SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File No. 0-21684
THE WELLCARE MANAGEMENT GROUP, INC.
(Exact Name of Registrant as specified in its charter)
NEW YORK 14-1647239
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization Identification Number)
PARK WEST/HURLEY AVENUE EXTENSION, KINGSTON, NY 12401
(Address of principal executive offices) (Zip Code)
(914) 338-4110
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
requiring to file such report(s), and (2) has been subject to such filing
requirements for the past 90 days. YES [X] NO [ ]
The number of Registrant's shares outstanding on July 1, 1999 was 7,196,944
shares of common stock, $.01 per value, and 352,448 shares of Class A common
stock, $.01 par value.
THE WELLCARE MANAGEMENT GROUP, INC. AND SUBSIDIARIES
INDEX TO FORM 10-Q
PART 1 - CONSOLIDATED FINANCIAL INFORMATION
Item 1 Financial Statements
Consolidated Balance Sheets at March 31, 1999
and December 31, 1998
Consolidated Statements of Operations for the
Three Months Ended March 31, 1999 and 1998
Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 1999 and 1998
Consolidated Statement of Shareholders' Equity
for the Three Months Ended March 31, 1999
Notes to Consolidated Financial Statements
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations
PART II - OTHER INFORMATION
Item 1 Legal Proceedings
Item 2 Changes in Securities
Item 3 Defaults Upon Senior Securities
Item 4 Submission of Matters to a
Vote of Security Holders
Item 5 Other Information
Item 6 Exhibits and Reports on Form 8-K
Signatures
Index to Exhibits
THE WELLCARE MANAGEMENT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
MARCH 31, DECEMBER 31,
1999 1998
--------- ---------
(unaudited)
ASSETS
CURRENT ASSETS:
Cash $ 5,101 $ 6,393
Short-term investments -
available for sale 2 2
Accounts receivable (net
of allowance for doubtful
accounts of $2,412 in 1999
and $2,808 in 1998) 3,108 2,240
Notes receivable (net of
allowance for doubtful
accounts of $7,797 in 1999
and $7,774 in 1998) 56 56
Advances to participating providers 848 56
Other receivables (net of allowances
for doubtful accounts of $2,153 in
1999 and $1,957 in 1998) 1,670 1,378
Taxes receivable 284 284
Prepaid expenses and other
current assets 668 541
Property and equipment disposed of
in 1999 5,564 5,564
------- -------
TOTAL CURRENT ASSETS 17,301 16,514
------- -------
PROPERTY AND EQUIPMENT (net of
accumulated depreciation and
amortization of $7,999 in 1999
and $7,758 in 1998) 1,980 2,145
OTHER ASSETS:
Restricted cash 5,286 5,286
Notes receivable (net of
allowance for doubtful accounts
of $1,108 in 1999 and 1998) -- --
Goodwill (net of accumulated
amortization of $5,407 in 1999
and $5,299 in 1998) 4,323 4,431
Other non-current assets (net of
allowance for doubtful accounts
of $1,376 in 1999 and 1998 and
accumulated amortization of $1,281
in 1999 and $1,241 in 1998) 1,532 1,563
------- -------
TOTAL $30,422 $29,939
======= =======
MARCH 31, DECEMBER 31,
1999 1998
--------- ---------
(unaudited)
LIABILITIES AND SHAREHOLDERS'
EQUITY/(DEFICIENCY IN ASSETS)
CURRENT LIABILITIES:
Current portion of long-term debt $20,602 $ 5,791
Medical costs payable 31,368 26,404
Accounts payable 1,784 1,321
Accrued expenses and other 2,350 2,286
Unearned income 5,033 6,767
------- -------
TOTAL CURRENT LIABILITIES 61,137 42,569
LONG-TERM LIABILITIES:
Long-term debt and other 7 15,078
------- -------
TOTAL LIABILITIES 61,144 57,647
------- -------
COMMITMENTS AND CONTINGENCIES -- --
(DEFICIENCY IN ASSETS)/SHAREHOLDERS'
EQUITY
Class A common stock ($.01 par
value; 1,041,233 and 1,109,292
shares authorized; 926,243
and 994,302 shares issued
and outstanding in 1999 and
1998, respectively) 9 10
Common stock ($.01 par value;
20,000,000 shares authorized,
6,635,999 and 6,567,940 shares
issued in 1999 and 1998,
respectively) 66 65
Additional paid-in capital 31,612 31,612
Accumulated deficit (68,898) (65,884)
Accumulated other comprehensive
income 1 1
Statutory reserve 6,695 6,695
------- -------
(30,515) (27,501)
Less:
Notes receivable from shareholders 5 5
Treasury stock (at cost; 12,850
shares of common stock in 1999 and
1998 202 202
------- -------
TOTAL (DEFICIENCY IN ASSETS)/
SHAREHOLDERS' EQUITY (30,722) (27,708)
------- -------
TOTAL $30,422 $29,939
======= =======
See accompanying notes to consolidated financial statements.
THE WELLCARE MANAGEMENT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(unaudited)
THREE MONTHS ENDED MARCH 31,
--------------------------
1999 1998
---- ----
REVENUE:
Premiums earned $ 34,108 $ 35,019
Interest income 279 268
Other income - net 25 277
-------- --------
TOTAL REVENUE 34,412 35,564
-------- --------
EXPENSES:
Medical expenses 29,094 28,509
General and administrative
expenses 7,523 6,929
Depreciation and amortization
expense 389 912
Interest expense 420 432
-------- --------
TOTAL EXPENSES 37,426 36,782
-------- --------
LOSS BEFORE INCOME TAXES (3,014) (1,218)
PROVISION FOR INCOME TAXES -- --
-------- --------
NET LOSS $ (3,014) $ (1,218)
======== ========
LOSS PER SHARE - BASIC $ (0.40) $ (0.19)
======== ========
Weighted average shares of
common stock outstanding 7,549 6,299
======== ========
LOSS PER SHARE - DILUTED $ (0.40) $ (0.19)
======== ========
Weighted average shares of common
stock and common stock equivalents Not Not
outstanding Applicable Applicable
See accompanying notes to consolidated financial statements.
THE WELLCARE MANAGEMENT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
THREE MONTHS ENDED MARCH 31,
---------------------------
1999 1998
---- ----
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net loss $ (3,014) $ (1,218)
Adjustments to reconcile net
loss to net cash (used)
by operating activities -
Depreciation and amortization 389 912
Changes in assets and liabilities:
(Increase) in accounts
receivable - net (868) (266)
Increase in medical costs payable 4,964 235
(Increase)/decrease in other receivables (308) 276
(Increase)/decrease in accounts payable,
accrued expenses and other
current liabilities 527 (924)
(Increase) in prepaid
expenses and other (127) (141)
(Decrease)/increase in unearned income (1,734) 930
(Increase)/decrease in advances to
participating providers (792) (602)
Other - net 7 (85)
-------- --------
NET CASH USED IN OPERATING
ACTIVITIES (956) (883)
-------- --------
CASH FLOWS FROM INVESTING
ACTIVITIES-
Purchase of equipment (76) (342)
-------- --------
NET CASH USED IN INVESTING
ACTIVITIES (76) (342)
-------- --------
THE WELLCARE MANAGEMENT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
THREE MONTHS ENDED MARCH 31,
----------------------------
1999 1998
---- ----
CASH FLOW FROM FINANCING
ACTIVITIES-
Repayment of notes payable and
long-term debt (260) (173)
-------- --------
NET CASH USED IN
FINANCING ACTIVITIES (260) (173)
-------- --------
NET DECREASE IN CASH AND
CASH EQUIVALENTS (1,292) (1,398)
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 6,393 3,368
-------- --------
CASH AND CASH EQUIVALENTS,
END OF PERIOD $ 5,101 $ 1,970
======== ========
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION:
Income taxes paid $ -- $ --
Interest paid 100 388
See accompanying notes to consolidated financial statements.
