The
[Logo] WellCare
Management
Group, Inc.
------------------------------------------
1997 Annual Report
[Graphic: Photograph of
Corporate Headquarters]
<PAGE>
Table of Contents
Letter to Shareholders ...................................................... 2
Selected Consolidated Financial Data ........................................ 4
Management's Discussion and Analysis of Financial Condition
and Results of Operations ............................................... 6
Report of Deloitte & Touche LLP, Independent Auditors ....................... 15
Consolidated Balance Sheets as of December 31, 1997 and 1996 ................ 16
Consolidated Statements of Operations for the years ended
December 31, 1997, 1996 and 1995 ......................................... 19
Consolidated Statements of Shareholders' Equity for the years
ended December 31, 1997, 1996 and 1995 ................................... 20
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1996 and 1995 ......................................... 22
Notes to Consolidated Financial Statements .................................. 23
Safe Harbor Statement under the Private Securities Litigation Reform Act of
1995: The statements contained in this annual report that are not historical
facts are forward-looking statements, actual results may differ materially from
those projected in the forward-looking statements which statements involve risks
and uncertainties, including but not limited to, the following: that increased
regulation will increase health care expenses; that increased competition in the
Company's markets or change in product mix will unexpectedly reduce premium
revenue; that the Company will not be successful in increasing membership
growth; that there may be adverse changes in Medicare and Medicaid premium rates
set by federal and state governmental agencies; the ability to satisfy statutory
net worth requirements; the exercise of the existing this party option to merge
with the owner and manager of the Alliances; that health care costs in any given
period may be greater than expected due to unexpected incidence of major cases,
natural disasters, epidemics, changes in physician practices, and new
technologies; that the Company will be unable to successfully expand its
operations into its recently approved service areas, including New York City,
Westchester County and State of Connecticut; that major health care providers
will be unable to maintain their operations and reduce or eliminate their
accumulated deficits; and the Company's ability to continue as a going concern.
Investors are also directed to the other risks discussed in the Company's Form
10-K for the year ended December 31, 1997, as well as other documents filed by
the Company with the Securities and Exchange Commission.
1
<PAGE>
Letter to Shareholders
[Graphic: April 24, 1998
Photograph]
Robert W. Morey, Jr.
Chairman To our Shareholders:
The year 1997 was a very challenging one; it was a
year of problems, but more importantly a year of
solutions. We believe that our infrastructure is now
in place in all areas: premiums, product lines,
geographic coverage, medical cost through provider
recontracting and utilization management, and general
and administrative expenses.
[Graphic:
Photograph]
Joseph R. Papa While commercial membership declined in 1997, we,
President/CEO where necessary, in late 1997 adjusted our commercial
premium rates to be competitive within our principal
markets. We believe that such adjustments have
positioned the Company to increase 1998 New York HMO
premiums rates within the guidelines recently
announced by the New York State Insurance Department.
The recent addition of Tom Curtin, as our Vice
President of Sales and Marketing, and the increased
efforts in telemarketing and selling efforts focused
on small and mid-size employer groups should also
benefit our future commercial membership growth. We
also are pleased with our continuing Connecticut
initiative: commercial enrollment there currently
exceeds 4,000 members, an increase of approximately
2,200 members from December 31, 1997.
WellCare now operates in 25 counties in New York
State, including four of the five counties in New York
City, and statewide in Connecticut. In 1997, we also
received approval from HCFA to expand the Medicare
Risk Program into New York City. At year-end, our
Medicare Risk Product reached 17 counties and is
available to approximately 1.5 million eligible
enrollees.
In order to improve our medical cost economics
during 1997, our New York HMO's contractual
arrangements focused the Plan on our assuming risk. By
year-end, most of the significant hospital contracts
had been recontracted. In addition, 1997 was our first
full year utilizing a new claims management system,
which tracks a daily inventory of hospital days and
patient stays by line of business. Further, virtually
all claims are immediately entered into the claims
inventory providing for a more timely pended claims
liability accounting.
2
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Although still encumbered by continuing legal
costs associated with litigation and related matters,
our general and administrative costs are now at the
lowest level in many years. Our current full-time
equivalent employees have been reduced to levels that
are in line with industry ratios.
While our auditors included a going concern
paragraph in their opinion on our 1997 financial
statements, primarily because of our continuing
operating losses and cash used in operations, we
believe that the year 1998 has great promise. The
Company announced in early January 1998 that The 1818
Fund II, L.P., a private investment fund managed by
Brown Brothers Harriman & Co., that holds a $20
million subordinated note issued by WellCare, agreed
to convert $5 million of that indebtedness into the
Company's Common Stock at $4 per share. We are
confident that our operations will continue to improve
to profitability, and that our recent engagement of
Bear Stearns & Co., Inc. to explore strategic
opportunities is well timed and should present
opportunities to enhance shareholder value.
In closing, we want to acknowledge the
extraordinary effort of our present staff in
addressing the many problems of a turn around. We also
wish to thank our medical providers, employer groups,
members and shareholders for their continued support.
Sincerely,
/s/ Robert W. Morey, Jr.
------------------------
Robert W. Morey, Jr.
Chairman
/s/ Joseph R. Papa
------------------------
Joseph R. Papa
President/CEO
3
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Selected Consolidated Financial Data
<TABLE>
STATEMENT OF OPERATIONS DATA:
(in thousands, except per share data)
<CAPTION>
Year Ended December 31,
----------------------------------------------------------
1997 1996 1995 1994 1993(1)
------ ------ ------ ------ --------
<S> <C> <C> <C> <C> <C>
Revenue:
Premiums earned .................... $ 142,115 $ 157,156 $ 144,518 $ 120,411 $ 72,905
Interest and other income .......... 1,755 3,930 8,031 2,171 3,417
--------- --------- --------- --------- ---------
Total revenue ......................... 143,870 161,086 152,549 122,582 76,322
--------- --------- --------- --------- ---------
Expenses:
Medical expenses ................... 126,251 135,957 115,560 98,411 58,471
General and administrative ......... 34,485 39,334 30,279 15,599 9,641
Depreciation and
amortization expenses ............ 3,624 3,254 2,292 1,611 761
Interest and other expenses ........ 1,652 2,361 1,629 1,099 1,331
--------- --------- --------- --------- ---------
Total expenses ........................ 166,012 180,906 149,760 116,720 70,204
--------- --------- --------- --------- ---------
(Loss)/income before income taxes and
change in accounting principle ..... (22,142) (19,820) 2,789 5,862 6,118
(Benefit)/provision for income taxes (2) -- (8,038) 1,116 2,403 2,533
--------- --------- --------- --------- ---------
(Loss)/income before change in
accounting principle ............... (22,142) (11,782) 1,673 3,459 3,585
Change in accounting principle (3) .... -- -- -- -- 1,063
--------- --------- --------- --------- ---------
Net (Loss)/income ..................... $ (22,142) $ (11,782) $ 1,673 $ 3,459 $ 4,648
========= ========= ========= ========= =========
(Loss)/earnings per share:
Basic:
(Loss)/income before change
in accounting principle ......... $ (3.52) $ (1.87) $ 0.27 $ 0.56 $ 0.72
Change in accounting principle (3) -- -- -- -- 0.21
--------- --------- --------- --------- ---------
Net (Loss)/income ................ $ (3.52) $ (1.87) $ 0.27 $ 0.56 $ 0.93
========= ========= ========= ========= =========
Weighted average shares
of Common Stock outstanding ......... 6,299 6,296 6,250 6,224 4,995
- -----------------------------
Diluted:
(Loss)/income before
change in accounting principle .. $ (3.52) $ (1.87) $ 0.26 $ 0.54 $ 0.71
Change in accounting principle (3). -- -- -- -- 0.21
--------- --------- --------- --------- ---------
Net (Loss)/income ................ $ (3.52) $ (1.87) $ 0.26 $ 0.54 $ 0.92
========= ========= ========= ========= =========
Weighted average shares
of Common Stock and Common Stock
equivalents outstanding .......... (5) (5) 6,396 6,354 5,025
</TABLE>
4
<PAGE>
<TABLE>
Balance Sheet Data:
(in thousands)
<CAPTION>
<S> <C> <C> <C> <C> <C>
Working capital/(deficiency) $ (5,115) $ 11,172 $ 12,733 $ 4,776 $ 9,582
Total assets 52,538 71,340 72,011 57,793 49,947
Long-term debt 25,852 26,467 19,209 6,336 5,982
Total liabilities 54,389 51,066 40,207 28,486 23,850
(Deficiency in assets)/
Shareholders' equity (4) (1,851)(4) 20,274 31,804 29,307 26,097
- ------------------------
(1) During 1993, the Company acquired Mid-Hudson Health Plan, Inc.
(2) Continuing operating losses during 1997 resulted in additional deferred tax
benefits of approximately $7.8 million. Although management believes that
profitable operations will be achieved in 1998, 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.
(See Note 13 of Notes to Consolidated Financial Statements).
(3) Cumulative effect of a change in accounting principle upon the
implementation of Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes".
(4) In January 1998, The 1818 Fund II, L.P. agreed to convert, subject to
regulatory approval, $5 million of the Company's subordinated convertible
debt into 1,250,000 shares of the Company's Common Stock. If this
transaction had occurred in December 1997, the Company's shareholders equity
would have been $3,149. (See Note 12 of Notes to Consolidated Financial
Statements).
(5) Weighted average shares of common stock and common stock equivalents are not
shown as the effect on per share would be anti-dilutive. 5
</TABLE>
5
<PAGE>
Management's Discussion and Analysis of Financial Condition
and Results of Operations
The following discussion and analysis should be read in conjunction with
the Consolidated Financial Statements and Notes thereto included elsewhere
herein.
The WellCare Management Group, Inc.'s ("WellCare" or the "Company")
financial statements have been prepared assuming that the Company will continue
as a going concern. The auditors' report states that "the Company's recurring
losses from operations, cash used in operations, deficiency in assets at
December 31, 1997 and failure to maintain 100% of the contingent reserve
requirement for the New York State Department of Insurance ("NYSID") at December
31, 1997 raise substantial doubt about its ability to continue as a going
concern." (See Consolidated Financial Statements).
Certain statements in this Annual Report on Form 10-K 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 and projections of future
earnings 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 higher payments from private
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 adjusted rates
lower than premium rates then in effect) or business conditions (including
intensification of competition and the other factors described above) could
result in premium revenues not increasing to 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.
Legislative and regulatory proposals have been made at the federal and
state government levels related to the health care system, including but not
limited to limitations on managed care organizations (including benefit
mandates) and reform of the Medicare and Medicaid programs. Such legislative or
regulatory action could have the effect of reducing the premiums paid to the
Company by governmental programs or increasing the Company's medical costs.
Specifically, pending federal budgetary action could reduce the premiums payable
to the Company under the Medicare program as compared to previously announced
levels. The Company is unable to predict the specific content of any future
legislation, action or regulation that may be enacted or when any such future
legislation or regulation will be adopted. Therefore, the Company cannot predict
the effect of such future legislation, action or regulation on the Company's
business.
GENERAL OVERVIEW
WellCare has instituted programs to increase premium revenue, reduce
medical expenses, and reduce general and administrative expenses. Management
believes that these initiatives have had a favorable impact in 1997 on the
Company's established Commercial and Medicaid programs. Unfavorable trends in
the relatively-new Medicare Program, particularly during the fourth quarter of
1997, have partially offset the improvements achieved in the commercial and
Medicaid programs.
The Company has also implemented changes that have reduced general and
administrative ("G&A") expenses. Increases in certain non-operating G&A
expenses, partially those related to the Securities Litigation, other
governmental investigations and non-recurring severance expenses related to
downsizing and overall reductions, have partially offset the cost-savings.
The Company also implemented full time equivalent ("FTE") staff reduction
programs in 1996, 1997 and 1998 to reduce the level of general and
administrative costs and bring FTE levels in line with industry ratios. FTE's
were as follows:
December 31, 1995 407
December 31, 1996 300
December 31, 1997 288
March 13, 1998 227
WellCare's principal source of revenue is premiums earned from WellCare of
New York, Inc. ("WCNY") and WellCare of Connecticut, Inc. ("WCCT"), (the
"WellCare HMOs"), while interest and other income consists of management and
administrative fees, interest and investment income, reimbursements from certain
third-party insurers, contributions, rental income and
6
<PAGE>
miscellaneous service income. Premium revenues represented 99% of the Company's
total revenue for the year ended December 31, 1997, and had grown substantially
since the Company's inception through 1996 as a result of increases in both HMO
membership and premium rates. Premiums revenues declined in 1997 reflecting
reduced commercial HMO membership. In addition, management and administration
fee income decreased significantly in 1997.
Medical expenses consist of the hospital charges, physician fees and
related health care costs for its members. Medical expenses also include
estimates of medical expenses incurred but not yet reported ("IBNR") to the
Company, based on a number of factors, including hospital admission data and
prior claims experience; adjustments, if necessary, are made to medical expenses
in the period the actual claims costs are ultimately determined. The Company
believes the IBNR estimates in the Consolidated Financial Statements are
adequate; however, there can be no assurance that actual health care claims
costs will not exceed such estimates.
The development of the claims management system that tracks claims on a
current basis has been an ongoing priority of the Company. The results of
operations depends in large part on the Company's ability to predict, quantify,
and manage medical costs. During 1997 the Company instituted procedures which
are continually reviewed, modified and enhanced to allow it to measure and
project medical costs on a timely basis. A daily inventory of hospital days and
patient stays by line of business is maintained by medical management. The speed
with which claims are entered into the claims inventory system has steadily
improved during the year. Currently, approximately 98% of all claims received
are entered and scanned to the claims system within two days of receipt. Claims
are then available for examiners to either process, review and approve for
payment, pend for additional information from the provider or deny. All claims
are entered into the system at charges and evaluated.
Ongoing studies conducted during the year for the three lines of business
have provided the Company with the tools to estimate the percentage of pended
claims to be paid relative to submitted charges. All claims paid, payable and
pended are evaluated weekly and a projection of ultimate payables is determined.
Moreover, procedures are now in place whereby the actual runoff of claims for
each of the last twelve months versus the reserve for IBNR and the paid, pended,
payable claims are reviewed for accuracy as compared to the original
projections. This procedure is intended to allow the Company to continually
estimate its unknown claims reserves ("IBNR") more effectively.
