UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
THE WELLCARE MANAGEMENT GROUP, INC.
(Exact name of Registrant as specified in its charter)
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COMMISSION FILE NO. 0-21684
NEW YORK 14-1647239
(State or other jurisdiction (I.R.S. Employer Identification
of incorporation or organization) Number)
PARK WEST/HURLEY AVENUE EXTENSION, KINGSTON, NEW YORK 12401
(Address of Registrant's principal executive offices)
(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
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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 [_] NO [X]
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 31, 2000 was
$11,324,088 based on the closing sales price of the common stock on such date.
The aggregate number of Registrant's shares outstanding on March 31, 2000
was 38,697,940 of common stock, $.01 par value and 313,555 shares of Class A
common stock, $.01 par value.
DOCUMENTS INCORPORATED BY REFERENCE
NONE
<PAGE>
TABLE OF CONTENTS
PAGE
PART I
ITEM 1. BUSINESS ....................................................... 4
GENERAL ........................................................ 4
BUSINESS DEVELOPMENTS ..................................... 4
RECENT EVENTS ............................................. 10
CAPITAL STRUCTURE - STOCK CONVERSIONS ..................... 11
FORWARD LOOKING STATEMENTS ................................ 11
LEGISLATIVE AND REGULATORY PROPOSALS ...................... 12
DESCRIPTION OF BUSINESS ........................................ 12
THE MANAGED HEALTH CARE INDUSTRY .......................... 12
THE WELLCARE HMOS ......................................... 15
COMPETITION ............................................... 25
MANAGEMENT INFORMATION SYSTEMS/THE YEAR 2000 .............. 26
GOVERNMENT REGULATION .......................................... 26
STATE REGULATION .......................................... 26
FEDERAL REGULATION ........................................ 31
ITEM 2. PROPERTIES ..................................................... 32
ITEM 3. LEGAL PROCEEDINGS .............................................. 33
CLASS ACTION LITIGATION ........................................ 33
OTHER MATTERS .................................................. 34
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ............ 35
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS .......................................... 36
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA ........................... 37
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS .......................... 40
ITEM 7A. QUANTITIVE AND QUALITATIVE DISCLOSURE ABOUT
MARKET RISK .................................................. 47
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA ..................... 47
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE ....................... 47
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT ............. 49
ITEM 12. EXECUTIVE COMPENSATION ......................................... 56
ITEM 13. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT ............................................... 62
PART IV
ITEM 14. EXHIBITS, CONSOLIDATED FINANCIAL STATEMENTS
AND SCHEDULES ............................................... 66
<PAGE>
PART I
ITEM 1. BUSINESS
GENERAL
The WellCare Management Group, Inc. ("WellCare" or the "Company") is a managed
health care company, whose direct and indirect wholly owned subsidiaries,
WellCare of New York, Inc. ("WCNY") and WellCare of Connecticut, Inc. ("WCCT"),
are health maintenance organizations ("HMOs"). WCCT, which is a wholly owned
subsidiary of WCNY, is modeled on WCNY and operates in the State of Connecticut.
As of December 31, 1999, WCNY membership coverage consisted of governmental
programs (Medicare, Medicaid and Child Health Plus). WCCT services only
commercial members. Until June 1, 1999, WellCare provided management services to
each of its subsidiaries. In 1999, the Company entered into a number of
transactions, which significantly changed the operations of the Company. These
transactions are described below under Business Developments.
BUSINESS DEVELOPMENTS
PATEL AND GHI TRANSACTIONS
At December 31, 1999 and December 31, 1998, the Company had a working capital
deficiency of approximately $7.4 million and $26.1 million, respectively. The
Company had incurred losses in the two years prior and was not in compliance
with the statutory net worth requirements for New York State and Connecticut
HMOs. The New York requirements called for WCNY to maintain a contingent reserve
of $4.1 million and $6.7 million at December 31, 1999 and December 31, 1998,
respectively. The New York State Insurance Department ("NYSID") has the
authority to allow an HMO to maintain a net worth of 50% to 100% of the
contingent reserve. WCNY had been operating within the 50%-100% discretionary
contingent reserve requirement during 1999 and 1998, respectively,with the full
knowledge of NYSID.
