UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File No. 0-21684
THE WELLCARE MANAGEMENT GROUP, INC.
(Exact name of Registrant as specified in its charter)
NEW YORK 14-1647239
(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
PARK WEST/HURLEY AVENUE EXTENSION, KINGSTON, NEW YORK 12401
(Address of principal executive offices) (Zip Code)
(914) 338-4110
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.01 PAR VALUE
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the Registrant was required to file
requirements for the past 90 days. YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein,
and will not be contained, to the best of this Registrant's
knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock (Common
Stock, $.01 par value) held by non-affiliates of the Registrant on
March 5, 1998 was $13,991,937 based on the closing sales price of
the Common Stock on such date.
The aggregate number of Registrant's shares outstanding on
March 5, 1998 was 5,308,217 of Common Stock, $.01 par value and
1,004,025 shares of Class A Common Stock, $.01 par value.
DOCUMENTS INCORPORATED BY REFERENCE
Portion of Registrant's definitive Proxy Statement
to be filed pursuant to Regulation 14A (Part III)
Page 1 of 212 Pages
Exhibit Index on Page 90<PAGE>
PART I
ITEM 1. BUSINESS
The WellCare Management Group, Inc. ("WellCare" or the
"Company") is a managed health care company whose wholly-owned
subsidiaries, WellCare of New York, Inc. ("WCNY") and WellCare of
Connecticut, Inc. ("WCCT"), are health maintenance organizations
("HMOs"). WCNY is one of the significant HMOs in the Hudson River
Valley region. WCCT is modeled on WCNY and operates in the State
of Connecticut. Through another wholly-owned subsidiary, WellCare
Administration, Inc. ("WCA") (a/k/a Agente Benefit Consultants,
Inc.- "ABC"), WellCare also provides specialty benefit programs
and related administrative services to employer and other groups
which utilize health care services. WellCare provides management
services to each of its subsidiaries.
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 offset 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 legislation, action
or regulation on the Company's business.
THE MANAGED CARE INDUSTRY
Health care costs in the United States have escalated
dramatically from $324 billion in 1982 to an estimated $1 trillion
in 1997, or approximately 13.6% of the gross national product. As
a result, employers, insurers, governmental entities and health
care providers have sought effective cost containment measures,
contributing to the development of the managed care industry.
Further, the inability of a significant portion of the population
to obtain health care coverage has resulted in health care reform
measures proposed both at the federal and state levels, many of
which focus on managed care as a means for providing quality
health care services on a cost-effective basis.
COMMERCIAL. An HMO provides or arranges for the provision
of comprehensive health care services, including physician and
hospital care, to a voluntarily enrolled population for a fixed,
prepaid premium. Except in cases of medical emergency, the member
receives care from participating primary care physicians who, in
turn, refer the members to participating specialists and hospitals
as required. HMOs provide management controls designed to
encourage efficient and economic utilization of health care
services. These controls include monitoring physician services,
the level of hospital admissions and the lengths of hospital stay,
and promoting the use of non-hospital based medical services.
Initially, managed care was provided primarily through HMOs,
but has expanded to the provision of an increasing variety of
products and services, including preferred provider organizations
("PPO"), utilization review services, third-party claims
administrators and specialty benefit programs, which are marketed
to self-insured employer plans, unions, indemnity insurers and
other groups.
A number of government-sponsored health care programs have
begun to encourage the enrollment of their beneficiaries into
managed care plans, particularly HMOs, as a means of controlling
escalating health care costs. The largest of these programs are
Medicaid and Medicare, which service the poor and the elderly,
respectively.
MEDICAID. The Medicaid program, sponsored by individual
state governments, provides health care services to low income
individuals in the United States, receiving significant financial
support from the federal government. In 1996, approximately $20
billion was spent on Medicaid programs in New York State, which
decreased by approximately 10% to approximately $18 billion in
1997. State governments have increasingly contracted with managed
care companies, including HMOs, to provide health care services to
their Medicaid recipients. In contracting with private managed
care companies, Medicaid shifts most of the financial risk of
health care services delivery to the HMO and allows the Medicaid
program to benefit from the cost-efficiency practices of the
managed care industry. Several states, including Connecticut and
New York, have received federal approval to mandate that all
Medicaid beneficiaries enroll with managed care companies to
receive medical services. At December 31, 1997 only approximately
30% of the estimated 2.1 million eligible Medicaid recipients in
New York State are enrolled in HMO plans.
MEDICARE. Medicare is a federal government-sponsored
entitlement program administered by the Health Care Financing
Administration ("HCFA"), providing health care coverage to
individuals, primarily over 65 years of age. In 1996, Medicare
accounted for approximately $203 billion in health benefits for 38
million aged and disabled enrollees. This represents an amount
which is 8.1% higher than fiscal year 1995 and reflects growth in
beneficiary enrollment, service utilization and medical inflation.
The federal government, through HCFA, has contracted with
HMOs since 1985 and, currently, approximately 6 million Medicare
beneficiaries are enrolled in managed care. Of that number,
approximately 5.3 million are covered under plans that assume risk
in the delivery of health care services to Medicare beneficiaries
("Medicare Risk Contracts"). In contracting with HMOs pursuant to
Medicare Risk Contracts, HCFA bases payment rates on 95 percent of
the average Medicare medical costs, determined by county and
adjusted for age, sex, and institutional status. In addition to
the five percent cost savings, the financial risk and most of the
administrative burdens of health care service delivery are shifted
to the HMO, and the administrative efficiency practices of managed
care are integrated into the Medicare program. At December 31,
1997 there were 324 Medicare Risk Plans nationwide (including
multiple plans by single HMOs). At December 31, 1997, there were
approximately 37 applications for Medicare Risk Contracts pending.
Over 100,000 Medicare beneficiaries each month choose managed
care.
BUSINESS STRATEGY
WCNY and WCCT (the "WellCare HMOs"), licensed to operate
HMOs in the States of New York and Connecticut, respectively,
provide comprehensive health care services to members in their
respective service areas. WCNY's service area extends from New
York City north through the Hudson River Valley to the Capital
Region and Southern Adirondacks and west into the Mohawk River
Valley and Southern Tier. WCCT is licensed to operate statewide
in Connecticut. WCNY and WCCT are mixed IPA/direct contract model
HMOs. WellCare's strategy is to provide high quality,
competitively priced HMO products and other managed care products
and services. Members of the WellCare HMOs are serviced through a
provider network that as of December 31, 1997 consisted of
approximately 3,500 primary care physicians, 8,900 specialists and
107 hospitals.
In March 1998 the Company engaged Bear, Stearns & Co. Inc.
to assist the Company in exploring its strategic opportunities.
WellCare believes that taking advantage of current market
opportunities will ultimately enhance shareholder value. These
opportunities could include joint venture, merger or sale of all
or a portion of the Company. No decision has been made to enter
into any transaction, nor is there an assumption that the
exploration process will result in any transaction.
At December 31, 1997, enrollment in plans owned, managed or
administered by WellCare was approximately 79,200 members from
approximately 2,300 employer groups, compared to approximately
93,500 members enrolled from approximately 2,600 employer groups
at December 31, 1996. At December 31, 1997, no employer group
accounted for more than 5% of the WellCare HMOs' membership.
Commercial membership comprised 61%, Medicaid recipients comprised
26% and Medicare beneficiaries comprised 13% of WellCare's total
membership.
WellCare's total membership decreased approximately 15% from
year-end 1996 to December 31, 1997. Commercial membership
decreased approximately 31%, Medicare membership increased
approximately 82% and Medicaid membership increased approximately
14%. Management believes the 1996 decline in commercial
membership was primarily attributable to customers' adverse
reaction to the negative publicity received by the Company at the
time of the restatement of its 1994 financial results and
subsequent losses in 1996 as well as WellCare's more stringent
application of its credit standards. Many contracts for non-paying or
slow-paying groups were canceled or not renewed. The loss of commercial
membership in 1997 was due primarily to 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.
Management attributes the increases in Medicare and Medicaid membership
to the Company's increased marketing focus on these programs. Although
Medicaid membership increased in 1997, the growth was slowed because of a
statewide decrease in the number of individuals eligible for
Medicaid, and significant case closings (involuntary
disenrollments) due to Welfare Reform and other state and local
caseload reduction strategies. As a result of the recent federal
approval of mandatory enrollment of Medicaid eligibles in New York
State, and with fewer managed care organizations contracted to
enroll Medicaid members, WellCare anticipates Medicaid enrollment
will continue to increase in 1998.
WellCare believes it can expand its HMO membership and
deliver effective managed care by continuing to focus on the
following strategies:
MAINTAINING COMPETITIVELY PRICED PREMIUMS AND CONTAINMENT OF
HEALTH CARE COSTS. The Company's success depends to a significant
degree upon its ability to control health care costs. The
WellCare HMOs' contracts with hospitals are an essential component
of cost containment. During 1997, WCNY's contracting efforts were
focused on converting DRG and risk bearing arrangements to a per
diem methodology. Currently, most of WCNY's significant contracts
with NY hospitals are based on per diem rates across all product
lines. The Company seeks to reduce hospital costs, though the
combination of per diem rates and the reduction in hospital length
of stay because of effective medical utilization management.
Primary care physicians are integral to health care cost
containment as they control, to a significant degree, member
utilization of hospitals, specialists and other health care
providers. WellCare has worked to develop a network in which many
of its primary care physicians are paid on a capitation basis.
Agreements are entered into with regional health care delivery
networks organized as independent practice associations ("IPAs").
WCNY directly capitates its IPAs and non-IPA primary care
physicians with a fixed monthly payment for each HMO member
selecting an IPA primary care physician or non-IPA primary care
physician. WellCare is committed to continuously improving its
capitation and other fee arrangements and to facilitating optimal
health care utilization in order to ensure high-quality,
competively-priced service. As part of this commitment, the
following specialties have been capitated by the WellCare HMOs:
mental health, substance abuse, laboratory, chiropractic, vision,
home infusion/durable medical equipment and certain diagnostic
services. In February 1998, the Company entered into a new
arrangement which it anticipates will reduce its laboratory costs.
The WellCare HMOs also have a contract with an unrelated pharmacy
benefits manager which covers prescription drug benefits. The
Company is negotiating to reduce the costs for this benefit, and
anticipate that a new contract will be executed shortly, which
will reduce pharmacy costs in 1998.
EXPANDING SERVICE AREAS. WellCare traditionally had
concentrated on expanding in secondary markets where price
competition is less intense than in major metropolitan areas and
where widespread name recognition is easier to achieve. The
Company's ability to work closely with physicians and hospitals,
which it believes leads to more effective cost containment, is
well suited to secondary markets. Currently, WellCare is focusing
on such contiguous markets as well as other urban growth areas,
including certain primary markets. As of December 31, 1997, WCNY
operates in 25 counties in New York State, including four of the
five counties of New York City. Effective January 1997, WCNY had
received approval for expansion into Westchester County. In 1995,
WellCare expanded its HMO operations into Connecticut through
WCCT, which is approved to operate statewide.
PROVIDING MEMBERS ACCESS TO A BROAD RANGE OF QUALITY
PHYSICIANS. WellCare recognizes that expansion and retention of
its HMO membership is dependent to a significant degree upon
providing access to a broad range of quality health care providers
and intends to continue expanding as well as improving its health
care provider network in its core service area and proposed areas
for expansion. At December 31, 1997, the provider network of the
WellCare HMOs consists of approximately 3,500 primary care
physicians and 8,900 Specialists. Over 90% of the provider
network is board-certified. WellCare's widespread name
recognition in its core service area facilitates recruitment of
participating physicians and, during 1997, approximately 1,350
additional primary care physicians and 3,000 specialists joined
WellCare's network.
ADDING NEW BENEFIT PROGRAMS AND INITIATING NEW PRODUCTS AND
SERVICES. In 1997, WCNY received approval from HCFA to expand its
Medicare Risk Program ("Senior Health") product into five
additional counties of WCNY's service area. As of December
31,1997, the Company's Medicare Plan reached 17 counties and was
available to approximately 1.5 million eligible enrollees. Along
with the geographic expansion of WellCare Senior Health, premium
benefit packages for groups were introduced which more closely
reflect commercial offerings. Senior Health provider panels were
also enhanced in 1997.
WCNY's Medicaid coverage program received regulatory
approvals to expand into an additional three counties.
In August 1997, The New York State Children's Health
Insurance Program ("CHIP") was enacted, and provides federal
funding to develop state programs to provide health care coverage
for uninsured children. When combined with the proposed New York
State funding, this program will provide approximately $420
million statewide in fiscal 1998/1999. WCNY began enrollment in
this program in November 1997, in 18 counties, including 4 of the
5 New York City counties.
To meet the needs of employer groups and take advantage of
new opportunities in managed care, WellCare offers complementary
managed care products and services. WellCare also offers a point-of-service
product for its HMO members.
INVESTMENTS IN TECHNOLOGY AND INFRASTRUCTURE. WellCare
believes that investments in technology and infrastructure are
critical for future HMO membership growth. In March 1998,
WellCare purchased upgrades to its production computer system and
a new upgraded test system. In 1996, WellCare implemented a new
electronic imaging and work flow distribution system which
enhances both enrollment and claims adjudication processing.
THE WELLCARE HMOS
The WellCare HMOs provide comprehensive health care services
to their members for a fixed monthly premium, plus a co-payment by
the member to the physician for each office visit generally, and a
dispensing fee to the pharmacy for each prescription filled. The
basic benefits, provided within a member's benefit plan consist of
primary and specialty physician care, inpatient and outpatient
hospital services, emergency and preventive health care,
laboratory and radiology services, ambulance services, eye care,
physical and rehabilitative therapy services, chiropractic
services, mental health care, and alcohol and substance abuse
counseling. For an increased monthly premium, members have the
option to receive prescription drugs and vision care.
The WellCare HMOs arrange for the provision of inpatient and
outpatient hospital health care services by contracting with
hospitals. Through 1996, New York hospitals were paid primarily
on a diagnostic related group ("DRG") basis under New York State
law rather than by length of hospital stay (although New York HMOs
were permitted to negotiate lower DRG or per diem rates with
regulatory approval). As of January 1, 1997, the New York State
regulated DRG rate setting system expired and was replaced by a
largely unregulated free market system whereby payors and
hospitals are free to negotiate the best rates possible. During
1997, WCNY's contracting efforts were focused on converting DRG
and risk bearing arrangements to a per diem methodology.
Currently, most of WCNY's significant contracts with NY hospitals
are based on per diem rates across all product lines. As a result
of New York State legislation, effective January 1, 1997, WellCare
has renegotiated most of its significant contracts with its New
York hospitals to a negotiated per diem rate basis (See "Business
- - - Government Regulation - Recent New York State Legislation"). To
the extent DRG rates apply, a member's length of hospital stay
does not affect the WellCare HMOs costs. Hospital costs can best
be controlled through managing hospital admissions and utilizing
the most effective treatment methods. When a per diem contract is
in effect, utilization management reduces medical costs to the
WellCare HMOs by minimizing length of hospital stay as well as
maximizing the utilization of the most effective treatment
methods.
<PAGE>
The WellCare HMOs also arrange for the provision of health
care services in the case of primary care services, on a capitated
fee basis, and with other health care providers, generally on a
discounted fee-for-service basis.
Members are allowed to select any primary care physician or
group practice participating in the WellCare HMO network and are
allowed to switch from one primary care physician or practice to
another within the network. All medical care received by the
member, including specialist and hospital care, is coordinated by
the primary care physician. Hospitalization for members requiring
non-emergency treatment generally takes place in hospitals, which
either are under contract or have arrangements with the WellCare
HMOs. Emergency treatment may be obtained in any hospital.
Premiums are generally fixed for a twelve-month period under
contracts with each subscriber group. WellCare considers a
variety of factors in determining HMO community rated premiums,
including anticipated health care utilization rates, projected
medical expenses, community rating requirements (applicable in
both New York and Connecticut) and competitive conditions.
Premiums are subject to state regulation (See "Business -
Government Regulation").
MEMBERSHIP
The following table reflects membership and employer groups
for plans owned, managed or administered by WellCare during the
five years ended December 31, 1997:
<TABLE>
<CAPTION>
At December 31,
------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
Commercial Members (1)(3) 48,400 69,700 78,900 71,100 60,100
Medicaid Members 20,800 18,300 19,100 10,000 9,000
Medicare Members (2) 10,000 5,500 2,000 1,400 1,100
Total Members 79,200 93,500 100,000 82,500 70,200
Number of Employer Groups 2,300 2,600 2,500 1,900 1,500
- - ------------------------------
(1) Includes HMO commercial members and members enrolled under non-HMO
specialty programs.
(2) Includes Medicare beneficiaries and Medicare supplement members.
(3) Includes 1,800, 900 and 140 WCCT members for 1997, 1996 and 1995,
respectively.
The five largest employer groups accounted for approximately
11% of total membership, with no one group accounting for more
than 5% of such membership.
The membership of the WellCare HMOs is comprised of the
following:
* Members enrolled through subscribing private or public sector employers
or unions, and members unaffiliated with subscriber groups enrolling
individually (collectively, "commercial members");
* Recipients of public aid whose eligibility is determined
by the local departments of social services and the New York State
Department of Health ("Medicaid members");
* Members enrolled in the Child Health Plus Program;
* Medicare beneficiaries covered under Full Risk program ("Medicare
beneficiaries"); and
* Medicare beneficiaries receiving HMO supplemental coverage
for medical services not covered by Medicare ("Medicare supplement
members").
All five classes of membership are enrolled in WCNY. WCCT
has received approval to offer coverage only to commercial
members.
When a subscriber group agrees to offer a WellCare HMO to its
employees, enrollment is voluntary by the individual, who must be
accepted for enrollment regardless of health status. Employers
generally pay all or part of the monthly health care premiums for
their employees, deducting the portion not so paid from the
employee's salary. Upon leaving a subscriber group, an individual
may elect to continue as an HMO member by paying a monthly
premium.
Individuals may be enrolled as Medicaid members in WCNY
through its Healthy Choice product ("Healthy Choice") only if they
are eligible recipients of Medicaid. Medicaid members are
enrolled on an individual basis pursuant to agreements with county
social services departments and approval by the New York State
Department of Health ("DOH") and must be enrolled regardless of
health status. Twenty-five percent of the premiums for Medicaid
members is funded by the applicable county, 25% by the State of
New York and the balance by the federal government. In the event
the contracts are terminated or not renewed, the Company's
operating results would be adversely affected. Medicaid Managed
Care legislation was enacted in 1996 authorizing New York State,
pursuant to federal waiver, to require most Medicaid recipients to
enroll in managed care plans. The Company believes it is well
positioned in the marketplace to enroll and provide services to
these individuals under New York State's federally approved
mandatory waiver.
Medicare beneficiaries are enrolled pursuant to annual
contracts with the federal government under which WCNY provides
health care services. These contracts provide for the federal
government to pay WCNY a fixed monthly premium per member equal to
approximately 95% of the average medical costs by county adjusted
for age, sex, and institutional status. Premiums are subject to
periodic unilateral revision by the federal government. Under the
basic plan, beneficiaries pay no monthly premiums or deductibles,
although there are co-payments for office visits or prescriptions
and there are annual limits on prescription charges per member.
Medicare members are able to disenroll for any reason at any time.
Effective January 1997, WellCare's Medicare Risk Program ("Senior
Health") expanded from eight counties with approximately 240,000
eligible individuals to twelve counties with a total of over
300,000 eligible individuals. Effective November 1997, WellCare's
Medicare Risk program expanded to 17 counties with approximately
1.5 million eligible individuals.
Medicare supplement members may enroll in WCNY on a group
basis through their present or past employers to supplement
medical coverage received from Medicare. Under the supplemental
coverage, in return for a fixed monthly premium, WCNY pays the
cost of most medical services not covered by Medicare, provided
the Medicare beneficiary uses the HMO provider network for such
services, other than for emergency care.
MEDICAL COST CONTROL
The Company's success depends to a significant degree upon
its ability to control health care costs. WellCare controls such
costs through (i) capitation arrangements with the IPAs and with
non-IPA primary care physicians, (ii) discounted fee-for-service
arrangements with specialists and other health care providers,
(iii) capitation arrangements with providers of certain specialty
services, (iv) medical management review programs, and (v) co-payments
by members for office visits and other services.
Notwithstanding such cost control measures, health care costs in
any given period may be greater than expected due to unexpected
incidence of major cases, legislative changes, broadening member
entitlements, natural disasters, epidemics, changes in physician
practices and new technologies. These factors which impact health
care costs are beyond the Company's control and may adversely
affect its operations.
PHYSICIAN ARRANGEMENTS
In October 1994, WCNY entered into contracted arrangements
with a majority of its primary care physicians and specialists
through contracts with regional health care delivery networks (the
"Alliances") for the provision of health care services to the
Plan'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
with different equity owners. In 1995, the four Alliances were
combined into two Alliances, with the same equity owner. The
Company has been advised that effective June 1997, the Alliances
converted into IPAs by establishing new corporations. WCNY's
initial agreement with each of the Alliances for the period
October 1994 through September 1995, required payment to the
Alliances based on a percentage of premium revenue for effected
members. Effective October 1995, WCNY entered into three year
agreements with each of the Alliances to capitate them at
specified per member per month ("PMPM") rates designated to cover
the costs of all health care services provided to the HMO members.
These agreements originally provided for periodic increases,
ranging from 1% to 6% for the period from October 1995 through
December 1998.
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, as well as reduced the capitation rate paid
for certain services which continued to be provided by the IPAs.
At December 31, 1996, WCNY capitated the Alliances for 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 a ten-year term.
Each Alliance/IPA, in turn, capitates each Alliance/IPA
primary care physician from the monthly payments received from
WCNY with a fixed monthly payment for each HMO member designating
the Alliance/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 Alliance/IPA which disburses payments to these specialists.
To the extent the risk pools are insufficient to cover the specialists'
fees, the amounts paid to thespecialists 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 IPAs' accounts
are reconciled periodically.
WCNY is financially responsible for all medical care provided
to its members notwithstanding its IPA arrangements, and intends
to remain integrally involved in assisting primary care physicians
to efficiently manage their practices.
During 1997, Alliance/IPA primary care physicians provided
medical care to approximately 70% of WCNY's commercial and
Medicaid members; the balance of WCNY's members were provided
services by primary care physicians who are directly contracted by
WCNY, as described in the following paragraph. WCNY also has
individual backup contracts with substantially all physicians in
the IPAs.
WCNY also contracts directly with primary care physicians and
specialists, with many primary care physicians being capitated
with a fixed monthly payment for each HMO member selecting the
physician. Specialists are generally paid on a discounted fee-for-
service basis.
WCCT contracts directly with some of its physician network.
A significant number of all primary care physicians and
specialists are contracted through an IPA or a physician hospital
organization ("PHO") that contracts directly with WCCT.
HOSPITAL AND OTHER PROVIDER ARRANGEMENTS
Third-party reimbursement for most inpatient hospital care in
New York State through December 31, 1996 was required to be paid
on a DRG basis, pursuant to which hospital charges as established
by the State were based on the diagnosis of the patient's
condition, generally notwithstanding the length of
hospitalization. New York HMOs have been permitted, subject to
regulatory approval, to negotiate lower DRG or per diem rates with
hospitals. To the extent DRG rates apply, a member's length of
hospital stay does not affect an HMO's costs. Hospital costs can
best be controlled through managing hospital admissions and
utilizing the most effective treatment methods. When a per diem
contract is in effect, utilization management reduces medical
costs to the HMO by minimizing length of hospital stay as well as
maximizing the utilization of the most effective treatment
methods. Currently, most of WCNY's significant contracts with NY
hospitals are based on per diem rates across all product lines.
<PAGE>
As of January 1, 1997, the New York State regulated DRG rate
setting system expired and was replaced by a largely unregulated
free market system whereby payors and hospitals are free to
negotiate the best rates possible. Another significant change is
in the area of funding for various public goods and Graduate
Medical Education. Under the state-run DRG system, these add-on
costs were built directly into the rates set by the state, and
were not subject to negotiation. However, as of January 1, 1997,
the responsibility for public goods and Graduate Medical Education
has shifted from hospitals to the payors. To account for this new
cost, payors have been renegotiating their hospital contracts in
order to remain on a cost-neutral basis.
The WellCare HMOs currently contract with 107 hospitals and
have informal arrangements with 2 additional hospitals. Pursuant
to its contract, the hospital is paid for all authorized
inpatient and outpatient services and all emergency room services
provided to members. In addition, the WellCare HMOs require the
hospitals to participate in utilization management and quality
improvement programs. The WellCare HMOs contracts with hospitals
are terminable upon 90 to 120 days' prior notice by either party.
In order to obtain high quality services at cost-effective
rates, the WellCare HMOs have contracted with other providers for,
among other things, mental health, diagnostic services, physical
therapy, outpatient surgery, laboratory services and home health
care, on either a capitated or negotiated fee basis. The Company
also has an agreement with an unrelated pharmacy benefits manager
which covers all of the service areas of the WellCare HMOs,
including a network of approximately 2,000 pharmacies.
CLAIMS RESERVES AND IBNR
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, and 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.
<PAGE>
The Company believes that the process of trending the
ultimate resolution of paid, pended and payable 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.
UTILIZATION MANAGEMENT
Utilization of health care services by members and physicians
is monitored under WellCare's health care utilization management
programs. In cases of excessive utilization, WellCare counsels
the provider with respect to possible unnecessary or duplicate
services or medications. In addition, under the direction of
local physicians and the WellCare HMOs medical directors, health
care service utilization data are analyzed.
EDUCATIONAL PROGRAMS
The WellCare HMOs believe that educating their members and
health care providers with respect to health care is a critical
component in health care cost containment. The Company's
quarterly newsletter to its members contains, among other items,
information on preventive health care. The Company also publishes
newsletters which it distributes to its physicians.
QUALITY OF CARE PROGRAMS
WellCare's quality of care programs, consisting of disease
management programs, periodic peer reviews and outcome studies,
assist the Company in controlling costs by identifying cost-effective
treatment procedures (See "Business - Quality Improvement"). In 1996,
WCNY received a certificate of one year accreditation from the National
Committee for Quality Assurance ("NCQA"). The NCQA performed its subsequent
annual review in 1997 and, in February 1998, again awarded the Company
with its one-year certificate of accreditation.
CO-PAYMENTS
To promote member participation in controlling health care
costs, the WellCare HMOs require co-payments by its members for
most office visits and some other services. These co-payments are
made by the member directly to the physician or other provider
and, for WCNY, range from $3 to $20 per office visit, and $25 or
$50 for emergency room treatment. WCCT is approved for a $3 to
$20 co-payment for office visits and a $25 to $50 co-payment for
emergency room treatment. Certain contracts also require members
to pay co-payments for inpatient hospital services.
SPECIALTY CARE BENEFIT PROGRAMS AND PREFERRED PROVIDER
ORGANIZATION
WellCare offers prescription drug, dental and expanded vision
and other specialty care benefit programs as stand-alone products
to self-insured employer and other groups through its third-party
claims administrator ("TPA") services.
The Company provides TPA services independently and as part
of its specialty care benefit programs offered to employer and
other groups. In addition, WellCare has established a PPO
network, using principally its HMO provider network, to provide
vision care and pharmacy benefit programs as stand-alone products
for self-insured employer and other groups.
POINT-OF-SERVICE PRODUCT
WCNY offers a point-of-service ("POS") product to its
commercial members, allowing them to select providers outside of
WCNY's provider network. When a member uses a POS product, the
member is required to make a higher co-payment and is subject to
pay a deductible.
MARKETING
As of December 31, 1997, WellCare's internal marketing staff
consisted of 50 marketing representatives, 26 of whom marketed
WellCare's benefit plans and specialty benefits plans and other
products and services to commercial groups, 17 to Medicaid
recipients, 7 to Medicare beneficiaries. The Company also
utilizes independent brokers for referrals.
Marketing to commercial groups is generally a two-step
process in which presentations are made to the employer and then
to the individual employees if the Company's benefit plan is
selected. During a designated period (usually one month
annually), employees select their desired health coverage. New
employees, however, make their choice when employment commences.
Medicaid managed care marketing has become a highly regulated
and supervised activity. All Healthy Choice marketing must be
conducted consistent with a pre-approved marketing plan and, all
Healthy Choice marketing materials must receive approval prior to
their use, from both the County Departments of Social Services and
the DOH. Additionally, surveillance of Plan marketing staff is
conducted to insure that all marketing is performed consistent
with applicable rules and guidelines.
Healthy Choice utilizes a variety of marketing approaches
including: direct marketing at County Social Services offices,
direct mail when approved and supervised by the Counties;
provider-assisted outreach; community-based organization
partnerships; and advertising in targeted community publications.
Marketing of WCNY's Full Risk Medicare program involves a
labor intensive one-on-one process. Marketing efforts focus on
informational presentations/seminars, community outreach programs,
direct mail and telemarketing activities.
WCNY also offers a supplemental coverage plan for Medicare
beneficiaries through existing employer groups who provide
contributed benefit programs to retirees. Marketing takes place
through on-site meetings and direct mailings to such retirees.
QUALITY IMPROVEMENT
All physicians in the WellCare HMOs' provider network are
required to participate in quality improvement and utilization
review programs. WCNY has received a one-year accreditation from
the NCQA. The quality improvement program is designed not only to
maintain but to continually improve the delivery of proper medical
care and includes:
* Utilization reviews, management programs and outcome
studies, which evaluate statistical information with
respect to services used by members and prescribed by
participating physicians and include such topics as
preventive care services, prescription drugs, physician
visits, emergency room use, hospital admissions and
referrals made by primary care physicians to specialists;
and
* Quality of care reviews, which identify issues affecting
HMO members, including physician availability, physician
treatment patterns and the structure and content of
medical records;
* Periodic peer reviews, which evaluate the quality and
appropriateness of medical care provided by a particular
physician and review, among other things, diagnoses,
tests, prescription drug usage and the utilization level
of the physician by the HMO members;
* A physician committee infrastructure to oversee medical
policy and the quality improvement program.
The quality improvement program utilizes computerized claims
information as well as medical records which are maintained by the
physicians and to which WCNY has access. In addition,
participating hospitals maintain quality improvement programs. As
required by state law, WCNY has an established complaints
procedure for HMO members and providers to formally register
concerns with the HMO. These concerns are then investigated and
resolved pursuant to the procedures established by the HMO.
COMPETITION
The managed care industry is highly competitive principally
on the basis of price, the size and quality of the provider
network, benefits provided and quality of service. Although WCNY
is one of the significant HMOs in the Hudson River Valley region,
WellCare has also been expanding its operations into other
geographic areas, including New York City, Westchester and
Connecticut, where there are other HMOs which have more members
and greater financial resources than the Company. The Company
also competes with commercial health insurance companies and not-for-profit
health service plans, including Blue Cross and Blue Shield, and may
compete with provider integrated delivery systems.
MANAGEMENT INFORMATION SYSTEMS
Information is key to success for any company, especially
those in the health care industry. WellCare has made information
systems a priority over the past several years. At the core is
the AMISYS Health Care Management Information System. AMISYS is
widely used in the HMO industry and provides detailed tracking of
employer group, provider and member data.
WellCare has enhanced enrollment and claims processing with
the implementation of MACESS, an electronic document imaging and
workflow distribution system. MACESS allows documents such as
claim and enrollment forms to be scanned and the image filed in a
computer rather than a file drawer. The workflow distribution
portion of the system allows claim adjudicators to process claims
from electronic "queues" rather than from a stack of claim forms.
When used in the customer service area, MACESS enhances the
ability to respond to customer inquiries by allowing
representatives to retrieve claim images, stored on CD Rom, in
approximately 2.5 seconds. Overall, MACESS enhances productivity
and customer service and provides the ability to track claims
though the system.
WellCare has also implemented relational database technology
to enhance utilization reporting and analysis.
WellCare continues its commitment to technology and has
budgeted for the purchase of additional computer hardware and
software as required to accommodate its anticipated growth for the
foreseeable future.
THE YEAR 2000
The Company has assessed the requirements of modifying its
computer systems to accommodate the year 2000 and anticipates that
these modifications will be completed in advance of the year 2000
so as to not adversely affect its operations. In most cases,
modification is dependent on outside vendors whose software the
Company uses. These vendors have advised the Company that the
required modifications are being made, and will be available to
the Company in the form of software release upgrades. The Company
has developed plans for implementing theses release upgrades in a
timely fashion and is expensing the costs incurred to make these
modifications. The inability of the Company to complete timely
its year 2000 modifications, or the inability of other companies
with which the Company does business to complete timely their year
2000 modifications, could have a material adverse effect on the
Company's operations.
GOVERNMENT REGULATION
STATE REGULATION
The WellCare HMOs are subject to extensive state regulation.
Applicable state statutes and regulations require an HMO to file
periodic reports with the relevant state agencies, and contain
requirements relating to the operation of the HMO, the HMO's rates
and benefits applicable to its products and the HMO's financial
condition and practices. In addition, state regulations require
each of the WellCare HMOs to maintain restricted cash or available
cash reserves, a minimum net worth and impose restrictions on the
WellCare HMOs abilities to make dividend payments, loans or other
transfers of cash to the Company. State regulatory authorities
exercise oversight regarding the provider networks, medical care
delivery and quality assurance programs, contract forms and
financial condition of the WellCare HMOs. The WellCare HMOs are
also subject to periodic examination by the relevant state
regulatory authorities.
In January 1997, WCNY received the final report on its
biennial statutory examination for the years ended December 31,
1994 and 1995 from The New York State Insurance Department
("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, NYSID
determined that WCNY was not in compliance with all pertinent New
York State regulation sections relating to WCNY's underwriting and
rating procedures and the requirements governing approval of
policy forms. These matters were referred 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.
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.
<PAGE>
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 claims
within 45 days of date of receipt. The Company believes it has
been and continues to be in compliance with this rule.
Applicable New York statutes and regulations require the
prior approval of the New York Commissioner of Health and the New
York Superintendent of Insurance for any change of control of WCNY
or the Company. A similar law in Connecticut requires the
approval of the Insurance Commissioner of Connecticut for any
change in control of WCCT or the Company. Under New York law,
transactions between a holding company and a controlled HMO must
be fair and equitable. Any transaction that involves five percent
or more of WCNY's assets requires prior approval.
Hospital charges in Connecticut are based on a per diem per
patient system rather than a DRG system. Eligible HMOs are
permitted to directly negotiate for a different rate and method of
reimbursement with a Connecticut hospital.
WellCare's TPA services and PPO (in New York State) currently
are not subject to state regulation, but there can be no assurance
that this status will continue. Connecticut regulations require
PPOs to make certain notification filings. WellCare does not
operate as a TPA or PPO in Connecticut.
RECENT NEW YORK STATE LEGISLATION
In September 1997, New York enacted a prompt payment law
which requires insurers and HMOs to pay providers within 45
calendar days of receipt of undisputed ("clean") claims. The law
provides guidelines for the timely reimbursement of claims. In
the event a claim is not undisputed, the insurer or HMO must
notify the provider within 30 calendar days of receipt and request
additional information if necessary. In addition to charging
interest on late claims, penalties of up to $500 per day per claim
may be imposed. The law is effective with claims submitted for
services provided after January 22, 1998.
New York also enacted a law which imposed penalties of up to
$10,000 on insurers and HMOs which fail to respond to NYSID
inquiries in a timely manner and in good faith. The new law
became effective January 22, 1998.
New York also enacted a law, effective September 24, 1997,
which conforms state law requirements to the federal Health
Insurance Portability and Accountability Act of 1996. The
significant provisions of this law include (i) the setting of
standards by which group and individual direct payment contracts
and group and individual market policies can be terminated or not
renewed, (ii) rules for eligibility and late enrollees, (iii) a
change in the definition of the minimum size of small group from
three members to two members, (iv) amendment of the rules
concerning the use of pre-existing condition provisions, and (v)
provision for certificates of creditable coverage, (vi) provision
for the guaranteed issuance of coverage in the individual health
insurance market.
New York State's excess medical malpractive program has been
extended for one year. The extension of the program is on a self-funded
basis based upon the existing surplus, with no contribution
from payors and insurers. Premiums will be returned to insurers
under certain circumstances.
In 1997, New York also enacted laws requiring coverage of the
following benefits:
Effective January 1, 1998, HMOs are required to cover
individuals undergoing mastectomies for a duration to be determined by
the attending physicians and the patient. The legislation also calls
for plan coverage of out-of-network second opinions for cancer.