The Company believes that the process of trending the ultimate resolution
of paid, payable, and pended claims allows the Company to analyze trends and
changes in payments and utilization patterns and, therefore, react to medical
costs on a proactive versus a reactive basis. This weekly analysis also allows
the Company to prepare detailed data for the Company's independent consulting
actuaries to review the Company's IBNR estimation methodology and results.
The Company seeks to control medical expenses through capitation
arrangements with the independent practice associations ("IPAs" or "Alliances")
and with non-Alliance/IPA primary care physicians, capitation arrangements with
certain specialty providers, and through its quality improvement programs,
utilization management and review of hospital inpatient and outpatient services,
and educational programs on effective managed care for its providers.
Effective October 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/IPAs comprised of the specialists and
previously-capitated primary care physicians. In an effort to improve
profitability of the Company and the Alliances, effective September 1996, WCNY
entered into a letter of understanding with the Alliances to restructure the
capitation arrangements. WCNY reassumed risk for certain previously capitated
services, with a corresponding reduction in rates. At December 31, 1996, WCNY
capitated the Alliances for all physician services, both primary care and
specialty services, on a per member per month ("PMPM") basis for each HMO member
associated with an Alliance/IPA except for physician services for certain
diagnostics and mental health, which are capitated through regional integrated
delivery systems. This restructuring had a minimal impact on medical expenses in
1996. The Alliances/IPAs have operated at an accumulated deficit since inception
but have recently instituted measures designed to reduce these deficits, and
achieve profitability. The Company has been provided unaudited financial
statements which shows profitable operations in the second half of 1997.
Although there is no contractual obligation, in the event of continuing losses
or increasing deficit by the Alliances/IPAs, the Alliances/IPAs may request
increased capitation rates from the Company. Management does not believe that
such additional funding should be required and, if requested by the
Alliances/IPA, does not intend to provide it. During 1997, the Alliances/IPAs
received a $4.0 million cash infusion from an unrelated third-party, which is
currently considering the exercise of its option to acquire the IPA holding
company.
7
<PAGE>
<TABLE>
RESULTS OF OPERATIONS
The following table provides certain statement of operations data expressed
as a percentage of total revenue and other statistical data for the years
indicated:
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Statement of Operations Data:
Revenue:
Premiums earned 98.8% 97.5% 94.5%
Interest and other income 1.2 2.5 5.5
------- ------- -------
Total revenue 100.0 100.0 100.0
Expenses:
Hospital services 25.1 23.1 20.0
Physician services 58.5 59.5 51.1
Other medical services 4.2 1.7 4.5
------- ------- -------
Total medical expenses 87.8 84.3 75.6
General and administrative 24.0 24.4 19.8
Depreciation and amortization 2.5 2.0 1.5
Interest and other expenses 1.1 1.6 1.3
------- ------- -------
Total expenses 115.4 112.3 98.2
(Loss)/income before income taxes (15.4) (12.3) 1.8
(Benefit)/provision for income taxes -- (5.0) 0.7
------- ------- -------
Net (loss)/income (15.4)% (7.3)% 1.1%
======= ======= =======
Statistical Data:
HMO member months enrollment 901,295 1,077,774 1,046,559
Medical loss ratio(1) 88.8% 86.5% 80.0%
General and administrative
ratio(2) 24.0% 24.4% 19.8%
- -----------------------------
(1) Total medical expenses as a percentage of premiums earned; reflects the
combined rates for commercial, Medicaid, Full Risk Medicare and Medicare
supplemental members.
(2) General and administrative expenses as a percentage of total revenue.
</TABLE>
8
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YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
Premiums earned in 1997 decreased by 9.6%, or $15.1 million, to $142.1
million from $157.2 million in 1996. Commercial premium revenue decreased 29.6%,
or $35.1 million, primarily because of a decrease in member months attributable
to the loss in membership. The decline in commercial membership is attributable
to WellCare's more stringent application of its credit standards, pursuant to
which contracts for non-paying or slow-paying groups were canceled or not
renewed, as well as to customers' adverse reaction to the negative publicity
received by the Company related to the restatement of its 1994 financial
results. The loss of commercial membership in 1997 was also affected by WCNY's
non-competitive rates relative to other companies operating within WCNY's
marketplace. The rates in effect during 1996 and in the first half of 1997
caused a decline in renewing membership for 1997. During 1997, the Company
adjusted its premium rates to be competitive within the principal markets where
WCNY operates. The Company believes it is positioned to increase 1998 premium
rates and remain competitive in the marketplace. Medicaid premium revenue
increased 11.3%, or $3 million, primarily as a result of a 10.4% increase in
member months. Medicare premium revenue increased 139.8%, or $17 million, due to
a 159% increase in member months, partially offset by a reduction in average per
member rates of 7.4%, or $2.3 million. Total member months decreased 16.4% in
1997 to 901,295.
Interest and other income decreased by 53.8%, or $2.1 million, to $1.8
million in 1997. This decrease is primarily due to reductions in management
fees, insurance reimbursements and interest income.
Medical expenses decreased 7.1% or $9.7 million, to $126.3 million in 1997,
from $136.0 million in 1996. There was a 11.1% increase on a PMPM basis and
increase as a percentage of premiums earned (the "medical loss ratio") from
86.5% in 1996 to 88.8% in 1997. The decrease in medical expenses from 1996 is
primarily due to decreased commercial membership partially offset by increases
attributable to a change in product mix. Beginning in the third quarter of 1996
and throughout 1997, the Company made a major effort to improve the medical cost
economics of the business. These initiatives principally revolved around
renegotiated provider contracts and an improved effort in utilization
management. The shift in the percentage of member months attributable to
Medicare versus commercial has also affected medical costs. Medical expenses as
a percentage of premiums in the commercial and Medicaid lines of business have
decreased during the quarters, however; these gains have been offset by higher
than anticipated medical costs associated with the expansion of the Medicare
business occurring principally in the fourth quarter of 1997.
The 1997 medical expenses include the following accrual items: a $2.5
million charge for adverse development relating to 1996 medical claims and a
$1.7 million charge for the estimated liability related to NYSID's audit of the
1993-1995 demographic pool ($1.2 million) and the 1996 demographic pool, and a
$435,000 credit relating to the 1994 restatement. In the absence of such
additional items, medical expenses would have been $122.5 million and the
medical loss ratio would have been approximately 86.2%. The 1996 medical
expenses include the recording, as instructed by NYSID, of medical expense of
(i) approximately $3.7 million relating to unpaid inpatient hospital claims and
(ii) approximately $2.9 million relating to unpaid claims for the period prior
to October 1994. Both of these charges represent obligations which had
previously been assumed by the Alliances and for which the Company had no
contractual obligation to pay. A percentage of the increase in 1996 medical
expenses is also due to a restructuring of the contractual capitation
arrangements with the Alliances. As a result of the 1994 prior period
restatement, medical expenses in 1996 were reduced approximately $2,423,000 (See
Note 2b of "Notes to Consolidated Financial Statements"). After giving pro forma
effect to the impact of the aforementioned changes on 1996, medical expenses in
1996 would have been $134.8 million and the medical loss ratio would have been
85.8%.
The decision to expand into the Medicare line of business recognized that
the early stages of expansion would generate a medical loss ratio in excess of
100% until sufficient membership was achieved. As a result of the renegotiation
of many provider contracts from a DRG to a per diem basis and the efforts to
improve utilization management, it appeared that the third quarter medical loss
ratio for Medicare would generate an adequate profit margin before G&A costs.
Expected utilization improvements in the fourth quarter were based on the
favorable results of the third quarter, and led management to anticipate a
fourth quarter Medicare loss ratio in the range of 90-92%. In late January and
early February 1998, additional Medicare claims were received for the third
quarter of 1997, beyond the time frame within which the Company had been
experiencing with its commercial product. The Company had been receiving greater
than 90% of its Medicare claims within 12 weeks of the date of service. The
receipt of these additional late claims beyond the 12 week period created a
situation whereby the updated third quarter medical loss ratio is approximately
5% higher than originally estimated. Additionally, higher than expected fourth
quarter Medicare utilization (together with the third quarter adverse
development) generated medical costs approximately $2.2 million above
projections.
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General and administrative expenses decreased 11.2%, or $4.4 million, to
$34.9 million from $39.3 million in 1996 and decreased as a percent of total
revenue (the "G&A ratio") to 24.0% from 24.4% in 1996. The decrease in G&A
expenses is the net result of a decrease of $3.2 million in the provision for
doubtful trade and other receivables; an increase of $0.3 million in
advertising, promotional and communication costs; a decrease of $.9 million in
payroll and labor related expenses because of reduced staffing levels; and a
decrease of $1.0 million in extraordinary legal and other professional services
primarily related to class action litigation. It is anticipated that legal costs
will increase during the normal progression of the class action litigation.
Depreciation and amortization increased by 11.4% or $.4 million, in 1997
due primarily to amortization of preoperational costs associated with service
area and product line expansion. Interest and other expenses decreased by 32.1%,
or $.8 million, in 1997 due primarily to retirement of bank debt during the
fourth quarter of 1996, and the reduction of the annual interest rate in
February 1997, on the Subordinated Convertible Note.
As previously reported in the Form 10-Q for the periods ended September 30,
June 30 and March 31, 1997, the quarterly reported results were affected by:
legislative actions affecting the amount of recorded Medicaid premium, the
effects of estimating the ultimate cost of New York State Demographic Pool Audit
assessment for the years 1993-1995 and on 1996, adverse development reported in
the 1997 quarters relating to 1996, the operating measures instituted in the
third and fourth quarters to speed the processing of claims receipts and reflect
expected claim amounts within the claim payment and IBNR process, the writeoff
of 1996 and prior years receivable balances and the 1997 impact of the 1994
restatement.
The following pro-forma (unaudited) table provides supplemental information
to assist the reader in evaluating the improvements in operations during 1997.
The tables should be read in conjunction with the narrative in the preceding
paragraphs.
<TABLE>
<CAPTION>
1997 Quarters
---------------------------------------
1st 2nd 3rd 4th 1997
---- ---- ---- ---- ----
(unaudited)
REPORTED
- --------
<S> <C> <C> <C> <C> <C>
Medical loss ratio (1)
Commercial 110.7% 81.5% 77.8% 83.3% 89.4%
Medicaid 98.3 57.1 77.5 61.7 70.6
Medicare 116.3 93.8 112.1 116.8 109.9
Total 108.9 78.5 85.0 84.3 88.8
G&A ratio (2) 26.4 18.4 25.0 26.2 24.0
Pretax margin (3) (37.9) 0.3 (12.4) (13.0) (15.4)
PRO-FORMA
- ---------
Medical loss ratio(1)(4)
Commercial 89.2 86.6 84.0 81.6 85.6
Medicaid 72.1 70.0 70.1 70.6 70.7
Medicare 113.4 111.0 98.4 108.0 107.0
Total 88.7 87.6 84.2 84.2 86.2
G&A ratio (2)(5) 20.0 20.0 21.5 23.4 21.2
Pre-tax margin (3) (11.4) (10.3) (8.1) (10.4) (10.1)
- ------------------------
(1) Total medical expenses as a percentage of premiums earned.
(2) General and administrative expenses as a percentage at total revenue.
(3) (Loss)/income before income taxes as a percentage of total revenue.
(4) Adjusted to reflect medical expenses for the non-recurring effects of the
medical expense adjustment described above.
(5) Adjusted to eliminate non-operating expenses pertaining to the Securities
Litigation, other governmental investigations, non-recurring severance
expenses and for prior years receivable balances.
</TABLE>
10
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YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
Premiums earned in 1996 increased 8.7%, or $12.7 million, to $157.2 million
from $144.5 million in 1995. This increase was attributable to premiums
generated from WCNY's Medicare Risk contract, a new product line started in
October 1995, of $12.0 million; a net increase in Medicaid premiums of $6.0
million (principally due to an increase in member months); offset by a $5.3
million reduction in commercial premiums reflecting reduced membership. The
decline in commercial membership is substantially attributable to WellCare's
more stringent application of its credit standards, pursuant to which contracts
for non-paying or slow-paying groups were canceled or not renewed, as well as to
customers' adverse reaction to the negative publicity received by the Company
related to the restatement of its 1994 financial results. Although Medicaid
member months increased, there was a decrease in actual Medicaid membership at
December 31, 1996 from December 31, 1995. The decline in Medicaid membership is
attributable to the ban on direct enrollment of Medicaid eligibles by any
managed care plans from August 1995 through August 1996 in New York City,
thereby not offsetting normal Medicaid disenrollments or permitting growth in
enrollment during that period, as well as a statewide decrease in the number of
individuals eligible for Medicaid which has caused a decrease in the total
number of Medicaid eligibles in all managed care organizations. Total member
months increased 3% in 1996 to 1,077,774.
Interest and other income decreased 51.0%, or $8.3 million, to $4.1 million
in 1996 due to decreases in WellCare University revenues, management fees,
third-party and insurance reimbursements.
Medical expenses increased 17.7%, or $20.4 million, to $136.0 million in
1996 representing a 14.2% increase on a per member per month basis, and
increased medical loss ratio from 80.0% in 1995 to 86.5% in 1996. The increase
in the medical loss ratio is due, in large part, to the Company agreeing to
record a one-time additional liability in the second quarter of 1996 of
approximately $3.7 million resulting from assuming the cost of hospital
inpatient care for members, the cost of which had previously been assumed by the
Alliances and to the recording of medical expenses of approximately $2.9 million
relating to unpaid claims for the period prior to October 1, 1994 (classified as
physician services). Both of the aforementioned medical expenses were recorded
by WCNY at the instruction of NYSID. Both of these changes represent obligations
which had previously been assumed by the Alliances and for which the Company had
no contractual obligation to pay. A percentage of the increase in medical
expenses is also due to a restructuring of the contractual capitation
arrangements with the Alliances. As a result of a prior period restatements,
medical expenses in 1996 were reduced approximately $2,423,000 (See Note 2b of
"Notes to Consolidated Financial Statements").
G&A expenses increased 29.9%, or $9.1 million, to $39.3 million in 1996,
and the G&A ratio increased to 24.4% in 1996 from 19.8% in 1995. The increase in
G&A expenses resulted primarily from increased salaries and benefits of
approximately $2.5 million for severance payments, addition of senior management
at higher annual compensation levels, and service and product line expansion, an
increase of approximately $2.4 million in reserves established for trade
accounts receivables and notes and other receivables (including valuation
reserves relating to obligations of the buyer of the assets of WellCare Medical
Management, Inc. (See Note 4 of "Notes to Consolidated Financial Statements"),
an increase of approximately $2.3 million in unusual legal costs and other
professional and outside services specifically relating to the class action
litigation, and an increase of $1.5 million related to marketing and consulting
costs.