In April 1999, WCNY agreed to 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 operation of
WCNY. Failure to come into compliance with the reserve requirement could have
caused NYSID to take action, which could include restriction or revocation of
WCNY's license. At December 31, 1999 no restriction or revocation action has
taken place.
The Connecticut requirements at that time called for a minimum statutory net
worth of $1 million, whereas WCCT statutory net worth at December 31, 1999 and
December 31, 1998 was approximately $(.2) million and $.6 million, respectively,
including an account receivable from the Company of approximately $.3 million
and $.9 million at December 31, 1999 and December 31, 1998. 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.
On June 11, 1999, WellCare closed on two separate transactions. Kiran C. Patel,
M.D. ("Patel"), the principal of Well Care HMO, Inc., a Florida corporation, an
entity unrelated to WellCare, purchased a fifty-five (55%) percent ownership
interest in the Company for five (5) million dollars. As part of the purchase
transaction, Dr. Patel received 100,000 shares (the "Shares") of a newly
authorized series of senior convertible preferred stock ("Series A Convertible
Preferred Stock"), which provided Dr. Patel with 55% of WellCare's voting power.
The preferred stock was 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 twenty (20) million to seventy-five
(75) million. Due to the excess of the fair value of the underlying common stock
over the purchase price, the Company recorded a deemed dividend on the preferred
stock totaling approximately $3 million. The shares are subject to anti-dilution
rights, whereby upon conversion 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, at his
option, will pay par value ($0.01per share) for each common share subsequently
purchased.
In a second transaction, Group Health Incorporated ("GHI") purchased WCNY's
commercial line of business consisting mainly of other assets and goodwill
associated with member lives for an amount approximating five (5) million
dollars. The completed transaction became effective June 1, 1999. WellCare
received four (4) million dollars at closing and one (1) million dollars was
placed in escrow pending a determination of the total number of WCNY commercial
members at June 1, 1999. If the commercial membership were at least 25,000
members, all of the proceeds would have been released from escrow. Final
measurement date for the June 1st measurement count transpired on August 31,
1999. The actual disbursement from the escrow was established at $793,000 plus a
pro rata share of interest income. A gain of approximately $352,000 was
recognized on the GHI sales transaction and the gain was included in the
December 31, 1999 Consolidated Statement of Operations. As stipulated and agreed
upon in the GHI transaction, WellCare and WCNY will not engage in commercial HMO
business in New York for a period of one (1) year from the June 1, 1999 closing
date.
The consummation of these transactions, along with other concurrent settlements
(noted at other transactions described herein, effectively reduced the Company's
working capital deficit by approximately eighteen (18) million dollars;
developed the ability to bring WCNY within the fifty (50%) percent - hundred
(100%) percent revised contingent reserve requirement, as permitted by the New
York State Insurance Department ("NYSID"); retire most of the Company's long-
term debt; and, provide a significant reduction of WCNY's obligations to
providers.
A change in the structure and focus of the Company's operations was also
created. WellCare's operations in New York will consist solely of governmental
programs (Medicare, Medicaid and Child Health Plus), with WCNY's revised
statutory cash reserve decreased to $3.0 million, and its revised statutory
contingent reserve decreased to $3.7 million. Dr. Patel's, investment in
WellCare, was approved by New York State regulators on June 11, 1999.
In September 1999, WCNY issued WCCT an $850,000 loan in the form of a
subordinated note (see "Comprehensive Transaction" re: further details of loan
establishment). In addition, WellCare agreed to pay an installment of $67,000
per month to WCCT to settle its inter-company loan. As a result, Connecticut
Department of Insurance ("DOI") rescinded its order of Administrative
Supervision by the State's Insurance Commissioner for the year ended December
31, 1999.
COMPREHENSIVE TRANSACTION
In connection with the Patel transaction, WCNY and WCCT entered into separate
and identical management agreements with Comprehensive Health Management, Inc.