THE WELLCARE MANAGEMENT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
For the Three Months Ended March 31, 1999
(in thousands)
(unaudited)
Class A Additional
Common Common Paid-In (Accumulated Statutory
Stock Stock Capital Deficit) Reserve
------- ------ ------- -------- ---------
BALANCE,
DEC 31, 1998 $ 10 $ 65 $31,612 $(65,884) $ 6,695
Conversion of Class
A common to common
shares (1) 1
Net loss $ (3,014)
BALANCE,
MARCH 31, 1999 $ 9 $ 66 $31,612 $(68,898) $ 6,695
Total
Accumulated Shareholders'
Other Notes Equity/
Comprehensive Receivables- Treasury (Deficiency
Income/(loss) Shareholders' Stock in Assets)
------------- ------------- -------- ----------
BALANCE,
DEC 31, 1998 $ 1 $ (5) $ (202) $(27,708)
Conversion of Class
A common to common
shares
Net loss (3,014)
BALANCE,
MARCH 31, 1999 $ 1 $ (5) $ (202) $(30,722)
See accompanying notes to consolidated financial statements.
THE WELLCARE MANAGEMENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with the instructions to Form 10-Q and, accordingly, do not
include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements and should be read in
conjunction with the audited consolidated financial statements and notes thereto
included in WellCare Management Group, Inc's ("WellCare" or the "Company")
Annual Report on Form 10-K for the year ended December 31, 1998, which have been
audited by Deloitte & Touche, LLP, independent auditors, as indicated in their
report therein. 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 (refer to the Company's audited consolidated
financial statements and notes thereto included in the Company's Annual Report
on Form 10-K for the year ended December 31, 1998, Notes 1m and 20 therein and
Management's Discussion and Analysis of Financial Condition and Results of
Operations for the quarter ended March 31, 1999). In the opinion of management,
the accompanying unaudited interim financial statements contain all adjustments
necessary to present fairly the financial position at March 31, 1999, and the
results of operations and cash flows for the interim period presented. Operating
results for the interim period may not necessarily be indicative of results that
may be expected for the year ending December 31, 1999. Certain amounts in the
1998 financial statements have been reclassified to conform to the 1999
presentation.
2. SUBSEQUENT EVENTS
a. In June 1999, Kiran C. Patel, M.D. ("Patel"), the principal of Well Care HMO,
Inc., a Florida corporation, an entity unrelated to WellCare, purchased a 55%
ownership interest in WellCare for $5 million. The investment was dependent on
the closing of the transactions described in Notes 2b, 2c, 2d, 6 and 7. Dr.
Patel purchased a newly authorized series of senior convertible preferred stock
(Series A) ("the shares") of WellCare, which will provide him with 55% of
WellCare's voting power. The preferred stock is subject to mandatory conversion
into common stock upon the amendment to WellCare's certificate of incorporation
to increase the number of authorized shares of common stock from 20 million to
75 million. The shares will be convertible into 55% of the then outstanding
common stock (after giving effect to such conversion) and will be subject to
anti-dilution rights under which Dr. Patel will generally preserve his 55%
interest in WellCare until there are 75 million shares of common stock issued
and outstanding. WellCare of New York, Inc. ("WCNY") and WellCare of
Connecticut, Inc. ("WCCT") also entered into management agreements with
Comprehensive Health Management, Inc. ("Comprehensive") an affiliate of Dr.
Patel, to manage their HMO operations, excluding the commercial business of WCNY
sold to GHI (see Note 2b).
THE WELLCARE MANAGEMENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
The management agreements with Comprehensive are for a term of five years,
effective June 1, 1999. The management fee to each HMO ranges from 7.5% of the
premium revenue when there are more than 80,000 members, to 9.5% of the premium
revenues when there are less than 40,000 members. Comprehensive will cover
services for claims, customer service, utilization review, data processing/MIS
(including Y2K compliance expenses and costs), credentialing, communication,
provider relations, and day to day accounting. Comprehensive will provide
financial reports to the HMOs and the appropriate regulatory agencies. The fee
does not cover other costs, such as marketing functions, legal costs,
extraordinary accounting and audit costs, and any extraordinary costs. The
management agreement with WCNY was approved by New York State regulators on June
11, 1999. Pending a public hearing in Connecticut and regulatory approval of the
acquisition of control of WCCT, Dr. Patel is precluded from exercising influence
in directing the management and policies of WCCT. State regulators, however,
have authorized the performance of the WCCT management agreement, with certain
limitations.
b. In June 1999, WCNY sold its commercial business, including approximately
25,000 members, to Group Health Incorporated ("GHI") for $5 million, effective
June 1,1999. WellCare received $4 million at closing, and $1 million was placed
in escrow pending a determination of the total number of WCNY commercial members
at June 1, 1999. If the commercial membership is at least 25,000 members, all of
the proceeds will be released from escrow. WellCare and WCNY have agreed not to
engage in commercial HMO business in New York for a period of one year following
the closing.
c. As a condition to the closing of the Patel and GHI transactions, more than 75
hospitals and physicians and other health care providers have entered into
settlement agreements to settle claims for services provided to WCNY HMO members
through April 30, 1999. These claims will be settled from a provider pool
consisting of at least $10 million, comprised of all of the proceeds from the
GHI and Patel transactions and 80% of WCNY's premium receivables at April 30,
1999, with WCNY able to utilize the amount in the provider pool in excess of $10
million, up to $2.5 million, to meet statutory reserves. These providers may
receive additional payments in an amount of up to 15% of the settled claims,
spread over the next three years, should they continue to provide health care
services to WCNY members.
d. As a further condition to the closing of the Patel transaction, the holders
of 644,287 shares of Class A common stock, which has ten votes per share, agreed
to convert their shares into shares of common stock on a share-for-share basis.
Robert W. Morey, the holder of the remaining 281,956 shares of Class A common
stock outstanding, has given a two-year proxy in favor of Dr. Patel to vote Mr.
Morey's share of Class A common stock.
After giving effect to conversion of these shares of Class A common stock, and
assuming conversion of the preferred shares held by Dr. Patel and the Fund,
there would be 38,716,693 shares of common stock and 281,956 shares of Class A
common stock outstanding with Dr. Patel owning 21,449,257 shares of common
stock, and 55% of the aggregate number of shares outstanding in the combined
classes.