Coverage is also required for all stages of reconstruction of the
breast on which the mastectomy has been performed. In addition,
coverage for surgery and reconstruction of the other breast to produce
a symmetrical appearance is now mandated.
Also effective January 1, 1998, legislation was passed which
expands patients' access to chiropractic care by requiring HMOs to
provide coverage by a licenses doctor of chiropractic upon
referral by a PCP. HMOs and non-managed care plans are subject to
different requirements.
Effective January 4, 1998, coverage of enteral formulas is required
for all plans which provide a pharmacy benefit. The modified food
component of this mandated coverage is capped at $2,500.00 per member per
year.
Effective September 24, 1997, HMOs and physicians must report to the
New York State Department of Health ("SDOH") the incidences of cancer among
members. SDOH must issue an annual report of its findings.
Legislation requiring a carve-out of pharmacy benefits from
the Medicaid managed care program was vetoed by the Governor.
This legislation is likely to be presented to the Governor again
in 1998.
Effective January 1, 1997, the Health Care Reform Act of
1996 ("HCRA,") for the first time, allowed all private health care
payors to negotiate payment rates for inpatient hospital services.
Previously, only HMOs could negotiate rates for these services.
While non-HMO payors who compete with WCNY may have begun paying
negotiated hospital rates beginning in 1997, WCNY believes it has
competitive arrangements with hospitals in its network. Also,
effective January 1, 1997, WCNY began making payments to state-administered
funding pools to finance hospital bad debt and charity care, graduate
medical education and other state programs under HCRA. Previously, bad debt
and charity care and graduate medical education were financed by surcharges
on payments to hospitals for inpatient services. Pursuant to HCRA, WCNY has
negotiated adjustments to rates paid to certain hospitals in New
York to reflect elimination of these surcharges. There can be no
assurance that WCNY will reach agreement on these adjustments with
all contracted hospitals in New York.
RECENT CONNECTICUT STATE LEGISLATION
New Connecticut legislation pertaining to managed care
organizations (the "MCO Act") became effective October 1, 1997.
With respect to providers, the MCO Act, except in limited
circumstances, provides that contracts with participating
providers must require that each party give at least 60 days'
advance written notice to the other in order to withdraw from or
terminate the agreement. The MCO Act also provides that an HMO
may not threaten or take action against a participating provider
in retaliation for such provider: (i) seeking expedited review by
a utilization review company; or (ii) assisting an enrollee during
an enrollee's appeals process. An HMO may neither prohibit a
participating provider from disclosing to an enrollee the method
of compensation the HMO utilizes, nor prohit a participating
provider from discussing with an enrollee any treatment options
and service available in or out of network, including experimental
treatments.
With respect to HMO members, the MCO Act requires HMOs to
have an internal grievance procedure permitting enrollees to seek
a review of any grievance that may arise from an HMO's action or
inaction, excluding an action or inaction based on utilization
review. The MCO Act and implementing regulations also created an
external appeals process. Enrollees who exhaust their appeals
with the HMO or the utilization review company may file an
external appeal with the Connecticut Insurance Department. The
external appeals are conducted by an external appeals entity which
may accept the grievance for full review. If the grievance
receives full review, the Insurance Commissioner shall accept the
decision of the external appeals entity, and the decision is
binding. External review does not apply to Medicaid, Medicare or
Medicare Risk health plans.
The MCO Act also requires an HMO to comply with the federal
Health Insurance Portability and Accountability Act of 1996
("HIPAA").
The MCO Act further requires that benefit policies provide
that members receive benefits for biologically-based mental or
nervous conditions that are at least equal to coverage for any
other medical or surgical conditions. Other Connecticut state
legislation enacted in 1997 requires HMOs to cover the following:
(i) a 48 hour minimum inpatient stay following a
mastectomy or lymph node dissection or a longer stay
as determined by the patient's physician, which
procedure may not be required to be done on an
outpatient basis:
(ii) reasonable costs for breast reconstruction after a
mastectomy;
(iii)laboratory and diagnostic test for all types of
diabetes, as well as medically necessary coverage for
specified types of diabetes; and
(iv) specified prescription foods for inherited metabolic
disease in certain situations.
Other legislation was enacted to prohibit HMOs in certain
instances from refusing to insure or continue to insure, or
limiting the amount, extent or kind of coverage available to an
individual, or from charging a different rate for the same
coverage because of genetic information. Genetic information
indicating a predisposition to a disease or condition may not be
deemed a preexisting condition, absent a diagnosis of such disease
or condition based on other medical information. In addition,
legislation enacted prohibits an HMO from refusing to insure or
continue to insure, or limiting the amount, extent or kind of
coverage available to an individual or from charging a different
rate for the same coverage because such person is a victim of
domestic violence.
FEDERAL REGULATION
The WellCare HMOs are not federally qualified and neither
they nor WellCare's managed health care operations currently are
subject to federal regulation other than those operations relating
to Medicaid and Medicare products and as otherwise described
below.
WCNY's Full Risk Medicare product is subject to regulation
by HCFA. A qualification for a Full Risk Medicare contract is
that not more than 50% of the HMO's enrollees be Medicare
beneficiaries. Regulations also cover, among other things,
quality of care, limitations on enrollment and compliance with
requirements established by peer review organizations contracting
with HCFA.
WCNY's Medicaid contracts are subject to both federal and
state regulation regarding services to be provided to Medicaid
enrollees, payment for those services and other aspects of the
Medicaid program. The New York State Department of Health is
responsible for oversight of WCNY's compliance with such
regulations.
In 1998, there are a number of proposals under consideration
by both state and federal officials to further regulate programs
and adjust payments for Medicaid and Medicare enrollees in managed
care, which may have a material effect on the Company's expansion
program.
Medicare+Choice (Part C) Legislation and the Balanced Budget
Act of 1997 will impact current Risk contractors. Medicare
beneficiaries will have more options for health care coverage
(PSO, PPO, MSAs), and HCFA will undertake an educational effort
paid for by Medicare managed care plans. Another major impact
will be the changes to the rate methodology, and new time frames
for submitting rate and benefit filings. HCFA continues to
develop the transitional rules for current contractors.
RECENT FEDERAL LEGISLATION
The Health Insurance Portability and Accountability Act of
1996 (HIPAA) required that states enact laws by July 1, 1997 to
implement the requirements of HIPAA. As stated above, both New
York and Connecticut enacted such laws.
Effective January 1, 1998, The Mental Health Parity Act of
1996 requires parity in annual and lifetime limits for
medical/surgical services and "mental health services." This
bill's provisions apply to insured and self-insured products,
including products of HMOs, that offer coverage to employer groups
with 50 or more employees.
<PAGE>
EXECUTIVE OFFICERS:
Name Age Position
---- --- --------
Joseph R. Papa 54 President, Chief Executive
Officer and Chief Operating
Officer
John E. Ott, M.D. 61 Executive Vice President and
Director
Howard B. Lorch 46 Vice President and Chief
Financial Officer
Mary Lee
Campbell-Wisely 49 Executive Director
Jack Sizer, M.D. 59 Medical Director
Adele Reiter, Esq. 44 Vice President, Legal and Governmental Affairs
Thomas Curtin 35 Vice President of Sales and Marketing
JOSEPH R. PAPA, age 54, has been Chief Executive Officer of
the Company since August 1997, a director since June 1997, and
also President and Chief Operating Officer since September 1996.
From 1989 to 1996, Mr. Papa was President of Healthcare Resources
International, Inc. a managed care consulting company he founded.
From 1986 to 1989, Mr. Papa was President and Chief Operating
Officer of Healthways, Inc., an individual practice association
model health maintenance organization licensed in the State of New
Jersey and then a wholly-owned subsidiary of Healthways Systems,
Inc., a publicly-traded company that was sold to Aetna Life
Insurance Company, a wholly-owned subsidiary of Aetna Life and
Casualty Company. Mr. Papa earned his C.P.A. after receiving a
B.S. in Accounting at St. Joseph's University in 1965.
JOHN E. OTT, M.D., age 61, has been Executive Vice President
of the Company since June 1996 and a director since October 1995.
Dr. Ott is the former Chief Executive Officer of The George
Washington University Health Plan, and from 1977 to 1996 was a
Professor in Health Care Sciences, Health Services Management and
Policy and Pediatrics at George Washington University, having
retired in 1996 as Emeritus Professor. He is a board certified in
Pediatrics and Medical Toxicology. Dr. Ott received his B.S. and
M.D. degrees at the University of Pittsburgh, and completed a
pediatric residency and fellowship in clinical genetics and
biophysics at the University of Colorado Medical Center.
HOWARD B. LORCH, age 46, has been the Vice President and
Chief Financial Officer of the Company since April 1997. Mr. Lorch
is a C.P.A. and was formerly a tax and insurance industry Partner
with Deloitte & Touche, LLP. where he was employed for more than
twenty-two years, the last eleven years as a Partner. He received
his B.A. in Economics from Yeshiva University, in June 1973 and
his M.B.A. in Finance and Accounting from Columbia University
Graduate School of Business in January, 1975.
<PAGE>
MARY LEE CAMPBELL-WISLEY, age 49, has been Executive
Director of WellCare of New York, Inc. since January 1997. Ms.
Campbell-Wisley joined WellCare from Mercy Health System of
Western New York where, since 1995, she had been Executive
Director of the Physician Hospital Organization, overseeing three
hospitals and 500 physicians. Ms. Campbell-Wisley had been
associated with Blue Cross and Blue Shield of Western New York,
Inc., from 1991 to 1995, as Executive Director of Community Blue,
a 200,000-member HMO.
JACK SIZER, M.D., age 59, has been Chief Medical Officer for
The WellCare Management Group, Inc. since 1997 and also Chief
Medical Officer for WellCare of Connecticut, Inc. since 1996. Dr.
Sizer joined WellCare from Care Advantage, Inc., where he was the
Medical Director. Dr. Sizer is a graduate of Ohio State
University Medical School.
ADELE REITER, ESQ., age 44, joined the Company in April
1995, as part-time in-house legal counsel. She became full-time
in-house legal counsel in August 1996, and was appointed as a Vice
President in July 1997 and in March 1998 assumed to additional
duties of Vice President of Legal and Governmental Affairs. Ms.
Reiter was employed by a Kingston, New York, cardiology medical
practice and served on the Board of Directors for several local
non-profit organizations. Ms. Reiter received her B.A. from State
University of New York at Stony Brook in 1973 and a Juris Doctor
from Temple University School of Law in May 1976.
THOMAS CURTIN, age 35, has been the Vice President of
Marketing for The WellCare Management Group, Inc. since October,
1997. Previously, for the last twelve years, Mr. Curtin has been
involved in sales management in the managed care industry. Prior
to WellCare, he was with from Cigna Health Care (January 1997 -
September 1997), HealthSource (September 1994 - December 1996),
and Blue Cross and Blue Shield of Massachusetts (1992 - September
1994). He is a graduate of St. Anselm College with a BA in
Business and Ecomonics.
ITEM 2. PROPERTIES
WellCare's executive offices had been located in two
adjacent buildings, Park West I and Park West II, at Hurley Avenue
in Kingston, New York, which provide approximately 38,600 square
feet of office space. In 1997, The Company consolidated its
executive offices into Park West I, which is approximately 27,000
square feet. Park West II is currently being used for storage.
The Company also owns four other buildings through its wholly-owned
subsidiary, WellCare Development, Inc. Three of the
buildings are located in Kingston and, combined, provide
approximately 40,000 square feet of office space utilized by the
Company's communication, information and member service divisions.
The fourth building is located in Saugerties, New York and
provides approximately 10,000 square feet of office suites that
are leased to three unrelated health care providers and a medical
laboratory at annual rental incomes of approximately $111,500,
$31,800, $30,600 and $9,700, respectively.
In addition to the buildings owned, the Company leases the
following properties for WCNY: approximately 14,100 square feet in
Newburgh, New York, 1,800 square feet in Albany, New York, 750
square feet in Nyack, New York, 1,250 square feet in Binghamton,
New York, 2,100 square feet in Kingston, New York and 10,000
square feet in New York, New York, at an annual expenses of
approximately $330,000, $34,000, $47,300, $16,000, $32,600 and
$206,300, respectively. The New York City lease expires March 31,
1998. In turn, the Company subleases roughly 4,100 square feet in
Newburgh, New York and the 2,100 square feet in Kingston, New
York, to unrelated health care providers at annual rental incomes
of approximately $109,900 and $32,600, respectively.
In anticipation of the expiration of its New York City
lease, the Company, leased 10,000 square feet in Tarrytown, New
York, at an annual rental of $191,500, effective March 1998, and
consolidated its New York City and Nyack, New York operations.
The Company also leases 5,000 square feet of office space in
North Haven, Connecticut, for WCCT, at an annual rental expense of
approximately $70,500.
The Company believes its available space is adequate for its
current and future needs.
ITEM 3. LEGAL PROCEEDINGS
CLASS ACTION SECURITIES LITIGATION
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 defendant's 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.
OTHER MATTERS
The Company and certain of it subsidiaries, including WCNY,
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 informed the
government that it will continue to cooperate fully in any was
that it can in connection with the ongoing investigation.
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
The Company's Common Stock began trading on The Nasdaq Small
Cap market, under the symbol "WELL", effective October 30, 1997.
Previously, the Common Stock had been listed on the Nasdaq
National Market. The following table sets forth the closing high
and low sale prices for the Common Stock for each quarter of the
last two calendar years. There is no trading market for the
Company's Class A Common Stock.
HIGH LOW
---- ---
1996
- - ----
First Quarter $ 29 $ 15
Second Quarter 18 3/4 7 3/4
Third Quarter 12 1/4 7 1/2
Fourth Quarter 11 3/4 7 1/4
1997
- - ----
First Quarter 10 5/8 6 1/2
Second Quarter 8 7/8 3 7/8
Third Quarter 6 7/8 2 5/8
Fourth Quarter 5 15/16 1 3/8
On March 5, 1998, there were approximately 5,308,217 and
1,004,025 holders of record of the Company's Common Stock and
Class A Common Stock, respectively, which did not include
beneficial owners of shares registered in nominee or street name.
WellCare has not paid cash dividends on its capital stock
and does not anticipate paying any cash dividends on its Common
Stock or Class A Common Stock in the foreseeable future (See
"Business - Government Regulation" for restrictions on the payment
of dividends by the WellCare HMOs, wholly-owned subsidiaries of
the Company).
<PAGE>
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following selected financial data have been derived from
the Company's audited consolidated financial statements and should
be read in conjunction with the consolidated financial statements,
related notes and other financial information included elsewhere
herein. The selected financial data in the table as of December
31, 1997 and 1996, and for the periods ended December 31, 1997, 1996
and 1995 are derived from the consolidated financial statements of the
Company which have been audited by Deloitte & Touche, LLP, independent
auditors, indicated in their report included elsewhere in this Form 10-K.
The audit report includes an explanatory paragraph regarding certain
conditions which raise substantial doubt about the Company's ability
to continue as a going concern. (See "Financial Statements").
Statement of Operations Data:
(in thousands, except per share data)
Year Ended December 31,
----------------------------------------------
1997 1996 1995 1994 1993(1)
----- ----- ----- ----- -------
Revenue:
Premiums earned $142,115 $157,156 $144,518 $120,411 $72,905
Interest and other income 1,75 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
expenses 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
======== ======== ======== ======== =======
<PAGE>
Year Ended December 31,
----------------------------------------------
1997 1996 1995 1994 1993(1)
----- ----- ----- ----- -------
(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
- - ------------------------
<PAGE>
Balance Sheet Data:
(in thousands) December 31,
----------------------------------------------
1997 1996 1995 1994 1993
----- ----- ----- ----- -----
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 t he 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.
ITEM 7. 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 Company's financial statements have been prepared assuming that
the Company will continue as a going concern. The independent 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 of the New York State
Department of Insurance 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 down-sizing 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
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 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
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.
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 Alliances/IPAs 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 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.
RESULT 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:
YEAR ENDED DECEMBER 31,
---------------------------
1997 1996 1995
------ ------ ------
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
<PAGE>
YEAR ENDED DECEMBER 31,
---------------------------
1997 1996 1995
------ ------ ------
(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.
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.
General and administrative ("G&A") 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 10Q 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.
1997 Quarters
------------------------
1st 2nd 3rd 4th 1997
---- ---- ---- ---- ----
(UNAUDITED)
REPORTED
- - --------
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)
<PAGE>
PRO-FORMA (UNAUDITED) (UNAUDITED)
- - ---------
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.
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").
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
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, 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. Key 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 on January 1, 2000,
approximately $795,000 is due on March 1, 2000 and approximately
$325,000 is due on 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 defendant's 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. See Part
I, Item 3, Legal Proceedings for additional detail.
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
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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
See Index to Financial Statements and Schedules elsewhere
herein.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not Applicable.
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
ITEM 11. EXECUTIVE COMPENSATION
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Items 10 through 13 is
incorporated by reference to Registrant's definitive proxy
statement to be filed pursuant to Regulation 14A under the
Securities Exchange Act of 1934, as amended, within 120 days after
December 31, 1997. Also see "Item 1 - Business - Executive
Officers" with respect to certain information required by Item 10.
<PAGE>
PART IV
ITEM 14. EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULES
AND REPORTS ON FORM 8-K
I. LIST OF DOCUMENTS FILED AS PART OF THIS REPORT.
A. Financial Statements
Independent Auditors' Report
Consolidated Balance Sheets as of December 31, 1997 and 1996
Consolidated Statements of Operations for the years ended
December 31, 1997, 1996 and 1995
Consolidated Statements of Shareholders' Equity for the
years ended December 31, 1997, 1996 and 1995
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1996 and 1995
Notes to Consolidated Financial Statements
B. Schedules
Schedule I - Condensed Financial Information of Registrant
Schedule II - Valuation and Qualifying Accounts
C. Exhibits Required by Item 601 of Regulation S-K
See Index to Exhibits
II. REPORTS ON FORM 8-K.
None
III. EXHIBITS
See Index to Exhibits
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 of 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused
this Report to be signed on its behalf by the undersigned,
thereunto duly authorized, on the 31st day of March, 1998.
The WellCare Management Group, Inc.
By: /s/ Joseph R. Papa
------------------
Joseph R. Papa
President, Chief Executive Officer
and Chief Operating Officer
Pursuant to the requirements of the Securities Exchange Act
of 1934, this Report has been signed by the following persons on
behalf of the Registrant and, in the capacities indicated on March
31, 1998.
Signature Title
- - --------- -----
/s/ Robert W. Morey Chairman of the Board
- - ------------------------
Robert W. Morey
/s/ Joseph R. Papa Director, President, Chief Executive
- - ------------------------ Officer and Chief Operating Officer
Joseph R. Papa (Principal Executive Officer)
/s/ Howard B. Lorch Vice President and Chief Financial
- - ------------------------ Officer, Corporate Secretary
Howard B. Lorch (Principal Financial and
Accounting Officer)
/s/ Charles E. Crew Director
- - ------------------------
Charles E. Crew, Jr.
/s/ Mark D. Dean, D.D.S. Director
- - ------------------------
Mark D. Dean, D.D.S.
/s/ John E. Ott, M.D. Director
- - ------------------------
John E. Ott, M.D.
Director
- - ------------------------
Walter W. Grist
Director
- - ------------------------
Lawrence C. Tucker
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED FINANCIAL STATEMENTS
OF THE COMPANY: PAGE
Report of Deloitte & Touche LLP, Independent Auditors 47
Consolidated Balance Sheets as of December 31, 1997
and 1996 48
Consolidated Statements of Operations for the years
ended December 31, 1997, 1996 and 1995 50
Consolidated Statements of Shareholders' Equity for
the years ended December 31, 1997, 1996 and 1995 51
Consolidated Statements of Cash Flows for the years
ended December 31, 1997, 1996 and 1995 55
Notes to Consolidated Financial Statements 57
<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 raise 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
<PAGE>
THE WELLCARE MANAGEMENT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
December 31, December 31,
1997 1996
----------- -----------
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
========= =========
<PAGE>
December 31, December 31,
1997 1996
------------ ------------
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
---------- ---------
See accompanying notes to consolidated financial statements.
THE WELLCARE MANAGEMENT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
Years Ended December 31,
--------------------------------
1997 1996 1995
-------- -------- --------
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 N/A N/A 6,396
=========
See accompanying notes to consolidated financial statements.
<PAGE>
THE WELLCARE MANAGEMENT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Years Ended December 31, 1997, 1996 and 1995
(in thousands)
(Accumulated
Class A Additional Deficit)/
Common Common Paid-in Retained Statutory
Stock Stock Capital Earnings Reserve
------- ------ -------- ---------- ---------
BALANCE,
DEC 31, 1994 $16 $47 $25,861 $1,017 $2,903
Conversion of
Class A Common
shares to
Common shares (1) 1 -- -- -- --
Exercise of
stock options -- -- 450 -- --
Issuance of
treasury stock -- -- 60 -- --
Repayments/re-
classification
of shareholders'
notes - net -- -- -- -- --
Net change of
valuation allow-
ance on short-
term investments -- -- -- -- --
Transfer to
statutory reserve -- -- -- (1,457) 1,457
Net income -- -- -- 1,673 --
------- ------ --------- --------- -------
<PAGE>
(Accumulated
Class A Additional Deficit)/
Common Common Paid-in Retained Statutory
Stock Stock Capital Earnings Reserve
------- ------ --------- --------- -------
BALANCE,
DEC 31, 1995 15 48 26,371 1,233 4,360
Conversion of
Class A Common
shares to
Common shares (1) 1 -- -- -- --
Exercise of
stock options -- -- 252 -- --
Issuance of
treasury stock -- -- 1 -- --
Repayments/re-
classification
of shareholders'
notes - net -- -- -- -- --
Net change of
valuation allow-
ance on short-
term investments -- -- -- -- --
Transfer to
statutory reserve -- -- -- (1,572) 1,572
Net (loss) -- -- -- (11,782) --
------- ------ --------- --------- -------
BALANCE,
DEC 31, 1996 14 49 26,624 (12,121) 5,932
------- ------ --------- --------- -------
Conversion of
Class A Common
shares to
Common shares (3) 3 -- -- -- --
Adjustment to
Treasury Stock -- -- -- -- --
Repayments/re-
classification
of shareholders'
notes - net -- -- -- -- --
Net change of
valuation allow-
ance on short-
term investments -- -- -- -- --
Transfer to
statutory reserve -- -- -- (724) 724
Net (loss) -- -- -- (22,142) --
------- ------ --------- --------- -------
BALANCE,
DEC 31, 1997 $11 $52 $26,624 $(34,987) $ 6,656
======= ====== ========= ========= =======
<PAGE>
Unrealized Total
(Loss)/Gain (Deficiency in
On Notes Assets)/
Short-term Receivable- Treasury Shareholders'
Investments Shareholders Stock Equity
----------- ------------ -------- ------------
BALANCE,
DEC 31, 1994 $ (104) $ (38) $ (395) $ 29,307
Conversion of
Class A Common
shares to
Common shares -- -- -- --
Exercise of
stock options -- -- -- 450
Issuance of
treasury stock -- -- 184 244
Repayments/re-
classification
of shareholders'
notes - net -- 21 -- 21
Net change of
valuation allow-
ance on short-
term investments 109 -- -- 109
Transfer to
statutory reserve -- -- -- --
Net income -- -- -- 1,673
-------- ------- -------- --------
<PAGE>
Unrealized Total
(Loss)/Gain (Deficiency in
On Notes Assets)/
Short-term Receivable- Treasury Shareholders'
Investments Shareholders Stock Equity
----------- ------------ -------- ------------
BALANCE,
DEC 31, 1995 5 (17) (211) 31,804
Conversion of
Class A Common
shares to
Common shares -- -- -- --
Exercise of
stock options -- -- -- 252
Issuance of
treasury stock -- -- 4 5
Repayments/re-
classification
of shareholders'
notes - net -- 11 -- 11
Net change of
valuation allow-
ance on short-
term investments (16) -- -- (16)
Transfer to
statutory reserve -- -- -- --
Net (loss) -- -- -- (11,782)
-------- -------- -------- ---------
BALANCE,
DEC 31, 1996 (11) (6) (207) 20,274
-------- -------- -------- ---------
Conversion of
Class A Common
shares to
Common shares -- -- -- --
Adjustment to
treasury stock -- -- 5 5
Repayments/re-
classification
of shareholders'
notes - net -- 1 -- 1
Net change of
valuation allow-
ance on short-
term investments 11 -- -- 11
Transfer to
statutory reserve -- -- -- --
Net (loss) -- -- -- (22,142)
------- ------ ------- --------
BALANCE,
DEC 31, 1997 $ -- $ (5) $ (202) $ (1,851)
======= ====== ======= =========
See accompanying notes to consolidated financial statements.
<PAGE>
THE WELLCARE MANAGEMENT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
YEARS ENDED DECEMBER 31,
---------------------------------
1997 1996 1995
--------- --------- ---------
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)
--------- -------- --------
<PAGE>
YEARS ENDED DECEMBER 31,
------------------------------
1997 1996 1995
---- ---- ----
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
========= ======== ========
See accompanying notes to consolidated financial statements.
<PAGE>
THE WELLCARE MANAGEMENT GROUP, INC. AND SUBSIDIARIES
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.
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.
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 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.
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
obligations, 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 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 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.
<PAGE>
5. SHORT-TERM INVESTMENTS
The value of short-term investments is as follows:
Gross
----------------------
Unrealized Unrealized Market
Cost Gains Losses Value
---------- ---------- ---------- ---------
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
======== ======== ========= ========
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
========== ==========
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 6,528 5,157
and amortization ----------- -----------
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
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
<PAGE>
1997 1996
---------- ----------
Capitalized costs incurred in
connection with placement
of subordinated convertible
note 743 821
Deposits and others 371 484
---------- ----------
TOTAL $ 3,302 $ 4,749
========== ==========
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).
11. LONG-TERM DEBT
Long-term debt consists of the following:
1997 1996
--------------- ------------
(in thousands)
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
<PAGE>
1997 1996
--------------- ------------
(in thousands)
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
=========== ===========
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 WCMG 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, otherwise Kay 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:
<PAGE>
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 not 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.
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 10Q'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
======== ========
<PAGE>
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)
============ ============ ============
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 carry forward
Federal 7,434
State 1,466 1,026
---------- ----------
Total 14,128 6,782
---------- ----------
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 share 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.
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 338,921 175,938 91,778
exercise currently ======== ======== ========
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.
<PAGE>
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
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 beyond the contractual increases
described in Note 1a, from the Company, 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 defendant's 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.
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.
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.
<PAGE>
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
believe it is not practicable to estimate its fair value at this
time. The carrying amount of other long-term debt, the majority
of which bears interest of floating rates, are assumed to
approximate their fair value.
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)
<PAGE>
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 millions 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).
<PAGE>
THE WELLCARE MANAGEMENT GROUP, INC.
Schedule I
Condensed Financial Information of Registrant
Condensed Balance Sheets
As of December 31, 1997 and 1996
(in thousands)
1997 1996
-------- --------
ASSETS
CURRENT ASSETS:
Cash and equivalents $ 356 $ 4,518
Short-term investments 103 920
Accounts and other receivables - net 1,301 1,864
Prepaid expenses and other
current assets - net 4,629 8,994
-------- --------
TOTAL CURRENT ASSETS 6,389 16,296
INVESTMENT IN SUBSIDIARIES 513 18,642
PROPERTY AND EQUIPMENT - net 205 288
NOTES RECEIVABLE - LONG-TERM - net 10,670 10,893
OTHER ASSETS - net 3,796 4,159
-------- --------
TOTAL $21,573 $50,278
======== ========
LIABILITIES AND (DEFICIENCY IN ASSETS)/
SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Account and notes payable $ 329 $ 327
Current portion of long-term debt 34 69
Accrued expenses and other 2,968 9,480
-------- --------
TOTAL CURRENT LIABILITIES 3,331 9,876
LONG-TERM DEBT 20,093 20,128
-------- --------
TOTAL LIABILITIES 23,424 30,004
-------- --------
(DEFICIENCY IN ASSETS)/SHAREHOLDERS' EQUITY:
Common Stock 63 63
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 202 207
-------- --------
TOTAL (DEFICIENCY IN ASSETS)/
SHAREHOLDERS' EQUITY (1,851) 20,274
-------- --------
TOTAL $ 21,573 $50,278
======== ========
<PAGE>
THE WELLCARE MANAGEMENT GROUP, INC.
Schedule I
Condensed Financial Information of the Registrant
Condensed Statements of Operations
For the years ended December 31, 1997, 1996 and 1995
(in thousands)
1997 1996 1995
--------- --------- ---------
REVENUE:
Fee income $ 14,098 $ 16,248 $14,569
Interest income 2,502 1,588 1,306
Other income 137 151 2,673
--------- --------- ---------
TOTAL REVENUE 16,737 17,987 18,548
--------- --------- ---------
EXPENSES:
General and administrative
expenses 18,483 22,642 21,730
Interest expense 1,123 1,223 323
Other expense - net 369 270 79
--------- --------- ---------
TOTAL EXPENSES 19,975 24,135 22,132
--------- --------- ---------
LOSS FROM OPERATIONS (3,238) (6,148) (3,584)
BENEFIT FOR INCOME TAX -- (2,485) (1,762)
--------- --------- ---------
LOSS BEFORE
EQUITY IN LOSS
OF SUBSIDIARIES (3,238) (3,663) (1,822)
EQUITY IN (LOSS)/INCOME OF
SUBSIDIARIES-NET OF TAXES (18,904) (8,119) 3,495
--------- --------- ---------
NET (LOSS)/INCOME $(22,142) $(11,782) $1,673
========= ========= =========
<PAGE>
THE WELLCARE MANAGEMENT GROUP, INC.
Schedule I
Condensed Financial Information of the Registrant
Condensed Statements of Cash Flows
For the years ended December 31, 1997, 1996 and 1995
(in thousands)
1997 1996 1995
--------- --------- ---------
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net loss $(3,238) $(3,663) $(1,822)
Depreciation and
amortization 353 341 163
Loss/(gain) on sale of assets 16 (71) 53
Decrease/(increase) in accounts
receivable 279 (300) (347)
Other - net 483 109 (725)
--------- --------- ---------
NET CASH USED IN
OPERATING ACTIVITIES (2,107) (3,584) (2,678)
--------- --------- ---------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Increase in notes receivable (2,021) (5,103) (2,355)
Capital contributions to
subsidiaries - net (775) (4,100) (2,750)
Sale of investments - net 817 342 4,804
Purchase of equipment (9) (8) (121)
--------- --------- ---------
NET CASH USED IN
INVESTING ACTIVITIES (1,988) (8,869) (422)
--------- --------- ---------
CASH FLOWS FROM FINANCING
ACTIVITIES:
(Decrease)/increase in
long-term debt (70) 16,158 3,026
Increase/(decrease) in
accounts and notes payable 2 282 (1,855)
Proceeds from issuance of
stock and treasury
stock - net -- 3 244
Proceeds from exercise of
stock options -- 254 450
Other - net 1 (5) 21
--------- --------- ---------
NET CASH (USED IN)/PROVIDED
BY FINANCING ACTIVITIES (67) 16,692 1,886
--------- --------- ---------
NET (DECREASE)/INCREASE IN
CASH AND CASH EQUIVALENTS (4,162) 4,239 (1,214)
CASH AND CASH EQUIVALENTS,
BEGINNING OF YEAR 4,518 279 1,493
--------- --------- ---------
CASH AND CASH EQUIVALENTS,
END OF YEAR $ 356 $ 4,518 $ 279
========= ========= =========
<PAGE>
THE WELLCARE MANAGEMENT GROUP, INC.
Schedule II
Valuation and Qualifying Accounts
For the years ended December 31, 1997, 1996 and 1995
(in thousands)
Balance at Balance at
Beginning Less: End of
of Period Additions Deductions Period
--------- --------- ---------- ----------
YEAR ENDED
DECEMBER 31, 1997
Allowance for
doubtful accounts -
Trade receivables $3,365 $3,462 $3,292 $ 3,555
Allowance for
doubtful accounts -
Other receivables 5,048 1,755 5,666 1,137
Allowance for
doubtful accounts -
Notes receivable 5,345 2,755 4 8,096
------- ------- ------- --------
Total $ 13,758 $ 7,992 $ 8,962 $ 12,788
======= ======= ======= ========
YEAR ENDED
DECEMBER 31, 1996
Allowance for
doubtful accounts -
Trade receivables $ 1,514 $ 3,937 $ 2,086 $ 3,365
Allowance for
doubtful accounts -
Due from affiliates -- 216 216 --
Allowance for
doubtful accounts -
Other receivables 744 4,321 17 5,048
Allowance for
doubtful accounts -
Notes receivable 5,130 535 320 5,345
------- ------- ------- --------
Total $7,388 $9,009 $2,639 $13,758
======= ======= ======= ========
<PAGE>
YEAR ENDED
DECEMBER 31, 1995
Allowance for
doubtful accounts -
Trade receivables $ 682 $ 832 $ -- $ 1,514
Allowance for
doubtful accounts -
Other receivables -- 744 -- 744
Allowance for
doubtful accounts -
Notes receivable -- 5,130 -- 5,130
------- ------- ------- --------
Total $ 682 $6,706 $ -- $ 7,388
======= ======= ======= ========
<PAGE>
INDEX TO EXHIBITS
EXHIBIT NO.
- - -----------
3.1 Copy of Registrant's Restated
Certificate of Incorporation (1)
3.1a Copy of Certificate of Amendment to
Restated Certificate of Incorporation
filed June 5, 1995 (4)
3.1b Copy of Certificate of Amendment to
Restated Certificate of Incorporation
(As Amended June 10, 1997)
3.2c Copy of Registrant's Amended By-Laws
(As Amended June 10, 1997) (11)
10.2d Copy of Voluntary Separation and
Release dated October 16, 1996,
between Registrant and Edward A. Ullmann* (8)
10.14 Form of Medicaid Contract between
WellCare of New York, Inc. ("WCNY")and
various counties of the New York State
Department of Social Services (1)
10.15a Copy of Restated Agreement dated March 1,
1994, between WellCare Administration, Inc.
and Diversified Pharmaceuticals, Inc. (3)
10.16a Copy of Reinsurance Agreement effective
November 1, 1993, between Registrant and
Preferred Life Insurance Company of
New York (3)
10.22 Copy of Lease dated February 1, 1993, between
WCNY, as Tenant, and Huntington Associates, as
Landlord, relating to lease of office space in
Albany, New York (1)
10.26a Copy of Full Risk Capitation Agreement between
Hudson Valley Family Health, P.C. and WCNY
dated October 1, 1995 (6)
10.27a Copy of Full Risk Capitation Agreement between
Valley Medical Services, P.C. and WCNY dated
October 1, 1995 (6)
10.27b Copy of Letter of Understanding between WCNY
and the contracted Alliances (Valley Medical
Services, P.C. and Hudson Valley Family
Medical Health, P.C.)dated September 23, 1996 (9)
10.27c Copy of Letter of Intent between Registrant,
WCNY, Primergy, Inc., Valley Medical Services,
P.C., and Hudson Valley Family Health, P.C.
dated January 7,1997 (9)
<PAGE>
INDEX TO EXHIBITS
EXHIBIT NO.
- - -----------
10.33b Copy of Employment and Consulting Agreement
dated March 3, 1997, between Registrant and
Registrant and Marystephanie Corsones* (9)
10.35 Copies of Stock Purchase Warrants issued by
Registrant to J.J. Farrell Associates, Inc. (3)
10.37 Copy of Lease Agreement dated October 14, 1994,
between Richard Bulger and WellCare Development,
Inc.("WCD") (3)
10.38 Copy of Management Agreement dated July 1,
1994, between Registrant and its Wholly-Owned
Subsidiary, WellCare of Connecticut, Inc.
("WCCT") (3)
10.40 Copy of Note Purchase Agreement by and
between Registrant and The 1818 Fund II, L.P. (5)
10.40a Copy of Letter Agreement dated February 28,
1997, between Registrant and The 1818 Fund
II, L.P. (9)
10.40b Copy of Letter Agreement dated January 14, 1998
between Registrant and The 1818 Fund II, L.P.