("Comprehensive"), an affiliate of Dr. Patel (majority shareholder of WellCare),
to manage their HMO operations. The management agreements with Comprehensive are
for a term of five (5) years. 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
provide services for claims processing, customer service, utilization review,
data processing/MIS, credentialing, communication, provider relations and day to
day accounting. Comprehensive will be responsible for providing financial
reports to the HMOs, as well as to the appropriate regulatory agencies.
Comprehensive's management fee will not include provision for costs associated
with marketing functions, legal costs, extraordinary accounting and audit costs,
D & O (Directors and Officers) and E & O (Errors and Omissions) Insurance
Expenses. Additionally, the management fee will not provide coverage for any
cost deemed extraordinary to Comprehensive's services.
Comprehensive loaned WCNY $850,000, as a subordinated loan, in September 1999 in
a separate transaction. The full amount of the loan was in turn issued as a
subordinated loan from WCNY to WCCT. This transaction in conjunction with other
WellCare transactions, provided substantial remedy to WCCT in meeting the
Connecticut DOI statutory net worth requirement. New York State Regulators
approved the management agreement between WCNY and Comprehensive on June 11,
1999. The Connecticut Department of Insurance did not approve the Comprehensive
management agreement with WCCT until September 1999.
PROVIDERS SETTLEMENT TRANSACTION
As a condition to the successful closing of the Patel and GHI transactions,
various hospitals, physicians and other health care providers entered into
settlement agreements to settle claims for services provided to WCNY HMO members
through April 30, 1999. The settlement agreements stipulated that the various
hospitals, physicians and other health care providers accept a payment of 30% of
the balance owed by the Company to the provider in the year of settlement, plus
5% of the balance owed by the Company, payable on February 1 of the three years
subsequent to the year of settlement, if they continue to be participating WCNY
providers. These claims are settled from a provider pool consisting of at least
ten (10) million dollars, comprising all the proceeds from the Patel and GHI
transactions in addition to eighty (80%) percent of WCNY's premium receivables
at April 30, 1999. WCNY, as stipulated, was able to use the designated provider
pool funds in excess of $10 million and up to $2.5 million, to meet statutory
reserves. As of the year ended December 31, 1999, the Company recognized an
extraordinary gain of $18.3 million due to the results of the completed provider
settlements.
THE 1818 FUND TRANSACTION
A further condition to the successful closing of the Patel transaction in June
1999, The 1818 Fund II, L.P. ("Fund"), the general partner of which is Brown
Brothers Harriman & Co., were required to convert a subordinated promissory note
issued by WellCare into a second newly authorized series of one
hundred(100)thousand shares of senior convertible preferred stock. The Fund
converted the fifteen (15) million dollar subordinated note, plus the net of
accrued and unpaid eight (8%) interest approximating $0.8 million and the
unamortized portion of the note facility fees of approximately $0.6 million into
one hundred(100)thousand shares of 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) and further predicated upon the
amendment to WellCare's certificate of incorporation to increase the number of
authorized shares of common stock from twenty (20) million to seventy-five (75)
million. Based on the completed conversion, the Fund owns ten (10) million
shares of WellCare common stock, an effective conversion price of $1.50 per
share.
In connection with the conversion of the Note, the Company recorded interest
expense of approximately $3 million relating to the fair value of the shares
received in excess of the shares issuable pursuant to the conversion terms of
the 1998 Amendment, a conversion price of $8 per share.
KEY AND PREMIER BANK TRANSACTIONS
As a further condition to the closing of the Patel transaction, in June 1999,
the Company reached a settlement with Key Bank ("Key") and Premier National Bank
("Premier"), whereby the company will transfer ownership of the real property
securing two mortgages to Key and two mortgages to Premier, in lieu of
foreclosure. The net book value of the real property was approximately $5.4
million compared to the outstanding mortgage balances of approximately $5.5
million. A loss of approximately $0.1 million was charged to operations.
The Company recorded a general and administrative 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.
CLASS A COMMON STOCK CONVERSION TRANSACTION
As an additional condition to the closing of the Patel transaction, the holders
of 680,747 shares of Class A common stock, which has ten (10) votes per share,
agreed to convert their shares into shares of common stock on a share-for-share
basis. Mr. Robert W. Morey, the holder of the remaining 313,555 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.
