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 March 31, 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 or 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 requiring to file
such report(s), and (2) has been subject t such filing
requirements for the past 90 days.
YES _X__ NO ____
The number of Registrant's shares outstanding on May 1, 1997 was
4,961,918 shares of Common Stock, $.01 per value, and 1,350,324
shares of Class A Common Stock, $.01 par value.
- ---------------------------------------------------------------
Page 1 of 28 Pages
Exhibit Index on Page 27
<PAGE>
THE WELLCARE MANAGEMENT GROUP, INC. AND SUBSIDIARIES
INDEX TO FORM 10-Q
Page
PART 1 - CONSOLIDATED FINANCIAL INFORMATION
Item 1 Financial Statements
Consolidated Balance Sheets
at March 31, 1997 and
December 31, 1996 3
Consolidated Statements of Operations
for the Three Months Ended
March 31, 1997 and 1996 5
Consolidated Statements of Cash Flows
for the Three Months Ended
March 31, 1997 and 1996 6
Consolidated Statements of Shareholders'
Equity for the Three Months Ended
March 31, 1997 8
Notes to Consolidated Financial Statements 10
Item 2 Management's Discussion and Analysis
of Financial Condition and
Results of Operations 19
PART II - OTHER INFORMATION
Item 1 Legal Proceedings 23
Item 2 Changes in Securities 24
Item 3 Defaults Upon Senior Securities 24
Item 4 Submission of Matters to a
Vote of Security Holders 24
Item 5 Other Information 24
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)
March 31, December 31,
1997 1996
--------- ---------
ASSETS (Unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 5,310 $ 7,869
Short-term investments -
available for sale 532 919
Accounts receivable (net
of allowance for doubtful
accounts of $4,170 in 1997
and $1,902 in 1996) 5,425 8,133
Notes receivable (net of
allowance for doubtful
accounts of $2,353 in 1997
and $2,032 in 1996) 389 351
Advances to participating providers 2,125 2,320
Other receivables (net of allowances
for doubtful accounts of $5,333 in
1997 and $4,995 in 1996) 3,917 4,874
Taxes receivable 5,783 6,969
Deferred tax asset 3,932 3,932
Prepaid expenses and other
current assets 309 400
--------- ---------
TOTAL CURRENT ASSETS 27,722 35,767
PROPERTY AND EQUIPMENT (net of
accumulated depreciation and
amortization of $5,529 in 1997
and $5,157 in 1996) 11,941 12,261
OTHER ASSETS:
Restricted cash 6,667 6,667
Notes receivable (net of allowance
for doubtful accounts of $2,993
in 1997 and $3,313 in 1996) 1,022 1,104
Preoperational costs (net of
accumulated amortization of
$1,571 in 1997 and $1,237 in 1996) 2,431 2,764
Other non-current assets (net of
allowance for doubtful accounts
of $2,527 in 1997 and $1,516 in 1996
and accumulated amortization of
$653 in 1997 and $585 in 1996) 3,617 4,749
Goodwill (net of accumulated
amortization of $1,867 in 1997
and $1,702 in 1996) 7,863 8,028
--------- ---------
TOTAL $61,263 $71,340
========= =========
<PAGE>
March 31, December 31,
1997 1996
--------- ---------
(Unaudited)
LIABILITIES AND SHAREHOLDERS'
EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 672 $ 702
Medical costs payable 18,548 15,965
Accounts payable 1,337 1,002
Accrue expenses 2,169 2,678
Unearned income 4,955 4,248
--------- ---------
TOTAL CURRENT LIABILITIES 27,681 24,595
LONG-TERM LIABILITIES -
Long-term debt 26,298 26,471
--------- ---------
TOTAL LIABILITIES 53,979 51,066
--------- ---------
COMMITMENTS AND CONTINGENCIES - -
SHAREHOLDERS' EQUITY
Class A Common Stock ($.01 par
value; 1,479,898 and 1,484,482
shares authorized; 1,364,908
and 1,369,492 shares issued
and outstanding at
March 31, 1997 and December 31,
1996, respectively) 14 14
Common Stock ($.01 par value;
20,000,000 shares authorized,
4,947,334 and 4,942,750 shares
issued at March 31, 1997 and
December 31, 1996 respectively) 49 49
Additional paid-in capital 26,624 26,624
(Accumulated deficit) (25,123) (12,121)
Statutory reserve 5,932 5,932
--------- ---------
7,496 20,498
Unrealized gain/(loss) on
short-term investments 1 (11)
Less:
Notes receivable from shareholders 6 6
Treasury stock (at cost; 14,066
shares of Common Stock
at March 31, 1997 and
December 31, 1996, respectively) 207 207
--------- ---------