Depreciation and amortization increased by approximately $962,000 to $3.3
million in 1996 as a result of amortization of preoperational costs associated
with service area and product line expansions.
LIQUIDITY AND CAPITAL RESOURCES
In January, 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., a private equity
fund managed by Brown Brothers Harriman & Co. The Company utilized a part of the
net proceeds of this private placement to retire a portion of its debt. The Note
was amended in February 1997, and subsequently in January 1998, and is
convertible into shares of WellCare Common Stock. In January 1998, the Fund
agreed to convert $5 million of the Note into 1,250,000 shares of Common Stock
of the Company at a conversion price of $4 per share, subject to the
anti-dilution adjustment. The conversion requires approval by the New York State
Department of Health, which the Company anticipates receiving in the near
future. The Note initially accrued interest at 6.0% per annum, amended to 5.5%
per annum in 1997 and amended to 8% per annum in 1998. The conversion price
after the 1998 amendment is $8 per share for the remaining $15 million debt, and
the mandatory redemption percentage is 150%. The Company will also have the
right to purchase one half of the shares of the Common Stock and the debt held
by the Fund, for $12 million plus accrued interest, if consolidated earnings
before taxes are positive for either the second or third quarter of 1998. This
right is exercisable after filing the relevant Form 10Q, and prior to December
31, 1998 (See Note 12 of "Notes to Consolidated Financial Statements").
11
<PAGE>
The Company's requirements for working capital are principally to meet
current obligations, fund geographic and product expansion for HMO operations,
maintain necessary regulatory reserves, and marketing and product expansion.
Net cash used by operating activities was approximately $4.8 million in
1997 compared to $4.1 million in 1996. The use of cash in 1997 is principally to
fund the cash operating loss of $18.4 million, reduced principally by the cash
provided from a $6.9 million decrease in taxes receivable, a reduction in
accounts, notes and other receivables of approximately $3.2 million, an increase
in payables of $2.6 million and a reduction in restricted cash of $.9 million.
The decrease in tax receivables reflects primarily the collection in 1997 of the
1996 income tax refund which resulted from carrying back the 1996 tax operating
loss against prior years' income. The Company also realized $.8 million from the
sale of investments. Cash used for capital expenditures in 1997 was
approximately $.3 million used primarily for expanding and upgrading the
Company's information systems.
Recent legislation by New York State ("Prompt Pay" legislation) requires
HMOs, effective with claims submitted for services provided after January 22,
1998, to pay undisputed ("clean") claims within 45 days of date of receipt. The
Company believes it has been and continues to be in compliance with this rule.
It is too early to determine if the prompt pay rule will require the Company to
accelerate the payment pattern of its claims.
New York State certified HMOs are required to maintain a cash reserve equal
to the greater of 5% of expected annual medical costs or $100,000. Additionally,
WCNY is required to maintain a contingent reserve which must be increased
annually by an amount equal to at least 1% of statutory premiums earned limited,
in total, to a maximum of 5% of statutory premiums earned for the most recent
calendar year and which may be offset by the cash reserve. The cash reserve is
calculated at December 31 of each year and is maintained throughout the
following calendar year. At December 31, 1997, WellCare had required cash
reserves of $5.8 million and a contingent reserve of $6.7 million. In the event
the contingent reserve exceeds the required cash reserve, the excess of the
contingent reserve over the required cash reserve is required to be maintained.
NYSID has the authority to allow an HMO to maintain a net worth of 50% to
100% of the contingent reserve. WCNY executed a Section 1307 loan in March 1998,
which has brought WCNY's December 31, 1997 statutory net worth above the
permitted 50% contingent reserve requirement. WCNY has been operating within the
50% discretionary contingent reserve requirement during 1997 with the full
knowledge of NYSID. In June 1997 and November 1997, the Company loaned $3.1 and
$1.3 million, respectively to WCNY under the provisions of Section 1307.
Management has had ongoing discussions and meetings with NYSID and has updated
NYSID of the Company's plans to obtain additional funds during 1998, which the
Company's Board has authorized to be contributed, as needed, to WCNY's capital.
Management expects that WCNY's 1998 budgeted return to profitability, together
with the capital contribution and additional Section 1307 loans, if required,
will fully fund the contingent reserve requirement in 1998.
In January 1997, WCNY received the final report on its biennial statutory
examination for the years ended December 31, 1994 and 1995 from NYSID. In 1996,
during the course of the audit, the Company had recorded two non-recurring
medical charges (See Note 2d of "Notes to Consolidated Financial Statements")
based on the interim findings and instructions of NYSID. Additionally, the
examiners determined that WCNY was not in compliance with all pertinent New York
State regulation sections relating to WCNY's underwriting and rating procedures
and referred the matter to NYSID's Office of General Counsel for disciplinary
action. In December 1997, WCNY entered into a Stipulation Agreement whereby it
agreed to pay a penalty of $91,000 and to correct past violations. An additional
penalty of $66,000 may be assessed if NYSID subsequently determines that WCNY
has not made a good faith effort to recoup undercharges from incorrectly rated
groups.
As a result of the examination, WCNY's statutory net worth at December 31,
1995 was deficient by approximately $1.1 million. In March 1996, the Company
made a capital contribution of $3 million to WCNY, and in October 1996, the
Company loaned WCNY $3 million under the provisions of Section 1307 of the New
York State Insurance Law. Under Section 1307, the principal and interest are
treated as equity capital for regulatory purposes and are repayable out of the
free and divisible surplus, subject to the prior approval of the Superintendent
of Insurance of the State of New York. These two cash infusions more than offset
the examination's adjustment to WCNY's net worth.
In June and November 1997, the Company made capital contributions of
$350,000 and $425,000 to WCCT to bring its statutory net worth to the required
$1 million. The Company, on March 2, 1998, made an additional capital
contribution of $368,000 to WCCT to bring its statutory net worth above the $1
million requirement.
At December 31, 1997, the Company had a working capital deficiency of $5.1
million, excluding the $5.8 million cash reserve required by New York State
which is classified as a non-current asset, compared to working capital of $11.2
million, excluding the $6.7 million cash reserve, at December 31, 1996; the
decrease in working capital is attributable primarily to the cash operating loss
incurred by the Company during 1997. The Company intends to finance its current
and future operations from the positive cash flow from its projected return to
profitability in 1998 via increased membership, rate increases and further
12
<PAGE>
reductions in medical and general and administrative expenses. The Company is
also aggressively pursuing balances due from commercial customers in accordance
with contractual stipulations to more closely match the collection of premium
with the payment of provider capitation fees and fees for service. A significant
portion of premiums receivable are due from governmental agencies relating to
the Medicaid program, some of which relate to 1996 and the early part of 1997.
Approximately $650,000 was collected in March 1998, and the remainder is
anticipated to be collected in the second quarter of 1998. The collection of
these balances will have a positive effect on the Company's cash flow.
Additionally, cash is expected from the proceeds upon the anticipated exercise
of the Investor's option to merge with the Buyer, as discussed in Note 4 of
"Notes to Consolidated Financial Statements". Management believes that the
Company will have sufficient funds available from the above sources to maintain
its planned level of operations and programs for 1998.
In March 1998, the Company engaged Bear, Stearns & Co. Inc., to assist the
Company in exploring its strategic opportunities. This could include joint
venture, merger or sale of all or a portion of the Company.
In January 1997, the Company had executed a renegotiated $6.0 million
line-of-credit with Key Bank of New York (the "Bank"), which was to expire on
May 31, 1998. There were no borrowings under this line-of-credit and, in May
1997, both parties mutually agreed to terminate the line-of-credit. In December
1996, the Company had repaid the outstanding $3.1 million on the previous
line-of-credit. At December 31, 1996, the Company was in technical default of
certain financial covenants even though there were no borrowings outstanding on
the line-of-credit. The Bank granted the Company a waiver of these financial
covenants for the period ended December 31, 1996 and as of that date. (See Note
11 of "Notes to Consolidated Financial Statements.")
At December 31, 1997, the Company had total mortgage indebtedness of $6.2
million outstanding on four of its office buildings, of which approximately
$780,000 is due February 1, 1999, approximately $4.3 million is due January 1,
2000, approximately $795,000 is due March 1, 2000 and approximately $325,000 is
due March 1, 2001.
Between April and June 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.
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 both
former officers who are defendants 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.
The amount of legal fees incurred with respect to the defense of the former
President and Chief Executive Officer and Chief Financial Officer in the
Securities Litigations, and included in G&A expenses, is as follows:
1996 1997 Total
---- ---- -----
(in thousands)
CEO $360 $163 $523
CFO 159 190 349
---- ---- ----
$519 $353 $872
==== ==== ====
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 (the
"Buyer") which had been newly formed, is in the business of managing medical
practices and providing related consultative services and had entered into
agreements to manage the Alliances (See Notes 1a and 18a of "Notes to
Consolidated Financial Statements"). The Company also had 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 December
31, 1997) with interest payable monthly through July 31, 2000 and, thereafter,
principal and interest monthly through July 31, 2000. The Buyer has paid only
interest through January 1996.
Subsequently, the Company also advanced $3.4 million to the Buyer ($.6
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 $1.1 million. The note for
$215,000, which is dated February 26, 1996, bears interest at a rate equal
13
<PAGE>
to prime plus 2% (10.5% at December 31, 1997) and was due December 31, 1996. No
payments of principal have been made, nor payments of interest beyond May 1996.
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. In April 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 fully reserved in 1995 the original $5.1
million note receivable, plus the $.7 million advanced in 1995. In 1996, the
Company established an additional net reserve of $1.9 million for the $215,000
note, interest accrued on the notes, and advances receivable, net of the
deferred gain of $144,00 on the original sale. In 1997, the Company established
a reserve of $.8 million for 1997 accrued interest not paid by the Buyer and for
advances made in 1997.
In February 1997, the Buyer executed the promissory note for $2.1 million,
bearing interest at the rate of prime plus 2% (10.5% at December 31, 1997), with
repayment of the principal over 36 months, starting upon the occurrence of
certain events explained below (no interest has been paid on this obligation).
Subsequently, in February 1997, the Buyer entered into an Option Agreement with
a potential investor (the "Investor"), whereby the Investor loaned the Buyer
$4,000,000 and received an option to merge with the Buyer, exercisable through
June 30, 1998. 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.
If 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 (which would include expiration
of the option) 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 continue paying 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 Buyer has not made any of the interest payments due under
the $2.1 million note. The notes are subordinated to the Investor's security
interests.
INFLATION
Medical costs have been rising at a higher rate than that for consumer
goods as a whole. The Company believes its premium increases, capitation
arrangements and other cost control measures mitigate, but do not wholly offset,
the effects of medical cost inflation on its operations and its inability to
increase premiums could negatively impact the Company's future earnings.
14
<PAGE>
Independent Auditors' Report
To the Board of Directors and Shareholders of
The WellCare Management Group, Inc.
Kingston, New York
We have audited the accompanying consolidated balance sheets of The
WellCare Management Group, Inc. and subsidiaries (the "Company") as of December
31, 1997 and 1996, and the related consolidated statements of operations,
shareholders' equity (deficiency in assets) and cash flows for each of the three
years in the period ended December 31, 1997. Our audits also included the
financial statement schedules listed in the Index at Item 14. These consolidated
financial statements and financial statement schedules are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
consolidated financial statements and financial statement schedules based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of the Company as of December 31,
1997 and 1996, and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 1997 in conformity with
generally accepted accounting principles. Also, in our opinion, such financial
statement schedules, when considered in relation to the basic consolidated
financial statements taken as a whole, present fairly in all material respects
the information set forth therein.
The accompanying 1997 consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in
Notes 1m and 19 to the consolidated financial statements, the Company's
recurring losses from operations, cash used in operations, deficiency in assets
at December 31, 1997, and failure to maintain 100% of the contingent reserve
requirement of the New York State Department of Insurance at December 31, 1997
raised substantial doubt about its ability to continue as a going concern.
Management's plans concerning these matters are also described in Notes 1m and
19. The consolidated financial statements do not include any adjustments that
might result from the outcome of this uncertainty.