PRIMERGY TRANSACTION
In June 1995, the Company contributed approximately $5.1 million to its then
wholly owned subsidiary, WellCare Medical Management, Inc. ("WCMM"). WCMM was
engaged in the business of managing physician practices. The assets of WCMM were
sold for cash of $0.6 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 relative 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 cancelled in 1996. The
note receivable carried interest at a rate equal to prime plus two (2%) percent
with interest payable monthly through July 31, 2000. Primergy had paid only
interest through January 1996.
The Company has also advanced $3.4 million to Primergy ($0.6 million in 1997,
$2.1 million in 1996 and $0.7 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, carried interest at a rate equal to prime plus two (2%)
percent and was due December 31, 1996. No payments of principal have been made
on this note, or payments of interest beyond May 1996.
Primergy executed a promissory note for $2.1 million in February 1997. The note
was interest bearing at the rate of prime plus two (2%) percent. Repayment of
the principal was to occur over a thirty-six (36) month period, 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 Four (4) million dollars 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. The forbearance would be
in exchange for the right to convert the $5.1 million note into forty-three
(43%) percent 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 restated.
Primergy is obligated to continue paying monthly interest on the $2.1 million
note, with principal payments over a thirty-six (36) month period 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. This action was executed 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 fully reserved
in 1995 the original $5.1 million note receivable, plus the $0.7 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 $0.8 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. However, this transaction was not consummated.
Consequently, in July 1999, the Company entered into an agreement with Primergy,
Inc., ProMedco of the Hudson Valley, Inc. and ProMedco Management Company to
settle its outstanding indebtedness with Primergy. The agreement stipulated a
$425,000 cash payment to the Company at closing; as well as, requiring a release
to the Company from Primergy for approximately $325,000 in past Quality and
Utilization incentive payments due to Primergy. Additionally, Primergy has
agreed to pay $2 per member per month for the period commencing from August 31,
2000 to July 31, 2002 for the members assigned to Primergy IPAs by WCNY. This
amount survives any termination or breach of the IPA Service Agreements by the
contracted IPAs and is guaranteed by ProMedco Management Company. Furthermore,
any and all Quality and Utilization based compensation to the Primergy IPAs was
eliminated from the contract. The Primergy IPAs contract period was reduced and
currently will terminate on July 31, 2002. The income effect was shown as a
recovery of bad debt in the third quarter of the Company's December 31, 1999
consolidated financial statements.
RECENT EVENTS
The Company's financial statements as of December 31, 1999 and for the year then
ended, have been prepared assuming that the Company will continue as a going
concern. The auditors' report states that "the Company's recurring losses from
operations, working capital deficit, capital deficiency, and failure to maintain
100% of the contingent reserve requirement of the New York State and Connecticut
Departments of Insurance raise substantial doubt about its ability to continue
as a going concern." (See Consolidated Financial Statements).
In March 2000, WCNY made a $738,000 subordinated surplus loan to WCCT to assist
WCCT in compliance to their statutory net capital requirements. Also, WCCT was
notified by the Connecticut Insurance Department that WCCT is not in compliance
with the Risk Based Capital requirement set by the National Association of
Insurance Commissioners (NAIC). Management filed a corrective action plan with
the Connecticut Insurance Department in April 2000.
In April 2000, WCNY voluntarily ceased marketing and enrollment in its Child
Health Plus and Healthy Choice products. Management made the decision to
temporarily cease the marketing and enrollment in the Child Health Plus and
Healthy Choice products to allow WCNY to fully evaluate the current operations
and implement a business strategy that will assure WCNY Medicaid members of a
high level of quality service and care. WCNY plans on re-marketing the Child
Health Plus and Healthy Choice products within a ninety day period thereafter.
CAPITAL STRUCTURE - STOCK CONVERSIONS
During the annual shareholder's meeting held on September 30, 1999, the Company
received shareholders' and Board of Directors approval to increase the number of
authorized shares of common stock from twenty (20) million to seventy-five (75)
million. The Company's certificate of incorporation was duly amended to reflect
the approved change in authorized shares of common stock.
