or a hearing to determine the
probable cause of the Lenders to obtain possession, by Court
proceedings or otherwise, of the Collateral.
5.4. METHODS OF SALE. So long as the Lenders act in
a commercially reasonable manner, the Lenders may assign, transfer
and deliver at any time or from time to time the whole or any
portion of the Collateral or any rights or interest therein in
accordance with the UCC, and without limiting the scope of the
Lenders' rights thereunder, the Lenders may sell the Collateral at
public or private sale, or in any other manner, at such price or
prices as the Lenders may deem best, and either for cash or
credit, or for future delivery, at the option of the Lenders, in
bulk or in parcels and with or without having the Collateral at
the sale or other disposition. The Lenders shall have the right
to conduct such sales on the Borrower's premises or elsewhere and
shall have the right to use the Borrower's premises without charge
for such sales for such time or times as the Lenders may see fit.
The Lenders are hereby granted a license or other right to use,
without charge, the Borrower's labels, patents, copyrights, rights
of use of any name, trade secrets, trade names, trademarks and
advertising matter, or any property of a similar nature, as it
pertains to the Collateral, in advertising for sale and selling
any Collateral and the Borrower's rights under all licenses and
franchise agreements shall inure to the Lenders' benefit. The
Borrower agrees that a reasonable means of disposition of accounts
shall be for the Lenders to hold and liquidate any and all
accounts. In the event of a sale of the Collateral, or any other
disposition thereof, the Lenders shall apply all proceeds first to
all costs and expenses of disposition, including attorneys' fees,
and then to the Liabilities of the Borrower to the Lenders.
5.5. ATTORNEYS' FEES AND EXPENSES. Add to the
Liabilities of Borrower, the Lenders' expenses to obtain or
enforce payment of any Liabilities and to exercise any of their
other rights under the Loan Documents, including, without
limitation, fees and expenses of counsel.
5.6. RELEASE OF PHYSICIANS FROM RESTRICTIVE
COVENANTS. At Lenders' request, Borrower shall release all of
those physicians with whom it employs or has under contract from
any and all restrictive covenants (including, without limitation,
those covenants set forth in their respective Employment
Agreements) that may interfere with a Lender's ability to contract
with said physicians or to assign said contracts to a Lender or
any subsidiary or affiliate of a Lender or to any professional
corporation or physician that a Lender may designate. If Lenders
make such a request, Borrower shall evidence such releases by
executing a Waiver and Release for each physician in the form to
be provided by Lenders.
VI. MISCELLANEOUS
6.1. NO WAIVER. The Borrower agrees that no delay on
the part of the Lenders in exercising any power or right hereunder
or any other Loan Document shall operate as a waiver of any such
power or right, preclude any other or further exercise thereof, or
the exercise of any other power or right. No waiver whatsoever
shall be valid unless in writing signed by the Lenders and then
only to the extent set forth therein.
6.2. WAIVER OF NOTICE. The Borrower waives
presentment, dishonor and notice of dishonor, protest and notice
of protest by the Lenders.
6.3. LAW OF NEW YORK. This Agreement and the rights
of the parties hereto shall be governed by and construed in
accordance with the internal laws (as opposed to the conflicts of
law provisions) of the State of New York.
6.4. JURISDICTION. The Borrower hereby irrevocably
consents to the nonexclusive jurisdiction of the Courts of the
State of New York or any Federal Court in such State in connection
with any action or proceeding arising out of or related to this
Agreement or any of the Loan Documents. In any such litigation,
the Borrower waives personal service of any summons, complaint or
other process and agrees that service of any summons, complaint or
other process may be made by certified or registered mail to it,
at the address provided herein. THE BORROWER WAIVES TRIAL BY JURY
IN ANY LITIGATION ARISING OUT OF OR RELATED TO THIS AGREEMENT OR
ANY OF THE LOAN DOCUMENTS.
6.5. SUCCESSORS OR ASSIGNS. This Agreement and all
other Loan Documents shall be binding upon and shall inure to the
benefit of the parties hereto and their respective heirs,
administrators, executors, legal representatives, successors and
assigns.
6.6. RIGHTS CUMULATIVE. The rights and remedies
herein expressed or in any other Loan Document to be vested in or
conferred upon the Lenders shall be cumulative and shall be in
addition to and not in substitution for or in derogation of the
rights and remedies conferred upon secured creditors by the UCC or
any other applicable law.