/s/ Deloitte & Touche LLP
- -------------------------
Deloitte & Touche LLP
New York, New York
March 31, 1998
15
<PAGE>
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31, December 31,
(in thousands, except share data) 1997 1996
------------ ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and equivalents ................................. $ 3,368 $ 7,869
Short-term investments - available for sale .......... 103 919
Accounts receivable (net of allowance for doubtful
accounts of $2,422 in 1997 and $1,902 in 1996) ...... 6,802 8,133
Notes receivable (net of allowance for doubtful
accounts of $5,441 in 1997 and $2,032 in 1996) ...... 679 351
Advances to participating providers .................. 2,860 2,320
Other receivables (net of allowance for doubtful
accounts of $1,137 in 1997 and $4,995 in 1996) ...... 4,873 4,874
Taxes receivable ..................................... 284 6,969
Deferred tax asset ................................... 3,927 3,932
Prepaid expenses and other current assets ............ 522 400
-------- --------
TOTAL CURRENT ASSETS ................................. 23,418 35,767
PROPERTY AND EQUIPMENT (net of accumulated depreciation
and amortization of $6,528 in 1997 and $5,157 in 1996) . 11,094 12,261
OTHER ASSETS:
Restricted cash ...................................... 5,771 6,667
Notes receivable (net of allowance for doubtful
accounts of $2,655 in 1997 and $3,313 in 1996) ...... 122 1,104
Preoperational costs (net of accumulated amortization
of $2,562 in 1997 and $1,237 in 1996) ............... 1,440 2,764
Other non-current assets (net of allowance for
doubtful accounts of $1,133 in 1997 and $1,516 in
1996 and accumulated amortization of $869 in 1997
and $585 in 1996) ................................... 3,302 4,749
Goodwill (net of accumulated amortization of $2,339
in 1997 and $1,702 in 1996) ......................... 7,391 8,028
-------- --------
TOTAL ................................................ $ 52,538 $ 71,340
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
16
<PAGE>
<TABLE>
<CAPTION>
December 31, December 31,
1997 1996
------------ ------------
<S> <C> <C>
LIABILITIES AND (DEFICIENCY ASSETS)/
SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt .................... $ 618 $ 702
Medical costs payable ................................ 16,199 15,965
New York State demographic pool ...................... 1,122 --
Accounts payable ..................................... 1,188 1,002
Accrued expenses and other ........................... 3,722 2,678
Unearned income ...................................... 5,684 4,248
-------- --------
TOTAL CURRENT LIABILITIES ............................ 28,533 24,595
LONG-TERM LIABILITIES:
Long-term debt ....................................... 25,852 26,467
Other liabilities .................................... 4 4
-------- --------
TOTAL LIABILITIES .................................... 54,389 51,066
-------- --------
COMMITMENTS AND CONTINGENCIES ........................... -- --
(DEFICIENCY IN ASSETS)/
SHAREHOLDERS' EQUITY:
Class A Common Stock ($.01 par value;
1,199,015 and 1,484,482 shares authorized;
1,084,025 and 1,369,492 shares issued and
outstanding at December 31,1997 and 1996,
respectively) ....................................... 11 14
Common Stock ($.01 par value; 20,000,000 shares
authorized, 5,228,217 and 4,942,750 shares issued
at December 31, 1997 and 1996, respectively) ........ 52 49
Additional paid-in capital ........................... 26,624 26,624
Accumulated deficit .................................. (34,987) (12,121)
Statutory reserve .................................... 6,656 5,932
-------- --------
(1,644) 20,498
Unrealized loss on short-term investments ............ -- (11)
Less:
Notes receivable from shareholders .................. 5 6
Treasury stock (at cost; 12,850 and 14,066 shares of
Common Stock at December 31, 1997 and 1996,
respectively) ...................................... 202 207
-------- --------
TOTAL (DEFICIENCY IN ASSETS)/
SHAREHOLDERS' EQUITY .................................. (1,851) 20,274
-------- --------
TOTAL ................................................ $ 52,538 $ 71,340
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
17
<PAGE>
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18
<PAGE>
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------------
(in thousands, except per share amounts) 1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
REVENUE:
Premiums earned ............................. $142,115 $157,156 $144,518
Administrative fee income ................... -- 1,592 2,792
Interest and investment income .............. 1,234 1,338 999
Other income - net .......................... 521 1,000 4,240
-------- -------- --------
TOTAL REVENUE ........................... 143,870 161,086 152,549
-------- -------- --------
EXPENSES:
Medical expenses ............................ 126,251 135,957 115,560
General and administrative expenses ......... 34,485 39,334 30,279
Depreciation and amortization expense ....... 3,624 3,254 2,292
Interest expense ............................ 1,652 2,185 1,447
Expenses to affiliates - net ................ -- 176 182
-------- -------- --------
TOTAL EXPENSES .......................... 166,012 180,906 149,760
-------- -------- --------
(LOSS)/INCOME BEFORE INCOME TAXES ................ (22,142) (19,820) 2,789
(BENEFIT)/PROVISION FOR INCOME TAXES ............. -- (8,038) 1,116
-------- -------- --------
NET (LOSS)/INCOME ................................ $(22,142) $(11,782) $ 1,673
======== ======== ========
(LOSS)/EARNINGS PER SHARE - BASIC ................ $ (3.52) $ (1.87) $ 0.27
======== ======== ========
Weighted average shares of common
stock outstanding ............................... 6,299 6,296 6,250
======== ======== ========
(LOSS)/EARNINGS PER SHARE - DILUTED .............. $ (3.52) $ (1.87) $ 0.26
======== ======== ========
Weighted average shares of common stock and
common stock equivalents outstanding ............ Not Not
Applicable Applicable 6,396
========
</TABLE>
See accompanying notes to consolidated financial statements.
19
<PAGE>
Consolidated Statements of Shareholders' Equity
<TABLE>
<CAPTION>
Years Ended December 31,
1997, 1996 and 1995
(in thousands)
Class A Additional
Common Common Paid-in
Stock Stock Capital
------- ------- ----------
<S> <C> <C> <C>
BALANCE, DEC 31, 1994 ....................................... $ 16 $ 47 $25,861
Conversion of Class A Common shares to Common shares ........ (1) 1 --
Exercise of stock options ................................... -- -- 450
Issuance of treasury stock .................................. -- -- 60
Repayments/reclassification of shareholders' notes - net .... -- -- --
Net change of valuation allowance on short-term investments . -- -- --
Transfer to statutory reserve ............................... -- -- --
Net income .................................................. -- -- --
------- ------- -------
BALANCE, DEC 31, 1995 ....................................... 15 48 26,371
Conversion of Class A Common shares to Common shares ........ (1) 1 --
Exercise of stock options ................................... -- -- 252
Issuance of treasury stock .................................. -- -- 1
Repayments/reclassification of shareholders' notes - net .... -- -- --
Net change of valuation allowance on short-term investments . -- -- --
Transfer to statutory reserve ............................... -- -- 1,572
Net (loss) .................................................. -- -- --
------- ------- -------
BALANCE, DEC 31, 1996 ....................................... 14 49 26,624
Conversion of Class A Common shares to Common shares ........ (3) 3 --
Adjustment to Treasury Stock ................................ -- -- --
Repayments/reclassification of shareholders' notes - net .... -- -- --
Net change of valuation allowance on short-term investments . -- -- --
Transfer to statutory reserve ............................... -- -- 724
Net (loss) .................................................. -- -- --
------- ------- -------
BALANCE, DEC 31, 1997 ....................................... $ 11 $ 52 $26,624
======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
20
<PAGE>
<TABLE>
<CAPTION>
Unrealized Total
(Accumulated (Loss)/Gain (Deficiency in
Deficit)/ on Notes Assets)/
Retained Statutory Short-term Receivable- Treasury Sharehodlers'
Earnings Reserve Investments Shareholders Stock Equity
---------- --------- ----------- ------------ -------- --------------
<S> <C> <C> <C> <C> <C>
$ 1,017 $2,903 $(104) $ (38) $(395) $ 29,307
-- -- -- -- -- --
-- -- -- -- -- 450
-- -- -- -- 184 244
-- -- -- 21 -- 21
-- -- 109 -- -- 109
(1,457) 1,457 -- -- -- --
1,673 -- -- -- -- 1,673
-------- ------ ------ ----- ----- --------
1,233 4,360 5 (17) (211) 31,804
-- -- -- -- -- --
-- -- -- -- -- 252
-- -- -- -- 4 5
-- -- -- 11 -- 11
-- -- (16) -- -- (16)
(1,572) 1,572 -- -- -- --
(11,782) -- -- -- -- (11,782)
-------- ------ ------ ----- ----- --------
(12,121) 5,932 (11) (6) (207) 20,274
-- -- -- -- -- --
-- -- -- -- 5 5
-- -- -- 1 -- 1
-- -- 11 -- -- 11
(724) 724 -- -- -- --
(22,142) -- -- -- -- (22,142)
-------- ------ ------ ----- ----- --------
$(34,987) $6,656 $ -- $ (5) $(202) $ (1,851)
======== ====== ====== ===== ===== ========
</TABLE>
See accompanying notes to consolidated financial statements.
21
<PAGE>
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------
(in thousands) 1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net (loss)/income ..................................... $(22,142) $(11,782) $ 1,673
Adjustments to reconcile net (loss)/income to net
cash (used)/provided by operating activities:
Depreciation and amortization .................... 3,624 3,254 2,292
Increase in deferred taxes ....................... -- (1,711) (1,788)
Loss/(gain) on sale of assets and other .......... 103 (71) 57
Changes in assets and liabilities:
Decrease/(increase) in accounts receivable - net . 1,331 5,808 (6,545)
Increase in medical costs payable ................ 234 1,935 522
Decrease/(increase) in due from affiliates - net . -- 223 (27)
Increase in NYSID payable ........................ 1,122 -- --
Decrease/(increase) in accounts receivable -
non-current - net .............................. 530 (644) --
Decrease/(increase) in other receivables - net ... 732 (148) (3,554)
Increase/(decrease) in accounts payable,
accrued expenses and other current liabilities . 1,230 1,531 (97)
Decrease/(increase) in taxes receivable/payable .. 6,885 (5,021) (2,186)
(Increase)/decrease in prepaid expenses and other . (122) 19 55
Increase in unearned income ...................... 1,436 1,187 1,048
Decrease/(increase) in restricted cash ........... 896 1,574 (1,657)
(Increase)/decrease in advances to participating
providers ....................................... (540) 757 1,032
Decrease/(increase)in other non-current assets -
excluding preoperational costs and accounts
and other receivables .......................... 191 (584) 41
Other operating activities - net ................. (280) (399) (166)
-------- -------- --------
NET CASH USED IN OPERATING ACTIVITIES ................. (4,770) (4,072) (9,300)
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment ................................. (314) (538) (1,608)
Decrease in notes receivable .......................... 653 613 466
Sale of investments ................................... 811 6,841 12,702
Purchase of investments ............................... -- (6,500) (6,367)
Increase in preoperational costs ...................... -- (420) (1,589)
Payments to acquire MCA, net of cash acquired ......... -- -- (215)
Other investing activities - net ...................... 11 (16) 109
-------- -------- --------
NET CASH PROVIDED BY/(USED IN) INVESTING ACTIVITIES ... 1,161 (20) 3,498
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of stock and treasury
stock - net .......................................... 5 3 244
Repayment of notes payable and long-term debt ......... (898) (15,002) (8,295)
Proceeds from exercise of stock options ............... -- 254 450
Proceeds from notes payable and long-term debt ........ -- 21,239 16,545
Other financing activities - net ...................... 1 11 21
-------- -------- --------
NET CASH (USED IN)/PROVIDED BY FINANCING ACTIVITIES ... (892) 6,505 8,965
-------- -------- --------
NET (DECREASE)/INCREASE IN CASH AND CASH EQUIVALENTS .. (4,501) 2,413 3,163
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD ........ 7,869 5,456 2,293
-------- -------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD .............. $ 3,368 $ 7,869 $ 5,456
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
22
<PAGE>
Notes to Consolidated Financial Statements
YEARS ENDED DECEMBER 31, 1997, 1996 and 1995
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. Description of Operations - The WellCare Management Group, Inc. ("WellCare"
or the "Company"), a New York corporation, owns, operates and provides
management services to health maintenance organizations ("HMOs"). An HMO is an
organization that accepts contractual responsibility for the delivery of a
stated range of health care services to its enrollees for a predetermined,
prepaid fee.
WellCare of New York, Inc. ("WCNY"), a wholly-owned subsidiary, operates as an
HMO in New York State. WCNY has a certificate of authority under Article 44 of
the New York State Public Health Law to operate in 25 counties in the Hudson
River Valley, Mohawk River Valley, Albany and Leatherstocking regions of New
York State, Westchester County and in four counties in New York City. WCNY is a
mixed IPA/Direct Contract model HMO. Under this type of arrangement, agreements
are entered into with regional health care delivery networks currently organized
as independent practice associations ("IPAs" or "Alliances"), which in turn
contract with providers to render health care services to an HMO's enrollees,
and directly with individual primary care physicians or physician groups for the
provision of such medical care.
Effective October 1994, WCNY had entered into contracted arrangements with a
majority of its primary care physicians and specialists through contracts with
the Alliances to provide health care services to WCNY's commercial and Medicaid
members. Initially, each Alliance was a professional corporation that then
contracted with individual primary care physicians and specialists to provide
health care services. At inception, there were four Alliances each with
different equity owners; by December 1995 the four Alliances had combined into
two Alliances with the same equity owner. The Company has been advised that in
late 1997, the Alliances converted to IPAs by setting up new corporations that
have recontracted with physicians. WCNY's initial agreement with each of the
Alliances, for the period from October 1994 through September 1995, required
payment to the Alliances based on a percentage of premium revenue for effected
members. Effective October 1995, the Company entered into a three year agreement
with each of the Alliances at specified per member per month ("PMPM") rates,
providing for increases ranging from 1% to 6% for the period from October 1995
through December 1998. Such rates were established through arms-length
negotiation with the Alliances. As part of this change in capitation
arrangements, the risk-sharing accounts of Alliance primary care physicians,
which had previously been capitated by WCNY were settled and outstanding
deficits were paid to WCNY in the fourth quarter of 1994, thereby reducing
WCNY's medical expenses during such quarter.
In an effort to improve the profitability of WCNY and the Alliances, WCNY
entered into a letter of understanding with the Alliances in September 1996 to
restructure its capitation arrangement. Pursuant to the terms of the
restructured arrangement, WCNY reassumed the risk for certain previously
capitated services, and also reduced the capitation rates paid for the services
which continued to be provided by the Alliances. WCNY capitated the Alliances
for all physician services, both primary care and specialty services, on a PMPM
basis for each HMO member except for physician services in the areas of certain
diagnostics and mental health, which WellCare capitated through contracts with
certain other regional integrated delivery systems. Additionally, if certain
conditions are met, these contracts will be extended to ten-year terms.
During 1995 and 1996, WCNY provided incentives to its IPAs and primary care
physicians to control health care expenses through the use of capitation
arrangements. Under these capitation arrangements, IPAs and primary care
physicians are entitled to the surplus to the extent health care costs incurred
are less than the negotiated capitation payments. Surpluses paid to the IPAs and
primary care physicians are recorded as medical expenses in the period in which
the related health care costs are incurred. During 1997, these incentive
arrangements were terminated.
Each IPA, in turn, capitates each IPA primary care physician from the monthly
payments received from WCNY with a fixed monthly payment for each HMO member
designating the IPA physician as their primary care provider, retaining and
allocating the balance to a group risk pool for payment to specialists.
Specialists are compensated on a fee-for-service basis by each IPA which
disburses payments to these specialists. To the extent the risk pools are
insufficient to cover the specialists' fees, the amounts paid to the specialists
as a group can be proportionately reduced, up to a maximum of 30%. To the extent
the risk pools are still insufficient to cover the specialists' fee after a
maximum reduction, a portion of the capitation payments to primary care
physicians can be withheld to cover the specialists' fees after the reduction.
Primary care physicians and specialists are furnished with periodic utilization
reports and the IPA accounts are reconciled on a quarterly basis.
23
<PAGE>
Notes to Consolidated Financial Statements (continued)
WellCare of Connecticut, Inc. ("WCCT"), a wholly-owned subsidiary, operates as
an IPA model HMO in the state of Connecticut. Under this type of arrangement,
agreements are entered into with IPAs and PHOs and individual physicians for the
provision of all medical care to WCCT's enrollees for a specified fee for
services rendered. WCCT is approved to operate State-wide in Connecticut.