TOTAL SHAREHOLDERS' EQUITY 7,284 20,274
--------- ---------
TOTAL $ 61,263 $ 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 ENDED MARCH 31,
---------------------------
1997 1996
--------- ---------
REVENUE:
Premiums earned $33,830 $40,051
Administrative fee income (20) 766
Interest and investment income 326 360
Other income - net 142 322
--------- ---------
TOTAL REVENUE 34,278 41,499
--------- ---------
EXPENSES:
Medical expense 36,846 32,538
General and administrative
expenses 9,052 7,502
Depreciation and amortization
expense 945 818
Interest expense 437 550
Expenses to affiliates - net - 45
--------- ---------
TOTAL EXPENSES 47,280 41,453
--------- ---------
(LOSS)/INCOME BEFORE (13,002) 46
INCOME TAXES
PROVISION FOR INCOME TAXES - 18
--------- ---------
NET (LOSS)/INCOME ($13,002) $28
========= =========
NET (LOSS)/EARNINGS PER SHARE ($2.06) $0.00
========= =========
Weighted average shares of
common and common stock
equivalents outstanding 6,298 6,289
========= =========
See accompany 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,
----------------------------
1997 1996
----- -----
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net (loss)/income $ (13,002) $ 28
Adjustments to reconcile
net income to net cash
provided by operating
activities:
Depreciation and
amortization 945 818
Decrease in deferred taxes - 19
Loss on sale of assets
and other 1 -
Changes in assets and
liabilities:
Decrease in accounts
receivable - net 2,708 1,249
Increase/(decrease) in
medical costs payable 2,583 (3,234)
Decrease in accounts
receivable -
non-current - net 754 -
Decrease/(increase) in other 1,266 (1,101)
receivables
(Decrease)/increase in
accounts payable, accrued
expenses and other current
liabilities (174) 568
Decrease/(increase) in taxes
receivable 1,186 (1,792)
Decrease/(increase) in
prepaid expenses and other 91 (78)
Increase in unearned income 707 414
Decrease in advances to
participating providers 195 642
(Increase)/decrease in other
non-current assets - excluding
preoperational costs and account
and other receivables 69 (1,061)
Other - net (65) (52)
--------- ---------
NET CASH (USED IN) OPERATING
ACTIVITIES $ (2,736) $ (3,580)
--------- ---------
<PAGE>
Three Months Ended March 31,
----------------------------
1997 1996
----- -----
CASH FLOWS FROM INVESTING
ACTIVITIES:
Purchase of equipment $ (61) $ (208)
Decrease in notes receivable 44 83
Sale of investments 385 8
Increase in preoperational costs - (115)
Other investing activities 11 (8)
--------- ---------
NET CASH PROVIDED BY/(USED IN)
INVESTING ACTIVITIES: 379 (240)
--------- ---------
CASH FLOW FROM FINANCING
ACTIVITIES:
Repayment of notes payable and
long-term debt (202) (7,366)
Proceeds from notes payable and
long-term debt - 20,335
Proceeds from issuance of stock
and treasury stock - net - 3
Proceeds from exercise of stock
options - 254
--------- ---------
NET CASH (USED IN)/PROVIDED
BY FINANCING ACTIVITIES (202) 13,226
--------- ---------
NET (DECREASE)/INCREASE IN
CASH AND CASH EQUIVALENTS (2,559) 9,406
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 7,869 5,456
--------- ---------
CASH AND CASH EQUIVALENTS,
END OF PERIOD $ 5,310 $ 14,862
========= =========
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION:
Income taxes paid $ - $ 398
Interest paid 418 1,793
See accompanying notes to consolidated financial statements.
<PAGE>
THE WELLCARE MANAGEMENT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
For the Three Months Ended March 31, 1997
(in thousands)
(Unaudited)
(Accumulated
Class A Additional Deficit)
Common Common Paid-In Retained Statutory
Stock Stock Capital Earnings 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
<PAGE>
THE WELLCARE MANAGEMENT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
For the Three Months Ended March 31, 1997
(in thousands)
(Unaudited)
Unrealized
Gain/(Loss) Notes Total
On Short-term Receivables- Treasury Shareholders'
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
<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 March 31, 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 ended December 31, 1997. Certain amounts
in the 1996 financial statements have been reclassified to conform
to the 1997 presentation.