10.41 Copy of 6% Subordinated Convertible Note
Due December 31, 2002, between Registrant
and The 1818 Fund II, L.P. (5)
10.42 Copy of Registration Rights Agreement
between Registrant and The 1818 Fund II, L.P. (5)
10.43 Copy of Asset Purchase Agreement between
WellCare Medical Management, Inc. ("WCMM")and
Primergy, Inc. dated June 30, 1995 (6)
10.44 Copy of Bill of Sale between WCMM and
Primergy, Inc. dated June 30, 1995 (6)
10.45 Copy of Promissory Note in the amount of
$5,130,000 between WCMM Inc. and
Primergy, Inc. dated June 30, 1995 (6)
10.45a Copy of Forbearance Agreement on the terms and
conditions of a Promissory Note in the amount
of $5,130,000 between Registrant and Primergy,
Inc. dated February 26, 1997 (9)
10.46 Copy of Note Agreement between WCMM and
Primergy, Inc. dated June 30, 1995 (6)
10.49 Copy of Quota Share Reinsurance Agreement
between Registrant and Allianz Life Insurance
Company of North America dated September 1,
1995 (6)
INDEX TO EXHIBITS
EXHIBIT NO.
- - -----------
10.50 Copy of Employment Contract dated May 29, 1996,
and Stock Option Agreements between Registrant
and Douglas A. Hayward* (7)
10.50a Copy of Voluntary Separation Agreement and
Release Between Douglas A. Hayward and the
Registrant*
10.51 Copy of Employment Contract dated June 1, 1996,
and Stock Option Agreements between Registrant
and John E. Ott, M.D.* (7)
10.52 Copy of Employment Agreement dated September 1,
1996, between Registrant and Joseph R. Papa* (8)
10.53 Copy of Registrant's 1996 Non-Incentive
Executive Stock Option Plan* (9)
10.54 Copy of Stock Option Agreement dated
December 23, 1996, between Registrant
and Robert W. Morey, Jr.* (9)
10.54a Copy of Amendment dated December 19, 1997,
to Stock Option Agreement between Registrant
and Robert W. Morey, Jr. for options
to purchase 450,000 shares of Common Stock*
10.55 Copy of Promissory Note in the amount of
$2,099,083 between Primergy, Inc. and
Registrant dated February 19, 1997 (9)
10.56 Copy of Loan and Security Agreement made
by Primergy, Inc. in favor of Registrant
and WCMM dated as of February 19, 1997 (9)
10.57 Copy of Wellness Administrative Services
Agreement dated July 1, 1996, and Amendment
to Administrative Services Agreement dated
October 10, 1996, between WCNY and Bienestar,
Inc. (9)
10.58 Copy of Lease Agreement dated July 1, 1996,
between Candid Associates, as Lessor, and
WCD, as Lessee, relating to lease of office
space in North Haven, Connecticut (9)
10.59 Copy of Loan and Security Agreement dated
April 1, 1997 between Catskill Medical
Associates, P.C., WCNY and Registrant (10)
10.60 Copy of Letter of Understanding dated
June 30, 1997 between Primergy, Inc. and
Registrant (10)
10.61 Copy of Memorandum dated July 23, 1997 between
Primergy, Inc. and Registrant (10)
<PAGE>
INDEX TO EXHIBITS
EXHIBIT NO.
- - -----------
10.62 Amendment to Stock Option Agreement
between Robert W. Morey, Jr. and Registrant
for options to purchase 150,000 share of
Common Stock
10.63 Copy of an Agreement of Lease between Reckson
Operating Partnership, LP and WCD for the Tarrytown office.
11 Computation of Per Share Earnings
21 List of Subsidiaries
23 Consent of Independent Auditors
27 Financial Data Schedule
- - ------------------------------------------------------------------
(1) Incorporated by reference to the same exhibit in Registrant's
Registration Statement on Form S-1 (File No. 33-61012)
(2) Incorporated by reference to the same exhibit in Registrant's
Annual Report on Form 10-K for the year ended December 31, 1993.
(3) Incorporated by reference to the same exhibit in Registrant's
Annual Report on Form 10-K for the year ended December 31, 1994.
(4) Incorporated by reference to the same exhibit in Registrant's
Report on Form 10-Q for the period ended June 30, 1995.
(5) Incorporated by reference to the same exhibit in Registrant's
Report on Form 8-K dated January 19, 1996.
(6) Incorporated by reference to the same exhibit in Registrant's
Report on Form 10-K for the year ended December 31, 1995.
(7) Incorporated by reference to the same exhibit in Registrant's
Report on Form 10-Q for the period ended June 30, 1996.
(8) Incorporated by reference to the same exhibit in Registrant's
Report on Form 10-Q for the period ended September 30, 1996.
(9) Incorporated by reference to the same exhibit in Registrant's
Report on Form 10-K for the year ended December 31, 1996.
(10) Incorporated by reference to the same exhibit in Registrant's
Report on Form 10-Q for the period ended June 30, 1997.
(11) Incorporated by reference to the same exhibit in Registrant's
Report on Form 10-Q for the period ended September 30, 1997.
* Denotes Management Contract or compensatory plan or arrangement required to
be filed as an exhibit to this Annual Report on Form 10-K.
<PAGE>
</TABLE>
EX-3.1b Copy of Certificate of Amendment to Restated
Certificate of Incorporation filed on June 10,
1997.
CERTIFICATE OF AMENDMENT
OF THE CERTIFICATE OF INCORPORATION OF
THE WELLCARE MANAGEMENT GROUP, INC.
(Under Section 805 of the Business Corporation Law)
The WellCare Management Group, Inc., a corporation (the
"Corporation") organized and existing under the Business
Corporation Law, hereby certifies as follows:
1. The name of the Corporation is The
WellCare Management Group, Inc. The Corporation was formed under
the name Ullmann and Castellon, Inc.
2. The Certificate of Incorporation of the
Corporation was filed with the Department of State of the State of
New York on August 25, 1983.
3. The purpose of this Certificate of
Amendment is to (i) delete subparagraphs (b) and (c) of Article
VII of the Corporation's Certificate of Incorporation relating to
the classification of the terms of office of the Board of
Directors into three classes, Class I, Class II and Class III,
(ii) add a new subparagraph (b) of Article VII of the
Corporation's Certificate of Incorporation relating to the
election of directors until the next Annual Meeting of
Shareholders and (iii) delete the reference to "any class of
directors" set forth in subparagraph (d) of Article VII of the
Corporation's Certificate of Incorporation and to reletter such
subparagraph as subparagraph (c).
4. Article VII of the Corporation's
Certificate of Incorporation is hereby amended and restated in its
entirety to read as follows:
ARTICLE VII
BOARD OF DIRECTORS
(a) The number of directors of the
Corporation constituting the entire Board of Directors shall be
not less than three or more than fifteen. The board of Directors
shall determine from time to time the number of directors who
shall constitute the entire Board of Directors. Any such
determination made by the Board of Directors shall continue in
effect unless and until changed by the Board of Directors, but no
such changes shall affect the term of any directors then in
office. Directors need not be shareholders of the Corporation.
(b) At each Annual Meeting of
Shareholders, directors of the Corporation shall be elected to
hold office until the next Annual Meeting of Shareholders and
until their successors shall have been duly elected and qualified.
(c) The directors of the Corporation may
not be removed prior to the expiration date of their terms of
office except for cause and by action of the Board of Directors or
by vote of the shareholders at the Annual Meeting of Shareholders
or at any Special Meeting of Shareholders called by the Board of
Directors or by the Chairman of the Board or by the President for
this purpose."
5. The amendments to the Certificate of
Incorporation of the corporation herein provided was authorized by
the Board of Directors followed by the authorization by the
affirmative vote of a majority of the total votes of the
outstanding shares of Common Stock and Class A Common Stock voting
as one class. Pursuant to Article IV, Section 2(b) of the
Certificate of Incorporation, with respect to voting on the
forgoing amendment, each holder of record of Common Stock entitled
to vote thereon was entitled to one vote per share and each holder
of record of Class A Common Stock entitled to vote thereon was
entitled to ten votes per share.
IN WITNESS WHEREOF, the undersigned have
subscribed this document on the date set forth below and do hereby
affirm, under penalties of perjury, that the statements contained
therein have been examined by them and are true and correct.
Dated: June 10, 1997
/s/ Joseph R. Papa
Joseph R. Papa
President and Chief Operating Officer
/s/ Howard B. Lorch
Howard B. Lorch
Secretary
EX-10.40b Copy of Letter Agreement dated January 14,
1998, between registrant and the 1818 Fund
II, L.P.
THE 1818 FUND II, L.P.
January 14, 1998
The WellCare Management Group, Inc.
Park West/Hurley Avenue Extension
P.O. Box 4059
Kingston, NY 12401
Gentlemen:
Reference is made to (i) the Note Purchase Agreement (as
amended to date by Amendment No. 1 (hereinafter defined), the
"Note Purchase Agreement") dated as of January 19, 1996, between
The WellCare Management Group, Inc., a New York corporation (the
"Company"), and The 1818 Fund II, L.P., a Delaware limited
partnership (the "Purchaser") and (ii) the 6.0% Subordinated
Convertible Note (as amended to date by Amendment No. 1, the
"Note") due December 31, 2002 issued by the Company to the
Purchaser on January 19, 1996, each as amended by that certain
amendment No. 1 contained in a Letter Agreement, dated February
28, 1997, between the Company and the Purchaser ("Amendment No.
1"). Capitalized terms used but not defined herein shall have the
meanings specified in the Note Purchase Agreement. The Note
Purchase Agreement and the Note are collectively referred to
herein as the "Transaction Documents".
The Purchaser and the Company desire to effect certain
additional amendments to the Note pursuant to this amendment No. 2
and to take certain other actions specified herein. Therefore,
for good and valuable consideration, the
The WellCare Management Group, Inc.
sufficiency of which is hereby acknowledged, the Purchaser and the
Company hereby agree as follows:
I. AMENDMENTS OF THE NOTE: The Note is hereby amended as follows:
A. AMENDMENT TO HEADING. The heading of the Note is hereby
amended by changing the reference to "6.0% Subordinated Convertible
Note" to "8.0% Subordinated Convertible Note".
B. AMENDMENT TO SECTION 1. Section 1 of the Note
is hereby amended by changing all references to "6.0%
Subordinated Convertible Note" to "8.0% Subordinated
Convertible Note".
C. AMENDMENT TO SECTION 2. Section 2 of the Note
is hereby amended by (i) changing the percentage in the (x)
third line thereof from 6.0% to 8.0% and (y) last line
thereof from 8.0% to 10.0% and (ii) deleting the proviso.
D. AMENDMENT TO SECTION 5.1. Section 5.1 of the
Note is hereby amended by changing 130% to 150% in the
seventh line thereof.
E. AMENDMENT OF SECTION 7.4(b). Section 7.4(b) of
the Note is hereby amended by changing the date in the fifth
line thereof from June 30, 1996 to January 14, 1998.
F. AMENDMENT OF SECTION 7.6. Section 7.6 of the
Note is hereby amended by adding the following sentence at
the end of such Section:
"Within 10 day after the end of each fiscal
quarter of the Company, the Company will provide
the Purchaser with a certificate signed by one
of the aforesaid officers, setting forth the
Conversion Price as of the end of such quarter
and any increases or decreases in the Conversion
Price (and the events giving rise thereto)
during such quarter, which certificate shall be
accompanied by a certification from Deloitte &
Touche, LLP (or any successor thereto or another
nationally recognized independent accounting
firm) of the information set forth in the
Company's certificate."
G. AMENDMENT OF SECTION 10.5. Section 10.5 of the
Note is hereby deleted in its entirety.
The WellCare Management Group, Inc.
H. ADDITION OF SECTION 10.10. The following
Section 10.10 is hereby added to the Note:
10.10 ADDITIONAL INFORMATION. The Company will
deliver to the holder of this Note, as soon as available but
no later than the 15th day of each month, a notice
specifying or attaching the following information as to the
Company, all certified by the Company's Chief Financial
Officer:
(a) statement of cash receipts and
disbursements for the preceding month;
(b) statement of cash balances at preceding
month end for the Company and each of its
Subsidiaries;
(c) itemizing statement of selling, general
and administrative expenses of the Company
and its Subsidiaries for the preceding
month;
(d) enrollment changes by category and region
for the preceding month;
(e) updated month-by-month projection of
sources and uses of cash for the next six
months;
(f) copies of all correspondence with
regulators in the preceding month; and
(g) schedule of in-patient days per thousand
by category of business and region for the
preceding month.
I. AMENDMENT OF SECTION 12. Section 12 of the Note is
hereby amended by deleting the definition of Conversion Price and
replacing it with the following new definition:
" Conversion Price' shall mean (i) $4.00 with respect
to $5,000,000 aggregate principal amount of the Notes and
(ii) $8.00 with respect to the remainder of the Notes, in
each case subject to adjustment (after the date of amendment
No. 2) as set forth in Section 7.4(b)."
The WellCare Management Group, Inc.
II. AMENDMENTS OF THE NOTE PURCHASE AGREEMENT. The Note
Purchase Agreement is hereby amended by changing all references to
the "6.0% Subordinated Convertible Note" to the "8.0% Subordinated
Convertible Note."
III. AMENDMENTS OF THE REGISTRATION RIGHTS AGREEMENT. The
Registration Rights Agreement is hereby amended by changing all
references to the "6.0% Subordinated Convertible Note" to the
"8.0% Subordinated Convertible Note."
IV. CONVERSION OF NOTES. The Company shall use its best efforts
to obtain within 90 days from the date of this letter agreement
the approval of the Commissioner of Health of the State of New
York to the conversion of the Notes by the Purchaser. The Company
shall promptly notify the Purchaser of the receipt of such
approval. Within 15 days of receipt of such approval, the
Purchaser shall convert $5,000,000 aggregate principal amount of
the Notes in accordance with Section 7 of the Note. The Company
shall pay interest on the Note upon such conversion pursuant to
Section 7.3 of the Note.
V. OPTION TO PURCHASE. If the consolidated earnings before
income taxes of the Company and its Subsidiaries for the quarter
ended June 30,1998 or September 30, 1998, as reported in the
consolidated financial statements of the Company and its
Subsidiaries included in the Company's Quarterly Report on Form
10-Q for the quarterly period ended June 30, 1998 or September 30,
1998, as the case may be, filed by the Company with the Commission
and delivered to the Purchaser are greater than zero (the
"Earnings Condition"), then beginning on the date such Earnings
Condition has been satisfied and ending on December 31, 1998, the
Company shall have the option to purchase from the Purchaser 50%
of the aggregate outstanding principal amount of the Note and 50%
of the Conversion Shares for an aggregate purchase price of
$12,000,000 plus all accrued and unpaid interest on the Note to
the date of purchase. Such option to acquire such portion of the
Note and such shares may be exercised only in its entirety and
only upon 30 days prior written notice to the Purchaser. The
purchase price shall be paid in immediately available funds to an
account designated by the Purchaser. Any transfer of Notes or
shares pursuant to this Section shall be made by the Purchaser
without presentation or warranty of any kind except that the
Purchaser will represent and warrant as to the absence of Liens
created by or through the Purchaser. If the Earnings Condition is
not met, the Company shall have no option to purchase Notes or
Conversion Shares from the Purchaser.
VI. REPRESENTATIONS AND WARRANTIES TRUE. Except as set forth on
Schedule VI, the Company hereby represents and warrants to the
Purchaser that on and as of the date hereof, all representations
and warranties of the Company contained in any of the Transaction
Documents (other than those specified in Section 5.11, Section
The WellCare Management Group, Inc.
5.12, Section 5.13 or, solely so far as it relates to any
representation or warranty specified in Section 5.11, 5.12 or
5.13, Section 5.21 of the Note Purchase Agreement or those
specified in Section V. C, D and E of Amendment No. 1 or, solely
so far as it relates to any representation or warranty specified
in Section V. C,D, or E of Amendment No. 1, Section V.F. of
Amendment No. 1) are true and correct as of the date hereof as if
made on the date hereof and with the same effect as if set forth
in this letter agreement except to the extent superseded by the
representatives and warranties contained in Section VII hereof.
VII. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company
hereby represents and warrants to the Purchaser as follows:
A. DUE AUTHORIZATION. The execution, delivery and
performance by the Company of this Amendment have been duly
authorized by all necessary corporate action, and the provisions
of this Amendment are valid and binding obligations of the
Company, enforceable in accordance with their respective terms.
B. GOVERNMENTAL AUTHORIZATION: Third Party Consents.
Other than, with respect to the issuance of Conversion Shares, (i)
any required pre-merger notification and relating filings under
the HSR Act, (ii) the filing of a notification with Nasdaq upon
the first issuance of any Conversion Shares, (iii) filings under
the Securities Act and any applicable state securities or "blue
sky" laws upon the issuance of any Conversion Shares to any Person
other than the Purchaser and (iv) approval by the Commissioner of
Health of the State of New York, no approval, consent, exemption,
authorization, or other action by, or notice to, or filing with,
any (i) Governmental Authority or (ii) any other Person, is
necessary or required in connection with the execution, delivery
or performance by the Company or enforcement against the Company
of this letter agreement or the transactions contemplated hereby
except, in the case of (ii) with respect to any Contractual
Obligation, any such consent or other action that would not,
individually or in the aggregate, have a material adverse effect
on the Condition of the Company if not obtained.
C. LITIGATION. There are no actions, suits, proceedings,
claims or disputes pending, or to the Company's Knowledge,
threatened, at law, in equity, in arbitration or before any
Governmental Authority against the Company or any of its
Subsidiaries:
(a) with respect to this letter agreement or any of the
transactions contemplated hereby; or
(b) except as set forth on Schedule VII.C, that would, if
adversely determined, (i) have a material adverse effect on the
Condition of the Company or (ii) have a material adverse effect on
the ability of the Company to perform its obligations under this
The WellCare Management Group, Inc.
letter agreement. No injunction, writ, temporary restraining
order, decree or any order of any nature has been issued by any
court or other Governmental Authority purporting to enjoin or
restrain the execution, delivery and performance of this letter
agreement.
D. FINANCIAL CONDITION. The Company heretofore has
delivered to the Purchaser true and correct copies of the
unaudited interim consolidated financial statements of the Company
and its Subsidiaries dated as of September 30, 1997 (the
"September 30 Interim Financials"0. The September 30 Interim
Financials have been prepared in accordance with GAAP applied
consistently throughout the periods covered thereby except for
normal recurring year-end adjustments. The September 30 Interim
Financials present fairly the consolidated financial condition of
the Company as of the date thereof, and the consolidated results
of operations of the Company for the period then ended. Except as
set forth on Schedule VII.D or as set forth in the September 30
Form 10-Q (defined below), neither the Company nor any of its
Subsidiaries has any material direct or indirect indebtedness,
liability or obligation, whether known or unknown, fixed or
unfixed, contingent or otherwise, and whether or not of a kind
required by GAAP to be set forth on a financial statement
(collectively "Liabilities"), other than (i) Liabilities fully and
adequately reflected on the September 30 Interim Financials and
(ii) those incurred since the date of the September 30 Interim
Financials in the ordinary course of business.
E. NO MATERIAL ADVERSE CHANGE. Since September 30, 1997,
except as set forth on Schedule VII.E, there has not been any
material adverse change in the Condition of the Company, nor in
the opinion of the Company's senior management is any such change
probable.
F. QUARTERLY REPORTS ON FORM 10-Q; Commission Documents.
(a) The Company's Quarterly Report on Form 10-Q for
the quarterly period ended September 30, 1997 filed by the Company
with the Commission on November 14, 1997 (the "September 30 Form
10-Q") was true and accurate in all material respects when filed
with the Commission and in compliance in all material respects
with the requirements of its report form.
(b) The Company has, since August 14, 1996, filed
all registration statements, proxy statements, reports and other
documents required to be filed by it under the Securities Act and
the Exchange Act, and all amendments thereto (collectively, the
"Commission Documents"); and the Company has furnished the
Purchaser correct and complete copies of all Commission Documents,
each as filed with the Commission, from and after August 14, 1996.
Each Commission Document filed after the September 30 Form 10-Q
was true and accurate in all material respects when filed with the
The WellCare Management Group, Inc.
Commission and in compliance in a all material respects with the
requirements of its respective report form.
; provided that the Company shall not be deemed to have breached
the representations and warranties set forth in Section VII D. or
F. To the extent that (i) any inaccuracy in any such
representations and warranties, together with all other
inaccuracies in such representations and warranties set forth in
Section VII D. Or F. To the extent that (i) any inaccuracy in any
such representations and warranties, together with all other
inaccuracies in such representations and warranties, give rise to
or result in liabilities, costs and expenses which have or could
have an affect on the cash of the Company and its Subsidiaries (on
a consolidated basis) of less than $5,000,000, in the aggregate,
or (ii) any inaccuracy in any such representations and warranties
result from the shareholder litigation or United States Attorney's
investigation referred to in the September 30 Form 10-Q.
VIII. AMENDMENT AND RESTATEMENT OF NOTES. The Company hereby
agrees that if requested to do so by the Purchaser, it will
execute an amended and restated Note (the "Amended and Restated
Note") incorporating the amendments to the note set forth in
Section I of this letter agreement. Upon delivery of the Amended
and Restated Note, the Purchaser will surrender to the Company the
Note outstanding on the date hereof (the "Old Note"). The Amended
and Restated Note shall be dated the date of, and be in the same
denomination as, the Old Note replaced by it. From and after the
date of delivery of the Amended and Restated Note, all references
in any Transaction Document, as amended hereby, to the term "Note"
or "Notes" shall be deemed to refer to the Amended and Restated
Note.
IX. COUNTERPARTS. This letter agreement may be executed in
counterparts, each of which shall be deemed an original but all of
which together shall constitute one and the same instrument.
X. EFFECT ON TRANSACTION DOCUMENTS. The Purchaser hereby
waives any claim under Amendment No. 1 that, based upon facts
known to the Purchaser on the date hereof, any representation or
warranty of the Company set forth in Section V.D., V.E. or V.F (in
respect to Section V.F. solely with respect to the financial
statements and notes thereto, Management's Discussion and Analysis
of Financial Condition and Results of Operations and Selected
Financial Information set forth in any Commission Documents), was
not true on the date of execution of Amendment No. 1. The
Purchaser hereby also waives (i) any default under Section 11.1
(g) of the Note relating to the matters discussed in Item 3 of
Part II of the September 30 Form 10-Q, (ii) any default under
Section V.B. of Amendment No.1 to the extent it failed to set
forth the government approvals or consents set forth in Section
VII.B. hereof, (iii) any violation that may have existed under
Section 8.2 (a) or (b) or Section 8.6 (b)(i) or (ii) through the
The WellCare Management Group, Inc.
date hereof, to the extent notice was required thereunder with
respect to any of the items specified in the other numbered
clauses of this sentence, (iv) any violation of Section 10.5 of
the Note that may have existed from February 28, 1997 to the date
hereof, and in each case any Event of Default (as defined in the
Note) that may have resulted therefrom. Except as specifically
set forth in this letter agreement, the Transaction Documents
shall remain unmodified and in full force and effect and are
hereby ratified by the parties thereto, as amended. The Company
acknowledges and agrees that this letter agreement does not
represent an intention by the Purchaser (other than as set forth
herein) to waive, modify or forebear from exercising any of its
rights, powers and privileges under any Transaction Document and
no such commitment, waiver modification (other than as set forth
herein) or forbearance has been offered, granted, extended or
agreed, nor is any implied, by the Purchaser.
XI. ENTIRE AGREEMENT. This letter agreement (which constitutes
the second amendment of the Note), together with the Transaction
Documents (including Amendment No. 1 thereto), represents the
complete understanding of the parties with respect to the subject
matter hereof.
XII. EXPENSES. The Company shall promptly pay or reimburse to the
Purchaser the fees and expenses (including fees, expenses and
other charges of Paul, Weiss, Rifkind, Wharton & Garrison)
incurred by the Purchaser in connection with the preparation,
negotiation and execution of this letter agreement and the
transactions contemplated hereby.
XIII. HEADINGS. Headings in this letter agreement are for
reference only, and shall not affect the interpretation or meaning
of any provision of this Agreement.
XIV. GOVERNING LAW. This letter agreement shall be governed by,
and construed and interpreted in accordance with, the laws of the
State of New York applicable to agreements made and to be
performed entirely within such State.
Very truly yours,
THE 1818 FUND II, L.P.
By: Brown Brothers Harriman & Co.,
its General Partner
By: /s/ Lawrence C. Tucker
Name: Lawrence C. Tucker
Title: Partner
ACKNOWLEDGED AND AGREED:
THE WELLCARE MANAGEMENT GROUP, INC.
By: /s/ Joseph R. Papa
Name: Joseph R. Papa
Title: President/CEO
EX-10.50a Copy of Voluntary Separation Agreement and
Release Between Douglas A. Hayward and the
registrant.
VOLUNTARY SEPARATION AGREEMENT AND RELEASE
This memorandum sets forth the terms and conditions of the
Voluntary Separation Agreement and Release ("Agreement") between
Douglas A. Hayward, on his own behalf and on behalf of his estate,
heirs, executors, administrators, attorneys, successors and
assigns (hereinafter collectively referred to as the "Employee"),
and The WellCare Management Group, Inc., WellCare of Connecticut,
Inc., WellCare of New York, Inc., its and their parent(s),
branches, agencies, subsidiaries, affiliates, related companies
and divisions and their respective successors, assigns,
representatives, agents, officers, directors, shareholders, and
employees, whether current or former (hereinafter collectively
referred to as "WellCare").
WHEREAS, the Employee and WellCare have agreed that the
Employee's employment with WellCare will be terminated effective
November 17, 1997 (the "Termination Date");
WHEREAS, the Employee will receive his base salary through
November 17, 1997, and shall be paid for all unused accrued
vacation in the amount of $7,010.83, and for all outstanding
business-related expenses in the amount of $2,247.80 (to the
extent not previously reimbursed);
WHEREAS, the Employee shall voluntarily resign as an officer
and a member of the board of directors of WellCare, effective
November 17, 1997. Notwithstanding anything to the contrary in
this Agreement, November 17, 1997 shall be his final date of
employment with WellCare in any capacity.
NOW, THEREFORE, in consideration of the premises and the
mutual covenants and undertakings set forth herein, the Employee
and WellCare agree as follows:
1. The employment agreement dated May 29, 1996, by and
between the Employee and WellCare ("Employment Agreement"), and
all rights and obligations of the Employee and WellCare thereunder
shall terminate effective at 5:00 p.m. on the seventh day after
Employee executes this Agreement, provided, however, that Employee
does not revoke this Agreement within seven (7) days after signing
it pursuant to paragraph 18 of this Agreement.
2. As consideration for the Employee's release of any and
all claims against WellCare as set forth in paragraph 3 herein,
WellCare agrees:
(a) to provide the Employee with bi-weekly payments of
$7,307.70, less applicable deductions, for the period from
November 18, 1997 through August 23, 1999, PROVIDED, HOWEVER, that
in the event the Employee secures Alternative Employment, as
defined below, said payments shall cease as of the date the
Alternative Employment commences. For purposes of this Agreement,
"Alternative Employment" shall mean any provision of services to a
health maintenance organization that is in competition with
WellCare in the States of Connecticut or New York. During the
period in which the Employee is receiving payments pursuant to
this paragraph 2(a), the Employee shall (i) be reasonably
available via telephone to answer questions from Joseph R. Papa,
Chief Executive Officer of WellCare, or his designee, relating to
those services the Employee performed prior to the termination of
his employment, and (ii) be available, upon reasonable notice and
at times reasonably convenient to the parties, to perform services
for WellCare up to one day per week from November 18, 1997 through
February 17, 1998. In connection with such telephone conferences
and services, WellCare shall reimburse Employee for all reasonable
travel and other expenses incurred or paid by Employee, upon
presentation by Employee of documentation, expense statements,
vouchers and/or such other supporting information as WellCare may
reasonably request. In the event that a "Change in Control," as
defined in Schedule 3.3(c) annexed to the Employment Agreement,
occurs prior to August 23, 1999, at the Employee's option the
remaining bi-weekly payments due under the paragraph 2(a) shall be
accelerated and shall be paid to Employee in a single lump sum
within ten (10) business days of receipt of the Employee's
request; PROVIDED, HOWEVER, WellCare shall be entitled to recover
from the Employee a ratable portion of such lump sum payment if
the Employee commences Alternative Employment prior to August 23,
1999. The Employee will notify WellCare in writing within five
business days of his procuring Alternative Employment;
(b) to pay for the continuation, or if applicable the
conversion, of the Employee's health and dental insurance coverage
in WellCare's group health and dental insurance plans, as in
effect for the Employee and his covered family members immediately
prior to his Termination Date, for the period from November 18,
1997 through August 23, 1999. In the event the Employee relocates
out of the geographic coverage area of such health care insurance
coverage, WellCare shall reimburse the Employee for his payment of
premiums for alternative health care insurance coverage, up to the
amount of WellCare paid premiums for the health care insurance
coverage provided to the Employee immediately prior to his
relocation, for the remainder of the WellCare paid period as set
forth in this paragraph 2(b). Notwithstanding the foregoing,
WellCare's obligation to pay for such continuation and/or
conversion coverage(s) shall cease in the event the Employee
secures full-time employment (i.e., employment other than on a
part-time basis or as a consultant) and is eligible to be covered
under a health benefits package. The Employee will notify
WellCare in writing within five business days of his procuring
other employment, and WellCare shall be entitled to recover from
the Employee any amounts paid for such coverages after the date
the Employee commences other employment;
(c) to pay the premiums, when due, (or if
applicable, reimburse the Employee for the premiums) for $250,000
of term life insurance coverage under the Employee's individual
life insurance policy with Travelers Insurance, as in effect
immediately prior to the Employee's Termination Date, for the
period from November 18, 1997 through August 23, 1999. If
WellCare is billed directly by Travelers for the above mentioned
life insurance policy, WellCare shall timely remit to Travelers an
amount equal to the premiums required to procure an additional
$250,000 of coverage under such policy, so that the Employee shall
have in force $500,000 of such term life insurance coverage
through August 23, 1999; PROVIDED, HOWEVER, that the payments due
to Employee under paragraph 2(a) above shall be reduced by the
amounts paid by WellCare for such additional life insurance
coverage. Notwithstanding the foregoing, WellCare's obligation to
make the payments provided for in this paragraph 2(c) shall cease
in the event the Employee secures other employment. The Employee
will notify WellCare in writing within five business days of his
procuring other employment, and WellCare shall be entitled to
recover from the Employee any amounts paid under this paragraph
2(c) after the date the Employee commences other employment; and
(d) to reimburse the Employee for premiums due and
payable by Employee for his individual Long-Term Disability policy
with Indianapolis Life as in effect immediately prior to the
Employee's Termination Date, for the period from November 18, 1997
through August 23, 1999. Notwithstanding the foregoing,
WellCare's obligation to make the payments provided for in this
paragraph 2(d) shall cease in the event that the Employee secures
other employment. The Employee will notify WellCare in writing
within five business days of his procuring other employment, and
WellCare shall be entitled to recover from the Employee any
amounts paid under this paragraph 2(d) after the date the Employee
commences other employment.
3. In exchange for the payments and benefits set
forth in paragraph 2 above and for other good and valuable
consideration, the Employee hereby releases WellCare from any and
all liability for any claims against WellCare as of the date of
his execution of this Agreement, whether known or unknown to him,
that may arise under express or implied contract, federal, state
or local statute, executive order, law, ordinance, tort or other
obligations arising out of public policy. This release includes
but is not limited to any claims for discrimination on the basis
of race, color, sex, national origin, religion, disability, age,
marital status and veteran status, including but not limited to
any claims arising under Title VII of the Civil Rights Act of
1964, the Civil Rights Act of 1866, the Civil Rights Act of 1991,
the Age Discrimination in Employment Act of 1967, the Older
Workers Benefit Protection Act of 1990, the Family and Medical
Leave Act of 1993, the Employee Retirement Income Security Act,
the Americans with Disabilities Act of 1990, the Fair Labor
Standards Act of 1938, the New York State Human Rights Law, and
all claims for wages, monetary or equitable relief, vacation,
other employee fringe benefits, benefit plans, medical plans,
401(k) plans, stock options plans or attorneys' fees. The
foregoing release shall not extend to: (a) any rights or claims
against WellCare that arise after the execution of this Agreement;
(b) any rights or claims in connection with the enforcement of
this Agreement; (c) any rights to indemnification under applicable
law or under the bylaws of WellCare that apply to Employee as a
former officer, director and employee of WellCare; and (d) any
rights with respect to the vested value of his participation in
WellCare's benefit plans (including the 401k plan), which Employee
shall retain in accordance with the terms of said plans. This
Agreement does not constitute any admission by WellCare that it
has violated any such law or legal obligation with respect to any
aspect of the Employee's employment or termination therefrom.
4. The Employee represents, warrants and
acknowledges that WellCare owes him no wages, commissions,
bonuses, sick pay, personal leave pay, holiday pay, severance pay,
vacation pay, tuition reimbursement, stock options, auto
allowance, 401(k) Plan benefits or other compensation or benefits
or payments or forms of remuneration of any kind or nature, other
than that specifically provided for in this Agreement. Reference
is made to Section 3.2 of the Employment Agreement and to the
Option Agreements dated May 29, 1996 (collectively, the "1996
Option Agreement"), and the Option Agreement dated June 27, 1997
(the "1997 Option Agreement" and together with the 1996 Option
Agreements, collectively the "Option Agreements"). Employee and
WellCare hereby acknowledge that: (i) 50% of the options issued
under the 1996 Option Agreement (or options to purchase an
aggregate of 20,000 shares) are currently exercisable; (ii) none
of the options granted under the 1997 Option Agreement are
currently exercisable; (iii) as a result of his termination of
employment, no further options granted under the Option Agreements
or otherwise shall become exercisable; and that (iv) under the
1996 Option Agreement, the Employee has three months from the date
of termination of employment in which to exercise the 20,000
options that are currently exercisable as of the date hereof.
Employee further acknowledges and agrees that WellCare has no
further obligation to issue any options to the Employee under the
Employment Agreement or otherwise.
5. The Employee confirms that he has delivered to
WellCare any and all property and equipment of WellCare, including
his car, beeper, phone, keys, laptop or other computers, and any
other WellCare items he may have had in his possession.
6. The Employee represents and agrees that: (a) he
has not filed or caused to be filed any lawsuits against WellCare
in any court whatsoever; (b) he has not filed or caused to be
filed any charges or complaints against WellCare with any
municipal, state or federal agency charged with the enforcement of
any law; and (c) pursuant to and as a part of the Employee's
complete, total and irrevocable release and discharge of WellCare,
the Employee agrees, to the fullest extent permitted by law, not
to file or cause to be filed a charge, complaint, grievance or
demand for arbitration in any forum, which relates to any matter
that is covered by the provisions of paragraph 3 and that occurred
on or before the date of the Employee's execution of this
Agreement.
7. The Employee, whether as employee, partner,
joint venturer, officer, director, manager, consultant, advisor,
owner (direct or indirect) of more than one percent (1%) of the
stock or equity interest of a corporation or other entity or
otherwise, shall not, for the period in which he is receiving
payments and benefits pursuant to paragraph 2 of this Agreement:
(a) provide any services to a health
maintenance organization that is in competition with WellCare in
the States of Connecticut or New York;
(b) without the prior written consent of
WellCare, recruit or otherwise solicit or induce any employee of
WellCare or any of its subsidiaries (including CT HMO) or
affiliates to terminate his or her employment with, or otherwise
terminate his or her relationship with, WellCare or any of its
subsidiaries (including CT HMO) or affiliates, as the case may be.
(c) If any restriction set forth in this
paragraph 7 is found by any court of competent jurisdiction to be
unenforceable because it extends for too long a period of time,
over too great a range of activities, in too broad a geographic
area or for any other reason, it shall be interpreted to extend
only to the maximum extent, whether period of time, range of
activities, geographic area or other terms, as to which it may be
enforceable.
In the event that the Employee elects not to receive
or continue to receive, or is otherwise not receiving payments
pursuant to paragraph 2(a), the provisions of paragraph 7(a) shall
not apply; PROVIDED, HOWEVER, that in the event the Employee
elects to accelerate the payments due to him under paragraph 2(a),
the provisions of paragraph 7(a) shall continue to apply for the
period of time covered by the accelerated lump sum payment.
8. The Employee agrees not to disclose the terms,
contents or execution of this Agreement, the claims that have been
or could have been raised against WellCare as of the date of
execution of this Agreement, and the facts and circumstances
underlying any such claims except in the following circumstances:
a. The Employee may disclose the terms of
this Agreement to his immediate family, so long as such family
member agrees to be bound by the confidential nature of this
Agreement;
b. The Employee may disclose the terms of
this Agreement to (i) his counsel, tax advisors, auditors or
accountants, so long as such persons agree in writing to be bound
by the confidential nature of this Agreement, or (ii) taxing
authorities, if requested by such authorities and so long as they
are advised in writing of the confidential nature of this
Agreement; and
c. Pursuant to the order of a court or
governmental agency of competent jurisdiction, or otherwise as may
be required by law, or for purposes of securing enforcement of the
terms and conditions of this Agreement.