WCNY and WCCT are collectively referred to as the "WellCare HMOs."
WellCare Administration, Inc. ("WCA") (a/k/a Agente Benefit Consultants, Inc.-
"ABC") is a wholly-owned subsidiary that administers the Company's pharmacy,
vision care, dental care and other specialty care benefit programs as
stand-alone products to self-insured employer and other groups.
WellCare Development, Inc. ("WCD") is a wholly-owned subsidiary formed to
acquire, own and develop real estate.
WellCare Medical Management, Inc. ("WCMM"), formerly a wholly-owned subsidiary
formed to provide managerial, administrative and financial services to
physicians, was sold in June 1995 (see Note 4).
WellCare University ("WCU"), a division of WellCare, was formed to focus on:
strategic planning, training and research and development for WellCare and
others within the managed care/health care arena. WCU's operations were
substantially reduced during 1997 and WCU is dormant as of December 31, 1997.
Park West Entertainment, Inc. ("PWE"), an affiliated entity, had provided
certain conferencing and administrative services through December 1996.
Bienestar, Inc. ("Bienestar"), was an unconsolidated affiliate until December
17, 1996, at which time WellCare sold its interest in Bienestar to the Company's
former Chief Executive Officer and President. In July 1996, WCNY entered into an
agreement for Bienestar to provide consulting and educational services regarding
wellness and integrated health services.
In March 1998, the Company engaged Bear, Stearns & Co. Inc., to assist the
Company in exploring its strategic opportunities. This could include joint
venture, merger or sale of all or a portion of the Company.
b. Principles of Consolidation - The consolidated financial statements include
the accounts of the Company and all majority owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated.
c. Revenue Recognition - Premiums from subscribers are recorded as income in the
period that subscribers are entitled to service. Premiums received in advance
are deferred. Subscriber premiums, for both WCNY and WCCT, are determined on an
annual basis using community rating principles as required by the Insurance
Department of each state. Although the rate filing requests and approval process
are performed on an annual basis, the HMOs are allowed to contract with
subscribers throughout the year based upon a "guaranteed" rate which
incorporates an estimated community rate. The WellCare HMOs are required to
remit or collect any difference between the community rate ultimately approved
and the guaranteed rate in the subsequent twelve-month contract period. In
connection with its biennial audit, NYSID determined that WCNY was not in
compliance with the requirement to settle these differences within twelve months
(see Note 19). Accounts receivable include approximately $729,000 and $1,763,000
at December 31, 1997 and 1996, respectively, which represented the excess of
subscriber premiums accrued based on approved community rates over amounts
actually billed under guaranteed rates, of which approximately $224,000 and
$754,000, respectively, have been classified as non-current.
Administrative and management fees received in advance are deferred and
recognized as income over the period in which services are rendered.
Accounts receivable, other receivables, notes receivable and other non-current
assets are reported net of reserves for doubtful accounts of approximately
$12,788,000 and $13,758,000 at December 31, 1997 and 1996, respectively.
d. Medical Costs Payable and Medical Expenses - Medical expenses for primary
care, hospital inpatient services, outpatient specialty care and pharmacy
services, including those for which advances have been made to providers, are
recorded as expenses in the period in which services are provided. The expense
is based in part on estimates, including an accrual for medical services
incurred but not yet billed ("IBNR"), which accrual is included in medical costs
payable. The IBNR accrual is based on a number of factors, including hospital
admission data and prior claims experience. Adjustments, as necessary, are made
to medical expenses in the period the actual claims costs are ultimately
determined. The Company believe the IBNR estimates in the Consolidated Financial
Statements are adequate; however, there can be no assurance that actual health
care claims costs will not exceed such estimates.
e. Reinsurance - The WellCare HMOs insure excess loss for commercial health care
claims under policies with a reinsurance company. Effective September 1995, WCNY
reinsured a portion of its Medicare Full Risk program with a reinsurance company
under a quota share agreement and, effective November 1996, supplemented this
agreement with a separate excess loss reinsurance policy.
24
<PAGE>
In March 1998, the Company amended its quota share arrangement with its
reinsurer. Such amendment will reduce the amount of future recoveries, but does
not affect the arrangement in place for 1997 and prior periods.
Effective August 1996, WCNY's Medicaid claims were covered under an excess loss
reinsurance policy. Previously, this coverage had been provided by New York
State. Premiums for these policies are reported as medical expense and insurance
recoveries are recorded as a reduction of medical expense. Under the excess loss
reinsurance policies, recoveries are made for annual claims of each enrollee or
each covered dependent of each enrollee in excess of the deductible established
in the policy, subject to certain limitations. From November 1994, through
October 1995, the deductible for commercial health care claims was $100,000,
increased to $115,000 in November 1995, and decreased to $85,000 in November
1996. The deductibles for the Medicaid and Medicare Full Risk products are
$115,000 and $200,000, respectively.
Reinsurance premiums charged to medical expenses in the accompanying
consolidated financial statements amounted to approximately $585,000, $560,000,
and $520,000 in 1997, 1996, and 1995, respectively. Reinsurance recoveries of
approximately $1,747,000, $524,000, and $577,000 in 1997, 1996, and 1995,
respectively, have been recognized as a reduction in medical expenses.
Included in other receivables at December 31, 1997 and 1996, were amounts
recoverable from the reinsurers of approximately $2,687,000 and $1,155,000,
respectively.
f. Short-term Investments - The Company has determined that the securities
included in short-term investments, consisting primarily of state and municipal
obligations might be sold prior to maturity to support its cash requirements.
Such investments have, therefore, been classified as available for sale. The
basis for available for sale securities is market value.
g. Advances to Participating Providers - Advances to participating medical
providers consist of amounts advanced to providers, principally hospitals, which
are under contract with the Company to provide medical services to plan members.
Such advances help provide funding to these providers for claims incurred but
not yet reported or claims in the process of adjudication.
h. Property and Equipment - Property and equipment is stated at cost, less
accumulated depreciation. Depreciation is computed by the straight-line method
based upon the estimated useful lives of the assets which range from 5 to 39
years.
i. Preoperational Costs - Preoperational costs, which include service area and
product line expansion costs, consist of certain incremental separately
identifiable costs directly associated with building a provider base of network
physicians in service areas in which the Company is applying for licensure and
expanding the Company's Medicare managed care program. Such costs are deferred
until the related licensure approval is received at which time the costs are
amortized on a straight-line basis over a 36-month period. Preoperational costs
are reported net of accumulated amortization. At December 31, 1997 and 1996,
accumulated amortization approximated $2,562,000 and $1,237,000, respectively.
j. Goodwill - Goodwill represents the excess of the purchase price over the fair
value of the net assets of acquired entities and is amortized on the
straight-line method over a 15-year period.
The Company evaluates the recoverability of goodwill by monitoring, among other
things, reenrollment trends of membership acquired as well as the inherent
profitability of such membership as determined in connection with annual rate
filings. The Company has determined that no impairment exists at December 31,
1997.
k. Advertising Costs - Advertising costs, which include costs for certain
marketing materials and development/implementation of public relations and
marketing campaigns, are expensed as incurred. Advertising costs expensed in
1997, 1996, and 1995, were approximately $2,226,000, $2,046,000, and $1,723,000,
respectively.
l. Income Taxes - The Company recognizes deferred tax liabilities and assets for
the expected future tax consequences of events that have been included in the
consolidated financial statements or tax returns. Accordingly, deferred tax
liabilities and assets are determined based on the difference between the
financial statement and tax bases of assets and liabilities using enacted tax
rates in effect for the year in which the differences are expected to reverse
and the benefits of operating loss carryforwards. A valuation allowance is
required to reduce net deferred tax assets unless management believes it is more
likely than not that such deferred tax assets will be realized.
m. Cash Flows - For purposes of the statements of cash flows, the Company
considers all highly liquid debt instruments purchased with a maturity of three
months or less to be cash equivalents. The Company considers all other
instruments to be short-term investments. Cash equivalents are carried at cost
which approximates market value.
At December 31, 1997, the Company had a working capital deficiency of $5.1
million, excluding the $5.8 million cash reserve required by New York State
which is classified as a non-current asset, compared to working capital of $11.2
million, excluding the $6.7 million cash reserve, at December 31, 1996; the
decrease in working capital is attributable primarily to the cash
25
Notes to Consolidated Financial Statements (continued)
operating loss incurred by the Company during 1997. The Company intends to
finance its current and future operations from the positive cash flow from its
projected return to profitability in 1998 via increased membership, rate
increases and further reductions in medical and general and administrative
expenses. The Company is also aggressively pursuing balances due from commercial
customers in accordance with contractual stipulations to more closely match the
collection of premium with the payment of provider capitation fees and fees for
service. A significant portion of premiums receivable are due from governmental
agencies relating to the Medicaid program, some of which relate to 1996 and the
early part of 1997. Approximately $650,000 was collected in March 1998, and the
remainder is anticipated to be collected in the second quarter of 1998. The
collection of these balances will have a positive effect on the Company's cash
flow. Additionally, cash is expected from the proceeds upon the anticipated
exercise of the Investor's option to merge with the Buyer, as discussed in Note
4. Management believes that the Company will have sufficient funds available
from the above sources to maintain its planned level of operations and programs
for 1998.
n. Long-Lived Assets - The Financial Accounting Standard Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of"
("SFAS 121") effective for fiscal years beginning after December 15, 1995. There
was no effect on the consolidated financial statements from the adoption of this
statement.
o. Stock-Based Compensation - The FASB issued SFAS No. 123, "Accounting for
Stock-Based Compensation" ("SFAS 123"), which defines a fair value method of
accounting for the issuance of stock options and other equity instruments,
effective for fiscal years beginning after December 15, 1995. Under the fair
value method, compensation cost is measured at the grant date based on the fair
value of the award and is recognized over the service period, which is usually
the vesting period. Pursuant to SFAS 123, companies are permitted to continue to
account for such transactions under Accounting Principles Board Opinion ("APB")
No. 25, "Accounting for Stock Issued to Employees", ("APB 25"), but would be
required to disclose in a note to the consolidated financial statements pro
forma net incomes, and per share amounts as if the company has applied the new
method of accounting. The Company has elected to continue to account for such
transactions under APB 25 and disclose per SFAS 123 the pro-forma effects (See
Note 15).
p. Current Accounting Pronouncements - SFAS No. 130, "Reporting Comprehensive
Income", ("SFAS 130") will require all companies to present all non-owner
changes in equity, e.g., market value adjustments to investments and adjustments
to the minimum pension liability, in a full set of financial statements,
effective the first quarter of 1998.
SFAS No. 131, "Disclosures About Segments of an Enterprise and Related
Information", ("SFAS 131") will require disclosure of "operating segments" based
on the way management disaggregates the Company for making internal operating
decisions. The new disclosures will be effective for the fiscal year ending
December 31, 1998.
The Company is presently evaluating the applicability of SFAS 130 and SFAS 131
to its operations.
SFAS No. 128, "Earnings per Share" ("SFAS 128") amends the standards for
computing and presenting earnings per share ("EPS"), to require the dual
presentation of basic and diluted EPS on the face of the income statement. SFAS
128 is effective for periods ending after December 15, 1997. The Company has
adopted SFAS 128, and has reflected the impact on prior period computations,
where appropriate.
q. Use of Estimates - The preparation of consolidated financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the consolidated financial statements and the reported amounts of revenues and
expenses during the reporting period. The amounts of IBNR medical expenses, the
reserve for uncollectible receivables, recoveries from third parties for
coordination of benefits, final determinations of medical cost adjustment pools
by New York State, and medical premiums subject to retrospective adjustment,
require the significant use of estimates. Actual results could differ from those
estimates used by management in the preparation of these consolidated financial
statements.
r. Reclassifications - Certain amounts in the 1996 and 1995 consolidated
financial statements have been reclassified to conform to the 1997 presentation.
2. MEDICAL EXPENSE
a. During 1997, the Company expensed approximately $1.7 relating to The New York
State Insurance Department ("NYSID") audit of the New York State market
stabilization pool for the audit years, 1993, 1994 and 1995 and for additional
amounts due for the year 1996.
26
<PAGE>
b. In 1994, two entities which were predecessors to the Alliances referred to in
Notes 1a and 18a, 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, then Chairman of the Board of Directors, 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. (Mr. Ullmann subsequently resigned as Chairman and Chief
Executive Officer in April 1996, and as President in September 1996).
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 has been
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, $2,423,000 and $1,738,000, was recorded in 1997, 1996 and 1995,
respectively. The remaining principal balance which is in default, is
approximately $116,000 at March 15, 1998. The Company's ability to reduce future
medical expense by the remaining $116,000 is contingent on this amount being
paid.
c. The Alliances described in Notes 1a and 18a commenced operations in 1994.
Based on information provided to the Company by the Alliances/IPAs, the
Alliances/IPAs have operated at an accumulated deficit since inception (the
deficit was approximately $15 million at December 31, 1997 based on unaudited
information), although the Alliances/IPAs have instituted measures designed to
reduce this deficit, and achieve profitability. The deficit is the result of
medical expense obligations assumed from WellCare upon the formation of the
Alliances, actual and estimated but not yet incurred medical losses in excess of
the amounts initially estimated, and operating losses. The Alliances/IPAs have
financed the deficit through a combination of borrowings from the Buyer and the
Investor referred to in Note 4; 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 in December 1995,
which was guaranteed by the former Chairman of the Board of Director, Chief
Executive Officer and President in his personal capacity.
In August 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/IPAs and WellCare
believed that this withhold program, together with general changes in the
management of the Alliances/IPAs, and the introduction of new provider
reimbursement schedules should enable the Alliances/IPAs to maintain their
operations and reduce their accumulated deficit.