2. MEDICAL EXPENSE
a. 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 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 consolidated 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.
Subsequently, in 1996, the Company's accounting personnel were
informed that Edward A. Ullmann, the 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, and as President on September 6, 1996), 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 the Company, 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 $627,000, was recorded in the first
three months of 1997 and 1996, respectively. The loans have been
paid in accordance with their contractual amortization schedules
and are scheduled to be fully paid in 1997.
b. 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 schedules should enable the Alliances to maintain
their operations and reduce their accumulated deficits in 1997 and
substantially eliminate them in 1998.
The Company has 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. However, the Company agreed to record
charges to medical expense based on the instructions of The New
York State Insurance Department ("NYSID"). Effective September 1,
1996, the Company entered into a letter of understanding with the
Alliances to restructure its capitation arrangement. Under this
understanding, the Company reassumed risk for certain previously
capitated services with a corresponding reduction in rates.
<PAGE>
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") was newly
formed to acquire WCMM and, as of March 1, 1997, approximately 11%
of the Buyer's equity was directly or indirectly held by current
or former directors, officers or employees of WellCare. The Buyer
is in the business of managing medical practices and providing
related consultative services. The Buyer has entered into
agreements to manage the Alliances referred to in Note 10a. The
Company also received a five-year option to acquire the Buyer at
any time at a formula price based on the Buyer's results of
operations. This option was canceled in 1996. A gain of
approximately $144,000 was not recognized in 1995, pending the
repayment of the note. The note receivable bears interest at a
rate equal to prime plus 2% (10.5% at March 31, 1997) with
interest payable monthly through July 31, 1996 and, thereafter,
principal and interest monthly through July 31, 2000. At March
31, 1997, the Buyer was in default on the note and had not paid
accrued interest of $.5 million at March 31, 1997.
The Company also advanced $2.8 million to the Buyer ($2.1 million
in 1996 and $.7 million in 1995) for operating expenses, which
obligation is documented, at March 31, 1997, by a note of
$215,000, receivables of $2.1 million and interest receivable of
$.5 million. The note for $215,000 bears interest at a rate equal
to prime plus 2% (10.5% at March 31, 1997) and matured December
31, 1996. No payments have been made against this note.
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. The
Company also obtained 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 fully reserved in 1995 the original $5.1
million note receivable, plus the $.7 million advanced in 1995.
In 1996, the Company established a net reserve of $1.9 million for
the additional note, interest accrued on the notes, and advances
receivable, net of the deferred gain on the original
sale.
On February 19, 1997, the Buyer executed a promissory note in the
amount of $2.1 million, evidencing the $2.1 million payable to
WellCare. The note bears interest at the rate of prime plus 2%
(10.5% at March 31, 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
million of which has been received as of May 14, 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. 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
rescission of the forbearance. The notes are subordinated to the
Investor's and Key Bank's security interests.
4. 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 $1,000 gain
at March 31, 1997 and a $11,000 loss at December 31, 1996.
5. OTHER RECEIVABLES
In March 1997, the Company received a notice from the New York State
Insurance Department ("NYSID") relating to the NYSID's audit of the New
York State market stabilization pools receivable. The notice indicated
that the NYSID may adjust this amount based on information that the
Company needs to provide with respect to the audit years 1993, 1994 and
1995. In a letter dated April 16, 1997, the Company received the State's
preliminary computation of the assessment, which indicates a required
payment of $1.7 million. Using the conclusions reached by the State in
their 1993-1995 computations, the Company has projected the potential
impact on the 1996 and first quarter 1997 medical expense.
As a result of its evaluation, the Company has charged medical expense
$4.3 million in the quarter ended March 31, 1997, representing its
estimate of the aggregate of the receivable which will not be collected,
and the total payments which will need to be made to the pool.
6. LONG-TERM DEBT
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. The
Company has not yet determined if non-compliance with these
financial covenants creates a cross-default of the Company's two
mortgages with Key Bank. The Company is negotiating with Key Bank
to obtain a waiver for any potential breaches of the mortgages
because of these non-compliances. In anticipation of obtaining
this waiver, the Company continues to classify the maturities of
its mortgages in accordance with their stated 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 31, 2002 with The 1818 Fund
II, L.P. (The "Fund"), a private equity fund managed by Brown
Brothers Harriman & Co. ("BBH & Co.").