6.7. NOTIFICATION OF DISPOSITION OF COLLATERAL. Any
notification of a sale or other disposition of the Collateral or
of any other action by the Lenders required to be given by the
Lenders to the Borrower will be sufficient if given personally or
mailed to the Borrower, by registered or certified mail (return
receipt requested), to the address set forth for the Borrower in
the first paragraph of this Agreement not less than five (5) days
prior to the day on which such sales or other disposition will be
made and such notification shall be deemed reasonable notice,
notwithstanding Section 6.8 hereof.
6.8. ADDRESS FOR NOTICE. All notices and other
communications hereunder shall be of no force or effect unless in
writing and shall be deemed given when delivered personally
(including by express courier) or, if mailed by registered or
certified mail (return receipt requested), five (5) calendar days
after having been so mailed, to the parties at their respective
addresses set forth in the first paragraph hereof (or at such
other address for a party as shall be specified by like notice).
Notice given by any other means shall be deemed given upon actual
receipt.
6.9. TITLES. The titles and headings indicated
herein are inserted for convenience only and shall not be
considered a part of this Agreement or in any way limit the
construction or interpretation of this Agreement.
6.10. COUNTERPARTS. This Agreement may be signed in
one or more counterparts which, taken together, shall constitute
one and the same document.
<PAGE>
IN WITNESS WHEREOF, the Lenders have executed and
delivered this Agreement and the Borrower has caused this
Agreement to be executed and delivered by its proper and duly
authorized officer as of the day and year first above written.
Borrower:
CATSKILL MEDICAL ASSOCIATES, P.C.
By:/s/ Richard Weininger, M.D.
Richard Weininger, President
ATTEST:
/s/ John Markes
John Markes
(Corporate Seal)
Lenders:
THE WELLCARE MANAGEMENT GROUP, INC.
BY:/s/ Joseph R. Papa
ATTEST: Joseph R. Papa
President
/s/ Howard B. Lorch
Howard B. Lorch
(Corporate Seal)
WELLCARE OF NEW YORK
BY:/s/ Joseph R. Papa
ATTEST: Joseph R. Papa
President
/s/ Howard B. Lorch
Howard B. Lorch
(Corporate Seal)
<PAGE>
SCHEDULE A
The "Management Agreements" mean the following Management
Agreements between the Borrower and Primergy, Inc. ("Primergy"), a
New York corporation having its principal place of business at 25
Barbarosa Lane, Kingston, New York, 12401 (as successor to
WellCare Medical Management, Inc., a New York corporation and
wholly-owned subsidiary of WCMG):
(1) Agreement, dated October 8, 1992, between Primergy and
Borrower (as successor to Kingston Family Medicine, P.C., a
New York professional services corporation).
(2) Agreement, dated October 8, 1992, between Primergy and
Borrower (as successor to WellCare Family Medicine, P.C., a
New York professional services corporation).
(3) Management Agreement, dated March 22, 1993, between Primergy
and Borrower (as successor to Dutchess Family Medicine,
P.C., a New York professional services corporation).
(4) Management Agreement, dated October 2, 1993, between
Primergy and Borrower.
EXHIBIT A
LETTER OF UNDERSTANDING
The undersigned agree as follows:
1. Beginning July 1, 1997, WellCare will assume financial
responsibility for ambulance/transport claims (specialty code
"ST").
2. Beginning July 1, 1997, Primergy and the Alliances will
assume financial responsibility for the costs of chemotherapy and
related supplies/drugs. Anticipated increases are consequent to
the medical management efforts to redirect chemotherapy treatments
from the hospital in-patient and hospital out-patient settings to
the physician offices. WellCare will increase the monthly
Alliance capitation by $0.45 PMPM beginning July 1, 1997 to offset
these increased costs.
3. Primergy and the Alliances will assume the financial
responsibility for all professional services associated with the
delivery of chemotherapy treatments in physician offices.
4. Beginning with July 1, 1997 dates of service, Primergy and
the Alliances will pay chemotherapy-related claims within thirty
(30) days of receipt. This advance of claims payment rate will be
implemented in order to facilitate the redirection of hospital
based chemotherapy treatments to physician offices, as noted in
(2), above.