Mandatory conversion of senior convertible preferred stock (series A) held by
Dr. Patel and senior convertible preferred stock (series B) held by the Fund was
immediately transacted. After giving effect to the Class A common stock
conversion (see Business-Class A common stock conversion transaction) and the
mandatory conversion of the preferred series A and B stocks, there were
38,697,940 shares of common stock and 313,555 shares of Class A common stock
outstanding. At this conversion Dr. Patel owned 19,780,115 shares of common
stock which represented fifty-one (51%) percent of the aggregate number of
shares outstanding in the combined classes. Dr. Patel transferred 4% of his
shareholder ownership to other shareholders of the Company.
FORWARD LOOKING STATEMENTS
Certain statements in this Annual Report on Form 10-K are "forward-looking
statements" within the meaning of the securities laws. These "forward looking
statements" are not based on historical facts but represent current expectations
and projections regarding future events based on best estimates from information
currently available to management.
Actual results may differ from these projections due to risks, uncertainties and
assumptions that may affect certain aspects of operations, performance and
development. The risks, uncertainties and assumptions include, but are not
limited to the following:
o The Company's ability to continue as a going concern;
o The inability to consistently meet HMO statutory net worth requirement
for WCNY and/or WCCT;
o The effect of the absence of a commercial line of business for WCNY
for at least one year;
o That increased regulation will inflate health care expenses;
o That increased competition in the Company's markets or change in
product mix will unexpectedly reduce premium revenue;
o That the Company will not be successful in increasing membership
growth;
o That there may be adverse changes in Medicare and Medicaid premium
rates set by federal and state governmental agencies;
o That health care cost in any given period may be greater than expected
due to unexpected incidence of major cases, natural disasters,
epidemics, changes in physician practices, and new technologies;
o That the Company will be unable to successfully expand its operations
into New York City, Westchester County and the State of Connecticut;
o That major health care providers will be unable to maintain their
operations and reduce or eliminate their accumulated deficits; and,
o That the Company will not have the ability to obtain and retain key
executives and employees.
The Company bears no obligation to publicly update or revise any forward looking
statements, whether as a result of new information, future events or any other
reason. In light of these risks, uncertainties and assumptions, the
forward-looking events in this report may not occur.
LEGISTRATIVE AND REGULATORY PROPOSALS
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 legislation, action or regulation on the Company's business.
DESCRIPTION OF BUSINESSES
THE MANAGED HEALTHCARE INDUSTRY
Health care costs in the United States have continued to escalate dramatically
to over $1 trillion in 1999. As a result, employers, insurers, governmental
entities and health care providers have sought more effective cost containment
measures, contributing to the development of the managed care industry. 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 these measures are focused on managed care, as
a means for providing quality health care services on a cost-effective basis for
this segment of the population.
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 the case of a 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 medical 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 Medicare and Medicaid, which service the elderly and the
poor, respectively.
As part of the "GHI Transaction" (see Business Developments section) WellCare
and WCNY have agreed not to engage in commercial HMO business in New York for a
period of one year following the June 1, 1999 closing of the transaction.
Commercial HMO business at WCCT has been conducted uninterrupted.
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. Substantial growth in
aged and disabled enrollees has been realized each year reflecting increases in
beneficiary enrollment, service utilization and medical inflation.
The federal government, through HCFA, has contracted with HMOs since 1985. The
majority of Medicare beneficiaries enrolled in managed care 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, for the year 1999 HCFA based payment rates on 95% of
the average Medicare medical costs, determined by county and adjusted for age,
sex, and institutional status. In addition to the 5% 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. For the year 2000, HCFA rates are
developed based on 90% of the average Medicare medical costs, determined by
county and adjusted for age, sex, and institutional status and 10% of risk
adjustments.