THE WELLCARE MANAGEMENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
3. PREMIUM REVENUE
Effective January 1, 1999, WCNY did not renew its Medicare Risk contracts in
four counties in New York. The Medicare enrollment in these counties was
approximately 4,000.
Effective June 1, 1999, WCNY sold its commercial business, including
approximately 25,000 members (see Note 2b).
4. MEDICAL COSTS PAYABLE AND MEDICAL EXPENSES
a. Medical expense includes estimates for medical expenses incurred but not yet
reported ("IBNR") based on a number of factors, including hospital admissions
data and prior claims experience; adjustments, if necessary, are made to medical
expenses in the period the actual claims costs are ultimately determined. The
Company believes the IBNR estimates in the consolidated financial statements are
adequate; however, there can be no assurances that actual health care claims
will not exceed such estimates.
b. In April 1998, NYSID announced the distribution of approximately $110 million
in accumulated pool funds to Health Plans to help offset losses resulting from
adverse selection of its products by high cost enrollees. These pools had been
established five years ago to reimburse Health Plans that covered a higher than
average number of sick people. The surplus relates to the years 1993 to 1996.
WCNY recorded an estimated $800,000 reduction in medical expenses in the quarter
ended March 31, 1998, substantially all of which amount was collected later in
1998. As part of this distribution, NYSID limited 1998 individual and small
group rate increases to less than ten percent (10%).
5. SALE OF WELLCARE MEDICAL MANAGEMENT, INC.
In June 1995, the Company contributed approximately $5.1 million to its then
wholly-owned subsidiary, WellCare Medical Management, Inc. ("WCMM"), which was
engaged in managing physician practices, and then sold the assets of WCMM for
cash of $.6 million and a note receivable of $5.1 million. The buyer, Primergy,
Inc. ("Primergy"), 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 regional health care
delivery networks (the "Alliances"/"IPAs"). The Company also received a
five-year option to acquire Primergy, which option was canceled in 1996. The
note receivable bears interest at a rate equal to prime plus 2% (9.75% at March
31, 1999), with interest payable monthly through July 31, 2000. Primergy has
paid only interest through January 1996.
The Company has also advanced $3.4 million to Primergy ($.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% (9.75% at
March 31, 1999) and was due December 31, 1996. No payments of principal have
been made on this note, nor payments of interest beyond May 1996.
THE WELLCARE MANAGEMENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
In February 1997, Primergy executed the promissory note for $2.1 million,
bearing interest at the rate of prime plus 2% (9.75% at March 31, 1999), 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, Primergy entered into an Option Agreement with a
potential investor (the "Investor"), whereby the Investor loaned Primergy
$4,000,000 and received an option to merge with Primergy, exercisable through
June 30, 1998. Concurrently, WellCare entered into an agreement with Primergy
whereby WellCare agreed to forebear 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 if the Investor were to exercise its
option to merge and immediate repayment of the $2.1 million note upon
effectiveness of such merger. At June 30, 1998, the Investor's option to merge
expired without being exercised. As a result, forbearance of the debt has been
rescinded and the original payment terms of the $5.1 million note reinstated.
Primergy is obligated to continue paying monthly interest on the $2.1 million
note, with principal payments over a thirty-six month commencing July 1, 1998.
Primergy has not made any of the principal or interest payments due under the
$2.1 million note. The notes are subordinated to the Investor's security
interest.
In view of Primergy's operating losses and advances to the Alliances, the
Company had obtained from certain of Primergy'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 Primergy's stock options that such guarantors
originally received from Primergy and a release from the guarantors for any
potential claims against WellCare associated with the transactions. In view of
Primergy's financial condition and difficulties inherent in the collection of
personal guarantees and realization of collateral, and Primergy'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 Primergy and for
advances made in 1997. In 1998, the Company established a reserve of $0.8
million for 1998 accrued interest not paid. All amounts due to the Company from
Primergy, net of the deferred gain on the original sale, are fully reserved.
In February 1999, the Company entered into a letter of intent to settle its
outstanding indebtedness with Primergy and to amend the five independent
practice association ("IPAs") service agreements with the IPAs owned by
Primergy. A transaction was not consummated.
THE WELLCARE MANAGEMENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
6. MORTGAGE DEBT
In June 1999, the Company reached a settlement with Key Bank (the "Bank"),
whereby the Company will transfer ownership of the real property securing two
mortgages to the Bank in lieu of foreclosure. The net book value of the real
property was approximately $6.5 million compared to the outstanding mortgage
balances of approximately $4.4 million. In June 1999, the Company reached a
settlement with Premier National Bank ("Premier"), whereby the Company will
transfer ownership to Premier of the real property securing two mortgages, in
lieu of foreclosure. The net book value of the real property was approximately
$1.8 million compared to the outstanding mortgage balances of approximately $1
million. The Company recorded an expense for impaired assets of approximately
$2.8 million in 1998 to reduce the net carrying value of the mortgaged
properties to its respective mortgage balance. At March 31, 1999, the adjusted
net carrying value of the mortgage assets, and the corresponding mortgage debt,
have been classified as current.
7. SUBORDINATED CONVERTIBLE NOTE
As a condition to the closing of the Patel transaction, in June 1999, The 1818
Fund II, L.P. (the "Fund") converted the $15 million Note, plus unpaid interest
of approximately $0.7 million, into newly authorized senior convertible
preferred stock (Series B) of the Company. The preferred stock is non-voting and
is subject to mandatory conversion (subject to regulatory approval) into
10,000,000 shares of common stock of WellCare upon the amendment to WellCare's
certificate of incorporation to increase the number of authorized shares of
common stock from 20 million to 75 million. At March 31, 1999, the entire debt
has been classified as current.
8. INCOME TAXES
The company has reported continuing operating losses in 1996, 1997, 1998 and the
first quarter of 1999. 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 ultimately be
achieved, the Company has provided a 100% valuation allowance with respect to
the additional 1999 tax assets in view of their size and length of the expected
recoupment period.
The maximum utilization period for the NOL's are fifteen (15) and five (5) years
for New York and Connecticut, respectively.
9. STOCK OPTIONS
The Company's 1993 Incentive and Non-Incentive stock option plan (the "Plan"),
as amended, has 820,904 shares reserved for issuance, as of March 31, 1999, upon
exercise of options granted or to be granted.
THE WELLCARE MANAGEMENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Options to purchase 600,741 shares of Common Stock at exercise prices ranging
from $1.25 to $24.50 per share were outstanding under the Plan on March 31,
1999. Of the total options outstanding at March 31, 1999, options to purchase
456,089 shares were exercisable.
Effective February 25, 1999, the Company's former Chairman of the Board resigned
and the 600,000 Non-Incentive Executive Stock Options previously granted to him
were terminated.
The Company has adopted the disclosure-only provisions of the FASB's SFAS No.
123, "Accounting for Stock Based Compensation" (SFAS 123"). Accordingly, no
compensation cost has been recognized for grants of stock options.