Pursuant to the 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"). The Note
accrued interest at an interest rate of six percent (6%) per annum
prior to the Amendment and then accrues interest at an interest
rate of five and one-half percent (5.5%) per annum, which interest
is payable quarterly by the Company. The principal amount of the
Note is payable in one amount on December 31, 2002. The Note is
subject to certain mandatory redemptions at the option of the
holder of the Note upon certain changes of control of the Company.
In addition, subject to certain conditions, the Note is subject to
certain optional redemptions at the option of the Company after
the fourth anniversary of the date of the Note. By its terms, the
Note is subordinated to all senior indebtedness of the Company.
The holder of the Note has the right to convert the then
outstanding principal amount of the Note into that number of
shares of Common Stock of the Company at a conversion price equal
to $10.37 per share, subject to adjustment for certain dilutive
events. Prior to the Amendment, the Note had been convertible at
a conversion price of $29.00 per share. Under the Note, the
conversion price is granted to the holder of the Note is adjusted,
inter alia, if the Company issues shares of its Common Stock or
options, warrants or other rights to acquire shares of Common
Stock of the Company at a price per share less than the current
market price or, pursuant to the Amendment, the conversion price
at the time. The holder of the Note also has the right to require
redemption of the Note following a change of control (as that term
is defined in the Note) of the Company at a redemption price equal
to 130% (previously 115% under the original Note) of the principal
amount of the Note together with all accrued and unpaid interest
thereon. Under the amendment, if a change of control occurs
within 24 months of a redemption of the Note, the Company may also
be required to pay the holder of the Note an amount equal to 30%
of the principal amount of the redeemed Note.
Pursuant to the terms of the Agreement, as of January 19, 1996,
the Company caused one (1) vacancy to be created on its Board of
Directors and caused Lawrence C. Tucker, as a designee of the
Fund, to be appointed to the Board. At such time, Mr. Tucker's
directorship did not have any classification. In addition, under
the terms of the Agreement, at the 1996 Annual Meeting of the
Shareholders of the Company, Mr. Tucker was elected by the
shareholders as a Class II Director for a term expiring at the
1998 Annual meeting of Shareholders. Under the Amendment, as of
February 28, 1997, the Company caused one (1) vacancy to be
created on its Board of Directors and appointed Walter Grist, as a
designee of the Fund, as a director without classification. The
persons elected to the Board who are designated by the Fund are
referred to herein as the "Fund Designees."
As part of the Amendment, the Company agreed to cause two
additional directors (the "Outside Directors") to be elected to
the Board. Each such person shall (i) be neither an officer,
director or employee of the Company or any subsidiary of the
Company nor any affiliate of the Company, and (ii) have experience
as a director of a public company or other relevant experience.
As of March 31, 1997, the Company is in default of certain
provisions of the Agreement and its Amendment, 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.
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 quarter 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 shares reserved for
issuance, as of March 31, 1997, upon exercise of options granted
or to be granted.
Options to purchase 639,967 shares of Common Stock at exercise
prices ranging from $7.22 to $24.50 per share were outstanding
under the Plan on March 31, 1997, of which options to purchase
92,000 shares at exercise prices ranging from $7.875 to $8.755 per
share had been granted in the first quarter of 1997. Of the total
options outstanding at March 31, 1997, options to purchase 203,175
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 March 31, 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 March 31, 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 first quarter of 1997.
The Company has adopted the disclosure-only provisions of the
FASB's SFAS No. 123, "Accounting for Stock Based Compensation"
(SPAS 123"). Accordingly, no compensation cost has been
recognized for grants of stock options.
10. COMMITMENTS AND CONTINGENCIES
a. Effective October 1, 1994, WCNY changed its capitation
arrangements 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", from the
Company, which management does not believe should be required and, if
requested, by the Alliances does not intend to provide. (As of May 14,
1997, the Alliances have received a $3.0 million cash infusion from the
Buyer 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 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.
Prior to the filing of the motion, discovery had not yet begun and
pursuant to the Private Securities Litigation Reform Act all
discovery was necessarily stayed pending the disposition of the
motions to dismiss. 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.
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 cash and
cash equivalents, short-term investments, due from affiliates -
net, advances to participating providers, other receivables - net,
restricted cash, other non-current assets - net, due from
affiliates, 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 each medical practice.
The Subordinated Convertible Note 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 believe 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
Earnings/(loss) per share calculations are based on a weighted
average number of shares outstanding for the applicable period and
give effect to all outstanding stock options. No material
dilutive securities existed at March 31, 1997 or 1996.
13. SUBSEQUENT EVENT
On May 14, 1997, the Company and Key Bank mutually agreed to
terminate the line-of-credit (see Note 6).