9. In the event the Employee is asked about the
circumstances of his termination by a prospective employer he may
state only that WellCare and the Employee mutually agreed to
terminate his employment so that Employee could seek other
opportunities.
10. The terms, contents or execution of this
Agreement, any claims that have been or could have been raised
against WellCare as of the date of execution of this Agreement,
and the facts and circumstances underlying any such claims shall
not be admissible in any litigation, arbitration or proceeding in
any forum for any purpose other than to secure enforcement of the
terms and conditions of this Agreement, except as required by law.
11. Employee agrees not to issue any communication,
written or otherwise, that disparages, criticizes or otherwise
reflects adversely or encourages any adverse action against
WellCare, except if testifying truthfully under oath pursuant to
any lawful court order or subpoena or otherwise responding to or
providing disclosures required by law.
12. Except as required by law, Employee
specifically agrees that he will not at any time, in any fashion,
form, or manner, either directly or indirectly, divulge, disclose,
or communicate to any person, firm or corporation, in any manner
whatsoever any information of any kind, nature, or description
concerning any matters affecting or relating to the business of
WellCare, including, without limiting the generality of the
foregoing, the names of any of its customers, the prices it
obtains or has obtained, or at which it sells or has sold its
products or services, or any other information of, about, or
concerning the business of WellCare, its manner of operation, its
plans, processes, or other data of any kind, nature, or
description, without regard to whether any or all of the foregoing
matters would be deemed confidential, material, or important, the
parties hereto stipulating that as between them, the same are
important, material, and confidential, and gravely affect the
successful conduct of the business of WellCare and its goodwill,
and that any breach of the terms of this paragraph is a material
breach of this Agreement.
13. Upon service on the Employee, or anyone acting
on his behalf, of any subpoena, order, directive or other legal
process requiring the Employee to engage in conduct encompassed
within paragraphs 6, 8, 10, 11 or 12 of this Agreement, the
Employee or his attorney shall immediately notify Seth I. Truwit,
Esq., Epstein Becker & Green, P.C., 250 Park Avenue, New York, New
York 10177 and Joseph R. Papa, Chief Executive Officer of WellCare
in writing within two business days of such service.
14. Employee agrees that he will assist and
cooperate with WellCare in connection with the defense or
prosecution of any claim that may be made against or by WellCare,
or in connection with any ongoing or future investigation or
dispute or claim of any kind involving WellCare, including any
proceeding before any arbitral, administrative, judicial,
legislative, or other body or agency, including testifying in any
proceeding to the extent such claims, investigations or
proceedings relate to services performed or required to be
performed by Employee, pertinent knowledge possessed by Employee,
or any act or omission by Employee. Employee further agrees to
perform all acts and execute and deliver any documents that may be
reasonably necessary to carry out the provisions of this
paragraph.
15. WellCare shall, to the maximum extent permitted
by corporate laws of the States of New York and Connecticut or any
other applicable jurisdiction (hereinafter referred to as the
"Applicable Corporate Law"), indemnify Employee against
judgements, fines, penalties, amounts paid in settlement and
reasonable expenses actually incurred by him (including reasonable
attorneys' fees) in the event he is made a party to any
proceeding, other than an action by or in the right of WellCare,
by reason of the fact that Employee is or was an employee,
officer, director, or agent of WellCare. WellCare may also
advance to Employee expenses incurred in defending any such
proceedings to the maximum extent permitted by Applicable
Corporate Law, contingent upon satisfaction of all requirements of
said Applicable Corporate Law, including agreement by Employee to
repay such advanced sums if he is later found not entitled to be
indemnified by WellCare pursuant to Applicable Corporate Law. In
accordance with the foregoing, no such indemnification shall be
made unless, INTER ALIA, Employee is successful on the merits in
the defense of any proceeding referenced above, employee acted in
good faith and in a manner he reasonably believed to be in the
best interests of WellCare and, with respect to any criminal
action or proceeding, Employee had not reasonable cause to believe
his conduct was unlawful. It is hereby agreed that such rights of
indemnification shall be in addition to any other rights of
indemnification Employee may have as an officer of WellCare,
pursuant to the Bylaws of WellCare or otherwise.
16. In consideration of the mutual promises,
covenants, benefits and other good and valuable consideration
contained in this Agreement, WellCare hereby releases and forever
discharges and holds the Employee harmless from any and all
claims, charges, complaints, liabilities, losses, obligations,
promises, agreements, damages, actions and expenses, of any nature
whatsoever, against the Employee which WellCare now has knowledge
of as of the date of its execution of this Agreement, including
without limitation, any and all claims, entitlements, and/or
rights which WellCare had, referring, relating or pertaining to
the Employee's employment with WellCare and his termination
therefrom, but excluding (i) any liabilities, claims and demands
which directly or indirectly result from any illegal conduct, act
of fraud, theft or violation of any material regulation or law,
committed by the Employee in connection with the Employee's
employment with WellCare; and (ii) the Employee's obligations
under this Agreement. The Employee represents to WellCare that he
has not engaged in or concealed any conduct as encompassed within
this paragraph 16(i).
17. The failure of the Employee or WellCare to
insist upon strict adherence to any term of this Agreement on any
occasion shall not be considered a waiver thereof, or deprive that
party of the right thereafter to insist upon strict adherence to
that term or any other term of this Agreement.
18. The Employee acknowledges that he has been
offered twenty-one (21) days from the date he received this
Agreement within which to consider its terms, and that he has been
advised that during such period he should consult an attorney
regarding the terms of this Agreement. The Employee further
acknowledges that his signature below indicates that he is
entering into this Agreement freely, knowingly and voluntarily
with a full understanding of its terms. The terms of this
Agreement shall not become effective or enforceable until seven
(7) days following the date of the Employee's execution of this
Agreement, during which time the Employee may revoke this
Agreement by notifying WellCare in writing, by registered letter
delivered to the attention of the undersigned representative of
WellCare. Any such revocation must be received by 5:00 p.m. on or
before the seventh day.
19. This Agreement constitutes the entire agreement
between the Employee and WellCare, and supersedes and cancels all
prior oral and written agreements, if any, between the Employee
and WellCare. Employee affirms that, in entering into this
Agreement, Employee is not relying upon any oral or written
promise or statement made by anyone at any time on behalf of
WellCare.
20. If any of the provisions, terms or clauses of
this Agreement are declared illegal, unenforceable or ineffective
in a legal forum, those provisions, terms and clauses shall be
deemed severable, such that all other provisions, terms and
clauses of this Agreement shall remain valid and binding upon both
parties; PROVIDED, HOWEVER, if the Employee's release of WellCare
as contained in paragraph 3 of this Agreement is declared by a
court of competent jurisdiction to be illegal, unenforceable or
ineffective and the Employee asserts against WellCare claims that
the parties intended to be released under Paragraph 3, the
Employee shall return to WellCare all monies paid to and the value
of all benefits received by him under this Agreement within ten
(10) business days of any such determination.
21. The Employee acknowledges and agrees that the
restrictions and agreements contained in paragraphs 7 and 12 of
this Agreement, in view of the nature of the Employee's position
and of WellCare's business, are reasonable and necessary in order
to protect WellCare's legitimate interests, and that any violation
thereof would result in irreparable injuries to WellCare that
would not be readily ascertainable or compensable in terms of
money, and therefore the Employee further acknowledges that, in
the event the Employee violates any of these restrictions,
WellCare shall be entitled to obtain from any court of competent
jurisdiction temporary, preliminary and permanent injunctive
relief as well as damages, which rights shall be cumulative and in
addition to any other rights or remedies to which it may be
entitled. The Employee further agrees that in the event he
breaches the terms of this Agreement, WellCare may immediately
cease all payments pursuant to this Agreement, and WellCare shall
be entitled to recover from the Employee all amounts paid to the
Employee pursuant to this Agreement as well as all costs and
reasonable attorneys' fees incurred as a result of WellCare's
attempt to redress such breach or to enforce WellCare's rights and
protect WellCare's legitimate interests; PROVIDED, HOWEVER, in the
event the Employee breaches the terms of paragraph 2(a)(i) of this
Agreement by not being reasonably available via telephone to
answer questions from Joseph R. Papa or his designee, Employee
shall be notified by WellCare of his breach and afforded two days
to cure the breach before WellCare may cease all payments pursuant
to this Agreement.
22. The law of the State of New York will control
any questions concerning the validity and interpretation of this
Agreement, without regard to principles of conflicts of law. Any
controversy or claim arising out of or relating to this Agreement,
or breach thereof, shall be settled by arbitration in accordance
with the applicable rules then obtaining of the American
Arbitration Association and judgment on the award rendered may be
entered in any court having jurisdiction thereof. The prevailing
party in any such proceeding shall be entitled to reimbursement of
its costs and expenses (including reasonable attorneys' fees) in
connection with such proceedings.
23. This Agreement has been reached by mutual and
purely voluntary agreement of the parties, and the parties, by
their signatures indicate their full agreement with, and
understanding of, its terms. Employee acknowledges that Employee
has been given a reasonable period of time to consider the
Agreement, and that this Agreement has binding legal effect.
24. This Agreement shall be binding upon and inure
to the benefit of the parties and their respective successors,
assigns, heirs, executors and legal representatives.
25. This Agreement may not be changed or altered,
except by a writing signed by the Employee and an authorized
officer of WellCare.
/s/ Douglas A. Hayward
Name: Douglas A. Hayward
STATE OF CONNECTICUT )
) ss.: December 9, 1997
COUNTY OF NEW HAVEN )
On this 9th day of December, 1997, before me
personally came Douglas A. Hayward, to me known to be the
individual described in the foregoing instrument, who executed the
foregoing instrument in my presence, and who duly acknowledged to
me that he executed the same.
Notary Public
THE WELLCARE MANAGEMENT GROUP, INC.
By:/s/Joseph R. Papa
Name: Joseph R. Papa
Title: President/CEO
STATE OF NEW YORK )
) ss.:
COUNTY OF ULSTER )
On this 10th day of December, 1997, before me
personally came Joseph R. Papa, to me known, who being by me duly
sworn, did depose and say that he is President/CEO of The WellCare
Management Group, Inc., the corporation described in and which
executed the foregoing instrument; that he is duly authorized to
execute said instrument on behalf of said corporation, and that he
executed said instrument pursuant to that authority.
/s/Jeannine G. Earl
Notary Public
JEANNINE G. EARL
Notary Public, State of New York
No. 4937485
Qualified in Ulster County
Commission Expires July 25, 1998
WELLCARE OF CONNECTICUT, INC.
By: /s/ Howard B. Lorch
Its Secretary/Treasurer
STATE OF NEW YORK )
) ss.:
COUNTY OF ULSTER )
On this 10th day of December, 1997, before me
personally came Howard B. Lorch, to me known, who being by me
duly sworn, did depose and say that he is Secretary/Treasuer of
WellCare of Connecticut, Inc., the corporation described in and
which executed the foregoing instrument, that he is duly
authorized to execute said instrument on behalf of said
corporation, and that he executed said instrument pursuant to that
authority.
/s/ Marianne Gilday
Notary Public, State of New York
Reg. #4917920
Qualified in Ulster County
Commission Expires January 19, 1998
WELLCARE OF NEW YORK, INC.
By:/s/ Joseph R. Papa
Name: Joseph R. Papa
Its President
STATE OF NEW YORK )
) ss.:
COUNTY OF ULSTER )
On this 10th day of December, 1997, before me
personally came Joseph R. Papa, to me known, who being by me duly
sworn, did depose and say that he is President of WellCare of New
York, Inc., the corporation described in and which executed the
foregoing instrument, that he is duly authorized to execute said
instrument on behalf of said corporation, and that he executed
said instrument pursuant to that authority.
/s/Jeannine G. Earl
Notary Public
JEANNINE G. EARL
Notary Public, State of New York
No. 4937485
Qualified in Ulster County
Commission Expires July 25, 1998
EX-10.54a Amendment to stock option agreement between
Robert W. Morey, Jr. and registrant for options
to purchase 450,000 shares of common stock.
NON-INCENTIVE STOCK OPTION AGREEMENT
To: ROBERT W. MOREY, JR.
We are pleased to notify you that by the determination
of the Compensation Committee (the "Committee") the non-incentive
stock option to purchase 450,000 shares of the Common Stock, $.01
par value per share ("Common Stock") of The WellCare Management
Group, Inc. (the "Company") at a price of $10.00 per share granted
to you on the 23rd day of December, 1996 under the Company's 1996
Non-Incentive Executive Stock Option Plan (the "Plan") has been
amended and restated by the Committee on the 19th day of December
1997 on the terms set forth below. The exercise price of the
option has been changed to $4.00 per share. All capitalized terms
not herein defined shall have the meanings set forth in the Plan,
unless the context requires a different meaning.
1. PURPOSE OF OPTION.
The purpose of this Plan is 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.
2. ACCEPTANCE OF OPTION AGREEMENT.
Your execution of this non-incentive stock option
agreement will indicate your acceptance of and your willingness to
be bound by its terms; it imposes no obligation upon you to
purchase any of the shares purchasable hereunder. Your obligation
to purchase shares will arise only upon your exercise of this
option in the manner set forth in Section 3 hereof.
3. WHEN OPTION MAY BE EXERCISED.
If this option has not terminated, lapsed or expired
pursuant to Section 6 hereof, this option shall be exercisable as
follows:
(a) On the date hereof, up to 33% of the total
number of shares subject to this option shall be
exercisable;
(b) on December 19, 1998, up to 66% of the total
number of shares subject to this option shall be
exercisable;
(c) on December 19, 1999, up to 100% of the total
number of shares subject to this option shall be
exercisable;
(d) upon your death or "Disability," the entire
option shall be exercisable; and
(e) upon a Change in Control, the entire option
shall be exercisable.
For purposes hereof, "Disability" shall have the meaning set forth
in Section 22(e)(3) of the Internal Revenue Code of 1986, as
amended. Similarly, for purposes hereof, a "Change of Control" of
the Company shall mean such time as:
(i) Any Person or "group" (within the meaning of Section
13(d)(3) of the Securities Exchange Act of 1934, as amended (the
"EXCHANGE ACT"), other than the Principal Shareholders or The 1818
Fund II, L.P., is or becomes the beneficial owner, directly or
indirectly, of outstanding shares of capital stock of the Company,
entitling such Person or Persons to exercise 50% or more of the
total votes entitled to be cast at a regular or special meeting,
or by action by written consent, of shareholders of the Company
(the term "beneficial owner" shall be determined in accordance
with Rule 13d-3, promulgated by the Securities Exchange Commission
under the Exchange Act);
(ii) A majority of the Board shall consist of Persons other
than Continuing Directors. The term "CONTINUING DIRECTOR" shall
mean any member of the Board on the Effective Date and any other
member of the Board who shall be recommended or elected to succeed
or become a Continuing Director by a majority of Continuing
Directors who are then members of the Board;
(iii) The shareholders of the Company shall have approved a
recapitalization, reorganization, merger, consolidation or similar
transaction, in each case, with respect to which all or
substantially all the Persons who were the respective beneficial
owners of the outstanding shares of capital stock of the Company
immediately prior to such recapitalization, reorganization, merger
or consolidation, beneficially own, directly or indirectly, less
than 50% of the combined voting power of the then outstanding
shares of capital stock of the Company resulting from such <PAGE>
recapitalization, reorganization, merger, consolidation or similar
transaction;
(iv) The shareholders of the Company shall have approved of
the sale or other disposition of all or substantially all the
assets of the Company in one transaction or in a series of related
transactions;
(v) Immediately after any merger, consolidation,
recapitalization or similar transaction, the Principal
Shareholders (A) shall have increased the aggregate percentage of
the outstanding shares of capital stock of the Company they
beneficially own, directly or indirectly, by 10% of such
outstanding shares of capital stock or more (or if the entity
surviving such transaction is a corporation, the Principal
Shareholders' ownership in the new entity shall have increased by
10% or more of their aggregate percentage of ownership of the
Company immediately prior to the transaction) and (B) shall be the
beneficial owners directly or indirectly, of outstanding shares of
stock of the Company (or any Person surviving such transaction)
entitling them collectively to exercise 50% or more of the total
voting power of shares of capital stock of the Company (or the
surviving Person in such transaction) and, in anticipation of, in
connection with or as a result of, such transaction, the Company
(or such surviving Person) shall have incurred or issued
additional Indebtedness such that the total Indebtedness so
incurred or issued equals at least 50% of the consideration
payable in such transaction; PROVIDED, HOWEVER, that any such
transaction shall not be considered a Change of Control if the
holders of Notes shall have participated therein on no less than a
PARI PASSU basis (assuming conversion of all such holders' Notes
into Conversion Shares) with the Principal Shareholders;
(vi) The shareholders of the Company approve any
transaction (or if no such approval is required, upon the
occurrence of any transaction) the result of which is that the
Common Stock shall no longer be required to be registered under
Section 12 of the Exchange Act and that the holders of shares of
Common Stock do not receive common stock of the Person surviving
such transaction that is required to be registered under Section
12 of the Exchange Act; or
(vii) The Company ceases to be the beneficial owner,
directly or indirectly, of the outstanding shares of capital stock
of WellCare of New York, Inc., entitling the Company to exercise
50% or more of the total votes entitled to be cast at a regular
or special meeting, or by action by written consent of the
shareholders of WellCare of New York, Inc.
For purposes of this Agreement (a) "CONVERSION SHARES" shall
mean the Common Stock issued or issuable upon the conversion of
the Notes; (b) "INDEBTEDNESS" shall mean as to any Person (i) all
obligations of such Person for borrowed money (including without
limitation, reimbursement and all other obligations with respect
to surety bonds, letters of credit and bankers' acceptances,
whether or not matured), (ii) all obligations evidenced by notes,
bonds, debentures or similar instruments, (iii) all obligations to
pay the deferred purchase price of property or services, except
trade accounts payable and accrued liabilities arising in the
ordinary course of business, (iv) all interest rate and currency
swaps and similar agreements under which payments are obligated to
be made, whether periodically or upon the happening of a
contingency, (v) all indebtedness created or arising under any
conditional sale or other title retention agreement with respect
to property acquired by such Person (even though the rights and
remedies of the seller or lender under such agreement in the event
of default are limited to repossession or sale of such property),
(vi) all obligations under leases which have been or should be, in
accordance with GAAP, recorded as capital leases, (vii) all
indebtedness secured by any lien on any property or asset owned or
held by that Person regardless of whether the indebtedness secured
thereby shall have been assumed by that Person or is non-recourse
to the credit of that Person, and (viii) any contingent obligation
of the foregoing; (c) "NOTES" shall mean the 6.0% Subordinated
Convertible Notes due December 31, 2002 of the Company; (d)
"PERSON" shall mean any individual, partnership, corporation,
business trust, joint stock company, trust, unincorporated
association, joint venture, or other entity of whatever nature;
and (e) "PRINCIPAL SHAREHOLDERS" shall mean Edward A. Ullmann and
Robert W. Morey.
4. HOW OPTION MAY BE EXERCISED.
This option is exercisable by a written notice signed
by you and delivered to the Company at its executive offices
signifying your election to exercise this option. The notice must
state the number of shares of Common Stock being purchased, must
contain a statement by you (in a form acceptable to the Company)
that such shares are being acquired by you for investment and not
with a view to their distribution or resale (unless a registration
statement covering the shares purchasable has been declared
effective by the Securities and Exchange Commission) and must be
accompanied by payment as set forth in Section 5 hereof for the
full purchase price of the shares being purchased, plus such
amount, if any, as is required for withholding taxes.
Notwithstanding anything herein to the contrary, this option may
not be exercised for less than fifty thousand shares at any one
time (or the remaining shares then purchasable if less than fifty
thousand).
<PAGE>
If notice of the exercise of this option is given by a
person or persons other than you, the Company may require, as a
condition to the exercise of this option, the submission to the
Company of appropriate proof of the right of such person or
persons to exercise this option.
Certificates for shares of the Common Stock so
purchased will be issued as soon as practicable. The Company,
however, shall not be required to issue or deliver a certificate
for any shares until it has complied with all requirements of the
Securities Act of 1933, the Exchange Act, The Nasdaq National
Market or any stock exchange on which the Common Stock may then be
listed and all applicable state laws in connection with the
issuance or sale of such shares or the listing of such shares
thereon. Further, in the event a registration statement relating
to the shares of Common Stock purchasable upon exercise of this
option has been declared effective by the Securities and Exchange
Commission, you agree by accepting this option to refrain from
selling or offering to sell any of the shares of Common Stock
purchasable hereunder for such reasonable period of time after the
effective date of a registration statement relating to an
underwritten offering of securities of the Company as may be
requested by the managing underwriter of such underwritten
offering and approved by the Company's Board of Directors.
Until the issuance of the certificate for such shares, you
or such other person as may be entitled to exercise this option,
shall have none of the rights of a shareholder with respect to the
shares purchasable upon exercise of this option.
5. PAYMENT OF OPTIONS.
Payment for the shares of Common Stock may be made (i) in
cash or by check payable to the order of the Company, (ii) by
surrender of shares of Common Stock having a Fair Market Value
equal to the exercise price of this option; or (iii) by any
combination of the foregoing where approved by the Committee in
its sole discretion; PROVIDED, HOWEVER, in the event of payment
for the shares of Common Stock by method (ii) above, the shares of
Common Stock so surrendered, if originally issued to you upon
exercise of an option granted by the Company, must have been held
by you for more than six months.
6. TERM AND TERMINATION OF OPTIONS.
This option expires on December 22, 2001 at 5 p.m., New York
time, whether or not it has been duly exercised.
Notwithstanding anything herein to the contrary, this option
shall immediately terminate, lapse and expire upon the occurrence
of any of the following: (i) your refusal, prior to
<PAGE>
December 31, 1999, to act at the Company's request as Chief
Executive Officer of the Company; (ii) your refusal, prior to
December 31, 2001, to act at the Company's request as a director
of the Company; (iii) your removal as Chief Executive Officer by
the Company With Cause (as defined below) or (iv) your removal as
a director by the Company "for cause" pursuant to the procedures
set forth in the Company's charter. For purposes of this Section
6, the term "With Cause" shall mean (a) your willful failure to
perform your reasonable responsibilities and duties attendant to
your position with the Company or (b) your indictment for any
felony.
If you cease being either Chief Executive Officer or a
director of the Company other than by reason of (i) through (iv)
above, including without limitation by reason of your death or
Disability, this option shall continue in full force and effect
until its expiration on December 22, 2001.
7. SUBJECT TO TERMS OF THE PLAN.
This non-incentive stock option agreement shall be
subject in all respects to the terms and conditions of the Plan.
In the event of any question or controversy relating to the terms
of the Plan, the decision of the Committee shall be conclusive.
8. TAX STATUS; EXCISE TAXES.
This option does not qualify as an "incentive stock
option" under the provisions of Section 422 of the Code and the
income tax implications of your receipt of a non-incentive stock
option and your exercise of such an option should be discussed
with your tax counsel.
In addition, if following a Change in Control, any
payment made hereunder alone or in conjunction with any other
payments made or estimated to be made by the Company or any of its
subsidiaries would cause you to be liable for the federal excise
tax levied on certain "excess parachute payments" under Section
4999 of the Internal Revenue Code, you shall be solely responsible
for the payment of such excise tax and may not seek reimbursement
therefor from the Company.
You shall not, however, be liable in any way to
reimburse the Company for any loss it may suffer if following a
Change in Control, any payment made hereunder alone or in
conjunction with any other payments made or estimated to be made
by the Company or any of its subsidiaries would not be
deductibility by the Company for federal income tax purposes
solely by reason of Internal Revenue Code Section 280G.
Sincerely yours,
THE WELLCARE MANAGEMENT GROUP, INC.
By: /s/ Joseph Papa
Name: Joseph Papa
Title: President/CEO
AGREED TO AND ACCEPTED:
/s/ Robert W. Morey, Jr.
Robert W. Morey
Signature of Option holder
EX-10.62 Amendment to Stock Option Agreement between
Robert W. Morey, Jr. and the Registrant for
options to purchase 150,000 shares of common
stock.
NON-INCENTIVE STOCK OPTION AGREEMENT
To: ROBERT W. MOREY, JR.
We are pleased to notify you that by the determination
of the Compensation Committee (the "Committee") the non-incentive
stock option to purchase 150,000 shares of the Common Stock, $.01
par value per share ("Common Stock") of The WellCare Management
Group, Inc. (the "Company") at a price of $15.00 per share granted
to you on the 23rd day of December, 1996 under the Company's 1996
Non-Incentive Executive Stock Option Plan (the "Plan") has been
amended and restated by the Committee on the 31st day of December
1997 on the terms set forth below. The exercise price of the
option has been changed to $6.25 per share. All capitalized terms
not herein defined shall have the meanings set forth in the Plan,
unless the context requires a different meaning.
1. PURPOSE OF OPTION.
The purpose of this Plan is 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.
2. ACCEPTANCE OF OPTION AGREEMENT.
Your execution of this non-incentive stock option
agreement will indicate your acceptance of and your willingness to
be bound by its terms; it imposes no obligation upon you to
purchase any of the shares purchasable hereunder. Your obligation
to purchase shares will arise only upon your exercise of this
option in the manner set forth in Section 3 hereof.
3. WHEN OPTION MAY BE EXERCISED.
If this option has not terminated, lapsed or expired
pursuant to Section 6 hereof, this option shall be exercisable as
follows:
(a) On the date hereof, up to 33% of the total
number of shares subject to this option shall be exercisable;
(b) on December 31, 1998, up to 66% of the total
number of shares subject to this option shall be exercisable;
(c) on December 31, 1999, up to 100% of the total
number of shares subject to this option shall be exercisable;
(d) upon your death or "Disability," the entire option shall
be exercisable; and
(e) upon a Change in Control, the entire option shall be
exercisable.
For purposes hereof, "Disability" shall have the meaning set forth
in Section 22(e)(3) of the Internal Revenue Code of 1986, as
amended. Similarly, for purposes hereof, a "Change of Control" of
the Company shall mean such time as:
(i) Any Person or "group" (within the meaning of
Section 13(d)(3) of the Securities Exchange Act of
1934, as amended (the "EXCHANGE ACT"), other than the
Principal Shareholders or The 1818 Fund II, L.P., is
or becomes the beneficial owner, directly or indirectly,
of outstanding shares of capital stock of the Company,
entitling such Person or Persons to exercise 50% or more
of the total votes entitled to be cast at a regular or
special meeting, or by action by written consent,
of shareholders of the Company (the term "beneficial
owner" shall be determined in accordance with Rule 13d-3,
promulgated by the Securities Exchange Commission under
the Exchange Act);
(ii) A majority of the Board shall consist of
Persons other than Continuing Directors. The term
"CONTINUING DIRECTOR" shall mean any member of the
Board on the Effective Date and any other member of
the Board who shall be recommended or elected to succeed
or become a Continuing Director by a majority of Continuing
Directors who are then members of the Board;
(iii) The shareholders of the Company shall have
approved a recapitalization, reorganization, merger,
consolidation or similar transaction, in each case,
with respect to which all or substantially all the
Persons who were the respective beneficial owners of
the outstanding shares of capital stock of the Company
immediately prior to such recapitalization,
reorganization, merger or consolidation, beneficially
own, directly or indirectly, less than 50% of the
combined voting power of the then outstanding shares
of capital stock of the Company resulting from such
recapitalization, reorganization, merger, consolidation
or similar transaction;
(iv) The shareholders of the Company shall have
approved of the sale or other disposition of all or
substantially all the assets of the Company in one
transaction or in a series of related transactions;
(v) Immediately after any merger, consolidation,
recapitalization or similar transaction, the Principal
Shareholders (A) shall have increased the aggregate
percentage of the outstanding shares of capital stock
of the Company they beneficially own, directly or
indirectly, by 10% of such outstanding shares of
capital stock or more (or if the entity surviving such
transaction is a corporation, the Principal Shareholders'
ownership in the new entity shall have increased
by 10% or more of their aggregate percentage
of ownership of the Company immediately prior to the
transaction) and (B) shall be the beneficial owners
directly or indirectly, of outstanding shares of stock
of the Company (or any Person surviving such transaction)
entitling them collectively to exercise
50% or more of the total voting power of shares of
capital stock of the Company (or the surviving Person
in such transaction) and, in anticipation of,
in connection with or as a result of, such transaction,
the Company (or such surviving Person) shall have incurred
or issued additional Indebtedness such that the total
Indebtedness so incurred or issued equal at least 50%
of the consideration payable in such transaction;
PROVIDED, HOWEVER, that any such transaction shall not
be considered a Change of Control if the holders of
Notes shall have participated therein on no less than
a PARI PASSU basis (assuming conversion of all such
holders' Notes into Conversion Shares) with the Principal
Shareholders;
(vi) The shareholders of the Company approve any
transaction (or if no such approval is required, upon
the occurrence of any transaction) the result of which
is that the Common Stock shall no longer be required
to be registered under Section 12 of the Exchange Act
and that the holders of shares of Common Stock do not
receive common stock of the Person surviving such
transaction that is required to be registered under
Section 12 of the Exchange Act; or
(vii) The Company ceases to be the beneficial
owner, directly or indirectly, of the outstanding
shares of capital stock of WellCare of New York, Inc.,
entitling the Company to exercise 50% or more of the
total votes entitled to be cast at a regular or
special meeting, or by action by written consent of
the shareholders of WellCare of New York, Inc.
For purposes of this Agreement (a) "CONVERSION SHARES"
shall mean the Common Stock issued or issuable upon the conversion
of the Notes; (b) "INDEBTEDNESS" shall mean as to any Person (i)
all obligations of such Person for borrowed money (including
without limitation, reimbursement and all other obligations with
respect to surety bonds, letters of credit and bankers' accept-
ances, whether or not matured), (ii) all obligations evidenced by
notes, bonds, debentures or similar instruments, (iii) all obliga-
tions to pay the deferred purchase price of property or services,
except trade accounts payable and accrued liabilities arising in
the ordinary course of business, (iv) all interest rate and
currency swaps and similar agreements under which payments are
obligated to be made, whether periodically or upon the happening
of a contingency, (v) all indebtedness created or arising under
any conditional sale or other title retention agreement with
respect to property acquired by such Person (even though the
rights and remedies of the seller or lender under such agreement
in the event of default are limited to repossession or sale of
such property), (vi) all obligations under leases which have been
or should be, in accordance with GAAP, recorded as capital leases,
(vii) all indebtedness secured by any lien on any property or
asset owned or held by that Person regardless of whether the
indebtedness secured thereby shall have been assumed by that
Person or is non-recourse to the credit of that Person, and (viii)
any contingent obligation of the foregoing; (c) "NOTES" shall mean
the 6.0% Subordinated Convertible Notes due December 31, 2002 of
the Company; (d) "PERSON" shall mean any individual, partnership,
corporation, business trust, joint stock company, trust,
unincorporated association, joint venture, or other entity of
whatever nature; and (e) "PRINCIPAL SHAREHOLDERS" shall mean
Edward A. Ullmann and Robert W. Morey.
4. HOW OPTION MAY BE EXERCISED.
This option is exercisable by a written notice signed
by you and delivered to the Company at its executive offices
signifying your election to exercise this option. The notice must
state the number of shares of Common Stock being purchased, must
contain a statement by you (in a form acceptable to the Company)
that such shares are being acquired by you for investment and not
with a view to their distribution or resale (unless a registration
statement covering the shares purchasable has been declared
effective by the Securities and Exchange Commission) and must be
accompanied by payment as set forth in Section 5 hereof for the
full purchase price of the shares being purchased, plus such
amount, if any, as is required for withholding taxes.
Notwithstanding anything herein to the contrary, this option may
not be exercised for less than fifty thousand shares at any one
time (or the remaining shares then purchasable if less than fifty
thousand).
If notice of the exercise of this option is given by a
person or persons other than you, the Company may require, as a
condition to the exercise of this option, the submission to the
Company of appropriate proof of the right of such person or
persons to exercise this option.
Certificates for shares of the Common Stock so
purchased will be issued as soon as practicable. The Company,
however, shall not be required to issue or deliver a certificate
for any shares until it has complied with all requirements of the
Securities Act of 1933, the Exchange Act, The Nasdaq National
Market or any stock exchange on which the Common Stock may then be
listed and all applicable state laws in connection with the
issuance or sale of such shares or the listing of such shares
thereon. Further, in the event a registration statement relating
to the shares of Common Stock purchasable upon exercise of this
option has been declared effective by the Securities and Exchange
Commission, you agree by accepting this option to refrain from
selling or offering to sell any of the shares of Common Stock
purchasable hereunder for such reasonable period of time after the
effective date of a registration statement relating to an
underwritten offering of securities of the Company as may be
requested by the managing underwriter of such underwritten
offering and approved by the Company's Board of Directors.
Until the issuance of the certificate for such shares,
you or such other person as may be entitled to exercise this
option, shall have none of the rights of a shareholder with
respect to the shares purchasable upon exercise of this option.
5. PAYMENT OF OPTIONS.
Payment for the shares of Common Stock may be made (i)
in cash or by check payable to the order of the Company, (ii) by
surrender of shares of Common Stock having a Fair Market Value
equal to the exercise price of this option; or (iii) by any
combination of the foregoing where approved by the Committee in
its sole discretion; PROVIDED, HOWEVER, in the event of payment
for the shares of Common Stock by method (ii) above, the shares of
Common Stock so surrendered, if originally issued to you upon
exercise of an option granted by the Company, must have been held
by you for more than six months.
6. TERM AND TERMINATION OF OPTIONS.
This option expires on December 22, 2001 at 5 p.m.,
New York time, whether or not it has been duly exercised.
Notwithstanding anything herein to the contrary, this
option shall immediately terminate, lapse and expire upon the
occurrence of any of the following: (i) your refusal, prior to
December 31, 1999, to act at the Company's request as Chief
Executive Officer of the Company; (ii) your refusal, prior to
December 31, 2001, to act at the Company's request as a director
of the Company; (iii) your removal as Chief Executive Officer by
the Company With Cause (as defined below) or (iv) your removal as
a director by the Company "for cause" pursuant to the procedures
set forth in the Company's charter. For purposes of this Section
6, the term "With Cause" shall mean (a) your willful failure to
perform your reasonable responsibilities and duties attendant to
your position with the Company or (b) your indictment for any
felony.
If you cease being either Chief Executive Officer or a
director of the Company other than by reason of (i) through (iv)
above, including without limitation by reason of your death or
Disability, this option shall continue in full force and effect
until its expiration on December 22, 2001.
7. SUBJECT TO TERMS OF THE PLAN.
This non-incentive stock option agreement shall be
subject in all respects to the terms and conditions of the Plan.
In the event of any question or controversy relating to the terms
of the Plan, the decision of the Committee shall be conclusive.
8. TAX STATUS; EXCISE TAXES.
This option does not qualify as an "incentive stock
option" under the provisions of Section 422 of the Code and the
income tax implications of your receipt of a non-incentive stock
option and your exercise of such an option should be discussed
with your tax counsel.
In addition, if following a Change in Control, any
payment made hereunder alone or in conjunction with any other
payments made or estimated to be made by the Company or any of its
subsidiaries would cause you to be liable for the federal excise
tax levied on certain "excess parachute payments" under Section
4999 of the Internal Revenue Code, you shall be solely responsible
for the payment of such excise tax and may not seek reimbursement
therefor from the Company.
You shall not, however, be liable in any way to
reimburse the Company for any loss it may suffer if following a
Change in Control, any payment made hereunder alone or in
conjunction with any other payments made or estimated to be made
by the Company or any of its subsidiaries would not be
deductibility by the Company for federal income tax purposes
solely by reason of Internal Revenue Code Section 280G.
Sincerely yours,
THE WELLCARE MANAGEMENT GROUP, INC.
By: /s/ Joseph Papa
Name: Joseph Papa
Title: President/CEO
AGREED TO AND ACCEPTED:
/s/ Robert W. Morey, Jr.
Robert W. Morey, Jr.
Signature of Optionholder
EX-10.63 Copy of Agreement of Lease between Reckson
Operating Partnership, LP and WCD for the
Tarrytown office.
AGREEMENT OF LEASE
BETWEEN
RECKSON OPERATING PARTNERSHIP, LP
AND
WELLCARE DEVELOPMENT, INC.