At December 31, 1999, there were over 300 Medicare Risk Plans nationwide
(including multiple plans by single HMOs). On January 1, 1999, Medicare Risk
HMOs have transitioned to Medicare+Choice contract under provisions enacted by
the Balanced Budget Act of 1997. This plan develops through contract with the
Federal Health Care Financing Administration ("HCFA") to provide coverage for
Medicare eligible individuals. The contracted plans receive a fixed monthly
payment from HCFA for each qualified enrolled individual. The plan must provide
at least the benefits that would be provided through traditional Medicare.
Significantly higher levels of coverage are provided under the plans coverage
and may, however infrequent, charge an additional monthly premium to the members
for greater benefits.
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. Each state has the
option to develop a Medicaid managed care initiative, through a state specific
regulatory agency. The initiative must be approved by the HCFA. The HCFA
requires that federal standards are met and cost does not exceed the amount of a
comparable fee-for-service basis. 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 covered 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 New York and Connecticut, have received federal approval to mandate
that all Medicaid beneficiaries enroll with managed care companies to receive
medical services.
CHILD HEALTH PLUS
Child Health Plus, a newly expanded subsidized program, provides comprehensive
primary and preventive health insurance to uninsured and underinsured children
under age 19. The program covers children in low-income families that do not
have similar coverage through the workplace and who are not eligible for
Medicaid. For most families, the program is currently free or requires a low
monthly contribution.
As of December 31, 1999, approximately 426,000 of the State's uninsured children
were enrolled in the program, more than half of the uninsured children
statewide. During 1999, education, outreach and facilitated enrollment
strategies have been developed to recruit children to enroll in the program.
THE WELLCARE HMOS
WCNY and WCCT (the "WellCare HMOs") provide comprehensive health care services
to their members for a fixed monthly premium, plus a co-payment as applicable,
by the member to the physician for each office visit generally, and a dispensing
fee or co-payment 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 and other supplemental benefits.
The WellCare HMOs arrange for the provision of inpatient and outpatient hospital
health care services by contracting with hospitals. Prior to 1997, New York
hospitals were paid primarily on a diagnostic related group ("DRG") basis under
New York State law rather than by length of hospital stays (although New York
HMOs were permitted to negotiate lower DRG or per diem rates with regulatory
approval). Effective 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. WCNY's contracting efforts are focused on converting DRG and risk
bearing arrangements to a per diem methodology, and most of WCNY's significant
contracts with NY hospitals are based on a negotiated per diem rates across all
product lines. 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.
WCCT contracts with its network of hospitals using various payment
methodologies, including per diem, case rates, and discounts from charges.
Currently, efforts are underway to convert discount contracts to per diem rates.
Hospital costs are controlled when medical management assures that hospital care
is appropriate, proceeds in an efficient manner, and hospitalized members are
moved to more appropriate care settings as soon as clinically sound. New
contracts have been developed for home care and skilled nursing facilities, and
competitive skilled nursing facility level rates have been included in hospital
contracts for use when members do not require hospital-level care.
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 provider 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, which can include 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,
1999:
At December 31,
----------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
Commercial Members (1)(3) 18,200 46,700 48,400 69,700 78,900
Medicaid Members 18,700 20,700 20,800 18,300 19,100
Medicare Members (2) 5,100 10,600 10,000 5,500 2,000
Total Members 42,100 78,000 79,200 93,500 100,000
Number of Employer Groups 3,500 6,600 2,900 2,600 2,500
-------------------------
(1) Includes HMO commercial members, members enrolled in the Child Health Plus
program, and members enrolled under non-HMO specialty programs.
(2) Includes Medicare beneficiaries and Medicare supplement members.
(3) Includes 13,300, 8,900, 1,800, 900 and 400 WCCT members for 1999, 1998,
1997, 1996 and 1995, respectively.
At December 31, 1999, the five largest employer groups accounted for less than
5% of total membership.
During 1999, the membership of the WellCare HMOs was comprised of the following:
o Members enrolled through subscribing private or public sector
employers or unions, and members unaffiliated with subscriber groups
enrolling individually (collectively, "commercial members") (WCNY
members sold to GHI, effective June 1 1999);
o 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");
o Members enrolled in the New York State Child Health Plus program
(included under "commercial members");
o Medicare beneficiaries covered under Full Risk program ("Medicare
beneficiaries"); and
o Medicare beneficiaries receiving HMO supplemental coverage for medical
services not covered by Medicare ("Medicare supplement members")
(These WCNY members sold to GHI, effective June 1, 1999. See
Business-GHI Transaction).