10. STATUTORY REQUIREMENTS
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 March 31,
1999, WellCare had required cash reserves of $5.3 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 retroactively brought WCNY's December 31, 1997
statutory net worth above the permitted 50% contingent reserve requirement. WCNY
had been operating within the 50-100% discretionary contingent reserve
requirement during 1997, and through the first quarter of 1998, with the full
knowledge of NYSID. In 1998, the Company forgave the management fees for WCNY
for 1998 in the amount of approximately $1.4 million. However, after giving
effect to the reported results for 1998, and for the quarter ended March 31,
1998, at December 31, 1998 and March 31, 1999 WCNY had a negative statutory net
worth of approximately ($14.6) and ($17.1) million, respectively. Failure to
come into compliance with the reserve requirement could cause NYSID to take
action which could include restriction or revocation of WCNY's license.
Management has had ongoing discussions and meetings with NYSID regarding WCNY's
operating results and compliance with various statutory requirements and has
updated NYSID of the Company's plans to obtain additional funds. This includes a
remedial action plan based upon capital to be contributed to WCNY and WCNY's
ultimate return to profitability. In April 1999, WCNY agreed to a consent to
rehabilitation in which the State of New York has the right to commence court
proceedings and have an order entered into that would give the State of New York
the right to assume the
THE WELLCARE MANAGEMENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
operations of WCNY. In June 1999, the Company consummated the Patel and GHI
transactions, among others, which are intended to bring WCNY within the 50% to
100% of the revised contingent reserve requirement, as permitted by NYSID. In
connection with the Patel and GHI transactions, in June 1999, the Company loaned
WCNY $5 million under the provisions of Section 1307. As a result of these
transaction, WellCare anticipates that the State of New York would not exercise
that right. In addition, as a result of WCNY's sale of its commercial business,
the statutory cash reserve required will decrease to $2.9 million, and the
statutory contingent reserve will decrease to $3.7 million. Management believes
that the consummation of these transactions will improve WellCare's ability to
continue as a going concern.
WCCT is subject to similar regulatory requirements with respect to its HMO
operations in Connecticut. The Connecticut Department of Insurance requires that
WCCT maintain a minimum statutory reserve of $1 million. In June and November
1997, the Company made capital contributions of $350,000 and $425,000,
respectively, to WCCT to bring its statutory net worth to the required minimum
of $1 million. In March 1998, the Company made an additional capital
contribution of $368,000 to WCCT to bring its statutory net worth above the $1
million requirement. At March 31, 1999 and December 31, 1998, WCCT is not in
compliance with the statutory net worth requirement, having a statutory net
worth of approximately $0.6 million at each date, including an account
receivable from the Company of approximately $0.9 million. As a result, on June
2, 1999 the State of Connecticut Insurance Department issued an order requiring
WCCT to submit to administrative supervision by the State's Insurance
Commissioner until WCCT meets its statutory net worth (without including the
account receivable from the Company) and other requirements. Management has been
meeting with the Connecticut Department of Insurance regarding the statutory net
worth deficiency to develop a mutually agreeable plan to bring WCCT into
compliance with the statutory net worth requirement.
11. COMMITMENTS AND CONTINGENCIES
a. In October 1994, WCNY entered into contracted arrangements with the majority
of its primary care physicians and specialists through contracts with regional
health care delivery networks with attendant risk-sharing to capitating the IPAs
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 IPAs could request additional funding beyond the contractual increases from
the Company, which management does not believe should be required and, if
requested by the Alliances, does not intend to provide such funding. During
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, WCNY
entered into a letter of understanding with the Alliances in September 1996 to
restructure its capitation arrangement. In April 1998, formal contracts were
finalized and executed. WCNY reassumed risk for certain previously capitated
services, with a corresponding reduction in rates. WCNY capitated
THE WELLCARE MANAGEMENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
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 except for physician services for certain
diagnostics and mental health substance abuse, which are capitated through
regional integrated delivery systems. Management of the Alliances and WCNY
believe that the these measures will enable the Alliances to achieve
profitability and reduce their accumulated deficits.
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.
Nevertheless, in the event of continuing losses or increasing deficits by the
Alliances/IPAs, the Alliances could request increased capitation rates from the
Company.
Management of the Company does not believe that such additional financial or
increased contractual capitation rates should be required by the Alliances/IPAs
and has no intention to agree to such terms if requested by the Alliances/IPAs
beyond the negotiated contractual increases. However, as described in Note 3g of
Notes to Consolidated Financial Statements in the 1998 Annual Report on Form
10-K, 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/IPAs to restructure its capitation
arrangement. Under this understanding, the Company reassumed risk for certain
previously capitated services with a corresponding reduction in rates.
On July 31, 1998, the Company notified four (4) major IPAs of its intent to
renegotiate the contracts between the Company and the respective IPAs because
the Investor's option to merge with Primergy, which owns and manages the IPAs,
expired on June 30, 1998. If a new agreement is not reached within 120 days
after June 30, 1998, either the Company or the respective IPA can thereafter
exercise its option to terminate the contract. The parties continue to negotiate
the terms of the new agreement and there can be no assurance that the contracts
will be successfully renegotiated and not terminated by either the Company or
the respective IPAs.
b. Between April and June 1996, the Company, its former President and Chief
Executive Officer (Edward A. Ullmann), and its former Vice President of Finance
and Chief Financial Officer (Marystephanie Corsones) were named as defendants in
twelve separate actions filed in Federal Court (the "Securities Litigations").
An additional three directors were also named in one of these actions.
Plaintiffs sought to recover damages allegedly caused by the Company's
defendants' violations of federal securities laws with regard to the preparation
and dissemination to the investing public of false and misleading information
concerning the Company's financial condition.
In July 1996, the Securities Litigations were consolidated in the United States
District Court for the Northern District of New York, and an amended
consolidating complaint (the "Complaint") was served in August 1996. The
Complaint did not name the three additional directors. The Company's auditor,
however, was named as an additional defendant. In October 1996, the Company
filed a motion to dismiss the consolidated amended complaint against the Company
as well as the individual defendants. The Company's auditor likewise filed its
own motion to dismiss. By Memorandum Decision and Order (the "Order"), entered
in April 1997, the Court (i) granted the auditor's motion to dismiss and ordered
that the claims against the auditors be dismissed with prejudice; and (ii)
denied the motion to dismiss brought by the individual defendants. Because the
Order did not specifically address the Company's motion to dismiss, in May 1997,
the Company moved for reconsideration of its motion to dismiss and dismissal of
all claims asserted against it. On reconsideration, the judge clarified his
previous ruling expanding it to include a denial of the Company's motion as
well. Following the Court's decision, the Company filed its answer and defense
to the Complaint. In September 1997, the plaintiffs' class was certified and the
parties thereafter commenced the discovery process of the litigation.
In May 1999, the Company entered into a settlement agreement for $2.5 million,
all of which is being funded by the insurance carrier which provided coverage to
the individual defendants. The settlement agreement is subject to Federal Court
approval. The Company expects to recoup from the insurance carrier the expenses
related to fees it paid to the attorneys representing the individual defendants,
less the Company's insurance deductible.
c. The Company and certain of its 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 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, and with subsequent requests
for supplementation. It is management's understanding that the Securities and
Exchange Commission investigation is continuing.
THE WELLCARE MANAGEMENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
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, if any, that might be sustained, either individually or collectively, from
these actions would not have a material effect on the Company's consolidated
financial statements.
12. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of financial instruments including short-term investments,
advances to participating providers, other receivables - net, restricted cash,
other non-current assets net, accounts payable and accrued expenses approximate
their fair values.
The fair value of notes receivable consisting primarily of advances to medical
practices, is not materially different from the carrying value for financial
statement purposes. In making this determination, the Company used interest
rates based on an estimate of the credit worthiness of each medical practice.
The Subordinated Convertible Note was issued in a private placement in January
1996, amended with the holder in February 1997 and January 1998, and converted
into senior convertible preferred stock of the Company in June 1999 (see Note
7). The other long-term debt, primarily mortgage debt, was settled in June 1999
(see Note 6) and approximates its fair value.
13. NET (LOSS) PER SHARE
Net (loss) per share - Basic is computed using weighted average number of common
shares outstanding for the applicable period. Net (loss) per share - Diluted is
computed using the weighted average number of common shares plus common
equivalent shares outstanding, except if the effect on the per share amounts of
including equivalents would be anti-dilutive.
14. PRO FORMA BALANCE SHEET
The Company's consolidated balance sheet at March 31, 1999, after giving pro
forma effect to reflect the transactions discussed in Notes 2, 6 and 7 as if
they had occurred at March 31, 1999, is as follows:
March 31, 1999
----------------------------------
(In thousands)
Actual Proforma
------ ---------
Current assets $ 17,301 $ 24,130
-------- --------
Total assets $ 30,422 $ 37,251
======== ========
THE WELLCARE MANAGEMENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
March 31, 1999
----------------------------------
(In thousands)
Actual Proforma
------ ---------
Current liabilities $ 61,137 $ 34,837
-------- --------
(Deficiency in assets)/
Shareholders' equity $(30,722) $ 2,407
-------- --------
Total liabilities and
Shareholders' equity $ 30,422 $ 37,251
======== ========
Working capital (deficiency $(43,836) $(10,707)
======== ========
In addition, after the successful consummation of the above transactions,
especially the renegotiation with the hospitals, physicians and other health
care providers, management anticipates that WCNY's statutory-basis net worth
would be at least 50% of the revised contingent reserve requirement of
approximately $3.7 million.
Item 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
Consolidated Financial Statements and Notes thereto, included in the quarterly
report and with the Company's Annual Report on Form 10-K for the year ended
December 31, 1998.
The Company's financial statements have been prepared assuming that the Company
will continue as a going concern. The auditors' report on the Company's 1998
financial statements states that "the Company's recurring losses from
operations, cash used in operations, deficiency in assets at December 31, 1998
and failure to maintain 100% of the contingent reserve requirement for the New
York State Department of Insurance ("NYSID") at December 31, 1998 raise
substantial doubt about its ability to continue as a going concern."
Certain statements in this Form 10-Q are forward-looking statements and are not
based on historical facts but are management's projections or best estimates.
Actual results may differ from these projections due to risks and uncertainties.
These risks and uncertainties include a variety of factors, including but not
limited to the following: the Company's ability to continue as a going concern;
that Dr. Patel will not obtain Connecticut regulatory approval of the change in
control of WCCT contemplated by the Patel transaction; the inability to meet HMO
statutory net worth requirement for WCNY or WCCT; the absence of a commercial
line of business in WCNY for at least one year; that increased regulation will
increase health care expenses; that increased competition in the Company's
markets or change in product mix will unexpectedly reduce premium revenue; that
the Company will not be successful in increasing membership growth; that there
may be adverse changes in Medicare and Medicaid premium rates set by federal and
state governmental agencies; that health care cost in any given period may be
greater than expected due to unexpected incidence of major cases, natural
disasters, epidemics, change in physician practices, and new technologies; that
the Company with be unable to successfully expand its operations into New York
City, Westchester County and the States of Connecticut; and that major health
care providers will be unable to maintain their operations and reduce or
eliminate their accumulated deficits.
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 or both. 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.
The following table provides certain statement of operations data expressed as a
percentage of total revenue and other statistical data for the periods
indicated:
THREE MONTHS ENDED MARCH 31,
----------------------------
1999 1998
---- ----
Revenue:
Premiums earned 99.1% 98.5%
Interest and other income .9 1.5
-------- --------
Total revenue 100.0 100.0
Expenses:
Hospital services 25.7 25.9
Physician services 57.3 54.5
Other medical services 1.6 (0.3)
-------- --------
Total medical expenses 84.6 80.1
General and administrative 21.9 19.5
Depreciation and amortization 1.1 2.6
Interest and other expenses 1.2 1.2
-------- --------
Total expenses 108.8 103.4
Loss before income taxes (8.8) (3.4)
Provision for income taxes -- --
-------- --------
Net loss (8.8)% (3.4)%
-------- --------
STATISTICAL DATA:
HMO member months enrollment 212,125 208,221
Medical loss ratio (1) 85.3% 81.4%
General and administrative
ratio (2) 21.9% 19.5%
- ------------------------
(1) Total medical expenses as a percentage of premiums earned; reflects the
combined rates of commercial, Medicaid, Full-Risk Medicare and Medicare
supplemental members. Medical expense in 1999 includes interest expense
relating to "Prompt Pay" payments.
(2) General and administrative expenses as a percentage of total revenue.
THREE MONTHS ENDED MARCH 31, 1999
COMPARED TO THREE MONTHS ENDED MARCH 31, 1998
Premiums earned in the first quarter of 1999 decreased by 2.6%, or $0.9 million,
to $34.1 million from $35.0 million in the first quarter of 1998. Medicaid
premium revenue, decreased 4.6%, or $0.4 million, primarily as a result of a
decrease in average per member rates of 1.9%, or $0.2 million, plus a 2.7%
decrease, or $0.2 million, in member months. Medicare premium revenue decreased
33.7%, or $3.5 million, as a result of a 39.1%, or $4.1 million, decrease in
member months, partially offset by an increase in average per member rates of
8.9%, or $0.6 million. The decrease in member months is the direct result of
WCNY not renewing its Medicare Risk contracts in four counties in New York,
effective January 1, 1999. Commercial premium revenue increased 18.5%, or $3.0
million, as a result of a 15.2%, or $0.5 million, increase in member months and
a 2.9%, or 2.5 million, increase in average member rates. The increase in
Commercial membership is the net result of increased membership in WCCT and in
the Child Health Plus program, less a decrease in WCNY commercial membership.
Total member months in the quarter ended March 31, 1999 increased 1.9% to
212,125 as compared to 208,221 for the quarter ended March 31, 1998.
Interest and other income decreased 44.2%, or $0.2 million, to $0.3 million in
the first quarter of 1999, due to a decrease in third party reimbursements.
Medical expenses increased 2.1% or $0.6 million, to $29.1 million in the first
quarter of 1999, from $28.5 million reported in the comparable period in 1998.