The Company has been advised by counsel that it would have no financial
liability to providers with whom the Alliances/IPAs had contracted for services
rendered in the event the Alliances/IPAs 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/IPAs' agreement with providers, in the event
that the Alliances/IPAs were unable to maintain their operations. Although there
is no contractual obligation, in the event of continuing losses or increasing
deficit by the Alliances/IPAs, the Alliances/IPAs may 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/IPAs
and has no intention to agree to such terms if requested by the Alliances/IPAs
beyond the contractual increases described in Note 1a. However, as outlined
below, the Company agreed to record charges to medical expense based on the
instructions of NYSID. Effective September 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.
d. In connection with a comprehensive review of its arrangements with the
Alliances, NYSID accelerated its normal statutory audit of WCNY. In 1996, NYSID
instructed the Company to assume certain medical expenses of prior periods and
to assume responsibility for unpaid inpatient hospital claims at June 30, 1996,
which had been contractually assumed by the Alliances. This resulted in
additional medical expense in 1996 of approximately $3.7 million. NYSID
instructed the Company to record
27
<PAGE>
Notes to Consolidated Financial Statements (continued)
additional medical expense for medical claims for the period prior to October 1,
1994, which had been contractually assumed by the Alliances. This resulted in
additional medical expense of $2.9 million in 1996. Both of these changes
represent obligations which had previously been assumed by the Alliances.
e. WCNY had arrangements with several medical practices owned by the principal
shareholder of the Buyer for the promotion of WCNY's access to primary care
medical services at these sites. Payments of $1,764,696 in 1996 and $3,691,878
in 1995 have been charged to medical expense. In addition, WCNY advanced
additional payments to the sites ($150,000 in 1997, $2,388,763 in 1996 and
$710,000 in 1995), and at December 31, 1997 and 1996 has included in "Other
Receivables" approximately $2.6 million and $2.5 million, representing
outstanding advances. As a result of operating losses at the sites and the
uncertainty of their ability to repay these advances, WCNY has fully reserved
these receivables. In addition, in October 1995, WCU entered into a similar
arrangement with these medical practices for access to these sites as training
facilities and made payments of $600,000 in 1996 and $150,000 in 1995, which
amounts have been charged to consulting expense in the respective years.
During the second half 1997, the principal shareholder of the Buyer entered
negotiations to sell these medical practices to unrelated third parties. Due to
the continuing losses at these medical practices and their importance in
providing medical services to a significant number of WCNY members, WellCare
determined that it was in the best interests of WCNY's members and WellCare to
subsidize the practices to avoid service disruptions to WCNY's members. During
1997 approximately $583,000 was advanced by WellCare to these practices to meet
operating expenses. These amounts have been expensed in 1997 as bad debt
expense. WellCare has advanced an additional $166,000 to the practices in 1998.
It is anticipated that the medical practices will be sold in the first half of
1998.
3. ACQUISITION OF MANAGED CARE ADMINISTRATORS, INC.
In March 1995, the Company acquired the assets and assumed certain liabilities
of MCA, a company engaged in managing a network of primary care physicians who
provide health care services to Medicaid recipients in New York City. As part of
the purchase price, MCA is to be paid each calendar year an amount equal to
twenty percent (20%) of the pre-interest, pre-tax income generated by the
acquired assets. There was no earn out in 1997, 1996 and 1995.
4. SALE OF WELLCARE MEDICAL MANAGEMENT, INC.
In June 1995, the Company contributed approximately $5.1 million to its then
wholly-owned subsidiary, WCMM, which was engaged in managing physician
practices, and then sold the assets of WCMM for cash of $.6 million and note
receivable of $5.1 million. The buyer (the "Buyer"), which had been 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. 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 December 31, 1997), with interest payable
monthly through July 31, 2000. The Buyer has paid only interest through January
1996.
The Company has also advanced $3.4 million to the Buyer ($.6 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 $1.1 million. The note for $215,000, which is dated
February 26, 1996, bears interest at a rate equal to prime plus 2% (10.5% at
December 31, 1997) and was due December 31, 1996. No payments of principal have
been made on this note, nor payments of interest beyond May 1996.
In February 1997, the Buyer executed the promissory note for $2.1 million,
bearing interest at the rate of prime plus 2% (10.5% at December 31, 1997), with
repayment of the principal over 36 months, starting upon the occurrence of
certain events explained below (no interest has been paid on this obligation).
Subsequently, in February 1997, the Buyer entered into an Option Agreement with
a potential investor (the "Investor"), whereby the Investor loaned the Buyer
$4,000,000 and received an option to merge with the Buyer, exercisable through
June 30, 1998. 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. If 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, (which would include
expiration of the option), or March 14, 1999, the forbearance will be rescinded
and the original payment terms of the $5.1
28
<PAGE>
million note reinstated. The Buyer would be obligated to continue paying 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 Buyer has not
made any of the interest payments due under the $2.1 million note. The notes are
subordinated to the Investor'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. In April 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 established an additional net reserve of $1.9 million for the
$215,000 note, interest accrued on the notes, and advances receivable, net of
the deferred gain of $144,000 on the original sale. In 1997, the Company
established a reserve of $.8 million for 1997 accrued interest not paid by the
Buyer and for advances made in 1997.
5. SHORT-TERM INVESTMENTS
The value of short-term investments is as follows:
<TABLE>
<CAPTION>
Gross
--------------------
Unrealized Unrealized Market
Cost Gains Losses Value
-------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
At December 31, 1997:
Fixed income securities - States and municipalities ....... $101,587 $ -- $ (813) $100,774
Equity securities ......................................... 1,449 1,073 -- 2,522
-------- -------- -------- --------
TOTAL ..................................................... $103,036 $ 1,073 $ (813) $103,296
======== ======== ======== ========
At December 31, 1996:
Fixed income securities - States and municipalities ....... $928,011 $ 3,500 $(18,345) $913,166
Equity securities ......................................... 1,858 4,399 -- 6,257
-------- -------- -------- --------
TOTAL ..................................................... $929,869 $ 7,899 $(18,345) $919,423
======== ======== ======== ========
</TABLE>
The contractual maturities of fixed income securities at December 31, 1997, are
as follows:
Market
Cost Value
--------- --------
Due in one year or less ................... $101,587 $100,774
Due after one year through five years ..... -- --
-------- --------
Fixed income securities ................... $101,587 $100,774
======== ========
6. OTHER RECEIVABLES
Other receivables at December 31, 1997 and 1996 (in thousands) consist of the
following:
1997 1996
------ ------
Current portion of:
Contributions receivable - WCU ....... $ 640 $1,348
Receivable from third-party insurers . 112 171
Reinsurance receivable ............... 2,687 1,155
New York State Pools receivable ...... 377 1,020
Pharmacy rebate receivable ........... 524 1,005
Other 533 175
------ ------
TOTAL .................................. $4,873 $4,874
====== ======
29
<PAGE>
Notes to Consolidated Financial Statements (continued)
7. PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1997 and 1996 (in thousands) consists of
the following:
1997 1996
------- -------
Land .......................................... $ 888 $ 888
Land improvements ............................. 448 439
Buildings and building improvements ........... 9,189 9,119
Leasehold improvements ........................ 434 434
Computer equipment ............................ 5,118 4,942
Furniture, fixtures and equipment ............. 1,545 1,490
Construction in progress ...................... -- 106
------- -------
17,622 17,418
Less accumulated depreciation and amortization 6,528 5,157
------- -------
TOTAL ......................................... $11,094 $12,261
======= =======
Included in computer equipment and furniture, fixtures and equipment is
equipment financed through capital leases aggregating approximately $2,574 at
December 31, 1997 and 1996, respectively. Accumulated amortization relating to
assets financed through capital leases was approximately $2,016 and $1,705 at
December 31, 1997 and 1996, respectively.
8. NOTES RECEIVABLE
Notes receivable of approximately $1,370,000 and 1,337,000 at December 31, 1997
and 1996, respectively represent advances made to six medical practices to
enhance WCNY's provider network. The notes are collateralized by first liens on
all cash, accounts
30
<PAGE>
receivable, inventory, and all office and medical equipment owned
by each of the practices. The notes require monthly principal and
interest payments, at a rate of 7.5% per annum and mature on
January 1, 2001. No payments have been received since March 1997.
A reserve of $624,000 was established in 1997 for unpaid principal
and interest. The owner of the medical practices is currently
negotiating the sale of the practices, and proceeds from such
sales will be used to repay the notes.
9. OTHER NON-CURRENT ASSETS
Other non-current assets at December 31, 1997 and 1996 (in thousands) consist of
the following:
1997 1996
------- ------
Long term portion of:
Deferred taxes - net ........................ $1,514 $1,509
Accounts receivable ......................... 225 755
Receivables from third-party insurers ....... 449 606
Contributions receivable - WCU .............. -- 574
Capitalized costs incurred in connection with
placement of subordinated convertible note .. 743 821
Deposits and others ........................... 371 484
------ ------
TOTAL ......................................... $3,302 $4,749
====== ======
30
<PAGE>
10. LIABILITY FOR MEDICAL COSTS PAYABLE
Activity in the medical costs payable liability is summarized as follows:
DECEMBER 31,
------------------------
1997 1996
--------- ---------
(in thousands)
Balance, beginning of year ........................ $ 15,965 $ 14,030
Incurred related to:
Current year .................................... 122,367 135,366
Prior years ..................................... 3,884 591
--------- ---------
Total incurred .................................... 126,251 135,957
--------- ---------
Paid related to:
Current year .................................... 106,704 120,212
Prior years ..................................... 17,820 13,810
--------- ---------
Total paid ........................................ 124,524 134,022
--------- ---------
Total incurred less total paid and beginning balance 17,692 15,965
Less: incurred related to NYS Demographic Pools (1) (1,493) --
--------- ---------
Balance, end of year .............................. $ 16,199 $ 15,965
========= =========
- -----------------------------
(1) This activity has not been included in medical costs payable.
The liability for accrued medical costs payable includes management's estimate
of amounts required to settle known claims, claims which are in the process of
adjudication and claims incurred but not reported ("IBNR.")
In 1997 and 1996, the Company experienced overall unfavorable development on
claims reserves established as of the previous year-end because of the
following:
The 1997 medical expenses include a $2.5 million charge for adverse development
relating to 1996 medical claims and a $1.7 million charge for the estimated
liability related to NYSID's audit of the 1993-1995 demographic pool and the
1996 demographic pool (see Note 2a) and a $435 credit relating to the 1994
restatement (see Note 2b).
The 1996 medical expenses included the recording, as instructed by NYSID, of
medical expense of (i) approximately $3.7 million relating to unpaid inpatient
hospital claims and (ii) approximately $2.9 million relating to unpaid claims
for the period prior to October 1994. Both of these charges represent
obligations which had previously been assumed by the Alliances and for which the
Company had no contractual obligation to pay (see Note 19).
The 1996 medical expenses were reduced as a result of a prior period
restatements in the amount of $2,423 (See Note 2b).
31
<PAGE>
Notes to Consolidated Financial Statements (continued)
11. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
1997 1996
------------ ------------
(in thousands)
<S> <C> <C>
Subordinated Convertible Note The 1818 Fund II, L.P.;
principal due December 31, 2002; interest at 8% per annum,
payable quarterly (see Note 12) .................................. $ 20,000 $ 20,000
Mortgage Payable - Key Bank of New York; $4,610,000;
interest at LIBOR plus 175 basis points (8.5% at December 31,
1997) with a balloon payment of $3,562,488 due January 1, 2000.
Secured by real estate, buildings, fixtures and assignment of
all leases. ...................................................... 4,060 4,272
Mortgage Payable - Key Bank of New York; first mortgage of
$862,500; interest at base rate (8.5%) at December 31, 1997);
monthly with a balloon payment of $642,250 due March 1, 2000.
Secured by property located in Saugerties. ....................... 748 794
Mortgage Payable - First Hudson Valley; first mortgage of $820,000;
interest at 7.25% with a balloon payment of $727,000 due
February 1, 1999 ................................................. 755 777
Mortgage Payable - First Hudson Valley; first mortgage of $335,000;
interest at prime rate (8.5% at December 31, 1997) with a balloon
payment of $264,525 due March 1, 2001. ........................... 314 326
Note Payable - Lincoln National Administrative Services Corporation;
payable monthly with interest at 6% on the initial $1 million
and prime plus 1% on the balance in excess of $1 million through
January 1997. A portion of the interest is deferred until
January 1, 1997. The amount of deferred interest is $207,430
and is included in other current liabilities. .................... -- 36
Capitalized Lease Obligations; due through 2002; monthly payments
ranging from $425 to $9,103 with interest ranging from
6.5% to 21.8%; secured by equipment .............................. 593 964
-------- --------
Total Debt .......................................................... 26,470 27,169
Less current portion ................................................ 618 702
-------- --------
Long-term portion ................................................... $ 25,852 $ 26,467
======== ========
</TABLE>
In November 1996, the Company's line-of-credit with Key Bank (the "Bank") was
renegotiated with the aggregate limit reduced from $15 million to $8 million. In
addition, the sublimits were reduced for WellCare from $8 million to $3 million,
reduced for WCNY from $10 million to $6 million, and a sublimit of $2 million
established for WCCT. The Company repaid the $3.1 million outstanding under this
line-of-credit in December 1996. At December 31, 1996, the Company was in
technical default of certain financial covenants, although no borrowings were
outstanding on the line-of-credit. The Bank granted the Company a waiver of
these financial covenants for the period ended December 31, 1996 and as of that
date.
In January 1997, the Company executed a renegotiated $6.0 million line-of-credit
with the Bank, which line was scheduled to expire in May, 1998. There were no
borrowings under this line-of-credit and, in May 1997, both parties mutually
agreed to terminate the line-of-credit.
Although the Company was current on all its mortgage obligations, in July 1997,
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 appraisals prepared for Key Bank, by
approximately $1.7 million. The Bank had requested that the Company either
reduce the outstanding obligation, or provide additional collateral for $1.7
million,
32
<PAGE>
otherwise the Bank would 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 disagreed
with the Bank's valuation methodology and has informed the Bank in writing of
this disagreement. The Company continues to classify the debts in accordance
with their original terms.
Maturities of long-term debt (in thousands), excluding capital lease
obligations, and future minimum lease payments under capital leases as of
December 31, 1997, for each of the next five years are as follows:
FUTURE
MINIMUM
LONG-TERM LEASE
DEBT PAYMENTS
--------- --------
Year:
- ----
1998 .................................... 315 331
1999 .................................... 1,050 227
2000 .................................... 4,242 67
2001 .................................... 270 20
2002 .................................... 20,000 --
Thereafter .............................. -- --
-------- -------
25,877 645
Less amount representing interest .......... -- 52
-------- -------
$ 25,877 $ 593
======== =======
12. SUBORDINATED CONVERTIBLE NOTE
In January 1996, The Company completed a private placement of a subordinated
convertible note in the principal amount of $20 million (the "Note"), with The
1818 Fund II, L.P. (the "Fund"), a private equity fund managed by Brown Brothers
Harriman & Co. ("BBH & Co"). The Note and underlying terms were amended on
February 28, 1997 (the "1997 Amendment") by the Company and the Fund. In January
1998, The Fund agreed to convert $5 million of the Note into Common Stock of the
Company, at a conversion price of $4 per share (the "1998 Amendment"). The
conversion requires approval by the New York State Department of Health, which
the Company anticipates receiving in the near future.