<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 on 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 (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, 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 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.
<PAGE>
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,
-------------------------------
1997 1996
----- -----
Revenue:
Premiums earned 98.7% 96.5%
Interest and other income 1.3 3.5
----- -----
Total Revenue 100.0 100.0
Expenses:
Hospital services 28.9 19.1
Physician services 62.4 56.0
Other medical services 16.1 3.3
----- -----
Total medical expenses 107.4 78.4
General and administrative 26.4 18.1
Depreciation and amortization 2.7 2.0
Interest and other expenses 1.3 1.5
----- -----
Total expenses 137.8 100.0
Income before income taxes (37.8) 0.0
Provision for income taxes 0.0 0.0
----- -----
Net (Loss)/Income (37.8)% 0.0%
----- -----
STATISTICAL DATA:
HMO member months
enrollment 233,791 275,314
Medical loss ratio (1) 108.9% 81.2%
General and administrative
ratio (2) 26.4% 18.1%
- --------------------------
(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 MARCH 31, 1997 COMPARED TO THREE MONTHS ENDED
MARCH 31, 1996
Premiums earned in the first quarter of 1997 decreased by 15.5%,
or $6.2 million, to $33.8 million from $40.0 million in the first
quarter of 1996. This decrease is attributable to a decrease in
HMO membership and in premium rates, including the impact of
retroactive Medicaid rate reductions of approximately $1.9
million. Total member months decreased by 15.1% in the first
quarter of 1997 to 233,791, accounting for $4.0 million of the
$6.2 million decrease in premiums earned. Premium rates decreased
1.1% for commercial members, 26.0% for Medicaid members and 8.0%
for full-risk Medicare members resulting in a .6% total weighted
average decrease, which accounted for $2.2 million of the decrease
in premiums earned.
Interest and other income decreased 69.1%, or $1.0 million, to
$0.5 million in the first quarter of 1997. This decrease was
primarily due to decreased management fee revenue.
Medical expenses increased 13.2%, or $4.3 million, to $36.8
million in the first quarter of 1997, and increased as a
percentage of premiums earned (the "medical loss ratio") from
81.2% in the first quarter of 1996 to 108.9% in the first quarter
of 1997. This increase is primarily due to the recording of the
demographic rate pool adjustment ($4.3 million) and adverse
development on 1996 medical claim reserves ($2.3 million), less
the reduction in medical expenses because of lower premium revenue
and membership.
General and administrative (G&A) expenses increased 20.7%, or $1.6
million, to $9.1 million in the first quarter of 1997 and
increased as a percentage of total revenue from 18.1% in the first
quarter of 1996 to 26.4% in the first quarter of 1997. The
increase in G&A expenses resulted primarily from an increase in
the doubtful account reserve for the rate reconciliation
receivable and Medicaid receivables ($2.2 million), partially
offset by decreases in payroll and other administrative expenses
($0.6 million).
Depreciation and amortization increased by 15.5%, or $.1 million
to $0.9 million, in the first quarter of 1997, due primarily to
amortization of preoperational costs associated with service area
and product line expansion.
Interest expenses decrease 21%, or $.1 million in the first
quarter of 1997, as the Company has reduced its borrowings by
repaying the outstanding Key Bank borrowings of $3.1 million in
December 1996.
LIQUIDITY AND CAPITAL RESOURCES
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. The
Company has not yet determined if non-compliance with these
financial covenants creates a cross-default of the Company's two
mortgages with Key Bank. The Company is negotiating with Key Bank
to obtain a waiver for any potential breaches of the mortgages
because of these non-compliances. In anticipation of obtaining
this waiver, the Company continues to classify the maturities of
its mortgages in accordance with their stated terms.
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 31, 2002 with The 1818 Fund
II, L.P. (the "Fund"), a private equity fund managed by Brown
Brothers Harriman & Co. ("BBH & Co."). 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"). The principal amount of the Note is payable in one
amount on December 31, 2002. Shares of Common Stock of the
Company at a conversion price equal to $10.37 per shares, subject
to adjustment for certain dilutive events. Prior to the
Amendment, the Note had been convertible at a conversion price of
$29.00 per share. Under the Note, the conversion price granted to
the holder of the Note is adjusted, inter alia, if the Company
issues shares of its Common Stock or options, warrants or other
rights to acquire shares of Common Stock of the Company at a price
per share less than the current market price or, pursuant to the
Amendment, the conversion price at the time. The holder of the
Note also has the right to require redemption of the Note
following a change of control (as that term is defined in the
Note) of the Company at a redemption price equal to 130%
(previously 115% under the original Note) of the principal amount
of the Note together with all accrued and unpaid interest thereon.