<PAGE>
TABLE OF CONTENTS
PAGE
SPACE. . . . . . . . . . . . . . . . . . . . . . . . .1
TERM . . . . . . . . . . . . . . . . . . . . . . . . .1
RENT . . . . . . . . . . . . . . . . . . . . . . . . .3
USE. . . . . . . . . . . . . . . . . . . . . . . . . .4
LANDLORD ALTERATION. . . . . . . . . . . . . . . . . .6
SERVICES . . . . . . . . . . . . . . . . . . . . . . .6
LANDLORD'S REPAIRS . . . . . . . . . . . . . . . . . .7
WATER SUPPLY . . . . . . . . . . . . . . . . . . . . .7
PARKING FIELD. . . . . . . . . . . . . . . . . . . . .7
DIRECTORY. . . . . . . . . . . . . . . . . . . . . . .7
TAXES AND OTHER CHARGES. . . . . . . . . . . . . . . .8
OPERATING COST INCREASES . . . . . . . . . . . . . . 11
TENANT'S REPAIRS . . . . . . . . . . . . . . . . . . 15
FIXTURES & INSTALLATIONS . . . . . . . . . . . . . . 16
ALTERATIONS. . . . . . . . . . . . . . . . . . . . . 17
REQUIREMENTS OF LAW. . . . . . . . . . . . . . . . . 18
END OF TERM. . . . . . . . . . . . . . . . . . . . . 20
QUIET ENJOYMENT. . . . . . . . . . . . . . . . . . . 22
SIGNS. . . . . . . . . . . . . . . . . . . . . . . . 22
RULES AND REGULATIONS. . . . . . . . . . . . . . . . 22
RIGHT TO SUBLET OR ASSIGN. . . . . . . . . . . . . . 23
LANDLORD'S ACCESS TO PREMISES. . . . . . . . . . . . 27
SUBORDINATION. . . . . . . . . . . . . . . . . . . . 28
PROPERTY LOSS, DAMAGE REIMBURSEMENT. . . . . . . . . 30
MUTUAL INDEMNITY . . . . . . . . . . . . . . . . . . 31
DESTRUCTION - FIRE OR OTHER CASUALTY . . . . . . . . 32
INSURANCE. . . . . . . . . . . . . . . . . . . . . . 34
EMINENT DOMAIN . . . . . . . . . . . . . . . . . . . 37
NONLIABILITY OF LANDLORD . . . . . . . . . . . . . . 39
DEFAULT. . . . . . . . . . . . . . . . . . . . . . . 40
TERMINATION ON DEFAULT . . . . . . . . . . . . . . . 42
DAMAGES. . . . . . . . . . . . . . . . . . . . . . . 43
SUMS DUE LANDLORD. . . . . . . . . . . . . . . . . . 45
NO WAIVER. . . . . . . . . . . . . . . . . . . . . . 46
WAIVER OF TRIAL BY JURY. . . . . . . . . . . . . . . 47
NOTICES. . . . . . . . . . . . . . . . . . . . . . . 48
INABILITY TO PERFORM . . . . . . . . . . . . . . . . 48
INTERRUPTION OF SERVICE. . . . . . . . . . . . . . . 49
CONDITIONS OF LANDLORD'S LIABILITY . . . . . . . . . 49
TENANT'S TAKING POSSESSION . . . . . . . . . . . . . 50
ENTIRE AGREEMENT . . . . . . . . . . . . . . . . . . 50
DEFINITIONS. . . . . . . . . . . . . . . . . . . . . 51
PARTNERSHIP TENANT . . . . . . . . . . . . . . . . . 52
SUCCESSORS, ASSIGNS, ETC.. . . . . . . . . . . . . . 53
BROKER . . . . . . . . . . . . . . . . . . . . . . . 53
CAPTIONS . . . . . . . . . . . . . . . . . . . . . . 53
NOTICE OF ACCIDENTS. . . . . . . . . . . . . . . . . 53
TENANT'S AUTHORITY TO ENTER LEASE. . . . . . . . . . 54
ESTIMATED CHARGES. . . . . . . . . . . . . . . . . . 54
SECURITY DEPOSIT . . . . . . . . . . . . . . . . . . 55
FINANCIAL CONDITION. . . . . . . . . . . . . . . . . 57
RENEWAL OPTION . . . . . . . . . . . . . . . . . . . 58
RIGHT OF FIRST OFFER . . . . . . . . . . . . . . . . 60
CANCELLATION OPTION. . . . . . . . . . . . . . . . . 61
GUARANTY . . . . . . . . . . . . . . . . . . . . . . 63
SCHEDULE "A" . . . . . . . . . . . . . . . . . . . . 65
SCHEDULE "B" . . . . . . . . . . . . . . . . . . . . 70
SCHEDULE "C" . . . . . . . . . . . . . . . . . . . . 74
SCHEDULE "D" . . . . . . . . . . . . . . . . . . . . 76
EXHIBIT 1. . . . . . . . . . . . . . . . . . . . . . 79
EXHIBIT 2. . . . . . . . . . . . . . . . . . . . . . 80
<PAGE>
AGREEMENT OF LEASE, made as of this 19th day of December,
1997, between RECKSON OPERATING PARTNERSHIP, L.P., a Delaware
limited partnership, having an office at 660 White Plains Road,
Tarrytown, New York 10591 (hereinafter referred to as "Landlord"),
and WELLCARE DEVELOPMENT, INC., a New York corporation, having its
principal place of business at Hurley Avenue Ext., Kingston, New
York, 12402 (hereinafter referred to as "Tenant").
WITNESSETH: Landlord and Tenant hereby covenant and
agree as follows:
SPACE
1. Landlord hereby leases to Tenant and Tenant hereby
hires from Landlord the space substantially as shown on the Rental
Plan annexed hereto as Exhibit "1" ("Demised Premises" or
"Premises") on the first floor of the building located at 660
White Plains Road, Tarrytown, New York (hereinafter referred to as
the "Building"), and the parties hereby stipulate and agree that
such space contains 10,079 rentable square feet in a Building
containing 258,715 rentable square feet which constitutes 3.90%
percent of the area of the Building ("Tenant's Proportionate
Share").
TERM
2. The term ("Term" or "Demised Term" or "term") of
this lease shall commence on February 1, 1998 (the "Term
Commencement Date") and shall terminate on January 31, 2008,
unless the Term shall sooner terminate pursuant to any of the
terms, covenants or conditions of this lease or pursuant to law.
If, on the foregoing date specified as the Term Commencement Date,
the Landlord's Initial Construction (as defined in article 5) is
not "substantially completed" (hereinafter defined), then the Term
Commencement Date shall be postponed until the sooner to occur of
(i) Tenant's occupancy of the Demised Premises, or (ii) the date
on which the Demised Premises shall be "substantially completed".
In such event the Term of this lease shall be extended so that
the Expiration Date shall be ten (10) years after the last day of
<PAGE>
the month in which the Term Commencement Date occurs.
"Substantially completed" or "substantial completion" as used
herein is defined to mean when the only items to be completed with
respect to the Demised Premises are those which Landlord and
Tenant mutually agree do not materially interfere with the
Tenant's use and occupancy of the Demised Premises. If Landlord
shall be delayed in such "substantial completion" as a result of
(i) Tenant's changes in the plans or specifications annexed hereto
as Exhibit "2"; (ii) the performance or completion of any work,
labor or services by a party employed by Tenant; or (iii) Tenant's
failure to execute this lease and return same to Landlord
(together with the Letter of Credit, Guaranty and payment of the
first month's Rent required hereunder) on or before December 16,
1997 (any such event referenced in the foregoing clauses (i), (ii)
and (iii) being herein deemed a "Tenant Delay"); then the Rent
Commencement Date hereunder shall be accelerated by the number of
days of such delay. Tenant waives any right to rescind this lease
under Section 223-a of the New York Real Property Law or any
successor statute of similar import then in force and further
waives the right to recover any damages which may result from
Landlord's failure to deliver possession of the Premises on the
Term Commencement Date. However, in the event that the Landlord's
Initial Construction has not been "substantially completed" on or
before April 1, 1998, then Landlord shall either (A) provide
temporary space, reasonably suitable for the operation of Tenant's
business therein and located in Tarrytown, New York, on a rent-free
basis until such time as the Landlord's Initial Construction
has been "substantially" completed, or (B) incur a one day Rent
Penalty (hereinafter defined) for each day between April 1, 1998
and the date on which the Landlord's Initial Construction is
"substantially completed". The term "Rent Penalty", as used
herein, means that Tenant shall be relieved of its obligation to
pay a portion of the Rent first becoming due hereunder, with such
portion being equal to $514.79 for each single day of "Rent
Penalty". Notwithstanding the foregoing, the April 1, 1998 date
referenced above shall be postponed one (1) day for each day of
Tenant Delay occurring hereunder.
Provided Tenant shall not be in default under the
provisions of this lease beyond any applicable notice and cure
periods, Tenant's obligation to pay the Rent reserved under
Article 3 hereof (but not Tenant's obligation to pay any items of
additional rent reserved under this lease including, without
limitation, Tenant's Tax Payments (as such term is defined in
Article 11 hereof) and<PAGE>
Tenant's Cost Payments (as such term is
defined in Article 12 hereof) shall be waived for the first
two (2) full calendar months of the Term of this lease (such two
(2) month period being herein referred to as the "Concession Period").
The day following the last day of the Concession Period shall be
deemed to be the "Rent Commencement Date"; and Tenant's obligation
to pay the Rent reserved under Article 3 hereof shall commence on the Rent
Commencement Date. In the event of a default by Tenant under
any of the provisions of this lease during the Concession Period,
the Rent Commencement Date shall be accelerated to, and the
Concession Period shall end on, the date of the default.
Upon the request of Landlord, Tenant agrees to
execute a writing, prepared and executed by Landlord, setting
forth the actual date on which the Term Commencement Date, the
Rent Commencement Date and the Expiration Date took place or will
take place. Notwithstanding anything to the contrary contained
herein, such writing shall be deemed a part of this lease and
conclusive evidence of such dates.
A "Lease Year" shall be comprised of a period of
twelve (12) consecutive months. The first Lease Year shall
commence on the Term Commencement Date but, notwithstanding the
first sentence of this paragraph, if the Term Commencement Date is
not the first day of a month, then the first Lease Year shall
include the additional period from the Term Commencement Date to
the end of the then current month. Each succeeding Lease Year
shall end on the anniversary date of the last day of the preceding
Lease Year. For example, if the Term Commencement Date is January
1, 1997, the first Lease Year would begin on January 1, 1997 and
end on December 31, 1997 and each succeeding Lease Year would end
on December 31st. If, however, the Term Commencement Date is
January 2, 1997, the first Lease Year would end on January 31,
1998, the second Lease Year would commence on February 1, 1998,
and each succeeding Lease Year would end on January 31st.
RENT
3. The annual minimum rental ("Rent" or "rent") is as
follows:<PAGE>
During the first Lease Year, the Rent shall be $191,501.04 per
annum, payable in monthly installments of $15,958.42.
During the second Lease Year, the Rent shall be $196,540.56 per
annum, payable in monthly installments of $16,378.38.
During the third Lease Year, the Rent shall be $199,060.20 per
annum, payable in monthly installments of $16,588.35.
During the fourth, fifth and sixth Lease Years, the Rent shall be
$201,579.96 per annum, payable in monthly installments of
$16,798.33.
During the seventh, eighth, ninth and tenth Lease Years, the Rent
shall be $211,659.00 per annum, payable in monthly installments of
$17,638.25.
Tenant agrees to pay the Rent to Landlord, without notice or
demand, in lawful money of the United States which shall be legal
tender in payment of the debts and dues, public and private, at
the time of payment, in advance on the first day of each calendar
month during the Demised Term following the end of the Concession
Period at the office of the Landlord, or at such other place as
Landlord shall designate, except that Tenant shall pay the first
monthly installment on the execution hereof. Tenant shall pay the
Rent as above and as hereinafter provided, without any set off or
deduction whatsoever. Should the Rent Commencement Date be a date
other than the first day of a calendar month, Tenant shall pay a
pro rata portion of the Rent on a per diem basis, based upon the
first full calendar month of the first Lease Year, from such date
to and including the last day of that current calendar month, and
the first Lease Year shall include said partial month. The Rent
payable for such partial month shall be in addition to the Rent
payable for the first Lease Year pursuant to the Rent schedule set
forth above and shall be payable by Tenant on the Rent
Commencement Date.
USE
4. (A) Tenant shall use and occupy the Demised
Premises only for executive and administrative offices related to
staffing<PAGE>
and managing the business and operation of health maintenance
organizations and affiliated entities, and for no other purpose.
In the event of an assignment of this lease or a subletting of all
or any portion of the Demised Premises in accordance with the
provisions of Article 21 hereof, the foregoing sentence shall be
reasonably amended so as to permit the intended use of the Demised
Premises by such assignee or subtenant.
(B) Tenant shall not use or occupy, suffer or
permit the Premises, or any part thereof, to be used in any manner
which would in any way, in the reasonable judgment of Landlord,
(i) violate any laws or regulations of public authorities; (ii)
make void or voidable any insurance policy then in force with
respect to the Building; (iii) impair the appearance, character or
reputation of the Building; (iv) discharge objectionable fumes,
vapors or odors into the Building, air-conditioning systems or
Building flues or vents in such a manner as to offend other
occupants. The provisions of this Section shall not be deemed to
be limited in any way to or by the provisions of any other Section
or any Rule or Regulation.
(C) The emplacement of any equipment which will
impose an evenly distributed floor load in excess of 50 pounds per
square foot shall be done only after written permission is
received from the Landlord. Such permission will be granted only
after adequate proof is furnished by a professional engineer that
such floor loading will not endanger the structure. Business
machines and mechanical equipment in the Premises shall be placed
and maintained by Tenant, at Tenant's expense, in such manner as
shall be sufficient in Landlord's judgment to absorb vibration and
noise and prevent annoyance or inconvenience to Landlord or any
other tenants or occupants of the Building.
(D) Tenant will not at any time use or occupy the
Demised Premises in violation of the certificate of occupancy
(temporary or permanent) issued for the Building or portion
thereof of which the Demised Premises form a part.
<PAGE>
LANDLORD ALTERATION
5. (A) Landlord, at its expense, will perform the work
and make the installations set forth on the Rental Plan annexed
hereto as Exhibit "1" pursuant to the specifications set forth in
Schedule A and Exhibit "2" initialed by Landlord and Tenant and
annexed hereto (which work is sometimes hereinafter referred to as
the "Landlord's Initial Construction"). Tenant shall be
responsible for the cost of all such work in excess of the work
allowance. Notwithstanding the foregoing, Tenant hereby
acknowledges and agrees that (i) the folding partition in the
executive conference room of the Demised Premises shall be
installed by Landlord at the sole cost and expense of Tenant, and
(ii) Tenant shall reimburse Landlord, upon demand, for the full
amount of any increase in the cost of Landlord's Initial
Construction resulting from changes made by Tenant to the plans
and specifications annexed hereto as Exhibit "2".
(B) "Landlord's Initial Construction" shall not
include the acquisition, moving or installation of any of Tenant's
personnel, furniture, equipment, decorations, telecommunications
wiring and cabling or work station partitions, which acquisition,
moving and/or installation shall be performed by or on behalf of
Tenant at its sole cost and expense.
SERVICES
6. As long as Tenant is not in default under any
covenants of this lease, Landlord, during the hours of 8:00 A.M.
to 6:00 P.M. on weekdays ("Working Hours"), excluding legal
holidays, shall furnish the Demised Premises with heat and air-conditioning
in the respective seasons. Notwithstanding the
foregoing, Tenant shall have access to the Demised Premises
twenty-four (24) hours per day, seven (7) days per week. However,
any use by Tenant of such services to the Demised Premises outside
of Working Hours shall be subject to the provisions of Schedule C.
Landlord and Tenant acknowledge that Tenant shall pay for all
light and outlet energy consumed in the Demised Premises pursuant
to a separate meter as set forth in Schedule "C".
<PAGE>
LANDLORD'S REPAIRS
7. Landlord, at its expense, will make all the repairs
to and provide the maintenance for the Demised Premises (excluding
painting and decorating) and for all public areas and facilities
as set forth in Schedule B, except such repairs and maintenance as
may be necessitated by the negligence, improper care or use of
such premises and facilities by Tenant, its agents, employees,
licensees or invitees, which will be made by Landlord at Tenant's
expense.
WATER SUPPLY
8. Landlord, at its expense, shall furnish hot and cold
or tempered water for lavatory purposes only.
PARKING FIELD
9. Tenant shall have the right to use thirty three
(33) parking spaces for the parking of automobiles of Tenant, its
employees and invitees, in the parking area designated for tenants
of the Building (hereinafter sometimes referred to as "Building
Parking Area"), subject to the Rules and Regulations now or
hereafter adopted by Landlord. One (1) such parking space shall
be located in that portion of the Building Parking Area closest to
the main entrance of the Building and shall be marked "Reserved".
Tenant shall not use nor permit any of its officers, agents or
employees to use any parking spaces in excess of Tenant's allotted
number of spaces therein.
DIRECTORY
10. Landlord will furnish on the building directories
listings requested by Tenant, however, the total number of lines
on the building directories devoted to Tenant's listings shall not
exceed Tenant's Proportionate Share of the total number of lines
on the building directories devoted to all tenants of the
Building.<PAGE>
The initial listings will be made at Landlord's expense and any
subsequent changes by Tenant shall be made at Tenant's expense.
Landlord's acceptance of any name for listing on the directory
will not be deemed, nor will it substitute for, Landlord's
consent, as required by this lease, to any sublease, assignment or
other occupancy of the Premises.
TAXES AND OTHER CHARGES
11. (A) As used in and for the purposes of this
Article 11, the following definitions shall apply:
(i) "Taxes" shall be the real estate taxes,
assessments, special or otherwise, sewer rents, rates and charges,
and any other governmental charges, general, specific, ordinary or
extraordinary, presently existing or created hereafter, foreseen
or unforeseen, and any personal property taxes imposed upon the
fixtures, machinery, equipment, apparatus, systems and
appurtenances in, upon or used in connection with the Real
Property for the operation thereof, which on the basis of any
calendar year or fiscal year may be assessed, levied, confirmed,
imposed upon, or become due and payable out of, or become a lien
against the Real Property. If at any time during the Term the
method of taxation prevailing at the date hereof shall be altered
so that there shall be levied, assessed or imposed in lieu of, or
as in addition to, or as a substitute for, the whole or any part
of the taxes, levies, impositions or charges now levied, assessed
or imposed on all or any part of the Real Property (a) a tax,
assessment, levy, imposition or charge based upon the rents
received by Landlord, whether or not wholly or partially as a
capital levy or otherwise, or (b) a tax, assessment, levy,
imposition or charge measured by or based in whole or in part upon
all or any part of the Real Property and imposed on Landlord, or
(c) a license fee measured by the rent payable by Tenant to
Landlord, or (d) any other tax, levy, imposition, charge or
license fee however described or imposed; then all such taxes,
levies, impositions, charges or license fees or any part thereof,
so measured or based, shall be deemed to be Taxes.
(ii) "Base Year Taxes" shall be the Taxes actually
due and payable with respect to the 1997/98 tax year with respect
<PAGE>
to Taxes imposed on a fiscal year basis and the 1997 tax year
with respect to Taxes imposed on a calendar year basis.
(iii) "Escalation Year" shall mean each calendar
year which shall include any part of the Demised Term.
(iv) "Real Property" shall be the land upon which
the Building stands and any part or parts thereof utilized for
parking, landscaped areas or otherwise used in connection with the
Building, and the Building and other improvements appurtenant
thereto.
(B) Tenant shall pay Landlord increases in Taxes levied
against the Real Property as follows: If the Taxes actually due
and payable with respect to the Real Property in any Escalation
Year shall be increased above the Base Year Taxes, then Tenant
shall pay to Landlord, as additional rent for such Escalation
Year, a sum equal to Tenant's Proportionate Share of said increase
("Tenant's Tax Payment" or "Tax Payment").
(C) Landlord shall render to Tenant a statement
containing a computation of Tenant's Tax Payment ("Landlord's
Statement"). Within thirty (30) days after the rendition of the
Landlord's Statement, Tenant shall pay to Landlord the amount of
Tenant's Tax Payment. On the first day of each month following
the rendition of each Landlord's Statement, Tenant shall pay to
Landlord, on account of Tenant's next Tax Payment, a sum equal to
one-twelfth (1/12th) of Tenant's last Tax Payment due hereunder,
which sum shall be subject to adjustment for subsequent increases
in Taxes. Upon Landlord receiving notice of a subsequent increase
in Taxes, Landlord shall have the right to increase the monthly
installments of Tenant's Tax Payment then due from Tenant by an
amount sufficient to compensate Landlord for any previous
deficiencies in installments and thereafter the monthly
installments shall be increased on a pro rata basis so that
installments due from Tenant shall be such as to be sufficient to
fully pay Tenant's Proportionate Share of the respective Taxes at
least one month prior to the due date of such Taxes.
(D) If during the Term Taxes are required to be paid as
a tax escrow payment to a mortgagee, then, at Landlord's option,
the installments of Tenant's Tax Payment shall be correspondingly
accelerated so that Tenant's Tax Payment or any installment
thereof<PAGE>
shall be due and payable by Tenant to Landlord at least thirty
(30) days prior to the date such payment is due to such mortgagee.
(E) Landlord's failure to render a Landlord's Statement
with respect to any Escalation Year shall not prejudice Landlord's
right to render a Landlord's Statement with respect to any
Escalation Year. The obligation of Landlord and Tenant under the
provisions of this Article with respect to any additional rent for
any Escalation Year shall survive the expiration or any sooner
termination of the Demised Term.
(F) Tenant shall not, without Landlord's prior written
consent, institute or maintain any action, proceeding or
application in any court or body or with any governmental
authority for the purpose of changing the Taxes. Tenant
acknowledges that Landlord may have, prior to the date of this
lease, initiated application for a decrease in the assessed
valuation with respect to the Real Property. Tenant acknowledges
and agrees that any reduction in Taxes which may result from any
proceeding involving the application for a decrease in Taxes with
respect to the Real Property will not be paid to Tenant in the
amount of Tenant's Proportionate Share or otherwise and will not
be subtracted from the Taxes payable or paid by Tenant for the tax
year to which the reduction, refund or abatement applies and that
no reimbursement shall be made by Landlord to Tenant after
Landlord receives or is credited with such refund, reduction or
abatement. If Landlord obtains a (i) reduction or an abatement in
the assessment of the Real Property and/or a (ii) reduction or an
abatement in Base Year Taxes, then Base Year Taxes, as utilized
for purposes of calculating Tenant's Proportionate Share of Taxes
due pursuant to this lease shall be in an amount equal to the tax
rates which were in effect during the base years set forth above
times the assessed valuation of the Real Property as so reduced.
If during the Term of this lease, Taxes are reduced for any tax
year and a tax certiorari proceeding or any other proceeding,
judicial or otherwise, is pending for the base years (or any of
the base years) then for purposes of calculating Base Year Taxes,
Landlord may utilize such reduced assessed valuation in
calculating Tenant's Proportionate Share of Taxes. In such an
event, Landlord shall determine Base Year Taxes to be equal to the
tax rates in effect for the base years times the reduced assessed
valuation for such interim year. After the assessed valuations
for the base years are finally determined, Landlord shall issue a
statement reconciling<PAGE>
all tax years affected by such final
determination and Tenant shall remit such additional funds as
may be payable with respect to Tenant's Proportionate Share of
Taxes, or Landlord shall refund to Tenant any excess payments
made by Tenant with respect to Tenant's Proportionate Share.
However, if Landlord obtains a reduction in tax assessments which
results in a reduction in Taxes for any tax year as a result of
proceedings respecting applications filed or made on or after
the date of execution of this lease, then for purposes of
calculating Tenant's Proportionate Share of Taxes due pursuant
to this lease for such tax year the Taxes imposed shall be reduced
accordingly and, if Landlord shall receive any tax refund or
remission in respect to the Taxes for any tax year which Tenant
has paid Tenant's Proportionate Share of the Taxes as herein
provided, then Landlord shall reimburse Tenant for Tenant's
Proportionate Share thereof, after first deducting therefrom
the share of Landlord's cost and expense in procuring such refund
or remission proportionately attributed to the reimbursement due
to Tenant. Upon written request therefor by Tenant, Landlord shall
provide Tenant with a copy of the tax bill or other appropriate
documentation evidencing a reduction in, or adjustment to, Taxes
for any tax year. The provisions of this Article 11(F) shall survive
the expiration or earlier termination of this Lease.
OPERATING COST INCREASES
12. (A) For purposes of this lease, the terms
"Operating Costs" and "Base Operating Costs" shall be defined as
follows:
(i) The term "Operating Costs" shall mean
and include the aggregate of all those expenses, adjusted for full
occupancy, to the extent incurred in respect to the operation and
maintenance of the Real Property (as such term is defined in
Article 11(A)(iv)) in accordance with accepted principles of sound
management and accounting practices as applied to the operation
and maintenance of non-institutional first class office
properties, including any and all of the following: salaries,
wages, hospitalization, medical, surgical and general welfare
benefits (including group life insurance), pension payments,
payroll taxes and workmen's compensation of and respecting
employees of Landlord engaged in the operation and maintenance of
the Real Property (including, among others, that of the Real
Property or Building<PAGE>
manager and such manager's administrative staff);
all insurance
carried by Landlord applicable to the Real Property (including,
without limitation, primary and excess liability, vehicle
insurance, fire and extended coverage, vandalism and all broad
form coverage, riot, strike and war risk insurance, flood
insurance, boiler insurance, plate glass insurance, rent insurance
and sign insurance); maintenance fees; maintenance and repairs of
grounds (including, without limitation, all landscaping, statuary,
exhibits, displays, walks, parking and other vehicle ways and
areas and common areas), underground conduits, pipes, line
equipment and systems; repaving, resurfacing and painting
(including line painting); removal of snow, ice, trash, garbage
and other refuse; public light and power, steam, fuel (including
oil and/or gas used to heat the Building), utility taxes and water
and sewer rental; cleaning, cleaning supplies, uniforms and dry
cleaning and window cleaning; accounting fees; taxes (including,
without limitation, sales and use taxes); service contracts with
independent contractors, energy providers and/or consultants,
security systems and security personnel, and traffic systems and
traffic personnel; telephone, telegraph and stationary;
advertising, and; and all other expenses paid in connection with
the operation of the Real Property. All such expenses are subject
to Landlord's overhead and administrative cost of fifteen (15%)
percent (which charge shall in no event exceed fifteen (15%)
percent of Base Operating Costs [hereinafter defined]).
If Landlord shall purchase any item of capital
equipment or make any capital expenditure intended to result in
savings or reductions in Operating Costs and which Landlord
reasonably believes shall provide Tenant with the benefit of a
savings or reduction in such Operating Costs based upon the advice
of Landlord's consultants (such capital costs and expenditures
hereinafter called "Savings Capital Costs"), then the cost for
same shall be included in Operating Costs, to the extent
hereinafter set forth. Savings Capital Costs shall be included in
Operating Costs in the year in which the costs are incurred and in
any subsequent years, amortized (on a straight-line basis) over
the useful life of such items. If any such Savings Capital Cost
shall result from the lease by Landlord of capital equipment
designed to result in savings or reductions in any Operating
Costs, then the rentals and other costs paid pursuant to such
leasing shall be included in Operating Costs for the year in which
they were incurred.
<PAGE>
If Landlord shall purchase any item of capital
equipment or make any other capital expenditure in order to comply
with legal requirements, insurance requirements or environmental
laws or in order to benefit or increase the safety and security of
the Building, the Real Property, or its tenants and/or invitees
(such capital costs and expenditures hereinafter called "Safety
Capital Costs"), then the costs for same shall be included in
Operating Costs for the year in which the costs are incurred and
in any subsequent years, amortized (on a straight-line basis) over
the useful life of such items. If any such Safety Capital Cost
shall result from the leasing by Landlord of capital equipment to
comply with legal requirements, insurance requirements,
environmental laws or to increase safety and security then, in
such event, the rentals and other costs paid pursuant to such
leasing shall be included in Operating Costs for the year in which
they were incurred.
Operating Costs shall not include: (1)
expenses for repairs or other work occasioned by fire or other
insured casualty; (2) expenses incurred in connection with leasing
and procuring new tenants; (3) interest or amortization payments
on any mortgage or mortgages, and rental under any ground or
underlying leases; (4) wages, salaries or other compensation paid
to any executive employee of Landlord above the grade of Real
Property or Building manager; (5) capital expenditures (except for
Savings Capital Costs and Safety Capital Costs); (6) leasing
commissions; (7) advertising and/or promotional expenses; and/or
(8) costs incurred in connection with the correction of any
construction defects.
(ii) The term "Base Operating Costs" shall mean the
Operating Costs in effect for the calendar year ending December
31, 1998 (whether or not retroactively determined).
(B) Tenant shall pay to Landlord increases in Operating
Costs as follows: If the Operating Costs actually incurred by
Landlord in any Escalation Year (as such term is defined in
Article 11(A)(iii)) shall exceed the Base Operating Costs, then
Tenant shall pay to Landlord, as additional rent for said
Escalation Year, a sum equal to Tenant's Proportionate Share of
the difference between said Operating Costs and the Base Operating
Costs ("Tenant's Cost Payment" or "Cost Payment").
<PAGE>
(C) Landlord shall render to Tenant a statement
containing a computation of Tenant's Cost Payment ("Landlord's
Cost Statement") with respect to each Escalation Year occurring in
whole or part during the Term of this lease. Within thirty (30)
days after rendition of Landlord's Cost Statement relating to the
first Escalation Year, Tenant shall pay to Landlord, as additional
rent, the full amount of Tenant's Cost Payment shown thereon. In
addition, on the first day of each month following the rendition
of each Landlord's Cost Statement, Tenant shall pay to Landlord,
on account of Tenant's next Cost Payment, a sum equal to
one-twelfth (1/12th) of Tenant's last Cost Payment due hereunder,
which sum shall be subject to adjustment for subsequent increases
in Operating Costs.
(D) All Landlord's Costs Statements after the first
Landlord's Cost Statement shall include the following amounts with
respect to the Escalation Year to which they apply: (i) the total
Operating Costs incurred by Landlord during the Escalation Year in
question; (ii) Tenant's Cost Payment for such Escalation Year;
(iii) all amounts paid by Tenant during such Escalation Year on
account of the subject Cost Payment; and (iv) the amount of the
difference, if any, between Cost Payment for such Escalation Year
and the amounts paid by Tenant during such Escalation Year on
account of the subject Cost Payment. Within thirty (30) days
after the rendition of such Landlord's Cost Statement, Tenant
shall pay to Landlord, as additional rent, the amount of the
difference referred to in (iv) above, if any. In addition,
together with such payment, Tenant shall pay to Landlord, for each
month that has transpired since the commencement of the current
Escalation Year and the rendition of the subject Landlord's Cost
Statement, the difference between one-twelfth (1/12th) of the Cost
Payment shown on such statements and the monthly payments toward
Tenant's Cost Payment made by Tenant for the prior months of such
current Escalation Year. In addition, on the first day of each
month following the rendition of the subject Landlord's Cost
Statement, Tenant shall pay to landlord, on account of the next
Tenant's Cost Payment, one-twelfth (1/12th) of the Cost Payment
shown on the subject Landlord's Cost Statement.
(E) [INTENTIONALLY OMITTED.].
(F) Every notice given by Landlord pursuant to this
Article, including, without limitation, Landlord's Cost Statement,
shall be<PAGE>
conclusive and binding upon Tenant unless within thirty (30) days
after the receipt of such notice, Tenant shall notify Landlord
that it disputes the correctness of the notice, specifying the
particular respects in which the notice is claimed to be
incorrect. Pending the determination of such dispute by agreement
or otherwise, Tenant shall pay additional rent or accept credit in
accordance with Landlord's notice and such payment or acceptance
shall be without prejudice to Tenant's position. If the dispute
shall be determined in Tenant's favor, Landlord shall forthwith
pay Tenant the amount of Tenant's overpayment of rents resulting
from compliance with Landlord's Cost Statement.
(G) Landlord's failure to render a Landlord's Cost
Statement with respect to any Escalation Year shall not prejudice
Landlord's right to render a Landlord's Cost Statement with
respect to any Escalation Year. However, in the event Landlord
fails to render any Landlord's Cost Statement by March 1st of the
year following the subject Escalation Year (the "Target Date"),
the time period during which Tenant must pay the difference (if
any) referenced in clause (iv) of Article 12(D) above shall be
extended by the number of days between the Target Date and the
date such Landlord's Cost Statement is actually rendered. The
obligations of Tenant under the provisions of this Article with
respect to any additional rent for any Escalation Year shall
survive the expiration or any sooner termination of the Demised
Term.
TENANT'S REPAIRS
13. Tenant shall take good care of the Demised Premises
and, subject to the provisions of Article 7 hereof, Landlord at
the expense of Tenant, shall make as and when needed as a result
of misuse or neglect by Tenant or Tenant's servants, employees,
agents or licensees, all repairs in and about the Demised Premises
necessary to preserve them in good order and condition. Except as
provided in Article 26 hereof, there shall be no allowance to
Tenant for a diminution of rental value and no liability on the
part of Landlord by reason of inconvenience, annoyance or injury
to business arising from Landlord, Tenant or others making any
repairs, alterations, additions or improvements in or to any
portion of the Building or of Demised Premises, or in or to the
fixtures, appurtenances or equipment thereof, and no liability
upon<PAGE>
Landlord for failure of Landlord or others to make any repairs,
alterations, additions or improvements in or to any portion of the
Building or of the Demised Premises, or in or to the fixtures,
appurtenances or equipment thereof.
FIXTURES & INSTALLATIONS
14. All appurtenances, fixtures, improvements, additions
and other property attached to or built into the Demised Premises,
whether by Landlord or Tenant or others, and whether at Landlord's
expense, or Tenant's expense, or the joint expense of Landlord and
Tenant, shall be and remain the property of Landlord (except for
purposes of sales tax which shall remain Tenant's obligation).
All trade fixtures, furniture, furnishings and other articles of
movable personal property owned by Tenant and located within the
Premises (collectively, "Tenant's Property") may be removed from
the Premises by Tenant at any time during the Term. Any telephone
switching systems or components and/or any data or voice
communication equipment installed in the Demised Premises by or on
behalf of Tenant shall remain the property of Tenant and Tenant
shall be required to remove same upon the expiration or earlier
termination of this Lease. Such telephone switching systems and
components and/or data or voice communication equipment shall be
included in the definition of the term "Tenant's Property".
Tenant, before so removing Tenant's Property, shall establish to
Landlord's satisfaction that no structural damage or change will
result from such removal and that Tenant can and promptly will
repair and restore any damage caused by such removal without cost
or charge to Landlord. Any repair made necessary as a result of
such removal shall itself be deemed an Alteration (as defined in
Article 15 below) within the purview of this lease. Any Tenant's
Property for which Landlord shall have granted any allowance,
contribution or credit to Tenant shall, at Landlord's option, not
be so removed. All the outside walls of the Demised Premises
including corridor walls and the outside entrance doors to the
Demised Premises, any balconies, terraces or roofs adjacent to the
Demised Premises, and any space in the Demised Premises used for
shafts, stacks, pipes, conduits, ducts or other building
facilities, and the use thereof, as well as access thereto in and
through the Demised Premises for the purpose of operation,
maintenance, decoration and repair, are expressly reserved
<PAGE>
to Landlord, and Landlord does not convey any rights to Tenant
therein. Notwithstanding the foregoing, Tenant shall enjoy full
right of access to the Demised Premises through the public
entrances, public corridors and public areas within the Building.
ALTERATIONS
15. (A) After completion of Landlord's Initial
Construction as set forth in Article 5 hereof, Tenant shall make
no alterations, installations, additions or improvements
(hereinafter collectively referred to as "Alterations") in or to
the Demised Premises. Tenant may make written request to Landlord
that certain Alterations be made to the Demised Premises, but all
such Alterations shall be performed, if at all, (i) in the sole
and absolute discretion of Landlord (including, the manner and
timing of such performance), (ii) by Landlord or its designee and
(iii) at the sole cost and expense of Tenant. Any Alteration to
be performed in, on or to the Demised Premises shall be performed
by Landlord (which term as used in this Article 15(A) shall be
deemed to include Landlord and/or Landlord's contractor) and
Tenant shall pay Landlord for the value of such Alteration. As
used herein, the term "value" shall mean that Landlord shall
perform all work in connection with the Alteration on a "cost-plus"
basis, whereby "value" shall include, but not be limited to,
the cost of sub-contractors, material, equipment rental, permits,
fees, taxes, insurance, debris removal, safety, labor, project
management and all other expenses incurred by Landlord in the
performance of such work and shall also include a general
contractor's fee equal to (i) fifteen (15%) percent (with regard
to Alteration projects having an out-of-pocket cost of less than
$150,000.00), or (ii) ten (10%) percent (with respect to
Alteration projects having an out-of-pocket cost of $150,000.00 or
more), of the total of all other costs included in the
calculation thereof.