5. Because the redirection of chemotherapy treatments to
physician offices began in May, 1997, WellCare will pay $0.45 PMPM
for May membership ($21,095.10) and $0.45 PMPM for June membership
($20,963.25) to the Alliances by July 1, 1997 (total payment of
$42,058.35).
6. WellCare will assume financial responsibility for dates of
service after December 31, 1996 for factor VIII (CPT J7 192)
dispensed by Albany Medical Center or similar vendors. Current
estimated payables for J7 192 are $50,000. Primergy will
negotiate a favorable payment schedule and dispensing control
system with Albany Medical Center.
/s/ Joseph R. Papa /s/ Richard B. Weininger, M.D.
Joseph R. Papa Richard B. Weininger, M.D.
President/COO CEO
WellCare Management Group Primergy
6/30/97 June 30, 1997
Date Date
PRIMERGY MEMO
TO: Joe Papa
FROM: Richard Weininger
DATE: July 23, 1997
RE: Hospital surplus negotiations, etc.
- ------------------------------------------------------------
This memo is intended to confirm that Primergy and WellCare have
been negotiating a change in the methodology for sharing hospital
surpluses for 2-3 months with substantial accomplishment, but are
presently without finalization.
In lieu of a sharing of hospital surpluses, WellCare has paid the
Alliances (in the aggregate for all Alliances) $75,000 per month
for April, May and June 1997. The payments for July, August and
September 1997 will be $100,000 per month payable on the 20th of
the month.
Furthermore, Primergy has agreed to a 12% reduction in the
Medicaid cap (in the aggregate for all Alliances) effective August
1, 1997 and assumption of 12% of the "retroactive premium
reduction" from October 1, 1996.
Furthermore, WellCare has agreed to contract with Primergy for the
Medicare risk book of business in the Alliance territories as of
January 1, 1998. Capitation rates have yet to be determined.
SHOULD THE PRESENT NEGOTIATIONS NOT BE BROUGHT TO SUCCESSFUL
CLOSURE, THE ABOVE TERMS WILL BE REPLACE BY THE WELLCARE-ALLIANCE
CONTRACT TERMS IN PLACE PRIOR TO THESE NEGOTIATIONS.
EX-11 Computation of Net Income
Per Share of Common Stock
(in thousands, except per share data)
(Unaudited)
Three Months Six Months
Ended June 30, Ended June 30,
--------------- --------------
1997 1996 1997 1996
---- ---- ---- ----
Income/(loss) before income taxes $ 105 ($4,889) ($12,897) ($4,843)
Benefit for income taxes - (1,955) - (1,937)
Net income/(loss) $ 105 ($2,934) ($12,897) ($2,906)
Primary earnings/(loss)
per share $0.02 ($0.47) ($2.05) ($0.46)
Weighted average common shares
outstanding 6,298 6,298 6,298 6,294
Fully diluted earnings/(loss)
per share $0.01 ($0.47) ($2.05) ($0.46)
Weighted average common shares
outstanding 8,227 6,298 6,298 6,294
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Consolidated
Balance Sheets of The WellCare Management Group, Inc. and Subsidiaries as of
June 30, 1997, and the related Statements of Operations for the period ended
June 30, 1997.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 5,160
<SECURITIES> 432
<RECEIVABLES> 10,634
<ALLOWANCES> 3,088
<INVENTORY> 0
<CURRENT-ASSETS> 24,680
<PP&E> 17,458
<DEPRECIATION> 5,900
<TOTAL-ASSETS> 57,569
<CURRENT-LIABILITIES> 23,996
<BONDS> 0
0
0
<COMMON> 63
<OTHER-SE> 7,538
<TOTAL-LIABILITY-AND-EQUITY> 57,569
<SALES> 70,444
<TOTAL-REVENUES> 71,254
<CGS> 0
<TOTAL-COSTS> 65,581
<OTHER-EXPENSES> 18,570
<LOSS-PROVISION> 2,583
<INTEREST-EXPENSE> 824
<INCOME-PRETAX> (12,897)
<INCOME-TAX> 0
<INCOME-CONTINUING> (12,897)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (12,897)
<EPS-PRIMARY> (1.57)
<EPS-DILUTED> 0
</TABLE>