The remaining $15 million principal is payable on December 31, 2002. Interest
was initially at the rate of 6% per annum, amended in 1997 to 5.5% per annum,
and amended in 1998 to 8% annum, and is payable quarterly, The Note is
subordinated to all senior indebtedness.
The Note is subject to certain mandatory redemption at the option of the Fund
upon certain changes in control (as defined) of the Company. The redemption
price was initially equal to 115% of the principal amount of the Note, amended
to 130% by the 1997 Amendment and to 150% by the 1998 Amendment, together with
all accrued and unpaid interest. If a change of control occurs within 24 months
of a redemption of the Note, the Company may also be required to pay the Fund an
amount equal to 30% of the principal amount of the redeemed Note. Under certain
conditions, the Note is redeemable at the option of the Company after the fourth
anniversary of the date of the Note.
After the 1998 Amendment, The Fund has the right to convert the outstanding
principal into shares of Common Stock of the Company at a conversion price of $8
per share, subject to the anti-dilution adjustment. Previously the conversion
price was equal to 115% of the average price of the Company's Common Stock
through February 28, 1997, subject to adjustments for certain dilutive events,
with a floor of $9 per share and a ceiling of $15 per share. Initially, the
conversion price was $29 per share. The conversion price granted to the holder
of the Note is adjusted, 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 the
conversion price at the time.
Pursuant to the terms of the Note, in January 1996, the Company caused one
vacancy to be created on its Board of Directors and caused a designee of the
Fund, to be appointed to the Board. At such time, the designee's directorship
did not have any classification. In addition, under the terms of the Note, at
the 1996 Annual Meeting of the Shareholders of the Company, the designee was
elected by the shareholders as a Class II Director for a term expiring at the
1998 Annual Meeting of Shareholders.
33
<PAGE>
Notes to Consolidated Financial Statements (continued)
Under the 1997 Amendment, as of February 28, 1997, the Company caused one
vacancy to be created on its Board of Directors and a second 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 1997 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. At
the 1997 Annual Meeting, shareholders voted to amend the Company's Restated
Certificate of Incorporation, eliminating the class of directors and reducing
the Board of Directors to seven with all directors serving annual terms.
As part of the 1998 Amendment, the Fund agreed to waive any existing defaults
known to it. The Company will also have the right to purchase one half of the
shares of the Common Stock and the debt held by the Fund, for $12 million plus
accrued interest, if consolidated earnings before taxes are positive for either
the second or third quarter of 1998. This right is exercisable after filing the
relevant Form 10-Q's, and prior to December 31, 1998
The Company's Consolidated Balance Sheet at December 31, 1997, after giving pro
forma effect (unaudited) to reflect the 1998 Amendment as if it had occurred at
December 31, 1997, is as follows:
DECEMBER 31, 1997
-----------------------------
(in thousands)
(UNAUDITED)
ACTUAL PROFORMA
-------- ----------
Current Assets .................................. $23,418 $23,418
------- -------
Total Assets .................................... $52,538 $52,538
======= =======
Current Liabilities ............................. $28,533 $28,533
(Deficiency in Assets)/Shareholders' Equity ..... $(1,851) $ 3,149
------- -------
Total Liabilities and Shareholders' Equity ...... $52,538 $52,538
======= =======
13. INCOME TAXES
The (benefit)/provision for income taxes (in thousands) consists of the
following:
YEAR ENDED DECEMBER 31,
-----------------------------
1997 1996 1995
------- ------- -------
Current:
Federal ........................ $ -- $(6,388) $ 2,180
State .......................... -- 62 724
------- ------- -------
$ -- $(6,326) $ 2,904
======= ======= =======
Deferred:
Federal ........................ $ -- $ (351) $(1,342)
State .......................... -- (1,361) (446)
------- ------- -------
$ -- $(1,712) $(1,788)
======= ======= =======
34
<PAGE>
A reconciliation of the Federal statutory rate to the Company's effective income
tax rate is as follows:
YEAR ENDED DECEMBER 31,
--------------------------------
1997 1996 1995
-------- -------- --------
Federal statutory rate ........................ 34.0% 34.0% 34.0%
State income taxes - Net of federal benefit ... 6.4 6.6 6.0
-------- -------- -------
Effective rate ................................ 40.4% 40.6% 40.0%
======== ======== =======
At December 31, 1996, the Company recorded a deferred tax asset of approximately
$5.4 million giving recognition to the tax benefit of reversing temporary
differences and state net operation 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 budget. The amounts of these NOLS, related to state tax benefits, are
approximately $897 and $129 for New York and Connecticut, respectively.
Additionally, the maximum utilization period for these NOLS is fifteen (15) and
five (5) years for New York and Connecticut, respectively.
Continuing operating losses during 1997 resulted in additional deferred tax
benefits of approximately $7.8 million. The ability to realize the tax benefits
associated with these losses is dependent upon the Company's ability to generate
future taxable income from operations and/or to effectuate successful tax
planning strategies. Although management believes that profitable operations
will be achieved in 1998, 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.
The Company has also engaged Bear, Stearns Co. Inc., to review available
strategic alternatives. The successful completion of a transaction could be a
source of future taxable income. The Company also is a party to other pending
transactions whose successful completion would generate taxable income in 1998.
The realization of the tax benefits would be achieved upon the completion of any
of these transactions.
Deferred income taxes reflect the net tax effects of (a) temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes, and (b) operating loss
and tax credit carryforwards. The tax effects of significant items comprising
the Company's deferred tax balance as of December 31, 1997 and 1996 are as
follows:
DECEMBER 31,
--------------------
1997 1996
-------- --------
(in thousands)
Deferred tax assets:
Accounts and other receivables - bad debt reserves ... $ 5,167 $ 5,579
Other ................................................ 61 177
Net operating loss carryforward
Federal ............................................ 7,434
State .............................................. 1,466 1,026
------- -------
Total ................................................... 14,128 6,782
------- -------
35
<PAGE>
Notes to Consolidated Financial Statements (continued)
DECEMBER 31,
--------------------------
1997 1996
-------- --------
(in thousands)
Deferred tax liabilities:
Depreciable assets ........................... $ 258 $ 259
Capitalized pre-operational costs ............ 588 1,082
------- -------
Total ........................................ 846 1,341
------- -------
Net before valuation allowance ............... 13,282 5,441
Less: valuation allowance .................... (7,841) --
------- -------
Net deferred tax asset .......................... $ 5,441 $ 5,441
======= =======
Management has not provided a valuation allowance for the 1996 deferred tax
assets in the belief that it is more likely than not that the deferred tax
assets will be realized as a result of future taxable income from operations
through reductions in the cost of medical services, improved medical utilization
controls, reductions in administrative expenses, increases in enrollment and/or
the successful implementation of tax strategies.
The Company's effective tax rate during 1997, 1996 and 1995 was 40.4%, 40.6% and
40.0%, respectively. The fluctuation in the effective rate is primarily
attributable to the amount of nondeductible expenses and tax exempt income, and
the reduction in 1997 of the New York State tax surcharge.
14. COMMON STOCK
The Class A Common Stock and the Common Stock are identical in all respects
except for voting rights, conversion rights and the non-transferability of the
Class A Common Stock. Holders of Class A Common Stock are entitled to ten (10)
votes per share and holders of Common Stock to one (1) vote per share. Class A
Common Stock is not transferable and must be converted to Common Stock to be
sold. Holders of Class A Common Stock may, at their option, convert their shares
to Common Stock on a share-for-share basis.
In January 1998, The Fund agreed to convert $5 million of the Company's Note
into 1,250,000 shares of the Company's Common Stock (see Note 12).
The Company has 1,000,000 shares of preferred stock authorized, no shares
issued.
An aggregate of 900,000 shares of Common Stock are reserved under the Company's
1993 Incentive and Non-Incentive Stock Option Plan (the "Plan"). In addition, an
aggregate of 650,000 shares of Common Stock are reserved under the Company's
1996 Non-Incentive Executive Stock Option Plan.
Earnings/(loss) per share calculations are based on the weighted average number
of shares outstanding for the year, giving effect to all outstanding options.
(Loss) per share for the years ended 1997 and 1996 did not give effect to
outstanding options because the effect would have been anti-dilutive. The
weighted average number of common and common equivalent shares outstanding for
the years ended 1997, 1996 and 1995 were 8,229 shares, 7,014 shares and 6,396
shares, respectively.
36
<PAGE>
15. STOCK OPTIONS
During 1997, 1996 and 1995, the Company granted stock options to certain
individuals to purchase Common Stock at the fair market value of the stock on
the date of the grant. Following is a summary of the transactions:
SHARES UNDER OPTION
----------------------------------------
1997 1996 1995
-------- -------- --------
Outstanding, beginning of year ... 556,455 388,012 335,785
Exercised during the year ........ -- (20,398) (37,408)
Terminated during the year ....... (106,368) (148,159) (25,213)
Granted during the year .......... 200,092 337,000 114,848
-------- -------- --------
Outstanding, end of year ......... 650,179 556,455 388,012
======== ======== ========
Eligible, end of year, for
exercise currently .............. 338,921 175,938 91,778
======== ======== ========
Option price per share ........... $3.01-$24.50 $7.22-$24.50 $11.75-$17.25
In December 1997, the Company amended the exercise price on the 200,000 options
previously granted to the President in 1996, from $10.125 to $3.01 per share. In
September 1997, the Company granted the President options for 30,000 shares, at
an exercise price of $15.00 per share. In February 1998, the Company amended the
exercise price for the 30,000 options to $4.51 per share, and granted additional
options for 100,000 shares, at an exercise price of $5.02 per share.
In December 1996, the Company created the 1996 Non-Incentive Executive Stock
Option Plan (the "NIE Plan") to acknowledge exceptional services to the Company
by senior executives and to provide an added incentive for such senior
executives to continue to provide such services and to promote the best
interests of the Company. An aggregate of 650,000 shares of the Company's Common
Stock, par value $0.01 per share ("Common Stock"), are reserved under to this
plan with options to purchase granted to any one senior executive limited to
600,000 shares or less. All options have a term of five years from the date of
grant but shall terminate, lapse and expire at such earlier time or times as
provided in the Option Agreement governing such option. Options granted are not
subject to review and are conclusive, although in no event shall such purchase
price be less than the fair market value (as defined in the Agreement). The
following is a summary of the transactions under the NIE Plan:
Non-incentive Executive Stock Option Plan:
1997 1996
-------- --------
Outstanding, beginning of year ............. 600,000 --
Exercised during the year .................. -- --
Terminated during the year ................. -- --
Granted during the year .................... -- 600,000
-------- --------
Outstanding, end of year ................... 600.000 600,000
======== ========
Eligible, end of year, for
exercise currently ....................... 198,000 --
======== ========
Option price per share ..................... $4.00-$6.25 $10.00-$15.00
In December 1997, the Company amended the exercise prices on the 600,000
options, granted in 1996, to the Chairman of the Board.
37
<PAGE>
Notes to Consolidated Financial Statements (continued)
The Company has adopted the disclosure-only provisions of SFAS 123 (See Note
1o). Accordingly, no compensation cost has been recognized for grants of stock
options. Had compensation cost for grants made under the Company's two stock
option plans been determined based on the fair market value at the grant dates
in a manner consistent with the provisions of SFAS 123, the Company's net
(loss)/earnings and net (loss)/earnings per share for the years ended December
31, 1997, 1996 and 1995 would have been adjusted to the pro forma amounts below:
YEAR ENDED DECEMBER 31,
--------------------------------------------
1997 1996 1995
--------- --------- ---------
(in thousands, except per share amounts)
Net (loss):
As reported .................. $(22,142) $(11,782) $ 1,673
Pro forma .................... $(23,840) $(12,587) $ 1,440
Net (loss)/ earnings per share:
As reported .................. $ (3.52) $ (1.87) $ 0.27
Pro forma .................... $ (3.78) $ (2.00) $ 0.23
The fair value of options at the date of grant was estimated using the
Black-Scholes option-pricing model with the following weighted-average
assumptions:
YEAR ENDED DECEMBER 31,
--------------------------------------------
1997 1996 1995
--------- --------- ---------
Dividend yield ................. 0.0% 0.0% 0.0%
Expected volatility ............ 70.3% 47.0% 47.0%
Risk-free interest rate(per annum) 6.2% 6.2% 6.4%
Expected lives (in years) ...... 3.1 4.3 3.9
In connection with their employment contracts, the Company's former President
and its former Chief Financial Officer were granted 15,000 and 5,000 phantom
shares, respectively, payable in cash only. These phantom shares vest, subject
to the executive's continued employment with the Company, 25% per year on
December 31st of each year, commencing December 31, 1994, and are payable in
January 1998 in an amount equal to the product of the number of phantom shares
vested in the executive, and the difference between the closing sales prices of
the Company's Common Stock as reported by The Nasdaq Stock Market (National
Market) at various points in time, as specified in their employment contracts.
Through December 31, 1997, no expenses have been accrued.
16. RETIREMENT SAVINGS PLAN
The Company sponsors a retirement plan designed to qualify under Section 401(k)
of the Internal Revenue Code of 1986, as amended. All employees over age
twenty-one (21) who have been employed by the Company for at least one year with
one thousand (1,000) hours of service are eligible to participate in the plan.
Employees may contribute to the plan on a tax deferred basis generally up to 18%
of their total annual salary, but in no event more than $9,500 in 1997. Under
the plan, the Company makes matching contributions at the rate of 50% of the
amount contributed by the employees up to a maximum of 2% of the employee's
total annual compensation.
The employer contributions vest to the employee after five (5) years of an
employee's service with the Company. At December 31, 1997, 93 employees were
enrolled in the plan. The Company intends to contribute approximately $63,000
for 1997, and has contributed $85,000 and $86,000 for 1996 and 1995,
respectively.
17. CONCENTRATIONS OF CREDIT RISK
Financial instruments which potentially subject the Company to concentration of
credit risk consist primarily of investments in short-term investments in
obligations of certain state and municipal entities and premiums receivable.
Short-term investments are managed by professional investment managers within
the guidelines established by the Board of Directors, which, as a
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matter of policy, limit the amounts which may be invested in any one issuer.