(B) Notwithstanding the foregoing, Tenant may make
certain non-structural, non-permanent changes or additions to the
interior of the Demised Premises which are deemed, in the sole and
absolute discretion of Landlord, decorative in nature, including,
by way of example, painting the walls or recarpeting the floors,
provided that Tenant provides written notice to Landlord of such
change or addition prior to its performance.
<PAGE>
REQUIREMENTS OF LAW
16. (A) Tenant, at Tenant's sole cost and expense, shall
comply with all statutes, laws, ordinances, orders, regulations
and notices of Federal, State, County and Municipal authorities,
and with all directions, pursuant to law, of all public officers,
which shall impose any duty upon Landlord or Tenant with respect
to the Demised Premises or the use or occupation thereof, except
that Tenant shall not be required to make any structural
alterations in order so to comply unless such alterations shall be
necessitated or occasioned, in whole or in part, by the acts,
omissions, or negligence of Tenant or any person claiming through
or under Tenant or any of their servants, employees, contractors,
agents, visitors or licensees, or by the use or occupancy or
manner of use or occupancy of the Demised Premises by Tenant, or
any such person.
(B) The parties acknowledge that there are certain
Federal, State and local laws, regulations and guidelines now in
effect and that additional laws, regulations and guidelines may
hereafter be enacted, relating to or affecting the Premises, the
Building, and the land of which the Premises and the Building may
be a part, concerning the impact on the environment of
construction, land use, the maintenance and operation of
structures and the conduct of business. Tenant will not cause, or
permit to be caused, any act or practice, by negligence, omission,
or otherwise, that would adversely affect the environment or do
anything or permit anything to be done that would violate any of
said laws, regulations, or guidelines. Any violation of this
covenant shall be an event of default under this lease.
(C) Tenant shall keep or cause the Premises to be
kept free of Hazardous Materials (hereinafter defined). Without
limiting the foregoing, Tenant shall not cause or permit the
Premises to be used to generate, manufacture, refine, transport,
treat, store, handle, dispose, transfer, produce or process
Hazardous Materials, except in compliance with all applicable
Federal, State and Local laws or regulations, nor shall Tenant
cause or permit, as a result of any intentional or unintentional
act or omission on the part of Tenant or any person or entity
claiming through or under Tenant or any of Tenant's employees,
contractors, agents, visitors or licensees (collectively, "Related
<PAGE>
Parties"), a release of Hazardous Materials onto the Premises or
onto any other property. Tenant shall comply with and ensure
compliance by all Related Parties with all applicable Federal,
State and Local laws, ordinances, rules and regulations, whenever
and by whomever triggered, and shall obtain and comply with, and
ensure that all Related Parties obtain and comply with, any and
all approvals, registrations or permits required thereunder. With
respect to Hazardous Materials brought onto or generated on the
Premises by Tenant or Related Parties, as described herein, Tenant
shall (i) conduct and complete all investigations, studies,
samplings, and testing, and all remedial removal and other actions
necessary to clean up and remove such Hazardous Materials, on,
from, or affecting the Premises (a) in accordance with all
applicable Federal, State and Local laws, ordinances, rules,
regulations, policies, orders and directives, and (b) to the
satisfaction of Landlord, and (ii) defend, indemnify, and hold
harmless Landlord, its employees, agents, officers, and directors,
from and against any claims, demands, penalties, fines,
liabilities, settlements, damages, costs, or expenses of whatever
kind or nature, known or unknown, contingent or otherwise, arising
out of, or in any way related to, (a) the presence, disposal,
release, or threatened release of such Hazardous Materials which
are on, from, or affecting the soil, water, vegetation, buildings,
personal property, persons, animals, or otherwise; (b) any
personal injury (including wrongful death) or property damage
(real or personal) arising out of or related to such Hazardous
Materials; (c) any lawsuit brought or threatened, settlement
reached, or government order relating to such Hazardous Materials;
and/or (d) any violation of laws, orders, regulations,
requirements, or demands of government authorities, or any
policies or requirements of Landlord which are based upon or in
any way related to such Hazardous Materials, including, without
limitation, attorney and consultant fees, investigation and
laboratory fees, court costs, and litigation expenses. In the
event this lease is terminated, or Tenant is dispossessed, Tenant
shall deliver the Premises to Landlord in an environmental
condition at least as good as the environmental condition of the
Premises on the Term Commencement Date. For purposes of this
paragraph, "Hazardous Materials" includes, without limitation, any
flammable explosives, radioactive materials, hazardous materials,
hazardous wastes, hazardous or toxic substances, or related
materials defined in the Comprehensive Environmental Response,
Compensation, and Liability Act of 1980, as amended (42 U.S.C.
Sections 9601, et seq.), the Hazardous Materials
<PAGE>
Transportation Act, as amended (49 U.S.C. Sections 1801 et seq.),
the Resource Conservation and Recovery Act, as amended (42 U.S.C.
Sections 9601, et seq.), and in the regulations adopted and
publications promulgated pursuant thereto, or any other Federal,
State or Local environmental law, ordinance, rule, or regulation.
END OF TERM
17. (A) Upon the expiration or other termination of the
Term of this lease, Tenant shall, at its own expense, quit and
surrender to Landlord the Demised Premises, broom clean, in good
order and condition, ordinary wear, tear and damage by fire or
other insured casualty excepted, and Tenant shall remove all of
its property and shall pay the cost to repair all damage to the
Demised Premises or the Building occasioned by such removal. Any
property not removed from the Premises shall be deemed abandoned
by Tenant and may be retained by Landlord, as its property, or
disposed of in any manner deemed appropriate by the Landlord. Any
expense incurred by Landlord in removing or disposing of such
property shall be reimbursed to Landlord by Tenant on demand.
Tenant's obligation to observe or perform this covenant shall
survive the expiration or other termination of the Term of this
lease. If the last day of the Term of this lease or any renewal
hereof falls on Sunday or a legal holiday, this lease shall expire
on the business day immediately preceding. Tenant's obligations
under this Article 17 shall survive the Expiration Date or sooner
termination of this lease.
(B) In the event of any holding over by Tenant after the
expiration or termination of this lease without the consent of
Landlord, Tenant shall:
(i) pay as holdover rental for each month of the
holdover tenancy an amount equal to (x) one hundred twenty-five
(125%) percent of the Rent payable by Tenant for the third month
prior to the Expiration Date of the term of this lease (for the
first seventy-five (75) days following the date of expiration or
termination), and (y) one hundred fifty (150%) percent of the
Rent payable by Tenant for the third month prior to the Expiration
Date of the term of this lease (for all periods following the
seventy-fifth (75th) day after the date of expiration or
termination), and<PAGE>
otherwise observe, fulfill and perform all of its obligations
under this lease, including but not limited to, those pertaining
to additional rent, in accordance with its terms;
(ii) be liable to Landlord for any payment or rent
concession which Landlord may be required to make to any tenant in
order to induce such tenant not to terminate an executed lease
covering all or any portion of the Premises by reason of the
holdover over by Tenant; and
(iii) be liable to Landlord for any damages suffered
by Landlord as the result of Tenant's failure to surrender the
Premises.
No holding over by Tenant after the Term shall operate
to extend the Term.
The holdover, with respect to all or any part of the
Premises, of a person deriving an interest in the Premises from or
through Tenant, including, but not limited to, an assignee or
subtenant, shall be deemed a holdover by Tenant.
Notwithstanding anything in this Article contained to
the contrary, the acceptance of any Rent paid by Tenant pursuant
to this Paragraph 17(B), shall not preclude Landlord from
commencing and prosecuting a holdover or eviction action or
proceeding or any action or proceeding in the nature thereof. The
preceding sentence shall be deemed to be an "agreement expressly
providing otherwise" within the meaning of Section 232-c of the
Real Property Law of the State of New York and any successor law
of like import.
(C) If at any time during the last six (6) months of
the Term, Tenant shall have removed all or substantially all of
Tenant's property from the Premises, Landlord may, and Tenant
hereby irrevocably grants to Landlord a license to, immediately
enter and alter, renovate and redecorate the Premises, without
elimination, diminution or abatement of Rent, or incurring
liability to Tenant for any compensation, and such acts shall have
no effect upon this lease.
<PAGE>
QUIET ENJOYMENT
18. Landlord covenants and agrees with Tenant that upon
Tenant paying the Rent and additional rent and observing and
performing all the terms, covenants and conditions on Tenant's
part to be observed and performed, Tenant may peaceably and
quietly enjoy the Demised Premises during the Term of this lease
without hindrance or molestation by anyone claiming by or through
Landlord, subject, nevertheless, to the terms, covenants and
conditions of this lease including, but not limited to, Article
23.
SIGNS
19. No signs or lettering of any nature may be put on or
in any window or on the exterior of the Building or elsewhere
within the Demised Premises such as will be visible from the
street. No sign or lettering in the public corridors or on the
doors is permitted except where Tenant has obtained the prior
written consent of Landlord to all such signs or lettering and all
sources constructing or furnishing such signs or lettering.
RULES AND REGULATIONS
20. Tenant and Tenant's agents, employees, visitors, and
licensees shall faithfully observe and comply with, and shall not
permit violation of, the Rules and Regulations set forth on
Schedule D annexed hereto and made part hereof, and with such
further reasonable Rules and Regulations as Landlord at any time
may make and communicate in writing to Tenant which, in Landlord's
judgment, shall be necessary for the reputation, safety, care and
appearance of the Building and the land allocated to it or the
preservation of good order therein, or the operation or
maintenance of the Building, and such land, its equipment, or the
more useful occupancy or the comfort of the tenants or others in
the Building. Landlord shall not be liable to Tenant for the
violation of any of said Rules and Regulations, or the breach of
any covenant or condition, in any lease by any other tenant in the
Building.
<PAGE>
RIGHT TO SUBLET OR ASSIGN
21. (A) Tenant shall not assign this lease nor sublet the
Demised Premises or any part thereof, by operation of law or
otherwise, including, without limitation, an assignment or
subletting as defined in (D) below, without the prior written
consent of Landlord in each instance, which consent shall not be
unreasonably withheld. Tenant may assign this lease or sublet all
or a portion of the Demised Premises with Landlord's prior written
consent, provided:
(i) That such assignment or sublease is for a use
which is in compliance with this lease and the then existing
zoning regulations and the Certificate of Occupancy;
(ii) That, at the time of such assignment or
subletting, there is no default under the terms of this lease on
the Tenant's part;
(iii) That, in the event of an assignment, the
assignee shall assume in writing the performance of all of the
terms and obligations of the within lease;
(iv) That a duplicate original of said assignment or
sublease shall be delivered by certified mail to the Landlord at
the address herein set forth within ten (10) days from the said
assignment or sublease and within ninety (90) days of the date
that Tenant first advises Landlord of the name and address of the
proposed subtenant or assignee, as required pursuant to
subparagraph (B) hereof;
(v) Such assignment or subletting shall not,
however, release the within Tenant or any successor tenant or any
guarantor from their liability for the full and faithful
performance of all of the terms and conditions of this lease;
(vi) If this lease be assigned, or if the Demised
Premises or any part thereof be underlet or occupied by anybody
other than Tenant, Landlord may after default by Tenant collect
rent from the assignee, undertenant or occupant, and apply the net
amount collected to the rent herein reserved; and
<PAGE>
(vii) That, in the event Tenant shall request
Landlord's consent to a proposed assignment of this lease or
proposed sublease of all or a portion of the Demised Premises,
Tenant shall pay or reimburse to Landlord the reasonable attorney
fees incurred by Landlord in processing such request (to a maximum
of $500.00).
(B) Notwithstanding anything contained in this
Article 21 to the contrary, no assignment or underletting shall be
made by Tenant in any event until Tenant has offered to terminate
this lease as of the last day of any calendar month during the
Term hereof and to vacate and surrender the Demised Premises to
Landlord on the date fixed in the notice served by Tenant upon
Landlord (which date shall be prior to the date of such proposed
assignment or the commencement date of such proposed lease).
Simultaneously with said offer to terminate this lease, Tenant
shall advise the Landlord, in writing, of the name and address of
the proposed assignee or subtenant, a reasonably detailed
statement of the proposed subtenant/assignee's business,
reasonably detailed financial references, and all the terms,
covenants, and conditions of the proposed sublease or assignment.
(C) Tenant may, without the consent of Landlord,
assign this lease to an affiliated (i.e., a corporation 20% or
more of whose capital stock is owned by the same stockholders
owning 20% or more of Tenant's capital stock), parent or
subsidiary corporation of Tenant or to a corporation to which it
sells or assigns all or substantially all of its assets or stock
or with which it may be consolidated or merged, provided such
purchasing, consolidated, merged, affiliated or subsidiary
corporation shall, in writing, assume and agree to perform all of
the obligations of Tenant under this lease and it shall deliver
such assumption with a copy of such assignment to Landlord within
ten (10) days thereafter, and provided further than Tenant shall
not be released or discharged from any liability under this lease
by reason of such assignment.
(D) For purposes of this Article 21, (i) the transfer
of a majority of the issued and outstanding capital stock of any
corporate tenant, or of a corporate subtenant, or the transfer of
a majority of the total interest in any partnership tenant or
subtenant, however accomplished, whether in a single transaction
or in a series of related or unrelated transactions, shall be
deemed an assignment of this lease, or of such sublease, as the
case may be; (ii) any person or legal representative of Tenant, to
whom<PAGE>
Tenant's interest under this lease passes by operation of law or
otherwise, shall be bound by the provisions of this Article 21;
and (iii) a modification or amendment of a sublease shall be
deemed a sublease.
(E) Whenever Tenant shall claim under this Article
or any other part of this lease that Landlord has unreasonably
withheld or delayed its consent to some request of Tenant, Tenant
shall have no claim for damages by reason of such alleged
withholding or delay, and Tenant's sole remedy thereof shall be a
right to obtain specific performance or injunction but in no event
with recovery of damages.
(F) Tenant shall not mortgage, pledge, hypothecate
or otherwise encumber its interest under this lease without
Landlord's prior written consent.
(G) Without affecting any of its other obligations
under this lease, except with respect to any permitted assignment
or subletting under Article 21(C) hereof, Tenant will pay Landlord
as additional rent any sums or other economic consideration, which
(i) are due and payable to Tenant as a result of any permitted
assignment or subletting whether or not referred to as rentals
under the assignment or sublease (after deducting therefrom the
reasonable costs and expenses incurred by Tenant in connection
with the assignment or subletting in question provided such costs
were approved by Landlord when it approved the assignment or
sublease); and (ii) exceed in total the sums which Tenant is
obligated to pay Landlord under this lease (prorated to reflect
obligations allocable to that portion of the Demised Premises
subject to such assignment or sublease), it being the express
intention of the parties that Tenant shall not in any manner
whatsoever be entitled to any profit by reason of such sublease or
assignment. The failure or inability of the assignee or subtenant
to pay rent pursuant to the assignment or sublease will not
relieve Tenant from its obligations to Landlord under this Article
21(G). Tenant will not amend the assignment or sublease in such a
way as to reduce or delay payment of amounts which are provided in
the assignment or sublease approved by Landlord.
(H) Landlord agrees that it shall not unreasonably
withhold its consent to a subletting or assignment in accordance
with the terms of this Article 21. In determining reasonableness,
<PAGE>
there shall be taken into account the character and reputation of
the proposed subtenant or assignee, the specific nature of the
proposed subtenant's or assignee's business and whether same is in
keeping with other tenancies in the building; the financial
standing of the proposed subtenant or assignee; and the impact of
all of the foregoing upon the Building and the other tenants of
Landlord therein. Landlord shall not be deemed to have
unreasonably withheld its consent if it refuses to consent to a
subletting or assignment to an existing tenant in any building in
the Tarrytown area which is owned by Landlord or its affiliate or
to a proposed subtenant or assignee with whom Landlord is
negotiating a lease or if at the time of Tenant's request, Tenant
is in default, beyond applicable grace and notice periods provided
herein for the cure thereof, of any of the terms, covenants and
conditions of this lease to be performed by Tenant. At least
thirty (30) days prior to any proposed subletting or assignment,
Tenant shall submit to Landlord a written notice of the proposed
subletting or assignment, which notice shall contain or be
accompanied by the following information:
(i) the name and address of the proposed subtenant
or assignee;
(ii) the nature and character of the business of the
proposed subtenant or assignee and its proposed use of the
premises to be demised;
(iii) the most recent three (3) years of balance
sheets and profit and loss statements of the proposed subtenant or
assignee or other financial information satisfactory to Landlord;
and
(iv) such shall be accompanied by a copy of the
proposed sublease or assignment of lease.
Notwithstanding the foregoing, Tenant agrees that it and anyone
holding through Tenant shall not sublet or assign all or any
portion of the Demised Premises to any subtenant or assignee who
will use the Demised Premises or a portion thereof for any of the
following designated uses nor for any other use which is
substantially similar to any one of the following designated uses:
<PAGE>
(i) federal, state or local governmental division,
department or agency which generates heavy public traffic,
including, without limitation, court, social security offices,
labor department office, drug enforcement agency, motor vehicle
agency, postal service, military recruitment office;
(ii) union or labor organization;
(iii) office for the practice of medicine, dentistry
or the rendering of medical procedures ;
(iv) chemical or pharmaceutical company provided;
however, that the subletting or assignment to such a company which
will use the premises only for executive, general and sales
offices and waive the right to conduct any research and
development shall not be prohibited; or
(v) brokerage firm.
LANDLORD'S ACCESS TO PREMISES
22. (A) Landlord or Landlord's agents shall have the right
to enter and/or pass through the Demised Premises at all
reasonable times on reasonable notice, except in an emergency, to
examine the same, and to show them to ground lessors, prospective
purchasers or lessees or mortgagees of the Building, and to make
such repairs, improvements or additions as Landlord may deem
necessary or desirable, and Landlord shall be allowed to take all
material into and upon and/or through said Demised Premises that
may be required therefor. During the nine (9) months prior to the
expiration of the Term of this lease, or any renewal term,
Landlord may exhibit the Demised Premises to prospective tenants
or purchasers at all reasonable hours and without unreasonably
interfering with Tenant's business. If Tenant shall not be
personally present to open and permit an entry into said premises
at any time, when for any reason an entry therein shall be
necessary or permissible, Landlord or Landlord's agents may enter
the same by a master key, or forcibly, without rendering Landlord
or such agent liable therefor (if during such entry Landlord or
Landlord's agents shall accord reasonable care to Tenant's
property).
<PAGE>
(B) Landlord shall also have the right, at any time,
to change the arrangement and/or location of entrances or
passageways, doors and doorways, and corridors, elevators, stairs,
toilets, or other public parts of the Building, provided, however,
that Landlord shall make no change in the arrangement and/or
location of entrances or passageways or other public parts of the
Building which will adversely affect in any material manner
Tenant's use and enjoyment of the Demised Premises. Landlord
shall also have the right, at any time, to name the Building,
including, but not limited to, the use of appropriate signs and/or
lettering on any or all entrances to the Building, and to change
the name, number or designation by which the Building is commonly
known.
(C) Neither this lease nor any use by Tenant shall
give Tenant any right or easement to the use of any door or
passage or concourse connecting with any other building or to any
public conveniences, and the use of such doors and passages and
concourse and of such conveniences may be regulated and/or
discontinued at any time and from time to time by Landlord without
notice to Tenant.
(D) The exercise by Landlord or its agents of any
right reserved to Landlord in this Article shall not constitute an
actual or constructive eviction, in whole or in part, or entitle
Tenant to any abatement or diminution of rent, or relieve Tenant
from any of its obligations under this lease, or impose any
liability upon Landlord, or its agents, or upon any lessor under
any ground or underlying lease, by reason of inconvenience or
annoyance to Tenant, or injury to or interruption of Tenant's
business, or otherwise.
SUBORDINATION
23. (A) This lease and all rights of Tenant hereunder
are, and shall be, subject and subordinate in all respects to all
ground leases and/or underlying leases and to all first mortgages
and building loan agreements which may now or hereafter be placed
on or affect such leases and/or the Real Property of which the
Demised Premises form a part, or any part or parts of such Real
Property, and/or Landlord's interest or estate therein, and to
each advance made and/or hereafter to be made under any such
mortgages, and to<PAGE>
all renewals, modifications, consolidations,
replacements and extensions thereof and all substitutions therefor.
This Section A shall be self-operative and no further instrument of
subordination shall be required. In confirmation of such subordination,
Tenant shall execute and deliver promptly any certificate that Landlord
and/or any mortgagee and/or the lessor under any ground or
underlying lease and/or their respective successors in interest
may request.
(B) Without limitation of any of the provisions of
this lease, in the event that any mortgagee or its assigns shall
succeed to the interest of Landlord or of any successor-Landlord
and/or shall have become lessee under a new ground or underlying
lease, then, at the option of such mortgagee, this lease shall
nevertheless continue in full force and effect and Tenant shall
and does hereby agree to attorn to such mortgagee or its assigns
and to recognize such mortgagee or its respective assigns as its
Landlord.
(C) Tenant shall, at any time and from time to time,
upon not less than five (5) days prior notice by Landlord,
execute, acknowledge and deliver to Landlord a statement in
writing certifying that this lease is unmodified and in full force
and effect (or if there have been modifications, that the same is
in full force and effect as modified and stating the modification)
and the dates to which the Rent, additional rent and other charges
have been paid in advance, if any, and stating whether or not to
the best knowledge of the signer of such certificate Landlord is
in default in performance of any covenant, agreement, term,
provision or condition contained in this lease, and if so,
specifying each such default of which the signer may have
knowledge, it being intended that any such statement delivered
pursuant hereto may be relied upon by any prospective purchaser or
lessee of said real property or any interest or estate therein,
any mortgagee or prospective mortgagee thereof, or any prospective
assignee of any mortgage thereof. If, in connection with
obtaining financing for the Building and the land allocated to it,
a banking, insurance or other recognized institutional lender
shall request reasonable modifications in this lease as a
condition to such financing, Tenant will not unreasonably
withhold, delay or defer its consent thereof, provided that such
modifications do not increase the obligations of Tenant hereunder
or materially adversely affect the leasehold interest hereby
created. If, in connection with such financing, such
institutional lender shall require financial<PAGE>
audited information
on the Tenant, Tenant shall promptly comply with such request.
(D) The Tenant covenants and agrees that if by
reason of a default under any underlying lease (including an
underlying lease through which the Landlord derives its leasehold
estate in the premises), such underlying lease and the leasehold
estate of the Landlord in the premises demised hereby is
terminated, providing notice has been given to the Tenant and
leasehold mortgagee, the Tenant will attorn to the then holder of
the reversionary interest in the premises demised by this lease or
to anyone who shall succeed to the interest of the Landlord or to
the lessee of a new underlying lease entered into pursuant to the
provisions of such underlying lease, and will recognize such
holder and/or such lessee as the Tenant's landlord of this lease.
The Tenant agrees to execute and deliver, at any time and from
time to time, upon the request of the Landlord or of the lessor
under any such underlying lease, any instrument which may be
necessary or appropriate to evidence such attornment. The Tenant
further waives the provision of any statute or rule of law now or
hereafter in effect which may give or purport to give the Tenant
any right of election to terminate this lease or to surrender
possession of the premises hereby in the event any proceeding is
brought by the lessor under any underlying lease to terminate the
same, and agrees that unless and until any such lessor, in
connection with any such proceeding, shall elect to terminate this
lease and the rights of the Tenant hereunder, this lease shall not
be affected in any way whatsoever by any such proceeding.
PROPERTY LOSS, DAMAGE REIMBURSEMENT
24. Landlord or its agents shall not be liable for any
damages to property of Tenant or of others entrusted to employees
of the Building. Landlord or its agents shall not be liable for
any injury or damage to persons or property resulting from theft,
fire, explosion, falling plaster, steam, gas, electricity,
electrical disturbance, water, rain or snow or leaks from any part
of the Building or from the pipes, appliances or plumbing works or
from the roof, street or subsurface or from any other place or by
dampness or by any other cause of whatsoever nature, unless caused
by or due to the negligence of Landlord, its agents, servants or
<PAGE>
employees; nor shall Landlord or its agents be liable for any such
damage caused by other tenants or persons in the Building or
caused by operations in construction of any private, public or
quasi-public work; nor shall Landlord be liable for any latent
defect in the Demised Premises or in the Building. If at any time
any windows of the Demised Premises are temporarily closed or
darkened incident to or for the purpose of repairs, replacements,
maintenance and/or cleaning in, on, to or about the Building or
any part or parts thereof, Landlord shall not be liable for any
damage Tenant may sustain thereby and Tenant shall not be entitled
to any compensation therefor nor abatement of rent nor shall the
same release Tenant from its obligations hereunder nor constitute
an eviction. Tenant shall reimburse and compensate Landlord as
additional rent for all expenditures (including, without
limitation, reasonable attorneys' fees) made by, or damages or
fines sustained or incurred by, Landlord due to non-performance or
non-compliance with or breach or failure to observe any term,
covenant or condition of this lease upon Tenant's part to be kept,
observed, performed or complied with. Tenant shall give immediate
notice to Landlord in case of fire or accidents in the Demised
Premises or in the Building or of defects therein or in any
fixtures or equipment.
MUTUAL INDEMNITY
25. (A) Tenant shall indemnify and save harmless
Landlord against and from any and all claims by or on behalf of
any person or persons, firm or firms, corporation or corporations
arising from the conduct or management of or from any work or
other thing whatsoever done (other than by Landlord or its
contractors or the agents or employees of either) in and on the
Demised Premises during any other period of occupancy by Tenant
including the Term of this lease and during the period of time, if
any, prior to the specified commencement date that Tenant may have
been given access to the Demised Premises for the purpose of
making installations, and will further indemnify and save harmless
Landlord against and from any and all claims arising from any
condition of the Demised Premises or Tenant's occupancy thereof
due to or arising from any act or omissions or negligence of
Tenant or any of its agents, contractors, servants, employees,
licensees or invitees and against and from all costs, expenses,
and liabilities incurred in<PAGE>
connection with any such claim or claims
or action or proceeding brought thereon; and in case any action or
proceeding be brought against Landlord by reason of any such claim,
Tenant, upon notice from Landlord, agrees that Tenant, at Tenant's
expense, will resist or defend such action or proceeding and will
employ counsel therefor reasonably satisfactory to Landlord.
(B) Landlord shall indemnify and save harmless
Tenant against and from any and all claims by or on behalf of any
person or persons, firm or firms, corporation or corporations
arising from the conduct or management of or from any work or
other thing whatsoever done (other than by Tenant or Tenant's
contractors, agents or employees) in and on the common areas of
the Building during any period of occupancy by Tenant including
the Term of this lease and during the period of time, if any,
prior to the specified commencement date that Tenant may have been
given access to the Demised Premises for the purpose of making
installations, and will further indemnify and save harmless Tenant
against and from any and all claims any condition of the common
areas of the Building due to or arising from any acts or omissions
or negligence of Landlord or any of its agents, contractors,
servants, employees, licensees or invitees and against and from
all costs, expenses, and liabilities incurred in connection with
any such claim or claims or action or proceeding brought thereon;
and in case any action or proceeding be brought against Tenant by
reason of any such claim, Landlord, upon notice from Tenant,
agrees that Landlord, at Landlord's expense, will resist or defend
such action or proceeding and will employ counsel therefor
reasonably satisfactory to Tenant.
DESTRUCTION - FIRE OR OTHER CASUALTY
26. (A) Except as otherwise provided herein, if the
Premises or any part thereof shall be damaged by fire or other
casualty and Tenant gives prompt notice thereof to Landlord,
Landlord shall proceed with reasonable diligence to repair or
cause to be repaired such damage. The Rent shall be abated to the
extent that the Premises shall have been rendered untenantable,
such abatement to be from the date of such damage or destruction
to the date the Premises shall be substantially repaired or
rebuilt to the condition existing immediately prior to the
occurrence of such fire or other casualty (excluding any personal
property of Tenant<PAGE>
located therein), in proportion which the area
of the part of the Premises so rendered untenantable bears to the total
area of the Premises.
(B) If the Premises shall be totally damaged or
rendered wholly untenantable by fire or other casualty, and
Landlord has not terminated this lease pursuant to Subsection (C),
then the Rent and all items of additional rent required hereunder
shall be paid by Tenant for all periods or partial periods up to
the date of such fire of casualty and thenceforth shall cease
until such time as the Demised Premises and Tenant's access
thereto have been repaired and restored by Landlord (or sooner
reoccupied in part by Tenant, in which case the Rent and
additional rent hereunder shall merely be abated to the extent the
Demised Premises remain untenantable). In addition, in the event
this lease has not been terminated by Landlord pursuant to
Subsection (C), then, Landlord shall use reasonable efforts to
locate temporary office space ("Temporary Space") in the Tarrytown
area which is suitable for Tenant's use until such time as the
Demised Premises are restored and rebuilt to the condition
existing immediately prior to such fire or other casualty
(excluding any personal property of Tenant located therein). The
Rent and other charges for Tenant's use and occupancy of the
Temporary Space, if any, shall be proportionate to (but shall not
exceed) the amounts set forth in this lease.
(C) If the Premises shall be totally damaged or
rendered wholly untenantable by fire or other casualty or if the
Building shall be so damaged by fire or other casualty that
substantial alteration or reconstruction of the Building shall, in
Landlord's opinion, be required (whether or not the Premises shall
have been damaged by such fire or other casualty), then in any of
such events Landlord may, at its option, terminate this lease and
the Term and estate hereby granted, by giving Tenant thirty (30)
days notice of such termination within ninety (90) days after the
date of such damage. In the event that such notice of termination
shall be given, this lease and the Term and estate hereby granted,
shall terminate as of the date provided in such notice of
termination (whether or not the Term shall have commenced) with
the same effect as if that were the Expiration Date, and the Rent
and additional rent shall be apportioned as of such date or sooner
termination and any prepaid portion of Rent and additional rent
for any period after such date shall be refunded by Landlord to
Tenant.<PAGE>
(D) Landlord shall not be liable for any
inconvenience or annoyance to Tenant or injury to the business of
Tenant resulting in any way from such damage by fire or other
casualty or the repair thereof. Landlord will not carry insurance
of any kind on Tenant's property, and Landlord shall not be
obligated to repair any damage thereto or replace the same.
(E) This lease shall be considered an express
agreement governing any case of damage to or destruction of the
Building or any part thereof by fire or other casualty, and
Section 227 of the Real Property Law of the State of New York
providing for such a contingency in the absence of such express
agreement, and any other law of like import now or hereafter
enacted, shall have no application in such case.
INSURANCE
27. (A) Tenant shall not do anything, or suffer or
permit anything to be done, in or about the Premises which could
reasonably be expected to (i) invalidate or be in conflict with
the provisions of any fire or other insurance policies covering
the Building or any property located therein, or (ii) result in a
refusal by fire insurance companies of good standing to insure the
Building or any such property in amounts reasonably satisfactory
to Landlord, or (iii) subject Landlord to any liability or
responsibility for injury to any person or property by reason of
any activity being conducted in the Premises or (iv) cause any
increase in the fire insurance rates applicable to the Building
or equipment or other property located therein at the beginning of
the Term or at any time thereafter. Tenant, at Tenant's expense,
shall comply with all rules, orders, regulations or requirements
of the New York Board of Fire Underwriters and the New York Fire
Insurance Rating Organization or any similar body.
(B) If, by reason of any act or omission on the part
of Tenant, the rate of fire insurance with extended coverage on
the Building or equipment or other property of Landlord or any
other tenant or occupant of the Building shall be higher than it
otherwise would be, Tenant shall reimburse Landlord and all such
other tenants or occupants, on demand, for the part of the
premiums
<PAGE>
for fire insurance and extended coverage paid by Landlord and such
other tenants or occupants because of such act or omission on the
part of Tenant.
(C) In the event that any dispute should arise
between Landlord and Tenant concerning insurance rates, a schedule
or make up of insurance rates for the Building or the Premises, as
the case may be, issued by the New York Fire Insurance Rating
Organization or other similar body making rates for fire insurance
and extended coverage for the Premises concerned, shall be
conclusive evidence of the facts therein stated and of the several
items and charges in the fire insurance rates with extended
coverage then applicable to such Premises.
(D) Tenant shall obtain and keep in full force and
effect during the Term, at its own cost and expense, (i) Public
Liability Insurance, such insurance to afford protection in an
amount of not less than Three Million ($3,000,000) Dollars for
injury or death arising out of any one occurrence, and Five
Hundred Thousand ($500,000) Dollars for damage to property,
protecting Landlord and Tenant as insureds against any and all
claims for personal injury, death or property damage and (ii) Fire
and Extended Coverage Insurance on Tenant's property, insuring
against damage by fire, and such other risks and hazards as are
insurable under present and future standard forms of fire and
extended coverage insurance policies, to Tenant's property for the
full insurable value thereof, protecting Landlord and Tenant as
insureds.
(E) Said insurance is to be written in form and
substance satisfactory to Landlord by a good and solvent insurance
company of recognized standing, admitted to do business in the
State of New York, which shall be reasonably satisfactory to
Landlord. Tenant shall procure, maintain and place such insurance
and pay all premiums and charges therefor and upon failure to do
so Landlord may, but shall not be obligated to, procure, maintain
and place such insurance or make such payments, and in such event
the Tenant agrees to pay the amount thereof, plus interest at the
maximum rate permitted by law, to Landlord on demand and said sum
shall be in each instance collectible as additional rent on the
first day of the month following the date of payment by Landlord.
Tenant shall cause to be included in all such insurance policies a
provision to the effect that the same will be non-cancelable
except<PAGE>
upon twenty (20) days written notice to Landlord. On the Term
Commencement Date the original insurance policies or appropriate
certificates shall be deposited with Landlord. Any renewals,
replacements or endorsements thereto shall also be deposited with
Landlord to the end that said insurance shall be in full force and
effect during the Term.
(F) Each party agrees to use its best efforts to
include in each of its insurance policies (insuring the Building
and Landlord's property therein, in the case of Landlord, and
insuring Tenant's property, in the case of Tenant, against loss,
damage or destruction by fire or other casualty) a waiver of the
insurer's right of subrogation against the other party, or if such
waiver should be unobtainable or unenforceable (i) an express
agreement that such policy shall not be invalidated if the insured
waives or has waived before the casualty, the right of recovery
against any party responsible for a casualty covered by the
policy, or (ii) any other form of permission for the release of
the other party, or (iii) the inclusion of the other party as an
additional insured, but not a party to whom any loss shall be
payable. If such waiver, agreement or permission shall not be, or
shall cease to be, obtainable without additional charge or at all,
the insured party shall so notify the other party promptly after
learning thereof. In such case, if the other party shall agree in
writing to pay the insurer's additional charge therefor, such
waiver, agreement or permission shall be included in the policy,
or the other party shall be named as an additional insured in the
policy, but not a party to whom any loss shall be payable. Each
such policy which shall so name a party hereto as an additional
insured shall contain, if obtainable, agreements by the insurer
that the policy will not be canceled without at least twenty (20)
days prior notice to both insureds and that the act or omission of
one insured will not invalidate the policy as to the other
insured.
(G) As long as Landlord's fire insurance policies
then in force include the waiver of subrogation or agreement or
permission to release liability referred to in Subsection (F) or
name the Tenant as an additional insured, Landlord hereby waives
(i) any obligation on the part of Tenant to make repairs to the
Premises necessitated or occasioned by fire or other casualty that
is an insured risk under such policies, and (ii) any right of
recovery against Tenant, any other permitted occupant of the
Premises, and any of their servants, employees, agents or<PAGE>
contractors,
for any loss occasioned by fire or other casualty that is an insured risk
under such policies. In the event that at any time Landlord's fire
insurance carriers shall not include such or similar provisions in
Landlord's fire insurance policies, the waivers set forth in the
foregoing sentence shall be deemed of no further force or effect.
Landlord shall deliver written notice to Tenant promptly following
Landlord's fire insurance carrier having discontinued the aforementioned
waivers in Landlord's fire insurance policies. During any period while
the foregoing waiver of right of recovery is in effect, Landlord shall
look solely to the proceeds of such policies to compensate Landlord
for any loss occasioned by fire or other casualty which is an insured risk
under such policy.