Medical expenses on a per member per month ("PMPM") basis were relatively
constant, and increased as a percentage of premiums earned (the "medical loss
ratio") from 81.9% in 1998 to 85.3% in 1999. Medical expenses and the medical
loss ratio in 1999 are higher than 1998 because 1998 medical expenses include an
$0.8 million credit relating to the accumulated pool funds distribution
announced by NYSID in 1998. In addition, the 1998 quarter does not include
approximately $1.5 million of additional medical expenses, which amounts were
recorded in subsequent 1998 quarters when it was determined that the IBNR
estimated in the 1998 first quarter was less than the medical claims expenses
actually incurred. In the absence of these items, 1999 medical expenses
decreased slightly because of the reduction in Medicare related medical expenses
attributable to the non renewal of this business in four counties, effective
January 1, 1999.
General and administrative (G&A) expenses increased 8.6%, or $0.6 million, to
$7.5 million in the first quarter of 1999 and increased as a percentage of total
revenue (the "G&A ratio") to 21.9% in the first quarter of 1999 from 19.5% in
the first quarter of 1998. The increase in G&A expenses resulted primarily from
increased contract labor incurred in connection with the transactions
consummated in June 1999 ($0.5 million) and additional consulting fees related
to upgrading the AMISYS and other data processing systems ($0.7 million), less a
decrease in bad debt expense ($0.9)
Depreciation and amortization decreased 57.3% to $0.4 million, as a result of
the accelerated amortization of Goodwill and Preoperating Costs in the fourth
quarter of 1998; and the accelerated depreciation recorded in the fourth quarter
of 1998 to reduce the net carrying value of Property and Equipment to its net
realizable value.
Interest expense remained constant at $0.4 million, although $0.3 relates to the
$15 million Note, which interest was not paid and was part of the conversion of
the Note into convertible preferred stock.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1999, the Company had a working capital deficiency of $43.8
million, excluding the cash reserve of $5.3 million required by New York State
which is classified as a non-current asset, compared to a working capital
deficiency of $6.8 million at March 31, 1998, excluding the cash reserve of $5.8
million. The increased deficiency is attributable primarily to the operating
loss in 1998 and the first quarter of 1999, and the classification of the $15
million Note as current to recognize its conversion into equity in June 1999.
The Company's requirements for working capital are principally to meet current
obligations, to fund HMO operations and to maintain necessary regulatory
reserves. In order to eliminate this deficiency, and to continue as a going
concern, the Company is dependent upon the successful consummation of a
transaction or transactions which would provide capital sufficient to meet its
financial obligations, including statutory compliance, and its achieving a
return to profitability. In March 1998, the Company engaged Bear, Stearns & Co.,
Inc. to assist the Company in exploring its strategic opportunities. In June
1999, the Company consummated a number of transactions which are expected to
reduce the Company's working capital deficit by approximately $33.1 million. The
transactions include: an equity investment of $5 million (the "Patel
transaction"); sale of WCNY's commercial business for approximately $5 million
(the "GHI transaction"); settlement of provider claims at amounts significantly
lower than the estimated liability of approximately $30.5 million; renegotiation
and settlement of approximately $5.4 million of mortgage debt; and the
conversion of the $15 million Note into senior convertible preferred stock of
the Company. After the conclusion of these transactions, the Company's ongoing
cash requirements will be less because all long-term debt will have been
retired, the Company will no longer provide commercial health care coverage in
New York, its space needs will have been reduced substantially, and it will have
105 employees compared to 236 at December 31, 1998.
Net cash used by operating activities was $1.0 million during the first quarter
of 1999 as compared to $0.9 million for the first quarter of 1999. The cash used
in operations in the first quarter of 1998 resulted primarily from the operating
loss, a decrease in unearned income, an increase in accounts receivable and an
increase in advances to participating providers, partially offset by an increase
in medical costs payable. The cash used in the first quarter of 1998 was to fund
the cash operating loss and the net decrease in payables, partially offset by an
increase in unearned income. Cash used for capital expenditures was
approximately $0.1 million during the first quarter of 1999 as compared to $0.3
million for the same period in 1998.
Legislation by New York State and Connecticut requires HMOs to pay undisputed
claims within 45 days of date of receipt. In the first quarter of 1999 WCNY and
WCCT continued to pay claims later than required. The Company records as an
expenses the estimated interest it is required to pay, which management believes
is not material to the Company's results of operations.
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 March 31,
1999, WellCare had required cash reserves of $5.3 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 retroactively brought WCNY's December 31, 1997
statutory net worth above the permitted 50% contingent reserve requirement. WCNY
had been operating within the 50-100% discretionary contingent reserve
requirement during 1997, and through the first quarter of 1998, with the full
knowledge of NYSID. In 1998, the Company forgave the management fees for WCNY
for 1998 in the amount of approximately $1.4 million. However, after giving
effect to the reported results for 1998, and for the quarter ended March 31,
1999, at December 31, 1998 and March 31, 1999 WCNY had a negative statutory net
worth of approximately ($14.6) and ($17.1) million, respectively. Failure to
come into compliance with the reserve requirement could cause NYSID to take
action which could include restriction or revocation of WCNY's license.
Management has had ongoing discussions and meetings with NYSID regarding WCNY's
operating results and compliance with various statutory requirements and has
updated NYSID of the Company's plans to obtain additional funds. This includes a
remedial action plan based upon capital to be contributed to WCNY and WCNY's
ultimate return to profitability. In April 1999, WCNY agreed to a consent to
rehabilitation in which the State of New York has the right to commence court
proceedings and have an order entered into that would give the State of New York
the right to assume the operations of WCNY. In June 1999, the Company
consummated the Patel and GHI transactions, among others, which are intended to
bring WCNY within the 50% to 100% of the revised contingent reserve requirement,
as permitted by NYSID. In connection with the Patel and GHI transactions, in
June 1999, the Company loaned WCNY $5 million under the provisions of Section
1307. As a result of these transactions, WellCare anticipates that the State of
New York would not exercise that right. In addition, as a result of WCNY's sale
of its commercial business, the statutory cash reserve required will decrease to
$2.9 million, and the statutory contingent reserve will decrease to $3.7
million. Management believes that the consummation of these transactions will
improve WellCare's ability to continue as a going concern.
WCCT is subject to similar regulatory requirements with respect to its HMO
operations in Connecticut. The Connecticut Department of Insurance requires that
WCCT maintain a minimum statutory reserve of $1 million. In June and November
1997, the Company made capital contributions of $350,000 and $425,000,
respectively, to WCCT to bring its statutory net worth to the required minimum
of $1 million. In March 1998, the Company made an additional capital
contribution of $368,000 to WCCT to bring its statutory net worth above the $1
million requirement. At March 31, 1999 and December 31, 1998, WCCT is not in
compliance with the statutory net worth requirement, having a statutory net
worth of approximately $0.6 million, at each date, including an account
receivable from the Company of approximately $0.9 million. As a result, on June
2, 1999 the State of Connecticut Insurance Department issued an order requiring
WCCT to submit to administrative supervision by the State's Insurance
Commissioner until WCCT meets its statutory net worth (without including the
account receivable from the Company) and other requirements. Management has been
meeting with the Connecticut Department of Insurance regarding the statutory net
worth deficiency to develop a mutually agreeable plan to bring WCCT into
compliance with the statutory net worth requirement.