Concentrations of credit risk with respect to premiums receivable are limited
due to the large number of employer groups comprising the Company's customer
base. As of December 31, 1997, management believes that the Company has no
significant concentrations of credit risk.
18. COMMITMENTS AND CONTINGENCIES
a. In October 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 an
accumulated deficit since inception but have instituted measures designed to
reduce this deficit and achieve profitability. The Alliance could request
additional funding from the Company beyond the contractual increases described
in Note 1a, which management does not believe should be required and, if
requested by the Alliances, does not intend to provide. As described in Note 4,
in 1997, the Alliances received a $4.0 million cash infusion from an unrelated
third-party.
In an effort to improve profitability of the Company and the Alliances,
effective September 1996, WCNY entered into a letter of understanding with the
Alliances to restructure the capitation arrangements. WCNY reassumed risk for
certain previously capitated services, with a corresponding reduction in rates.
WCNY capitated the Alliances for all physician services, both primary care and
specialty services, on a PMPM basis for each HMO member associated with an
Alliance except for physician services for certain diagnostics and mental
health, which are capitated through regional integrated delivery systems.
Management of the Alliances and WCNY believe that the these measures will enable
the Alliances to maintain their operations and reduce their accumulated
deficits.
b. Between April and June 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.
In July 1996, the Securities Litigations were consolidated in the United States
District Court for the Northern District of New York, and an amended
consolidating complaint (the "Complaint") was served in August 1996. The
Complaint did not name the three additional directors. The Company's auditor,
however, was named as an additional defendant. In October 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
in April 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. Because the
Order did not specifically address the Company's motion to dismiss, in May 1997,
the Company moved for reconsideration of its motion to dismiss and dismissal of
all claims asserted against it. On reconsideration, the judge clarified his
previous ruling expanding it to include a denial of the Company's motion as
well. Following the Court's decision, the Company filed its answer and defense
to the Complaint. In September 1997, the plaintiff's class was certified and the
parties are currently actively 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 both former officers
who are defendants 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. The Company and certain of its subsidiaries, including WellCare of New York,
Inc. have responded to subpoenas issued in April and August 1997 from the United
States District Court for the Northern District of New York through the office
of the United States Attorney for that District. These subpoenas sought the
production of various documents concerning financial and accounting systems,
corporate records, press releases and other external communications. While the
United States Attorney has not disclosed the purpose of its inquiry, the Company
has reason to believe that neither its current management nor its current
directors are subjects or targets of the investigation. The Company has,
however, informed the government that it will continue to cooperate fully in any
way that it can in connection with the ongoing investigation.
d. On July 31, 1996 and October 3, 1996 the Securities and Exchange Commission
issued subpoenas to the Company for the production of various financial and
medical claims information. The Company fully complied with both of these
subpoenas on August 21, 1996 and October 31, 1996.
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Notes to Consolidated Financial Statements (continued)
e. 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.
f. Leases - Future minimum rental payments (in thousands) required under
operating leases that have initial or remaining noncancellable lease terms in
excess of one year as of December 31, 1997, are approximately as follows:
YEAR AMOUNT
-------- --------
1998 $ 1,416
1999 1,205
2000 1,060
2001 489
2002 288
Thereafter 1,215
-------
TOTAL $ 5,673
=======
19. STATUTORY REQUIREMENTS AND DIVIDEND RESTRICTIONS
The New York State Department of Health requires that WCNY maintain cash
balances equal to the greater of five percent (5%) of expected annual medical
costs or $100,000. At December 31, 1997 and 1996, WCNY had required cash
reserves of approximately $5.8 and $6.7 million, respectively, included in Other
Assets. Additionally, WCNY is required to maintain a statutory reserve for the
protection of subscribers in the event WCNY is unable to meet its obligations.
The reserve must be increased annually by an amount equal to at least one
percent (1%) of the premiums earned limited, in total, to a maximum of five
percent (5%) of premiums earned for the most recent calendar year. At December
31, 1997 and 1996, WCNY had a required statutory reserve of approximately $6.7
and $5.9 million respectively.
WCCT is subject to similar regulatory requirements with respect to its HMO
operations in Connecticut.
As a holding company, WellCare's ability to declare and pay dividends is
dependent upon cash distributions from its subsidiaries which, with respect to
WCNY, are limited by state regulations. Although such regulations do not
specifically restrict WCNY from paying dividends, they require WCNY to be
financially sound as determined by the New York State Departments of Health and
Insurance, and thereby may preclude WCNY from paying dividends. Any transaction
that involves five percent (5%) or more of WCNY's assets requires notice to the
Commissioner and Superintendent of the Departments of Health and Insurance,
respectively, and any transaction that involves ten percent (10%) or more of
WCNY's assets requires prior approval. Any decision to pay dividends in the
future will be made by WellCare's Board of Directors and will depend upon the
Company's earnings, capital requirements, financial condition and such other
factors as the Board of Directors may deem relevant.
In January 1997, WCNY received the final report on its biennial statutory
examination for the years ended December 31, 1994 and 1995 from NYSID. In 1996,
during the course of the audit, the Company had recorded two non-recurring
medical charges (See Note 2d) based on the interim findings and instructions of
NYSID. Additionally, the examiners determined that WCNY was not in compliance
with all pertinent New York State regulation sections relating to WCNY's
underwriting and rating procedures and referred the matter to NYSID's Office of
General Counsel for disciplinary action. In December 1997, WCNY entered into a
Stipulation Agreement whereby it agreed to pay a penalty of $91,000 and to
correct past violations. An additional penalty of $66,000 may be assessed if
NYSID subsequently determines that WCNY has not made a good faith effort to
recoup undercharges from incorrectly rated groups.
As a result of the examination, WCNY's statutory net worth was impaired by
approximately $1.1 million. In March 1996, the Company made a capital
contribution of $3 million to WCNY, and in October 1996, the Company loaned WCNY
$3 million under the provisions of Section 1307 of the New York State Insurance
Law. Under Section 1307, the principal and interest are treated as equity
capital for regulatory purposes and are repayable out of the free and divisible
surplus, subject to the prior approval of the Superintendent of Insurance of the
State of New York. These two cash infusions offset the examination's adjustment
to WCNY's net worth.
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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,
except as described in the following paragraph, WCNY is required to maintain a
contingent reserve which must be increased annually by an amount equal to at
least 1% of statutory premiums earned limited, in total, to a maximum of 5% of
statutory premiums earned for the most recent calendar year and which may be
offset by the cash reserve. The cash reserve is calculated at December 31 of
each year and is maintained throughout the following calendar year. At December
31, 1997, WellCare had required cash reserves of $5.8 million and a contingent
reserve of $6.7 million. In the event the contingent reserve exceeds the
required cash reserve, the excess of the contingent reserve over the required
cash reserve is required to be maintained.
Notwithstanding the above, NYSID has the authority to allow an HMO to maintain a
net worth of 50% to 100% of the contingent reserve. WCNY executed a Section 1307
loan in March 1998, which has brought WCNY's December 31, 1997, statutory net
worth above the permitted 50% contingent reserve requirement. WCNY has been
operating within the 50-100% discretionary contingent reserve requirement during
1997 with the full knowledge of NYSID. In June 1997 and November 1997, the
Company loaned $3.1 and $1.3 million, respectively, to WCNY under the provisions
of Section 1307. Management has had ongoing discussions and meetings with NYSID
and has updated NYSID of the Company's plans to obtain additional funds during
1998, which the Company's Board has authorized to be contributed to WCNY's
capital. Management expects that WCNY's 1998 budgeted return to profitability,
together with the capital contribution and additional Section 1307 loans, if
required, will fully fund the contingent reserve requirement in 1998.
In June and November 1997, the Company made capital contributions of $350,000
and $425,000 to WCCT to bring its statutory net worth to the required $1
million. The Company, on March 2, 1998, made an additional capital contribution
of $368,000 to WCCT to bring its statutory net worth above the $1 million
requirement.
20. SUPPLEMENTAL CASH FLOW DISCLOSURES
Cash paid during the year for:
1997 1996 1995
---------- ---------- ----------
(in thousands)
Income taxes ................ $ -- $ 1,792 $ 5,140
Interest .................... $ 1,507 $ 1,951 $ 1,387
During 1997, 1996 and 1995, WellCare entered into capital leases for equipment
in the amounts of approximately $0, $176,000 and $605,000, respectively.
21. 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 receivables consisting primarily of advances to medical
practices, is not materially different from the carrying value of 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 in January
1996, and amended with the holder in February 1997, and January 1998 (see Note
12). 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 of floating rates, are assumed to approximate their fair value.
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Notes to Consolidated Financial Statements (continued)
22. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
Selected unaudited data reflecting the Company's consolidated results of
operations for each of the last eight quarters are shown in the following table
(in thousands, except per share amounts):
1997
-------------------------------------------
1ST 2ND 3RD 4TH
-------- -------- -------- --------
Total revenue .................... $ 34,278 $ 36,976 $ 35,537 $ 37,078
Total expenses ................... 47,280 36,871 39,959 41,901
Income/(loss) from operations .... (13,002) 105 (4,422) (4,823)
Net income/(loss) ................ (13,002) 105 (4,422) (4,823)
Net income/(loss) per share ...... (2.06) .01 (0.70) (0.77)
1996
-------------------------------------------
1ST 2ND 3RD 4TH
-------- -------- -------- --------
Total revenue .................... $ 41,567 $ 41,193 $ 39,587 $ 38,904
Total expenses ................... 41,521 46,082(1) 50,622(2) 42,846
Income/(loss) from operations .... 46 (4,889) (11,035) (3,942)
Net income/(loss) ................ 28 (2,934) (6,621) (2,255)
Net income/(loss) per share ...... 0.00 (0.47) (1.05) (0.35)
The sum of the above quarterly amounts may not equal reported year to date
amounts due to rounding.
- -----------------------------
(1) Includes a one-time $3.7 million charge for the cost of hospital inpatient
care for members, as assumed by the Company based on instruction from NYSID
(see Note 2d).
(2) Includes a one-time $2.9 million charge to medical expenses for medical
claims prior to October 1, 1994, which had previously been assumed by the
Alliances, as per instructions from NYSID (see Note 2d).
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<S> <C>
BOARD OF DIRECTORS TRANSFER AGENT AND REGISTRAR
American Stock Transfer & Trust Company
ROBERT W. MOREY, JR., Chairman 40 Wall Street, 46th Floor, New York, NY 10005
The WellCare Management Group, Inc. Attn.: Shareholder Relations (718) 921-8210
CHARLES E. CREW, JR., Director FORM 10-K REPORT
Vice President and General Manager Shareholders may receive, without charge, a copy of The
GE Plastics - Americas WellCare Management Group, Inc., 10-K Annual Report
General Electric Company submitted to the Securities and Exchange Commission
by writing to:
MARK D. DEAN, D.D.S., Vice Chairman Investor Relations, The WellCare Management Group, Inc.
Dentist in Private Practice Park West/Hurley Avenue Extension, Kingston, NY 12401
WALTER W. GRIST, Director MARKET INFORMATION
Senior Manager A Common Stock of The WellCare Management Group, Inc. is traded on
Brown Brothers Harriman & Co. The Nasdaq Small Cap Stock Market, Inc. under the symbol "WELL",
effective October 27, 1997. Previously, the Common Stock had been
JOHN E. OTT, M.D., Director listed on the Nasdaq National Market. The following table sets forth
Executive Vice President the closing high and low sale prices for the Common Stock for each
The WellCare Management Group, Inc. quarter of the last two calendar years. There is no trading for the
Company's Class A Common Stock.
JOSEPH R. PAPA, Director
President/Chief Executive Officer/COO
The WellCare Management Group, Inc.
HIGH LOW
LAWRENCE C. TUCKER, Director 1996
Partner First Quarter $29 $15
Brown Brothers Harriman & Co. Second Quarter 18 3/4 7 3/4
Third Quarter 12 1/4 7 1/2
EXECUTIVE OFFICERS Fourth Quarter 11 3/4 7 1/4
ROBERT W. MOREY, JR. 1997
Chairman First Quarter $10 5/8 $ 6 1/2
Second Quarter 8 7/8 3 7/8
JOSEPH R. PAPA Third Quarter 6 7/8 2 5/8
President/Chief Executive Officer/COO Fourth Quarter 5 15/16 1 3/8
JOHN E. OTT, M.D. On March 5, 1998, there were approxinately 216 and 12 holders of
Executive Vice President record of the Company's Common Stock and Class A Common Stock,
which did not include beneficial owners of shares registered in
CRAIG S. DUPONT nominee or street name.
Chief Financial Officer
WellCare has not paid cash dividends on its capital stock and does not
MARY LEE CAMPBELL-WISLEY anticipate paying any cash dividends on its Common Stock or Class A
Executive Director Common Stock in the foreseeable future.
ADELE REITER, ESQ.
Vice President, INDEPENDENT PUBLIC ACCOUNTANTS
Legal and Governmental Affairs Deloitte & Touche, LLP
Two World Financial Center
THOMAS CURTIN New York, New York 10281 (212) 436-2000
Vice President of Sales
and Marketing CORPORATE COUNSEL
Epstein Becker & Green, P.C.
250 Park Avenue
New York, New York 10177 (212) 351-4500
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[Logo] WellCare (TM)
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<S> <C> <C> <C>
THE WELLCARE MANAGEMENT GROUP, INC.
CORPORATE HEADQUARTERS
Park West / Hurley Avenue Extension, Kingston, New York 12401 ................. (914) 338-4110
WELLCARE OF NEW YORK, INC.
Park West / Hurley Avenue Extension, Kingston, New York 12401 ................. (914) 338-4110
350 Meadow Avenue, Newburgh, New York 12550 ................................... (914) 566-0700
Executive Woods, 4 Palisades Drive, Albany, New York 12205 .................... (518) 466-0200
660 White Plains Road, Tarrytown, New York 10591 .............................. (914) 460-0060
3209 Vestal Parkway East, Vestal, New York 13850 .............................. (607) 770-1444
WellCare Communications Center, 120 Wood Road, Kingston, New York 12401 ....... (914) 334-4000
WellCare Information Center, 25 Barbarosa Lane, Kingston, New York 12401 ...... (914) 334-4170
WELLCARE OF CONNECTICUT, INC.
127 Washington Avenue, North Haven, Connecticut 06473 ......................... (203) 239-9522
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