(H) As long as Tenant's fire insurance policies then
in force include the waiver of subrogation or agreement or
permission to release liability referred to in Subsection (F), or
name the Landlord as an additional insured, Tenant hereby waives
(and agrees to cause any other permitted occupants of the Premises
to execute and deliver to Landlord written instruments waiving)
any right of recovery against Landlord, any other tenants or
occupants of the Building, and any servants, employees, agents or
contractors of Landlord or of any such other tenants or occupants,
for any loss occasioned by fire or other casualty which is an
insured risk under such policies. In the event that at any time
Tenant's fire insurance carriers shall not include such or similar
provisions in Tenant's fire insurance policies, the waiver set
forth in the foregoing sentence shall, upon notice given by Tenant
to Landlord, be deemed of no further force or effect with respect
to any insured risks under such policy from and after the giving
of such notice. During any period while the foregoing waiver of
right of recovery is in effect, Tenant, or any other permitted
occupant of the Premises, as the case may be, shall look solely to
the proceeds of such policies to compensate Tenant or such other
permitted occupant for any loss occasioned by fire or other
casualty which is an insured risk under such policies.
EMINENT DOMAIN
28. (A) In the event that the whole of the Demised
Premises shall be lawfully condemned or taken in any manner for
any public<PAGE>
or quasi-public use, this lease and the Term and estate hereby
granted shall forthwith cease and terminate as of the date of
vesting of title. In the event that only a part of the Demised
Premises shall be so condemned or taken, then effective as of the
date of vesting of title, the Rent hereunder shall be abated in an
amount thereof apportioned according to the area of the Demised
Premises so condemned or taken. In the event that only a part of
the Building shall be so condemned or taken, then (i) Landlord
(whether or not the Demised Premises be affected) may, at its
option, terminate this lease and the Term and estate hereby
granted as of the date of such vesting of title by notifying
Tenant in writing of such termination within ninety (90) days (to
the extent practicable) following the date on which Landlord shall
have received notice of vesting of title, and (ii) if such
condemnation or taking shall be of a substantial part of the
Demised Premises or a substantial part of the means of access
thereto, Tenant shall have the right, by delivery of notice in
writing to Landlord within ninety (90) days (to the extent
practicable) following the date on which Tenant shall have
received notice of vesting of title, to terminate this lease and
the Term and estate hereby granted as of the date of vesting of
title, or (iii) if neither Landlord nor Tenant elects to terminate
this lease, as aforesaid, this lease shall be and remain
unaffected by such condemnation or taking, except that the Rent
shall be abated to the extent, if any, hereinabove provided in
this Article 28. In the event that only a part of the Demised
Premises shall be so condemned or taken and this lease and the
Term and estate hereby granted are not terminated as hereinbefore
provided, Landlord will, at its expense, restore the remaining
portion of the Demised Premises as nearly as practicable to the
same condition as it was in prior to such condemnation or taking.
(B) In the event of a termination in any of the
cases hereinabove provided, this lease and the Term and estate
granted shall expire as of the date of such termination with the
same effect as if that were the date hereinbefore set for the
expiration of the Term of this lease, and the Rent hereunder shall
be apportioned as of such date.
(C) In the event of any condemnation or taking
hereinabove mentioned of all or part of the Building, Landlord
shall be entitled to receive the entire award in the condemnation
proceeding, including any award made for the value of the estate
<PAGE>
vested by this lease in Tenant, and Tenant hereby expressly
assigns to Landlord any and all right, title and interest of
Tenant now or hereafter arising in or to any such award or any
part thereof, and Tenant shall be entitled to receive no part of
such award, except that the Tenant may file a claim for any taking
of nonmovable fixtures owned by Tenant and for moving expenses
incurred by Tenant. It is expressly understood and agreed that
the provisions of this Article 28 shall not be applicable to any
condemnation or taking for governmental occupancy for a limited
period.
NONLIABILITY OF LANDLORD
29. (A) If Landlord or a successor in interest is an
individual (which term as used herein includes aggregates of
individuals, such as joint ventures, general or limited
partnerships or associations), such individual shall be under no
personal liability with respect to any of the provisions of this
lease, and if such individual hereto is in breach or default with
respect to its obligations under this lease, Tenant shall look
solely to the equity of such individual in the Demised Premises
for the satisfaction of Tenant's remedies and in no event shall
Tenant attempt to secure any personal judgment against any such
individual or any partner, employee or agent of Landlord by reason
of such default by Landlord.
(B) The word "Landlord" as used herein means only
the owner of the landlord's interest for the time being in the
land and Building (or the owners of a lease of the Building or of
the land and Building) of which the Premises form a part, and in
the event of any sale of the Building and land of which the
Demised Premises form a part, Landlord shall be and hereby is
entirely freed and relieved of all covenants and obligations of
Landlord hereunder and, it shall be deemed and construed without
further agreement between the parties or between the parties and
the purchaser of the Premises, that such purchaser has assumed and
agreed to carry out any and all covenants and obligations of
Landlord hereunder.
<PAGE>
DEFAULT
30. (A) Upon the occurrence, at any time prior to or
during the Demised Term, of any one or more of the following
events (referred to as "Events of Default"):
(i) If Tenant shall default in the payment when due
of any installment of Rent or in the payment when due of any
additional rent, and such default shall continue for a period of
seven (7) days; or
(ii) If Tenant shall default in the observance or
performance of any term, covenant or condition of this lease on
Tenant's part to be observed or performed (other than the
covenants for the payment of Rent and additional rent) and Tenant
shall fail to remedy such default within ten (10) days after
notice by Landlord to Tenant of such default, or if such default
is of such a nature that it cannot be completely remedied within
said period of ten (10) days and Tenant shall not commence within
said period of ten (10) days, or shall not thereafter diligently
prosecute to completion, all steps necessary to remedy such
default; or
(iii) If Tenant shall file a voluntary petition in
bankruptcy or insolvency, or shall be adjudicated a bankrupt or
become insolvent, or shall file any petition or answer seeking any
reorganization, arrangement, composition, readjustment,
liquidation, dissolution or similar relief under the present or
any future federal bankruptcy code or any other present or future
applicable federal, state or other statute or law, or shall make
an assignment for the benefit of creditors or shall seek or
consent to or acquiesce in the appointment of any trustee,
receiver or liquidator of Tenant or of all or any part of Tenant's
property; or
(iv) If, within sixty (60) days after the
commencement of any proceeding against Tenant, whether by the
filing of a petition or otherwise, seeking any reorganization,
arrangement, composition, readjustment, liquidation, dissolution
or similar relief under the present or any future federal
bankruptcy code or any other present or future applicable federal,
state or other statute or law, such proceedings shall not have
been dismissed, or if, within sixty (60) days after the
appointment or any trustee, receiver or liquidator of Tenant, or
of all or any<PAGE>
part of Tenant's property, such appointment shall not
have been vacated or otherwise discharged, or if any execution or attachment
shall be issued against Tenant or any of Tenant's property
pursuant to which the Demised Premises shall be taken or occupied
or attempted to be taken or occupied; or
(v) If Tenant shall default in the observance or
performance of any term, covenant or condition on Tenant's part to
be observed or performed under any other lease with Landlord of
space in the Building and such default shall continue beyond any
grace period set forth in such other lease for the remedying of
such default; or
(vi) If the Demised Premises shall become deserted or
abandoned for a period of ten (10) consecutive days; or
(vii) If Tenant's interest in this lease shall devolve
upon or pass to any person, whether by operation of law or
otherwise, except as expressly permitted under Article 21;
then, upon the occurrence, at anytime prior to or during
the Demised Term, of any one or more of such Events of Default,
Landlord, at any time thereafter, at Landlord's option, may give
to Tenant a five (5) days' notice of termination of this lease
and, in the event such notice is given, this lease and the Term
shall come to an end and expire (whether or not said term shall
have commenced) upon the expiration of said five (5) days with the
same effect as if the date of expiration of said five (5) days
were the Expiration Date, but Tenant shall remain liable for
damages as provided in Article 32.
(B) If, at any time (i) Tenant shall be comprised of
two (2) or more persons, or (ii) Tenant's obligations under this
lease shall have been guaranteed by any person other than Tenant,
or (iii) Tenant's interest in this lease shall have been assigned,
the word "Tenant", as used in subsection (iii) and (iv) of
Section 30(A), shall be deemed to mean any one or more of the
persons primarily or secondarily liable for Tenant's obligations
under this lease. Any monies received by Landlord from or on
behalf of Tenant during the pendency of any proceeding of the
types referred to in said subsections (iii) and (iv) shall be
deemed paid as compensation for the use and occupation of the
Demised Premises and the acceptance of such compensation by
Landlord shall not be deemed<PAGE>
an acceptance of Rent or a waiver
on the part of Landlord of any rights under Section 30(A).
TERMINATION ON DEFAULT
31. (A) If Tenant shall default in the payment when due
of any installment of Rent; or if Tenant shall default in the
payment when due of any additional rent and such default shall
continue for a period of seven (7) days; or if this lease and the
Demised Term shall expire and come to an end as provided in
Article 30:
(i) Landlord and its agents and servants may
immediately, or at any time after such default or after the date
upon which this lease and the Demised Term shall expire and come
to an end, re-enter the Demised Premises or any part thereof,
without notice, either by summary proceedings or by any other
applicable action or proceeding, or by force or other means
provided such force or other means are lawful (without being
liable to indictment, prosecution or damages therefor), and may
repossess the Demised Premises and dispossess Tenant and any other
persons from the Demised Premises and remove any and all of their
property and effects from the Demised Premises; and
(ii) Landlord, at Landlord's option, may relet the
whole or any part or parts of the Demised Premises from time to
time, either in the name of Landlord or otherwise, to such tenant
or tenants, for such term or terms ending before, on or after the
Expiration Date, at such rental or rentals and upon such other
conditions, which may include concessions and free rent periods,
as Landlord, in its sole discretion, may determine. Landlord
shall have no obligation to relet the Demised Premises or any part
thereof and shall in no event be liable for refusal or failure to
relet the Demised Premises or any part thereof, or, in the event
of any such reletting, for refusal or failure to collect any rent
due upon any such reletting, and no such refusal or failure shall
operate to relieve Tenant of any liability under this lease or
otherwise to affect any such liability; Landlord, at Landlord's
option, may make such repairs, replacements, alterations,
additions, improvements, decorations and other physical changes in
and to the Demised Premises as Landlord, in its sole discretion,
considers advisable or necessary in connection with any such<PAGE>
reletting
or proposed reletting, without relieving Tenant of any liability under
this lease or otherwise affecting any such liability.
(B) Tenant, on its own behalf and on behalf of all
persons claiming through or under Tenant, including all creditors,
does hereby waive any and all rights which Tenant and all such
persons might otherwise have under any present or future law to
redeem the Demised Premises, or to re-enter or repossess the
Demised Premises, or to restore the operation of this lease, after
(i) Tenant shall have been dispossessed by a judgment or by
warrant of any court or judge, or (ii) any re-entry by Landlord,
or (iii) any expiration or termination of this lease and the
Demised Term, whether such dispossess, re-entry, expiration or
termination shall be by operation of law or pursuant to the
provisions of this lease. In the event of a breach or threatened
breach by Tenant or any persons claiming through or under Tenant,
of any term, covenant or condition of this lease on Tenant's part
to be observed or performed, Landlord shall have the right to
enjoin such breach and the right to invoke any other remedy
allowed by law or in equity as if re-entry, summary proceeding and
other special remedies were not provided in this lease for such
breach. The rights to invoke the remedies hereinbefore set forth
are cumulative and shall not preclude Landlord from invoking any
ther remedy allowed at law or in equity.
DAMAGES
32. (A) If this lease and the Demised Term shall expire
and come to an end as provided in Article 30 or by or under any
summary proceeding or any other action or proceeding, or if
Landlord shall re-enter the Demised Premises as provided in
Article 31 or by or under any summary proceedings or any other
action or proceeding, then, in any of said events:
(i) Tenant shall pay to Landlord all Rent,
additional rent and other charges payable under this lease by
Tenant to Landlord to the date upon which this lease and the
Demised Term shall have expired and come to an end or to the date
of re-entry upon the Demised Premises by Landlord, as the case
may be; and<PAGE>
(ii) Tenant shall also be liable for and shall pay to
Landlord, as damages, any deficiency (referred to as "Deficiency")
between the Rent and additional rent reserved in this lease for
the period which otherwise would have constituted the unexpired
portion of the Demised Term and the net amount, if any, of rents
collected under any reletting effected pursuant to the provisions
of Section 31(A) for any part of such period (first deducting from
the rents collected under any such reletting all of Landlord's
expenses in connection with the termination of this lease or
Landlord's re-entry upon the Demised Premises and with such
reletting including, but not limited to, all repossession costs,
brokerage commissions, legal expenses, attorneys' fees, alteration
costs and other expenses of preparing the Demised Premises for
such reletting). Upon written request therefor by Tenant,
Landlord shall provide Tenant with written evidence supporting the
calculation of any such Deficiency. Any such Deficiency shall be
paid in monthly installments by Tenant on the days specified in
this lease for payment of installments of Rent. Landlord shall be
entitled to recover from Tenant each monthly Deficiency as the
same shall arise, and no suit to collect the amount of the
Deficiency for any month shall prejudice Landlord's rights to
collect the Deficiency for any subsequent month by a similar
proceeding; and
(iii) At any time after the Demised Term shall have
expired and come to an end or Landlord shall have re-entered upon
the Demised Premises, as the case may be, whether or not Landlord
shall have collected any monthly Deficiencies as aforesaid,
Landlord shall be entitled to recover from Tenant, and Tenant
shall pay to Landlord, on demand, as and for liquidated and agreed
final damages, a sum equal to the amount by which the Rent and
additional rent reserved in this lease for the period which
otherwise would have constituted the unexpired portion of the
Demised Term exceeds the then fair and reasonable rental value of
the Demised Premises for the same period, both discounted to
present worth at the rate of six (6%) per cent per annum. If,
before presentation of proof of such liquidated damages to any
court, commission, or tribunal, the Demised Premises, or any part
thereof, shall have been relet by Landlord for the period which
otherwise would have constituted the unexpired portion of the
Demised Term, or any part thereof, the amount of Rent reserved
upon such reletting shall be deemed, prima facie, to be the fair
and reasonable rental value for the part or the whole of the
Demised Premises so relet during the term of the reletting.
<PAGE>
(B) If the Demised Premises, or any part thereof,
shall be relet together with other space in the Building, the
rents collected or reserved under any such reletting and the
expenses of any such reletting shall be equitably apportioned for
the purposes of this Article 32. Tenant shall in no event be
entitled to any rents collected or payable under any reletting,
whether or not such rents shall exceed the rent reserved in this
lease. Solely for the purposes of this Article, the term "Rent"
as used in Section 32(A) shall mean the rent in effect immediately
prior to the date upon which this lease and the Demised Term shall
have expired and come to an end, or the date of re-entry upon the
Demised Premises by Landlord, as the case may be, plus any
additional rent payable pursuant to the provisions of Article 11
and Article 12 for the Escalation Year (as defined in Article 11)
immediately preceding such event. Nothing contained in Articles
30 and 31 of this lease shall be deemed to limit or preclude the
recovery by Landlord from Tenant of the maximum amount allowed to
be obtained as damages by any statute or rule of law, or of any
sums or damages to which Landlord may be entitled in addition to
the damages set forth in Section 32(A).
SUMS DUE LANDLORD
33. If Tenant shall default in the performance of any
covenants on Tenant's part to be performed under this lease,
Landlord may immediately, or at anytime thereafter, without
notice, and without thereby waiving such default, perform the same
for the account of Tenant and at the expense of Tenant. If
Landlord at any time is compelled to pay or elects to pay any sum
of money, or do any act which will require the payment of any sum
of money by reason of the failure of Tenant to comply with any
provision hereof, or, if Landlord is compelled to or elects to
incur any expense, including reasonable attorneys' fees,
instituting, prosecuting and/or defending any action or proceeding
instituted by reason of any default of Tenant hereunder, the sum
or sums so paid by Landlord, with all interest, costs and damages,
shall be deemed to be additional rent hereunder and shall be due
from Tenant to Landlord on the first day of the month following
the incurring of such respective expenses or, at Landlord's
option, on the first day of any subsequent month. Any sum of
money (other than the annual minimum rent due under this lease)
accruing from Tenant to Landlord<PAGE>
pursuant to any provisions of this lease,
including, but not limited to, the provisions of Article 6 hereof, whether
prior to or after the Term Commencement Date, may, at Landlord's option, be
deemed additional rent, and Landlord shall have the same remedies
for Tenant's failure to pay any item of additional rent when due
as for Tenant's failure to pay any installment of Rent when due.
Tenant's obligations under this Article shall survive the
expiration or sooner termination of the Demised Term. In any case
in which the Rent, additional rent or other charge is not paid
within seven (7) days of the day when same is due, Tenant shall
pay interest on such amount from the due date of such amount until
the payment date of such amount at the rate of fifteen (15%)
percent per annum, provided, however, the rate charged shall in no
event be higher than the highest rate permitted by law. The
payment of the aforementioned interest will not constitute a
waiver by Landlord of any default by Tenant under this lease.
NO WAIVER
34. No act or thing done by Landlord or Landlord's agents
during the term hereby demised shall be deemed an acceptance of a
surrender of said Demised Premises, and no agreement to accept
such surrender shall be valid unless in writing signed by
Landlord. No employee of Landlord or of Landlord's agents shall
have any power to accept the keys of the Demised Premises prior to
the termination of this lease. The delivery of keys to any
employee of Landlord or of Landlord's agents shall not operate as
a termination of this lease or a surrender of the Demised
Premises. In the event Tenant shall at any time desire to have
Landlord underlet the Demised Premises for Tenant's account,
Landlord or Landlord's agents are authorized to receive said keys
for such purposes without releasing Tenant from any of the
obligations under this lease, and Tenant hereby relieves Landlord
of any liability (other than liability due to Landlord's gross
negligence or willful misconduct) for loss of or damage to any of
Tenant's effects in connection with such underletting. The
failure of Landlord to seek redress for violation of, or to
insist upon the strict performance of, any covenants or conditions
of this lease, or any of the Rules and Regulations annexed hereto
and made a part hereof or hereafter adopted by Landlord, shall not
prevent a subsequent act, which would have originally constituted
a violation, from having all the<PAGE>
force and effect of an original violation.
The receipt by Landlord of rent with knowledge of the breach of any
covenant of this lease shall not be deemed a waiver of such breach. The
failure of Landlord to enforce any of the Rules and Regulations
annexed hereto and made a part hereof, or hereafter adopted,
against Tenant and/or any other tenant in the Building shall not
be deemed a waiver of any such Rules and Regulations. No
provision of this lease shall be deemed to have been waived by
Landlord, unless such waiver be in writing signed by Landlord. No
payment by Tenant or receipt by Landlord of a lesser amount than
the monthly Rent herein stipulated shall be deemed to be other
than on account of the earliest stipulated Rent nor shall any
endorsement or statement on any check or any letter accompanying
any check or payment of Rent be deemed an accord and satisfaction,
and Landlord may accept such check or payment without prejudice to
Landlord's right to recover the balance of such Rent or pursue any
other remedy in this lease provided.
WAIVER OF TRIAL BY JURY
35. To the extent such waiver is permitted by law,
Landlord and Tenant hereby waive trial by jury in any action,
proceeding or counterclaim brought by Landlord or Tenant against
the other on any matter whatsoever arising out of or in any way
connected with this lease, the relationship of landlord and
tenant, the use or occupancy of the Demised Premises by Tenant or
any person claiming through or under Tenant, any claim of injury
or damage, and any emergency or other statutory remedy. The
provisions of the foregoing sentence shall survive the expiration
or any sooner termination of the Demised Term. If Landlord
commences any summary proceeding for nonpayment, Tenant agrees not
to interpose any counterclaim (other than mandatory counterclaims)
of whatever nature or description in any such proceeding or to
consolidate such proceeding with any other proceeding.
Tenant hereby expressly waives any and all rights of
redemption granted by or under any present or future laws in the
event of Tenant being evicted or dispossessed for any cause, or in
the event of Landlord's obtaining possession of the Demised
Premises, by reason of the violation by Tenant of any of the
covenants and conditions of this lease or otherwise.
<PAGE>
NOTICES
36. Except as otherwise expressly provided in this lease,
any bills, statements, notices, demands, requests or other
communications (other than bills, statements or notices given in
the regular course of business) given or required to be given
under this lease shall be effective only if rendered or given in
writing, sent by registered or certified mail (return receipt
requested), addressed (A) to Tenant, to the attention of Tenant's
Chief Operating Officer, at Tenant's address set forth in this
lease, or (B) to Landlord, to the attention of Landlord's Chief
Financial Officer, at Landlord's address set forth in this lease,
or (C) addressed to such other address as either Landlord or
Tenant may designate as its new address for such purpose by notice
given to the other in accordance with the provisions of this
Article. Any such bills, statements, notices, demands, requests
or other communications shall be deemed to have been rendered or
given on the date when it shall have been mailed as provided in
this Article. Landlord shall endeavor to deliver a courtesy copy
of any such bills, statements, notices, demands, requests or other
communications to the attention of Tenant's In-House Counsel, at
Tenant's address set forth in this lease. Failure to deliver such
courtesy copy shall have no affect, however, on the effectiveness
of the giving of any such bill, statement, notice, demand, request
or other communication.
INABILITY TO PERFORM
37. If, by reason of strikes or other labor disputes, fire
or other casualty (or reasonable delays in adjustment of
insurance), accidents, orders or regulations of any Federal,
State, County or Municipal authority, or any other cause beyond
Landlord's reasonable control, whether or not such other cause
shall be similar in nature to those hereinbefore enumerated,
Landlord is unable to furnish or is delayed in furnishing any
utility or service required to be furnished by Landlord under the
provisions of this lease or any collateral instrument or is unable
to perform or make or is delayed in performing or making any
installations, decorations, repairs, alterations, additions or
improvements, <PAGE>
whether or not required to be performed or made
under this lease, or under any collateral instrument, or is unable
to fulfill or is delayed in fulfilling any of Landlord's other
obligations under this lease, or any collateral instrument, no such
inability or delay shall constitute an actual or constructive eviction, in
whole or in part, or entitle Tenant to any abatement or diminution
of rent, or relieve Tenant from any of its obligations under this
lease, or impose any liability upon Landlord or its agents, by
reason of inconvenience or annoyance to Tenant, or injury to or
interruption of Tenant's business, or otherwise.
INTERRUPTION OF SERVICE
38. Landlord reserves the right to stop the services of
the air conditioning, elevator, escalator, plumbing, electrical or
other mechanical systems or facilities in the Building when
necessary by reason of accident or emergency, or for repairs,
alterations or replacements, which, in the judgment of Landlord
are desirable or necessary, until such repairs, alterations or
replacements shall have been completed. The exercise of such
rights by Landlord shall not constitute an actual or constructive
eviction, in whole or in part, or entitle Tenant to any abatement
or diminution of rent, or relieve Tenant from any of its
obligations under this lease, or impose any liability upon
Landlord or its agents by reason of inconvenience or annoyance to
Tenant, or injury to or interruption of Tenant's business or
otherwise.
CONDITIONS OF LANDLORD'S LIABILITY
39. Except as otherwise specifically set forth in Article
2 hereof, if Landlord shall be unable to give possession of the
Demised Premises on any date specified for the commencement of the
term by reason of the fact that the Premises have not been
sufficiently completed to make the Premises ready for occupancy,
or for any other reason, Landlord shall not be subject to any
liability for the failure to give possession on said date, nor
shall such failure in any way affect the validity of this lease or
the obligations of Tenant hereunder. <PAGE>
TENANT'S TAKING POSSESSION
40. (A) Tenant, by entering into occupancy of the
Premises, shall be conclusively deemed to have agreed that
Landlord, up to the time of such occupancy, has performed all of
its obligations hereunder and that the Premises were in
satisfactory condition as of the date of such occupancy, unless
within fifteen (15) days after such date Tenant shall have given
written notice to Landlord specifying the respects in which the
same were not in such condition. If Landlord agrees that the
items listed in Tenant's list are Landlord's responsibility, such
items shall be deemed to be "Punchlist Items" which Landlord shall
remedy, at Landlord's expense, within thirty (30) days after its
receipt of Tenant's notice.
(B) If Tenant shall use or occupy all or any part of
the Demised Premises for the conduct of business prior to the date
on which Landlord's Initial Construction is substantially
completed, such use or occupancy shall be deemed to be under all
of the terms, covenants and conditions of this lease, including
the covenant to pay rent for the period from the commencement of
said use or occupancy to the date on which Landlord's Initial
Construction is substantially completed.
ENTIRE AGREEMENT
41. Except for the confirmation of the dates referred to
in Article 2 hereof, this lease (including the Schedules and
Exhibits annexed hereto) contains the entire agreement between the
parties and all prior negotiations and agreements are merged
herein. Tenant hereby acknowledges that neither Landlord nor
Landlord's agent or representative has made any representations or
statements, or promises, upon which Tenant has relied, regarding
any matter or thing relating to the Building, the land allocated
to it (including the parking area) or the Demised Premises, or any
other matter whatsoever, except as is expressly set forth in this
lease, including, but without limiting the generality of the
foregoing, any statement, representation or promise as to the
fitness of the Demised Premises for any particular use, the
services to be
<PAGE>
rendered to the Demised Premises, or the prospective amount of any
item of additional rent. No oral or written statement,
representation or promise whatsoever with respect to the foregoing
or any other matter made by Landlord, its agents or any broker,
whether contained in an affidavit, information circular, or
otherwise, shall be binding upon the Landlord unless expressly set
forth in this lease. No rights, easements or licenses are or
shall be acquired by Tenant by implication or otherwise unless
expressly set forth in this lease. This lease may not be changed,
modified or discharged, in whole or in part, orally, and no
executory agreement shall be effective to change, modify or
discharge, in whole or in part, this lease or any obligations
under this lease, unless such agreement is set forth in a written
instrument executed by the party against whom enforcement of the
change, modification or discharge is sought. All references in
this lease to the consent or approval of Landlord shall be deemed
to mean the written consent of Landlord, or the written approval
of Landlord, as the case may be, and no consent or approval of
Landlord shall be effective for any purpose unless such consent or
approval is set forth in a written instrument executed by
Landlord.
DEFINITIONS
42. The words "re-enter", "re-entry", and "re-entered" as
used in this lease are not restricted to their technical legal
meanings. The term "business days" as used in this lease shall
exclude Saturdays (except such portion thereof as is covered by
specific hours in Article 6 hereof), Sundays and all days observed
by the State or Federal Government as legal holidays. The terms
"person" and "persons" as used in this lease shall be deemed to
include natural persons, firms, corporations, partnerships,
associations and any other private or public entities, whether any
of the foregoing are acting on their behalf or in a representative
capacity. The various terms which are defined in other Articles
of this lease or are defined in Schedules or Exhibits annexed
hereto, shall have the meanings specified in such other Articles,
Exhibits and Schedules for all purposes of this lease and all
agreements supplemental thereto, unless the context clearly
indicates the contrary.
<PAGE>
PARTNERSHIP TENANT
43. If Tenant is a partnership (or is comprised of two
(2)or more persons, individually or as co-partners of a
partnership) or if Tenant's interest in this lease shall be
assigned to a partnership (or to two (2) or more persons,
individually or as co-partners of a partnership) pursuant to
Article 21 (any such partnership and such persons are referred to
in this Section as "Partnership Tenant"), the following provisions
of this Section shall apply to such Partnership Tenant: (a) the
liability of each of the parties comprising Partnership Tenant
shall be joint and several, and (b) each of the parties comprising
Partnership Tenant hereby consents in advance to, and agrees to be
bound by, any modifications of this lease which may hereafter be
made, and by any notices, demands, requests or other
communications which may hereafter be given, by Partnership Tenant
or by any of the parties comprising Partnership Tenant, and (c)
any bills, statements, notices, demands, requests and other
communications given or rendered to Partnership Tenant or to any
of the parties comprising Partnership Tenant shall be deemed given
or rendered to Partnership Tenant and to all such parties and
shall be binding upon Partnership Tenant and all such parties, and
(d) if Partnership Tenant shall admit new partners, all of such
new partners shall, by their admission to Partnership Tenant, be
deemed to have assumed performance of all of the terms, covenants
and conditions of this lease on Tenant's part to be observed and
performed, and (e) Partnership Tenant shall give prompt notice to
Landlord of the admission of any such new partners, and upon
demand of Landlord, shall cause each such new partner to execute
and deliver to Landlord an agreement in form satisfactory to
Landlord, wherein each such new partner shall assume performance
of all of the terms, covenants and conditions of this lease on
Tenant's part to be observed and performed (but neither Landlord's
failure to request any such agreement nor the failure of any such
new partner to execute or deliver any such agreement to Landlord
shall vitiate the provisions of subdivision (d) of this Section).
<PAGE>
SUCCESSORS, ASSIGNS, ETC.
44. The terms, covenants, conditions and agreements
contained in this lease shall bind and inure to the benefit of
Landlord and Tenant and their respective heirs, distributees,
executors, administrators, successors, and, except as otherwise
provided in this lease, their respective assigns.
BROKER
45. Tenant represents that this lease was brought about by
Insignia/Rostenberg Doern, 300 Atlantic Street, Stamford,
Connecticut 06901 as broker and all negotiations with respect to
this lease were conducted exclusively with said broker. Tenant
agrees that if any claim is made for commissions by any other
broker through or on account of any acts of Tenant, Tenant will
hold Landlord free and harmless from any and all liabilities and
expenses in connection therewith, including Landlord's reasonable
attorney's fees.
CAPTIONS
46. The captions in this lease are included only as a
matter of convenience and for reference, and in no way define,
limit or describe the scope of this lease nor the intent of any
provisions thereof.
NOTICE OF ACCIDENTS
47. Tenant shall give notice to Landlord, promptly after
Tenant learns thereof, of (i) any accident in or about the
Premises, (ii) all fires and other casualties within the Premises,
(iii) all damages to or defects in the Premises, including the
fixtures, equipment and appurtenances thereof for the repair of
which Landlord might be responsible, and (iv) all damage to or
defects in any parts or appurtenances of the Building's sanitary,
electrical, heating, ventilating, air-conditioning, elevator and
other systems located in or passing through the Premises or any
part thereof.
<PAGE>
TENANT'S AUTHORITY TO ENTER LEASE
48. In the event that the Tenant hereunder is a
corporation, Tenant represents that the officer or officers
executing this lease have the requisite authority to do so.
Tenant agrees to give Landlord written notice of any proposed
change in the ownership of the majority of the outstanding capital
stock of Tenant or any change in the ownership of the majority of
the assets of Tenant. Failure of Tenant to give the notice
provided for in the preceding sentence shall be deemed a non-curable
default by Tenant pursuant to this lease (that is, a
default which has already extended beyond the applicable grace
period, if any, following notice from Landlord), giving Landlord
the right, at its option, to cancel and terminate this lease or to
exercise any and all other remedies available to Landlord
hereunder or as shall exist at law or in equity.
ESTIMATED CHARGES
49. Notwithstanding anything to the contrary contained in
this lease, Landlord shall have the option, in lieu of or as a
supplement to the procedures set forth in Articles 6, 11 and 12
hereof, to notify Tenant from time to time of the amounts which
Landlord estimates will be Tenant's Tax Payment, if any, under
Article 11 hereof, and/or Tenant's Cost Payment, if any, under
Article 12 hereof, for the next Escalation Year, for the next
calendar year, as the case may be, and Tenant shall pay such
amount(s) in equal monthly installments in advance on or before
the first day of each month for such Escalation Year or calendar
year, as the case may be. Within a reasonable period following
the end of such Escalation Year or calendar year, as the case may
be, Landlord shall submit to Tenant a statement (the
"Reconciliation Statement") indicating (i) the Tax Payment, the
Cost Payment and/or the electrical charge for such Escalation Year
or calendar year, as the case may be, (ii) the amount(s) thereof
theretofore paid by Tenant and (iii) the balance due thereon or
the overpayment thereof, as the case may be. Each Reconciliation
Statement shall be conclusive evidence of all such amounts. In
the event the Escalation Year or calendar year, as the case may
be, covered by a particular Reconciliation Statement includes any
period of time which did not constitute part of the Term, the
amount set forth in<PAGE>
clause (i) of this Article 49 shall be
prorated accordingly on the basis of a three hundred sixty (360) day year.
SECURITY DEPOSIT
50. (a) Upon execution of this lease, Tenant shall
deliver to Landlord an unconditional, irrevocable, standy-by
letter of credit (in accordance with the requirements set forth in
Subparagraph (e) below) in the amount of thirty one thousand nine
hundred sixteen and 84/100 ($31,916.84) dollars (representing two
(2) months Rent during the first Lease Year), as security for the
full and faithful performance and observance by Tenant of all of
the terms, conditions, covenants and agreements of this lease.
(b) In the event Tenant defaults in payment of Rent,
Additional Rent, or other sums due from Tenant to Landlord under
this lease, or in performance or observance of any other term,
covenant, condition or agreement of this lease, after the
expiration of applicable notice periods provided herein for the
cure thereof, Landlord may notify the "Issuing Bank" (hereinafter
defined) and thereupon receive all monies represented by the
letter of credit and use, apply or retain the whole or any part of
such monies to the extent required for the payment of any sums as
to which Tenant is in default (including, without limitation, any
damages or deficiency accrued before or after summary proceedings
or other re-entry by Landlord) or for coverage or reimbursement of
any sums which Landlord may expend or may be required to expend by
reason of such default by Tenant. In the event Landlord so uses,
applies or retains all or any portion of such monies represented
by the letter of credit, Tenant shall forthwith restore the amount
so used, applied or retained, upon delivery of written notice by
Landlord detailing such use, application or retention, through
delivery of a new or amended letter of credit which conforms to
the requirements of Subparagraph (c) below. In the event Landlord
shall not apply all of the proceeds of such letter of credit to
cover Tenant's default as permitted hereunder, Landlord shall hold
the unapplied portion of such proceeds as a security deposit under
this lease.
(c) The letter of credit to be delivered by Tenant
pursuant to this Paragraph shall conform to each the following
requirements:
<PAGE>
(i) such letter of credit may only be issued
by a commercial bank, insured by the Federal Deposit Insurance
Corporation and acceptable to Landlord, which bank is authorized
to do business in New York and maintains an office in New York
City or Westchester County (the "Issuing Bank");
(ii) such letter of credit shall indicate the
address of the Issuing Bank in New York City or Westchester county
where it can be drawn upon;
(iii) such letter of credit must be payable "on
sight", in its face amount, to Landlord or an authorized
representative of Landlord, but may contain as a condition to a
draw the requirement of Landlord's certification of the existence
of Tenant's default; and
(iv) such letter of credit shall be deemed to
be automatically renewed, without amendment, for consecutive one
year periods unless Landlord receives sixty (60) days prior
written notice from the Issuing Bank setting forth its intention
to cancel the letter of credit. Upon the Issuing Bank's giving of
such notice, Tenant must replace said letter of credit with a new
letter of credit on the terms set forth herein at least thirty
(30) days prior to the termination of the original letter of
credit. Failure by Tenant to replace the original letter of
credit as required herein shall constitute a default under this
Lease and there shall be no notice or opportunity to cure said
default. Thereupon, Landlord shall be permitted to draw upon the
original letter of credit up to the full amount thereon.
Tenant acknowledges and agrees that Landlord shall have no
responsibility or liability on account of any error by the Issuing
Bank.
(d) In the event of a sale of the Property and Building or
lease of the Building by Landlord, Landlord shall have the right
to transfer its rights under the letter of credit to the vendee or
lessee and Landlord shall thereupon be released by Tenant from all
liability in connection with such letter of credit; Tenant agrees
to look solely to the new landlord with respect to any dispute
arising in connection with such letter of credit; and the
provisions hereof shall apply to every transfer or assignment made
of such rights to a new landlord. Tenant shall not assign or
encumber or attempt to assign or encumber the letter of credit.
Any such assignment, encumbrance, attempted assignment or
attempted<PAGE>
encumbrance by Tenant shall be deemed void and of no force or
effect, nor shall same be binding upon Landlord or its successors
or assigns.
(e) The acceptance of the letter of credit or the exercise
of any remedies under this Paragraph by Landlord shall not be a
limitation on Landlord's damages, remedies or other rights under
this Lease, or construed as a payment of liquidated damages or an
advance payment of Rent or any Additional Rent.