In June 1999, the Company reached a settlement with Key Bank (the "Bank"),
whereby the Company will execute deeds in favor of the Bank on the real property
securing two mortgages, in lieu of foreclosure. The net book value of the real
property was approximately $6.5 million compared to the outstanding mortgage
balances of approximately $4.4 million. In June 1999, the Company reached a
settlement with Premier National Bank ("Premier"), whereby the Company will
execute deeds in favor of Premier on the real property securing two mortgages,
in lieu of foreclosure. The net book value of the real property was
approximately $1.8 million compared to the outstanding mortgage balances of
approximately $1 million.
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., (the "Fund"), 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 an
anti-dilution adjustment. The conversion was completed in May 1998. 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. In June 1999, the Fund converted the
remaining $15 million Note, plus accrued and unpaid interest of approximately
$0.7 million, into newly authorized senior convertible preferred stock (Series
B) of the Company. The preferred stock is non-voting and is subject to mandatory
conversion (subject to regulatory approval) into 10,000,000 shares of WellCare's
common stock upon the amendment to WellCare's certificate of incorporation to
increase the number of authorized shares from 20 million to 75 million.
Between April and June 1996, the Company, its former President and Chief
Executive Officer (Edward A. Ullmann), and its former Vice President of Finance
and Chief Financial Officer (Marystephanie Corsones) 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 May 1999, the Company entered into a settlement agreement for $2.5 million,
all of which is being funded by the insurance carrier which provided coverage to
the individual defendants. The settlement agreement is subject to Federal Court
approval. The Company expects related to fees it paid to the attorneys
representing the individual defendants, less the Company's insurance deductible.
At March 31, 1999, the Company had total mortgage indebtedness of $5.4 million
outstanding on five of its office buildings, of which approximately $3.9 million
is due January 1, 2000, approximately $0.7 million is due March 1, 2000, and
approximately $0.3 million is due March 1, 2001. All of the mortgages debt was
retired in June 1999.
THE YEAR 2000 (Y2K)
In connection with the "Patel" and "GHI" transactions, the Company sold or
assigned substantially all of its computer hardware and software to GHI. The
plan is for all data processing/MIS requirements to ultimately be provided under
the terms of the newly executed management agreements with Comprehensive Health
Management, Inc. ("Comprehensive"), an affiliate of Dr. Patel. Under the terms
of the GHI transaction, the Company will continue to use the existing computer
systems and software during a transition period. The computer hardware and
software that was not sold or assigned to GHI is in the process of being
upgraded so that it will be Y2K compliant. The Company anticipates these
modifications will be completed by September 1999.
With respect to the efforts undertaken to date by Comprehensive and affiliates
to address the Y2K issues, Comprehensive has upgraded its computer hardware and
software systems, and has expended approximately $430,000 in software related
costs and $235,000 in hardware related costs.
The inability of Comprehensive or the Company to complete timely any of its Year
2000 modifications, or the inability of other companies with which Comprehensive
or the Company does business to complete timely their Year 2000 modifications,
could have a material adverse effect on the Company's operations.
INFLATION
Medical costs have been rising at a higher rate than consumer goods as a whole.
The Company believes its premium increases, capitation arrangements and other
cost controls measures mitigate, but do not wholly offset, the effects of
medical cost inflation on its operations and its inability to increase premiums
could negatively impact the Company's future earnings.
QUANTITIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company is exposed to interest rate risk primarily through its borrowing
activities and minimally through its short-term investments. In June 1999, the
Company retired its long-term debt. This includes conversion into equity by The
1818 Fund II, L.P., and the settlement by the Company of its mortgages with Key
Bank and Premier National Bank, whereby the Company will transfer ownership of
real property securing the mortgages to the banks in lieu of foreclosure. There
were no fluctuations in interest rates for these obligations between March 31,
1999 and the date of retirement. Although there is inherent risk for any
replacement borrowings, the extent of this is not quantifiable or predictable
because of the restructuring of the Company as a result of the June
transactions.
Part II - OTHER INFORMATION
Item 1 Legal Proceedings
Between April and June 1996, the Company, its former President and Chief
Executive Officer (Edward A. Ullmann), and its former Vice President of Finance
and Chief Financial Officer (Marystephanie Corsones) were named as defendants in
twelve separate actions filed in Federal Court (the "Securities Litigations").
An additional three directors were also named in one of these actions.
Plaintiffs sought to recover damages allegedly caused by the Company's
defendants' violations of federal securities laws with regard to the preparation
and dissemination to the investing public of false and misleading information
concerning the Company's financial condition.
In July 1996, the Securities Litigations were consolidated in the United States
District Court for the Northern District of New York, and an amended
consolidated 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 plaintiffs' class was certified and the
parties thereafter commenced the discovery process of the litigation.
In May 1999, the Company entered into a settlement agreement for $2.5 million,
all of which is being funded by the insurance carrier which provided coverage to
the individual defendants. The settlement agreement is subject to Federal Court
approval. The Company expects to recoup from the insurance carrier the expenses
related to fees it paid to the attorneys representing the individual defendants,
less the Company's insurance deductible.
The Company and certain of its 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 way 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, and with subsequent requests
for supplementation. It is management's understanding that the Securities and
Exchange Commission investigation is continuing.
Item 2 Changes in Securities
On June 11, 1999, Kiran C. Patel, M.D. ("Patel"), the principal of Well Care
HMO, Inc., a Florida corporation, an entity unrelated to WellCare, purchased a
55% ownership interest in WellCare for $5 million. Dr. Patel purchased 100,000
shares (the "Shares") of a newly authorized series of senior convertible
preferred stock ("Series A Convertible Preferred Stock") of WellCare, which will
provide him with 55% of WellCare's voting power. The Series A Convertible
Preferred Stock is subject to mandatory conversion into common stock upon the
amendment to WellCare's certificate of incorporation to increase the number of
authorized shares of common stock from 20 million to 75 million. The Shares will
be convertible into 55% of the then outstanding common stock (after giving
effect to such conversion) and will be subject to anti-dilution rights under
which Dr. Patel will generally preserve his 55% interest in WellCare until there
are 75 million shares of common stock issued and outstanding. In order to
preserve his 55% interest, Dr. Patel will be required to pay the par value ($0.1
per share) for each common share subsequently purchased. The Shares were
purchased for investment and the issuance of those securities was exempt from
the registration requirements of the Securities Act of 1933, as amended, by
virtue of Section 4(2) thereof. The certificate representing the Shares was
appropriately legended to reflect that the Shares have not been registered under
said Act.
On June 11, 1999, the 1818 Fund II, L.P. converted the $15 million 8%
subordinated convertible promissory note, plus accrued and unpaid interest of
approximately $0.7 million, into 100,000 shares of a second newly authorized
series of senior convertible preferred stock ("Series B Convertible Preferred
Stock") of WellCare. The Series B Convertible Preferred Stock is non-voting and
is subject to mandatory conversion (subject to regulatory approval) into
10,000,000 shares of WellCare's common stock upon the amendment to WellCare's
certificate of incorporation to increase the number of authorized shares from 20
million to 75 million. The shares were purchased for investment and the issuance
of those securities was exempt from the registration requirements of the
Securities Act of 1933, as amended, by virtue of Section 4(2) thereof. The
certificate representing the shares of Series B Convertible Preferred Stock was
appropriately legended to reflect that the shares have not been registered under
said Act.