Under the Amendment, if a change of control occurs within 24
months of a redemption of the Note, the Company may also be
required to pay the holder of the Note an amount equal to 30% of
the principal amount of the redeemed Note. As of March 31, 1997,
the Company is in default of certain provisions of the Agreement
and its Amendment, 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.
Net cash used in operating activities was $2.7 million during the
first quarter of 1997 as compared to net cash used by operations
of $3.8 million for the first quarter of 1996. The cash used in
operations in the first quarter of 1997 resulted primarily from
the operating loss and the decrease in medical costs payable,
partially offset by the impact of a decrease in accounts and other
receivables and an increase in accounts payable. The cash used in
operations in the first quarter of 1996 resulted from a reduction
of medical costs liabilities primarily due to increased levels of
disbursements. Cash used for capital expenditures was
approximately $.1 million during the first quarter of 1997 as
compared to $.2 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 31, of each
year and is maintained throughout the following calendar year. At
March 31, 1997, WellCare had 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.
At March 31, 1997, the Company had working capital of $41,000,
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
attributable primarily to the operating loss. Based on current
internal cash projections, which include a $5.1 million federal
income tax refund for 1996 tax returns filed with IRS, the Company
believes it can fund its future working capital needs from
operations.
At March 31, 1997, the Company had total mortgage indebtedness of
$6.1 million outstanding on five of its office buildings, of which
approximately $771,000 is due February 1, 1999, approximately $4.2
million is due on January 1, 2000, approximately $782,000 is due
March 1, 2000, and approximately $323,000 is due on March 1, 2001.
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.
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.
Prior to the filing of the motion, discovery had not yet begun and
pursuant to the Private Securities Litigation Reform Act all
discovery was necessarily stayed pending the disposition of the
motions to dismiss. 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 March 31, 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. The
Company has not yet determined if non-compliance with these
financial covenants creates a cross-default of the Company's two
mortgages with Key Bank. The Company is negotiating with Key Bank
to obtain a waiver for any potential breaches of the mortgages
because of these non-compliances. In anticipation of obtaining
this waiver, the Company continues to classify the maturities of
its mortgages in accordance with their stated terms.
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 Brown
Brothers Harriman & Co ("BBH & Co.").
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"). Under the Amendment, as of
February 28, 1997, the Company caused one (1) vacancy to be
created on its Board of Directors and appointed Walter Grist, as a
designee of the Fund, as a director without classification.
As part of the Amendment, the Company agreed to cause two
additional directors (the "Outside Directors") to be elected to
the Board. Each such person shall (i) be neither an officer,
director or employee of the Company or any subsidiary of the
Company nor any affiliate of the Company, and (ii) have experience
as a director of a public company or other relevant experience.
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
Not Applicable
<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, 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: May 15, 1997
<PAGE>
INDEX TO EXHIBITS
All exhibits below are filed with this Quarterly Report of Form
10-Q:
EXHIBIT NUMBER PAGE
- -------------- ----
11 Computation of Net Income 25
Per Share of Common Stock
<PAGE>
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,
------------------------------
1997 1996
--------- ---------
(Loss)/Income before
income taxes ($13,002) $ 46
Provision for income taxes - 18
--------- ---------
Net (Loss)/income ($13,002) $ 28
========== =========
Weighted average number of
common and common equivalent
shares outstanding 6,298 6,289
========== =========
Net (Loss)/ Earnings
per share ($2.06) $0.00
========== =========
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Consolidated
Balance Sheet of The WellCare Management Gorup, Inc. and Subsidiaries as of
March 31, 1997 and the related statement of operations for the period ended
March 31, 1997.
</LEGEND>
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<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<EXCHANGE-RATE> 1
<CASH> 5310
<SECURITIES> 532
<RECEIVABLES> 9595
<ALLOWANCES> 4170
<INVENTORY> 0
<CURRENT-ASSETS> 27722
<PP&E> 17470
<DEPRECIATION> 5529
<TOTAL-ASSETS> 61263
<CURRENT-LIABILITIES> 27681
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0
0
<COMMON> 63
<OTHER-SE> 7221
<TOTAL-LIABILITY-AND-EQUITY> 61263
<SALES> 33830
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<CGS> 0
<TOTAL-COSTS> 36846
<OTHER-EXPENSES> 10434
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