FINANCIAL CONDITION
51. Tenant represents that prior to the execution of this
lease, it has delivered to Landlord a true, correct and complete
copy of its most recent financial statement. Tenant further
represents that there has been no material adverse change in the
business, assets or condition (financial or otherwise) or results
of operation of Tenant's business from the date of preparation of
such financial statement through and including the date of
execution of this lease.
From and after the Rent Commencement Date, and throughout
the Term of this lease, Tenant shall deliver to Landlord,
quarterly financial statements which shall be in the same form and
substance as previously provided to Landlord and which shall be
delivered as soon as available, but not more than ninety (90) days
after the end of each such quarter. If there shall have been any
material adverse change in the financial condition of Tenant
during the Term of this lease, then Landlord, at its option, may
require Tenant to deliver to Landlord an additional security
deposit (the "Financial Condition Security"). The Financial
Condition Security shall be held in accordance with the terms of
Article 50 and shall be in an amount equal to the unamortized
balance of any costs incurred by Landlord in connection with this
lease, including, without limitation, costs of Landlord's Initial
Construction, any and all brokerage commissions, abated rent and
conceded rent. Tenant shall deliver such Financial Condition
Security within thirty (30) days after demand therefor by
Landlord. In the event Tenant shall fail to deliver the Financial
Condition Security to Landlord within such thirty (30) day period,
Tenant shall be in default under this lease and Landlord shall
have all rights and remedies available to Landlord available
hereunder, at law or in equity. If there shall have been any
material adverse change in the financial condition of
<PAGE>
Tenant prior to its occupancy of the Demised Premises, then, in
addition to the rights and remedies provided above, Landlord, at
its option, may terminate this lease upon fifteen (15) days notice
to Tenant and, thereafter, this lease shall be of no further force
or effect.
RENEWAL OPTION
52. Provided Tenant has complied with all the terms,
covenants and conditions of this lease and is not then in default
hereof, Tenant shall have the option to renew this lease for one
(1) additional five (5) year period (the "Renewal Term") to
commence on the expiration of the initial term of this lease (the
"Initial Term") and to expire on the day preceding the fifth
(5th) anniversary of the first day of such additional period, upon
the following terms and conditions:
(i) Tenant shall give notice to Landlord, in
writing, not less than six (6) months prior to the expiration of
the Initial Term that such option is being exercised. The parties
agree to then negotiate the minimum annual rent for the Renewal
Term (the "Minimum Annual Renewal Rent"). The Minimum Annual
Renewal Rent is intended to be the then current fair market
annual rental rate per square foot per year for the Demised
Premises as of the expiration of the Initial Term. Upon
determination of the Minimum Annual Renewal Rent, this lease shall
be renewed for the Renewal Term on the same terms, covenants and
conditions as contained in this lease, except that (A) the Minimum
Annual Renewal Rent shall be fixed in accordance with the
provisions of this Article 52, (ii) the Demised Premises shall be
delivered in its "as is" condition as of the first day of the
Renewal Term and (iii) there shall be no further option to renew.
(ii) If Landlord and Tenant have not mutually agreed
upon the Minimum Annual Renewal Rent by the first day of the fifth
(5th) month prior to the termination of the Initial Term, they
shall each select one real estate appraiser each of whom shall
conduct a real estate appraisal and furnish a report to indicate
their opinion of the fair market rental of the Demised Premises.
(iii) If, after a review of the appraisal reports
prepared and submitted in accordance with Article 52(ii), above,
<PAGE>
Landlord and Tenant have not agreed on the Minimum Annual Renewal
Rent by the first day of the fourth (4th) month prior to the
expiration of the Initial Term, the matter shall immediately be
submitted to arbitration before the American Arbitration
Association ("AAA"), and shall be determined by a single
arbitrator in accordance with the provisions of this lease and the
then applicable rules of the AAA within the County of Westchester,
or of the closest office of the AAA. The arbitrator shall, in
determining the Minimum Annual Renewal Rent, take into
consideration the then existing current fair market rental value
of similar premises in the vicinity. The arbitrator shall then,
on an expedited basis, choose one of the determinations of the two
appraisers originally selected by the parties. The parties agree
that the decision and determination to be made by the arbitrator
with respect to the Minimum Annual Renewal Rent shall be final and
binding upon Landlord and Tenant.
(iv) Notwithstanding anything to the contrary
contained in this Article 52, in no event shall the Minimum Annual
Renewal Rent be less than the minimum annual rental rate
applicable to the last Lease Year of the Initial Term.
(v) Landlord and Tenant shall each separately pay
their respective designated appraisers. The expenses, fees and
charges in connection with the arbitration process set forth in
clause (iii), above, shall be borne equally between Landlord and
Tenant.
(vi) Upon agreement as to the Minimum Annual Renewal
Rent by the parties hereto or upon the Minimum Annual Renewal Rent
being fixed by the arbitrator, as the case may be, the parties
hereto shall enter into a supplementary agreement extending the
term of this lease as hereinabove provided. In the event of no
agreement between the parties or no decision by arbitration prior
to the expiration of the Initial Term, Tenant shall pay an interim
fixed rental at the minimum annual rental rate last in effect
until the arbitration shall have been completed, after which
Landlord and Tenant shall make appropriate adjustment of such
interim rent, such adjustment to be as of the commencement date of
the Renewal Term.
TIME IS OF THE ESSENCE WITH RESPECT TO ALL OF TENANT'S OBLIGATIONS
UNDER THIS ARTICLE 52.
This option to renew shall be personal to Wellcare Development,
Inc., and shall not be transferrable by operation of law or
otherwise.
<PAGE>
RIGHT OF FIRST OFFER
53. (A) At any time during the Term in which space
adjacent to Tenant on the same floor of the Building (the "Offer
Premises"), is or becomes available for lease, Tenant shall have a
first priority right of first offer, subject only to currently
existing rights of renewal and expansion of other existing
tenants, to lease all of the Offer Premises. Tenant shall
exercise such right of first offer, if at all, in strict
accordance with the following terms and conditions:
(i) At the time Tenant intends to exercise its right
of first offer hereunder, Tenant shall be occupying all of
the Demised Premises and no event of default shall have
occurred and be continuing under this lease;
(ii) Tenant shall give written notice to Landlord
("Tenant's Offer Notice") of its intent to exercise its
right of first offer to lease the Offer Premises hereunder;
(iii) The minimum annual rental rate for the Offer
Premises shall be equal to the then current fair market
rental rate for the Offer Premises (the "Offer Rent"). In
the event Landlord and Tenant have not mutually agreed upon
the Offer Rent within fifteen (15) days following delivery
of the Tenant's Offer Notice, the Offer Rent shall be
determined through arbitration in accordance with Article 52
(iii) of this lease (except that the determinations of
Landlord and Tenant as to the Offer Rent shall be submitted
in lieu of appraisal reports). In no event shall the Offer
Rent be less than the then current Rent under this lease
(each calculated on a per rentable square foot basis);
(iv) Tenant shall accept the Offer Premises in its
then "as is" condition, and Landlord shall not be required
to perform any work to or make any installations in the
Offer Premises in order to prepare same for occupancy by
Tenant, unless Landlord and Tenant shall then mutually agree
on certain reasonable modifications to be made in and to the
<PAGE>
Offer Premises (in which event the cost of performance of such
reasonable modifications shall be reflected in the Offer Rent).
The request for reasonable modifications in and to the Offer
Premises shall not be deemed an improper exercise of Tenant's
right of first offer under this Article 53;
(v) The Offer Premises shall be incorporated into
the Demised Premises under all of the terms of this lease,
except as otherwise set forth in clauses (iii) and (iv)
above and except for other changes made necessary by reason
of the increased size of the Demised Premises (e.g.,
Tenant's Proportionate Share).
(vi) If requested by Landlord, Landlord and Tenant
shall enter into an amendment of this lease (the "Offer
Agreement"), which shall reflect the necessary modifications
set forth in clauses (i) through (v) above.
(B) In the event Tenant fails to execute the Offer
Agreement within five (5) days of presentment thereof by Landlord,
Tenant's right of first offer will be deemed to have lapsed and
Landlord shall be free to lease the Offer Premises to any third
party upon any terms. TIME IS OF THE ESSENCE WITH RESPECT TO ALL
OF TENANT'S OBLIGATIONS UNDER THIS ARTICLE 53.
(C) Notwithstanding anything to the contrary
contained in this Article 53, in the event Landlord delivers
written notice to Tenant advising Tenant of the availability of
the Offer Premises, Tenant shall have five (5) days in which to
deliver Tenant's Offer Notice, or Tenant's rights hereunder shall
lapse and be of no further force or effect.
(D) Nothing contained in this Article 53 shall
prevent Landlord from marketing or leasing the Offer Premises to
any third party until such time as Landlord shall have received
Tenant's Offer Notice.
(E) This right of first offer with respect to the
Offer Premises is personal to Wellcare Development, Inc. and shall
not be transferrable by operation by law or otherwise.
CANCELLATION OPTION
54. (A) Provided Tenant has complied with all the terms,
covenants and conditions of this lease and is not then in default
of its obligations hereunder, Tenant shall have the one time right
<PAGE>
to cancel this lease as of the last day of the seventh year of the
term (the "Cancellation Date") by notifying Landlord, in writing
(the "Cancellation Notice"), at least twelve (12) months prior to
the Cancellation Date of Tenant's intent to exercise this
cancellation option and by delivering and paying to Landlord, on
or before the Cancellation Date, a bank or certified check in the
amount of the "Cancellation Fee" set forth in Article 54(B),
below.
(B) The term "Cancellation Fee", as used herein,
shall, in all instances, be deemed to mean the sum of those
portions of all costs incurred by Landlord in connection with this
lease which have not been amortized as of the Cancellation Date
(the "Unamortized Costs"), which Unamortized Costs shall include,
without limitation, (1) the unamortized portion of each of the
following: (a) construction, architectural, engineering and other
costs and fees associated with the performance of Landlord's
Initial Construction; and (b) brokerage fees, plus (2) $52,914.75.
For the purpose of calculating the one-time Cancellation Fee, the
foregoing costs shall be amortized over the Term of this lease as
if same were a one hundred twenty (120) month self-amortizing loan
at an annual interest rate of ten (10%) percent payable in equal
monthly installments of principal and interest combined.
(C) Upon satisfaction by Tenant of each of the above
conditions, and upon the Demised Premises having been surrendered
to Landlord and vacated by Tenant on or before the Cancellation
Date as if that date were the Expiration Date under this lease,
this lease shall be deemed canceled and terminated as of the
Cancellation Date. Time is of the essence with respect to all
time periods referenced in this Article 54. In the event that
Tenant shall fail to fully and timely comply with each of the
conditions herein contained, Tenant will be deemed to have waived
all of its rights contained in this Article 54.
(D) This cancellation option is personal to Wellcare
Development, Inc., and may not be transferred by operation of law
or otherwise.
<PAGE>
GUARANTY
55. In order to induce Landlord to enter into this Lease
with Tenant, Tenant shall deliver to Landlord, simultaneously with
its execution of this lease, the Guaranty annexed hereto as
"Exhibit 3".
IN WITNESS WHEREOF, Landlord and Tenant have respectively
signed and sealed this lease as of the day and year first above
written.
Witness for Landlord: RECKSON OPERATING PARTNERSHIP, L.P.
/s/ Salvatore Compofranco
_____________________
By: Salvatore Campofranco
Senior Vice President
Witness for Tenant: WELLCARE DEVELOPMENT, INC.
/s/ Joseph R. Papa
/s/ Brenda Pollack By: Joseph R. Papa
<PAGE>
STATE OF NEW YORK )
) ss.:
COUNTY OF ULSTER )
On this 15th day of December, 1997, before me personally
came Joseph R. Papa to me known, who being by me duly sworn, did
depose and say that he resides at North Long Branch, New Jersey,
that he is the President of WellCare Development, Inc., the
corporation described in and which executed the foregoing
instrument as "Tenant"; that he knows the seal of said
corporation; that the seal affixed to said instrument is such
corporate seal; that it was so affixed by order of the Board of
Directors of said corporation, and that he signed his name thereto
by like order.
/s/Michelle F. Sickler
NOTARY PUBLIC
MICHELLE F. SICKLER
Notary Public, State of New York
No. 02S15055961
Qualified in Albany County
Commission Expires February 20, 1998
<PAGE>
SCHEDULE "A"
LANDLORD'S INITIAL CONSTRUCTION
The following is intended to set forth a description of the
general construction specifications employed by Landlord in the
Building and individual premises demised therein. To the extent
that any of the provisions in this Schedule "A" conflict with the
"Plans and Specifications" annexed hereto as Exhibit "2", the
"Plans and Specifications" of Exhibit "2" shall control.
1. PARTITIONS:
Landlord shall supply and install ceiling-high metal
stud drywall partitions with 5/8" sheetrock on both
sides with 4" asphalt tile base, as per attached plan.
Corridor and between Tenant partitions shall be of sound
attenuating construction, extending to under side of
floor above.
2. CLOSETS:
Landlord shall supply chests as per attached plan.
Closets will contain one (1) wood hat shelf and one (1)
metal coat rod.
3. DOORS:
Landlord shall supply and install necessary doors as per
attached plan. Corridor doors are to be 3'0" X 7'0"
solid core walnut doors with all other passage doors to
be birch, flush panel, hollow core type 3'0" X 7'0".
All doors to be set in pressed steel bucks.
4. HARDWARE:
Landlord shall supply and install all necessary building
standard hardware such as latch sets, hinges, door stops
and bucks where required.
5. CEILINGS:
Landlord shall supply and install a 2'0" X 4'0" textured
acoustical tile ceiling laid in exposed white tees
throughout all Tenant areas.
<PAGE>
6. ELECTRICAL:
i. Lighting
Landlord shall supply and install in perimeter and
interior working area, recessed building standard 2' X
4' fluorescent light fixtures (except where conditions
necessitate a surface mounted fixture) in amounts not
to exceed one (1) fixture for every 90 square feet of
ceiling area corresponding to approximately 55 candle
power initial illuminations. Initial bulbs supplied
by Landlord. All subsequent replacements by Tenant.
ii. Outlets
Supply and install duplex wall convenience outlets at
the rate of one (1) for every 150 square feet of
rentable area.
iii. Switches
Supply and install switches at the rate of one (1)
switch for every 300 square feet of rentable area.
iv. Telephone
Tenant shall make arrangements with any pay telephone
company for installation of telephone service.
Tenant's telephone lines must be installed within the
ceiling of Tenant's leased space.
v. Circuits and Service
The building will contain sufficient electrical
facilities to provide for all normal installations.
The design capacity is based on a combined lighting
and receptacle load of four (4) watts per square foot
of usable area at 265/460 volts. Within this four (4)
watts per square foot, Tenant will be allowed 1.5
watts per usable square foot of 120 volt service.
<PAGE>
7. VENETIAN BLINDS:
Landlord shall supply and install ceiling-high venetian
blinds on all exterior windows. These blinds shall be
maintained by Tenant.
8. CARPETING:
Landlord shall supply and install throughout the demised
premises Landlord's building standard carpeting, colors
to be selected from samples submitted by Landlord.
9. PAINTING:
Landlord shall paint the entire premises (excluding the
acoustical ceiling) in a good workman-like manner with a
primer and two (2) coats of paint in colors to be
selected by Tenant from building color chart consisting
of twelve (12) colors. Tenant will be permitted five
(5) of the standard colors per floor and one (1) color
per room.
10. HEATING AND AIR CONDITIONING:
This work shall comprise essentially the design and
installation of the variable volume duct system on each
floor together with a reasonable amount of air diffusers
and associated fixtures, all supplied from a central
system designed to conform to the standards per
performance of the best new office buildings in Suburban
New York. Normal operating hours shall be 8:00 A.M. to
6:00 P.M., Monday through Friday.
The systems shall be capable of delivering 100% outside
fresh air and shall never deliver less than 15% outside
fresh air, or less than 0.35 cfm and is based upon the
normal design of air conditioning, where four (4) watts
of light and power/square foot is available for Tenant's
use and an average occupancy of one (1) person per 1000
square feet.
The system shall be capable of maintaining inside
conditions of not more than 78 F and 50% relative
humidity when outside conditions are not more than 95 F
dry bulb and 75 F wet bulb except that as the outside
<PAGE>
temperature conditions vary, the inside space conditions
shall be maintained approximately as follows:
OUTSIDE CONDITIONS MAXIMUM INSIDE CONDITIONS
66--72 db 72 + 2db, 25--50
RH*
72--80 db 74 + 2db, 35--50
RH*
85--90 db 76 + 2db, 35--50
RH*
91--95 db 78 + 2db, 35--50
RH*
* With normal humidity tolerances
The performance requirements noted above shall be
maintained all year round, either by the use of
varying amounts of outside air or by mechanical
refrigeration.
A. The above noted performance requirements
shall be based upon the following
conditions of internal heat and moisture
gain.
1. One person per 100 square feet.
2. Four watts per square foot for Tenant
lighting and power use.
B. The system shall also be capable of
maintaining a minimum temperature
throughout the demised premises of 69 F
when the outside temperature is 0 F.
System shall be automatically controlled, free of
noticeable noise, vibration, or drafts and require
minimum cost expenditure in fuel.
11. SPRINKLER SYSTEM:
Landlord shall supply and install throughout the demised
premises, a sprinkler system for all normal office
installations. Pipes and fittings for the system will be
concealed in the area above the hung ceiling with the
sprinkler heads protruding below ceiling level.
<PAGE>
12. PLUMBING:
The Landlord shall provide and install five (5) wet
columns, designed to carry a cold water line, a hot
water line, a sewer line and a vent line. These wet
columns shall be located in the corners of the building
approximately halfway between the exterior wall and the
core. Wet connections and extensions of said system
shall be performed by the Landlord at the Tenant's
expense.
13. PUBLIC HALLS:
Public halls on all floors shall be carpeted and will
receive textured vinyl wall coverings.
14. SUBSTITUTIONS:
Tenant may substitute like items for building standard
items, but no credits for the building standard items
will be given against the cost of items so substituted.
No credit will be given for building standard items not
utilized by Tenant.
<PAGE>
SCHEDULE "B"
LANDLORD'S CLEANING SERVICES AND MAINTENANCE OF PREMISES
1. Landlord shall perform the following General Office Cleaning
services between the hours of 6:00 p.m. and 7:00 a.m.,
Monday through Friday of each week and said cleaning shall
not be rescheduled by Tenant's overtime or extraordinary use
of the building or demised premises.
a. Empty all wastepaper baskets, damp wipe ashtrays and
receptacles.
b. Sweep and/or dustmop all hard surfaced flooring with
mops so treated as to preserve the sheen and appearance
of such flooring.
c. Carpet sweep all areas requiring same. Said areas to be
vacuumed clean twice weekly; conduct spot cleaning where
necessary.
d. Deposit all wastepaper from baskets in plastic bags (to
be supplied by Contractor), placing same in locations as
shall be designated convenient for the remove thereof.
Landlord shall not be responsible for the removal of
large boxes, wooden pallets or abnormal amounts of waste
paper.
e. Hand dust all desks, chairs, worktables, office
furniture and equipment, window sills and moldings,
filing cabinets, bookcases, open shelving and all other
forms of office furniture and fixtures within normal
arms reach; vacuum upholstered furniture where
necessary.
f. Damp dust and wipe clean all glass tops and all desks
and tables, removing all finger marks and smudges from
same.
g. Wipe clean of finger marks and maintain all brass and
other bright work.
h. Wash and clean tops of all water coolers and fountains
and floors and wall areas surrounding same.
<PAGE>
i. Hand dust all doors and other ventilation louvers
located within normal arms reach.
j. Dust clean interior of all wastepaper baskets and
disposal cans.
k. Dust and sweep all open closet flooring.
l. Lift and dust under all telephones and other such
lightweight desk appurtenances, dusting and replacing
same in their proper locations. Telephones will be
sanitized once a month.
m. Wisk brush all fabric covered furniture.
n. Instruct all employees to notify their supervisor, who
in turn shall notify the proper designated
representative of the building, of any irregularity
found in any office during the nightly tour of office
cleaning.
o. After cleaning, all electric lamps are to be
extinguished, office windows closed, office doors
securely locked and premises to be left in a neat and
orderly condition.
p. Do high dusting once per month.
2. The Landlord shall perform the following Porter Services and
Janitorial Maintenance Services in the manner and with the
scheduling as set forth in the following:
a. Scour wash all public lavatory flooring, using the
proper coefficient of disinfectant for same.
b. Thoroughly wash, scour clean and disinfect all basins,
bowls and urinals located in all public lavatories.
c. Damp dust and wipe clean all mirrors, powder shelves and
enameled surfaces located in all public lavatories.
d. Wipe clean of finger marks and maintain in a constant
state of uniform brightness, all brass and other bright
work located in all public lavatories.
<PAGE>
e. Damp wipe clean all soap dispensers, receptacles,
partitions, stalls and tiled work within normal arms
reach in all public lavatories. Said areas to be washed
down at least once during the course of each weekly
period.
f. Empty and clean all paper towel and sanitary disposal
receptacles in all public lavatories, depositing waste
from same in designated locations.
g. Refill all toilet tissue, hand soap and towel dispensers
located in all public lavatories.
h. Wash all terrazzo lobby flooring. Same to be machine
scrubbed a minimum of once during the course of each
monthly period.
i. Hand dust all lobby marble, stone work and fixtures
within normal arms reach.
j. Dustmop and/or vacuum all public corridors as situated
throughout the entire building.
k. Thoroughly wash, wax and machine polish and/or refinish
all public corridors as situated throughout the entire
building twice during the course of each weekly period.
(Full floor tenants responsible for floor maintenance of
their entire floor; Landlord is not responsible for the
maintenance of any elevator corridors or aisles).
l. Thoroughly wash, wax and machine polish and/or refinish
all flooring as situated within the two elevator cabs.
m. Hand dust and clean all vertical surfaces located within
the two elevator cabs.
n. Dust clean exterior of overhead lighting fixtures. Wash
clean both inside and outside all of the lighting
fixtures, fluorescent and incandescent, situated in the
core space of the building; once during the course of
each yearly period.
o. Dust clean all overhead pipes, ventilating louvers, air
conditioning louvers and ducts, high moldings and other
high areas and surfaces situated on all floors of the
<PAGE>
building and not reached during the regularly scheduled
tours of nightly cleaning twice during the course of
each yearly period.
p. Damp mop all stairways and landings, dusting down all
handrails, stairway doors and frames, fire hoses,
standpipe nozzles and racks located in two sets of
stairways once during the course of each weekly period.
q. Clean and polish saddles and entrance hardware in public
areas once a month.
r. All of the foregoing porter and janitorial maintenance
services are to be rendered nightly, from Monday through
Friday of each week, between the hours of 6:00 p.m. and
7:00 a.m., unless otherwise scheduled.
s. Police parking areas of the building as required.
3. Interior and exterior window cleaning shall be performed
once every four months (three times a year).
4 No cleaning services shall be rendered on any legal holiday
or union holiday, including, without limitation, those
listed below:
a. Lincoln's Birthday
b. Columbus Day
c. Election Day
d. Veteran's Day
e. Good Friday
f. Martin Luther King's Birthday
<PAGE>
SCHEDULE "C"
1) LIGHTING AND OUTLET ENERGY: There shall be a meter
installed in the Demised Premises measuring all light and outlet
energy consumption by Tenant but not heating, ventilating and air
conditioning ("HVAC") which is supplied to Tenant as set forth in
Article 6 above and in this Schedule "C". Tenant shall pay to
Landlord, as additional rent, the cost of such lighting and outlet
energy calculated by multiplying the kilowatt hours shown on such
meter by the rate of the utility supplying the service, including
any fuel charges, surcharges, taxes and any other component part
of the utility bill.
2. OVERTIME SERVICE: OVERTIME SERVICE is HVAC consumed in
the Demised Premises at all hours other than WORKING HOURS.
OVERTIME SERVICE is based upon the aggregate number of hours HVAC
is consumed in the Demised Premises at all hours other than
WORKING HOURS ("OVERTIME HOURS").
3. Charges for OVERTIME SERVICE: The Landlord's monthly
charge for Tenant's OVERTIME SERVICE, payable in addition to any
additional applicable charges, shall be derived as follows:
An amount equal to the OVERTIME HOURS in the month
multiplied by $25.00.
These amounts shall be billed at least once every three
months and shall be payable during the month in which billed, as
additional rent.
4. Landlord shall have full and unrestricted access to all
air-conditioning and heating equipment, and to all other utility
installations servicing the Building and the Demised Premises.
Landlord reserves the right temporarily to interrupt, curtail,
stop or suspend air-conditioning and heating service, and all
other utility or other services, because of Landlord's inability
to obtain, or difficulty or delay in obtaining (only with regard
to unique parts or materials or parts or materials made available
by only a small number of manufacturers), labor or materials
necessary therefor, or in order to comply with governmental
restrictions in connection therewith or for any other cause beyond
Landlord's reasonable control. No diminution or abatement of
Rent, additional rent, or other compensation shall or will be
claimed by Tenant, nor<PAGE>
shall this lease or any of the obligations
of Tenant hereunder be affected or reduced by reason of such
interruptions, stoppages, curtailments or suspensions, the causes
of which are hereinabove enumerated, nor shall the same give rise
to a claim in Tenant's favor that such failure constitutes actual
or constructive, total or partial eviction from the Demised Premises.
5. Telephone and computer data services shall be the
responsibility of Tenant. Tenant shall make all arrangements for
telephone service with the company supplying said service,
including the deposit requirement for the furnishing of service.
Landlord shall not be responsible for any delays occasioned by
failure of the telephone company to furnish service.
6. At Landlord's option, it shall furnish and install all
lighting tubes, bulbs and ballasts used in the Premises and Tenant
shall pay Landlord's reasonable charges therefor, on demand, as
additional rent. All such lighting tubes, bulbs and ballasts
shall be provided by Landlord at no charge to Tenant during the
first Lease Year only. Thereafter, Tenant shall be responsible
for the cost of materials and installation. The current cost of
such materials is approximately $4.85 per bulb and $10.85 per
ballast. The current cost of installing ballasts is approximately
$28.00 per hour. The aforementioned prices and charges are
provided for informational purposes only and are subject to change
throughout the term.
<PAGE>
SCHEDULE "D"
1. The sidewalks, entrances, driveways, passages, courts,
elevators, vestibules, stairways, corridors or halls shall not be
obstructed or encumbered by any Tenant or used for any purpose
other than for ingress to and egress from the Demised Premises and
for delivery of merchandise and equipment in a prompt and
efficient manner using elevators and passageways designated for
such delivery by Landlord. There shall not be used in any space,
or in the public hall of the building, either by any Tenant or by
jobbers or others in the delivery or receipt of merchandise, any
hand trucks, except those equipped with rubber tires and
sideguards.
2. The water and wash closets and plumbing fixtures shall
not be used for any purposes other than those for which they were
designed or constructed and no sweepings, rubbish, rags, acids or
other substances shall be deposited therein, and the expense of
any breakage, stoppage, or damage resulting from the violation of
this rule shall be borne by the Tenant who, or whose clerks,
agents, employees or visitors, shall have caused it.
3. No Tenant shall sweep or throw or permit to be swept or
thrown from the Premises any dirt or other substances into any of
the corridors or halls, elevators, or out of the doors or windows
or stairways of the building, and the Tenant shall not use, keep
or permit to be used or kept any coffee machine, vending machine,
burner, microwave oven, refrigerator or oven, food or noxious gas
or substance in the Demised Premises, or permit or suffer the
Demised Premises to be occupied or used in a manner offensive or
objectionable to Landlord or other occupants of the Building by
reason of noise, odors and/or vibrations, or interfere in any way
with other tenants or those having business therein, nor shall any
animals or birds be kept in or about the Building. Smoking or
carrying lighted cigars or cigarettes in the elevators of the
Building is prohibited.
4. No awnings or other projections shall be attached to the
outside walls of the Building without the prior written consent of
the Landlord.
5. No sign, advertisement, notice or other lettering and/or
window treatment shall be exhibited, inscribed, painted or affixed
by any Tenant on any part of the outside of the Demised Premises
or the Building or on the inside of the Demised Premises if the
same is visible from the outside of the Demised Premises without
the<PAGE>
prior written consent of the Landlord. In the event of the
violation of the foregoing by any Tenant, Landlord may remove same
without any liability, and may charge the expense incurred by such
removal to Tenant or Tenants violating this rule. Interior signs
on doors and directory tables shall be inscribed, painted or
affixed for each Tenant by Landlord at the expense of such Tenant,
and shall be of a size, color and style acceptable to Landlord.
6. No Tenant shall mark, paint, drill into, or in any way
deface any part of the Demised Premises or the Building of which
they form a part. No boring, cutting or stringing of wires shall
be permitted, except with the prior written consent of Landlord,
and as Landlord may direct. No tenant shall lay linoleum or other
similar floor covering so that the same shall come in direct
contact with the floor of the Demised Premises and, if linoleum or
other similar floor covering is desired to be used, an interlining
of builder's deadening felt shall be first affixed to the floor,
by a paste or other water soluble material, the use of cement or
other similar adhesive material being expressly prohibited.
7. No additional locks or bolts of any kind shall be placed
upon any of the doors or windows by any Tenant, nor shall any
changes be made in existing locks or in the mechanisms thereof.
Each Tenant must, upon the termination of his tenancy, restore to
Landlord all keys of stores, offices and toilet rooms, either
furnished to, or otherwise procured by, such Tenant, and in the
event of the loss of any keys, so furnished, such Tenant shall pay
to Landlord the cost thereof. Tenant shall be permitted to
install an alarm system in the Demised Premises, provided (i)
Tenant engages a licensed, reputable contractor to perform such
installation, and (ii) Landlord is provided with all appropriate
keys, codes and/or pass cards to disarm such alarm system. Tenant
shall not be responsible for the payment of any supervisory or
other charge to Landlord in connection with the installation of
such alarm system.
8. Freight, furniture, business equipment, merchandise and
bulky matter of any description shall be delivered to and removed
from the Premises only through the service entrances and
corridors, and only during hours and in a manner approved by
Landlord. Landlord reserves the right to inspect all freight to
be brought into the Building and to exclude from the Building all
freight which violates any of these Rules and Regulations or the
lease of which these Rules and Regulations are a part.
<PAGE>
9. Canvassing, soliciting and peddling in the building is
prohibited and each Tenant shall cooperate to prevent the same.
10. Landlord reserves the right to exclude from the
building between the hours of 6:00 P.M. and 8:00 A.M. and at all
hours on Sundays and legal holidays, all persons who do not
present a pass to the building signed by Landlord. Landlord will
furnish passes to persons for whom any Tenant requires same in
writing. Each Tenant shall be responsible for all persons for
whom he requires such a pass and shall be liable to Landlord for
all acts of such persons.
11. Landlord shall have the right to prohibit any
advertising by any Tenant which, in Landlord's opinion, tends to
impair the reputation of the Building or its desirability as an
office building, and upon written notice from Landlord, Tenant
shall refrain from or discontinue such advertising.
12. Tenant shall not bring or permit to be brought or kept
in or on the Premises, any inflammable, combustible, hazardous or
explosive fluid, material, chemical or substance, or cause or
permit any odors of cooking or other processes, or any unusual or
other objectionable odors, to permeate in or emanate from the
Premises.
13. Tenant agrees to keep all entry doors closed at all
times and to abide by all rules and regulations issued by the
Landlord with respect to such services.
<PAGE>
EXHIBIT 1
RENTAL PLAN
<PAGE>
EXHIBIT 2
PLANS AND SPECIFICATIONS
SEE ANNEXED INTIALED COPY OF PLANS AND SPECIFICATIONS
<PAGE>
EXHIBIT 3
GUARANTY
FOR VALUE RECEIVED, the undersigned, personally, jointly
and severally, absolutely and unconditionally, hereby guaranty to
RECKSON OPERATING PARTNERSHIP, L.P. ("Landlord"), and its heirs,
legal representatives, successors and assigns, the prompt and full
payment and performance of all of the covenants, terms,
provisions, conditions and agreements required to be performed by
WELLCARE DEVELOPMENT, INC. ("Tenant") under that certain lease
dated of even date herewith (the "Lease"), between Landlord and
Tenant, to which this Guaranty is annexed and made a part of.
The undersigned hereby waive notice of all defaults and
hereby consent to all extensions of time that Landlord may grant
Tenant in the performance of any of the terms of the Lease and/or
any waiver, in whole or in part, of any such performance, and/or
any release of Tenant, in whole or in part, from any such
performance, and/or any adjustment of any dispute in connection
with the Lease. No such defaults, extensions, waivers, releases
or adjustments, with or without the knowledge of the undersigned,
shall affect or discharge the liability of the undersigned.
THE UNDERSIGNED HEREBY KNOWINGLY WAIVE ANY AND ALL RIGHT
TO TRIAL BY JURY IN ANY ACTION OR PROCEEDING TO ENFORCE SUCH
LIABILITY HEREAFTER INSTITUTED BY LANDLORD, ITS SUCCESSORS OR
ASSIGNS, TO WHICH EITHER OR BOTH OF THE UNDERSIGNED MAY BE A
PARTY.
This Guaranty shall not be impaired by, and the
undersigned hereby consent to, any modification, supplement,
extension or amendment of the Lease to which Landlord and Tenant
may agree.
The liability of the undersigned is personal, direct,
unconditional, joint and several and may be enforced without
requiring that Landlord first resort to any other right, remedy or
security. The undersigned shall have no right of subrogation,
reimbursement or indemnity whatsoever, nor any right of recourse
to security for the debts and obligations of Tenant to Landlord,
unless and until all of said debts and obligations have been
satisfied in full.
<PAGE>
In the event Landlord shall be required to retain an
attorney to enforce this Guaranty, the undersigned shall be
responsible for the reasonable attorney fees and disbursements
incurred by Landlord.
This Guaranty is a continuing guaranty of all of
Tenant's obligations accruing under the Lease.
This Guaranty shall bind the heirs, personal
representatives, successors and assigns of the undersigned.
IN WITNESS WHEREOF, the undersigned have executed this
instrument as of the 15th day of December, 1997.
THE WELLCARE MANAGEMENT GROUP, INC.
/s/ Joseph R. Papa
By: Joseph R. Papa
STATE OF NEW YORK )
) ss.:
COUNTY OF )
On this ___ day of , 19__, before me personally came
____________ to me known to be the individual described in and who
executed the foregoing instrument and acknowledged that he
executed the same.
_______________________________
NOTARY PUBLIC
<PAGE>
STATE OF NEW YORK )
) ss.:
COUNTY OF ULSTER )
On this 15th day of December, 1997, before me came Joseph R.
Papa to me known, who, being by me duly sworn, did depose and say
that (s)he resides at North Long Branch, New Jersey, he is the
President of WellCare Management Group, Inc., the corporation
described in, and which executed, the foregoing instrument; that
(s)he knows the seal of the corporation; that the seal affixed to
said instrument is such corporate seal; that it was so affixed by
order of the board of directors of said corporation; and that
(s)he signed his/her name thereto by like order.
/s/Michelle F. Sickler
NOTARY PUBLIC
MICHELLE F. SICKLER
Notary Public, State of New York
No. 02S15055961
Qualified in Albany County
Commission Expires February 20, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Consolidated Balance Sheet of The WellCare Management Group, Inc. and
Subsidiaries as of December 31, 1997 and the related Statement of Operations
for the year ended December 31, 1997, and is qualified in it's entirety by
reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 3,368
<SECURITIES> 103
<RECEIVABLES> 9,224
<ALLOWANCES> 2,422
<INVENTORY> 0
<CURRENT-ASSETS> 23,418
<PP&E> 17,622
<DEPRECIATION> 6,528
<TOTAL-ASSETS> 52,538
<CURRENT-LIABILITIES> 28,533
<BONDS> 0
0
0
<COMMON> 63
<OTHER-SE> (1,914)
<TOTAL-LIABILITY-AND-EQUITY> 52,538
<SALES> 142,115
<TOTAL-REVENUES> 143,870
<CGS> 0
<TOTAL-COSTS> 126,251
<OTHER-EXPENSES> 39,761
<LOSS-PROVISION> 5,914
<INTEREST-EXPENSE> 1,652
<INCOME-PRETAX> (22,142)
<INCOME-TAX> 0
<INCOME-CONTINUING> (22,142)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (22,142)
<EPS-PRIMARY> (3.52)
<EPS-DILUTED> (3.52)
</TABLE>