As a condition of the closing of the Patel transaction, the holders of 644,287
shares of Class A common stock, which has ten votes per share, agreed to convert
their shares into shares of common stock on a share-for-share basis. Robert W.
Morey, the holder of the remaining 281,956 shares of Class A common stock
outstanding, has given a two-year proxy in favor of Dr. Patel to vote Mr.
Morey's shares of Class A common stock.
Item 3 Defaults Upon Senior Securities
In June 1999, the Fund converted the $15 million Note, plus accrued and unpaid
interest of approximately $0.7 million, into newly authorized senior convertible
preferred stock (Series B) of the Company (see Note 7). Prior to the conversion,
the Company had been in non-compliance with certain of the Note's provisions.
In July 1998, Key Bank (the "Bank") notified the Company that it considered the
Company not in compliance with certain financial ratio requirements included in
its two mortgages, with outstanding balances, at that time, of approximately
$4.9 million (approximately $4.4 million at March 31, 1999. The Bank has
expressed a willingness to pursue a resolution, and had not exercised its rights
or remedies. The Company had been current in the payments of its obligations
with the Bank. In June 1999, the Company reached a settlement with the Bank
whereby the Company agreed to transfer ownership of the mortgaged properties to
the Bank in settlement of the outstanding mortgages.
Item 4 Submission of Matters to a Vote of Security Holders
Not Applicable
Item 5 Other Information
a. Changes in Control
On June 11, 1999, Kiran C. Patel, M.D. ("Patel"), the principal of Well Care
HMO, Inc., a Florida corporation, an entity unrelated to WellCare, purchased a
55% ownership interest in the Company for $5 million. Dr. Patel purchased
100,000 shares (the "Shares") of a newly authorized series of senior convertible
preferred stock ("Series A Convertible Preferred Stock") of WellCare, which will
provide him with 55% of WellCare's voting power. The Series A Convertible
Preferred Stock is subject to mandatory conversion into common stock upon the
amendment to WellCare's certificate of incorporation to increase the number of
authorized shares of common stock from 20 million to 75 million. The Shares will
be convertible into 55% of the then outstanding common stock (after giving
effect to such conversion) and will be subject to anti-dilution rights under
which Dr. Patel will generally preserve his 55% interest in WellCare until there
are 75 million shares of common stock issued and outstanding. In order to
preserve his 55% interest, Dr. Patel will be required to pay the par value ($0.1
per share) for each common share subsequently purchased.
On June 11, 1999, the 1818 Fund II, L.P. converted a $15 million 8% subordinated
convertible promissory note, plus accrued and unpaid interest of approximately
$0.7 million, into 100,000 shares of a second newly authorized series of senior
convertible preferred stock ("Series B Convertible Preferred Stock") of
WellCare. The Series B Convertible Preferred Stock is non-voting and is subject
to mandatory conversion (subject to regulatory approval) into 10,000,000 shares
of WellCare's common stock upon the amendment to WellCare's certificate of
incorporation to increase the number of authorized shares from 20 million to 75
million.
As a condition of the closing of the Patel transaction, the holders of 644,287
shares of Class A common stock, which has ten votes per share, agreed to convert
their shares into shares of common stock on a share-for-share basis. Robert W.
Morey, the holder of the remaining 281,956 shares of Class A common stock
outstanding, has given a two-year proxy in favor of Dr. Patel to vote Mr.
Morey's shares of Class A common stock.
b. Disposition of Assets
In June 1999, WCNY sold its commercial business, including approximately 25,000
members, to Group Health Incorporated ("GHI") for $5 million, effective June 1,
1999. WellCare received $4 million at closing, and $1 million was placed in
escrow pending a determination of the total number of WCNY commercial members at
June 1, 1999. If the commercial membership is at least 25,000 members, all of
the proceeds will be released from escrow. WellCare and WCNY have agreed not to
engage in commercial HMO business in New York for a period of one year following
the closing.
In June 1999, the Company reached a settlement with Key Bank (the "Bank"),
whereby the Company will transfer ownership of the real property securing two
mortgages to the Bank in lieu of foreclosure. The net book value of the real
property was approximately $6.5 million compared to the outstanding mortgage
balances of approximately $4.4 million. In June 1999, the Company reached a
settlement with Premier National Bank ("Premier"), whereby the Company will
transfer ownership to Premier of the real property securing two mortgages, in
lieu of foreclosure. The net book value of the real property was approximately
$1.8 million compared to the outstanding mortgage balances of approximately $1
million.
c. Changes in Directors and Executive Officers
Effective June 11, 1999, John E. Ott, M.D., resigned as Executive Vice President
and director.
Effective June 11, 1999, the following individuals were elected to the positions
listed:
Kiran C. Patel, M.D. President, Chief Executive
Officer and Chairman of the
Board
Henry Suarez Treasurer and director
Sandip I. Patel, Esq. General Counsel
Pradip C. Patel Director
Rupesh R. Shah Director
Hitesh P. Adhia Director
Item 6 Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit 11 Computation of Net Income Per Share of
Common Stock
Exhibit 27 Financial Data Schedule
(b) Reports on Form 8-K
Not Applicable
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
The WellCare Management Group, Inc.
By: /s/ Kiran C. Patel, M.D.
--------------------------------------------
Kiran C. Patel, M.D.
Chairman of the Board, President and
Chief Executive Officer
(Principal Executive Officer)
By: /s/ Craig S. Dupont
--------------------------------------------
Craig S. Dupont
Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
Date: July 28, 1999
INDEX TO EXHIBITS
All exhibits below are filed with this Quarterly Report of Form 10-Q:
EXHIBIT NUMBER
- --------------
11 Computation of Net Income Per Share of Common Stock
27 Financial Data Schedule
THE WELLCARE MANAGEMENT GROUP, INC. AND SUBSIDIARIES
COMPUTATION OF NET INCOME PER SHARE OF COMMON STOCK
(in thousands, except per share data)
(unaudited)
THREE MONTHS ENDED MARCH 31,
---------------------------------
1999 1998
---- ----
Loss before income taxes $ (3,014) $ (1,218)
Income taxes -- --
-------- --------
Net Loss $ (3,014) $ (1,218)
======== ========
LOSS PER SHARE - BASIC $ (0.40) $ (0.19)
======== ========
Weighted average shares of
common stock outstanding 7,549 6,299
======== ========
LOSS PER SHARE - DILUTED $ (0.40) $ (0.19)
======== ========
Weighted average shares of common
stock and common stock equivalents Not Not
outstanding Applicable Applicable
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>I
This schedule contains summary financial information extracted from the
Consolidated Balance Sheet of The WellCare Management Group, Inc. and
Subsidiaries as of March 31, 1999 and the related Statement of Operations for
the period ended March 31, 1999, and is qualified in its entirety by reference
to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> US Dollars
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<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<EXCHANGE-RATE> 1
<CASH> 5,101
<SECURITIES> 2
<RECEIVABLES> 5,520
<ALLOWANCES> 2,412
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<SALES> 34,108
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<INCOME-PRETAX> (3,014)
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