All five classes of membership were enrolled in WCNY through June 1, 1999
(closing date for sale of commercial members to GHI). WCCT has 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
by WellCare 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 COBRA
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. The premiums for Medicaid members are funded 25% 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 that once marketing restarts, the Company will be 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, prescriptions, and certain other services and
there are annual limits on prescription benefits received per member. Medicare
members are able to dis-enroll for any reason effective the first of any month
with prior written notice. Effective January 1997, WellCare's Medicare Risk
program ("Senior Health") expanded from 8 counties with approximately 240,000
eligible individuals to 12 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. In October
1998, WCNY announced that WCNY would not renew Medicare Risk contracts in four
counties, effective January 1999. Approximately 4,000 Medicare members were
affected by this reduction. The decision was made following a review of the
medical loss ratio in each of these counties. WCNY currently participates in 13
counties with approximately 1.1 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 there are also co-payments for certain services received by
members.
MEDICAL COST CONTROL
The Company's success depends to a significant degree upon its ability to
control health care costs. WellCare use's the following methods of cost control:
(i) capitation arrangements with the independent practice associations
("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
WCNY has contractual arrangements with many of its primary care physicians
("PCP") and specialists. The arrangements are formed through contracts with
regional health care delivery networks, formerly referred to as "Alliances".
These Alliances were converted into independent practice associations ("IPA").
Agreements with each of the IPAs generally, provide for a fixed
per-member-per-month ("PMPM") fee, called a "capitation" payment. The fixed
rates are designed to cover the cost of all professional health care services
provided to the HMO members through PCP services. This format is designed to
shift a portion of the financial risk from the HMO, to the IPA. Capitated rates
were not applicable to physician services in the areas regarding certain
diagnostics and mental health substance abuse, which WCNY capitates through
contracts with certain other regional integrated delivery systems.
Each IPA, in turn, capitates a majority of it's 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. Each IPA compensates specialists on a fee-for-service basis. To the
extent the risk pools are insufficient to cover the specialists' fees, the
amounts paid to the contracted specialists as a group can be proportionately
reduced, up to a maximum of 15%. 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 amended the service agreements with the IPAs owned by Primergy (see
"Primergy Transaction" at Business Developments) in January 1999. The amendment
added Medicare risk as a product for which the IPAs would arrange for the
provision of physician primary care and specialty services and certain other
agreed upon health care services.
After the GHI transaction (see "GHI Transaction" at Business Developments), the
existing IPA service agreements, between Primergy and WCNY no longer encompassed
WCNY commercial members. WCNY intends to remain integrally involved in assisting
PCPs to efficiently manage their practices.
During 1999, IPA primary care physicians provided medical care to approximately
52% of WCNY's commercial and Medicaid members, the balance of WCNY's members
were provided services through contracts directly with PCPs and specialists. A
portion of the PCPs, are 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 the 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
New York HMOs have been permitted, subject to regulatory approval, to negotiate
lower DRG (diagnostic related group) 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.
Subsequent changes to the DRG rate-setting system now provide for a largely
unregulated free market system. Whereby, payors and hospitals are free to
negotiate the best possible rates. Additionally, changes affected various public
goods and Graduate Medical Education, eliminating directly built in add on costs
into rates set by the state. Responsibility for public goods and Graduate
Medical Education has shifted from the hospitals to the payors. In order to
remain on a cost neutral basis, payors have been renegotiating their hospital
contracts in order to provide accountability for this new cost.
In Connecticut, WCCT initially developed a network of hospitals using various
payment methods, including per diem, case rates, and discount from charges. As
WCCT experienced significant growth in 1998, the hospital network was expanded
to a more comprehensive list with more aggressive steering of members to
participating hospitals. Currently, efforts are underway to convert discount
contracts to per diem rates, and to contract with non-participating hospitals.
In 1999, WCCT has experienced marginal success in converting discount contracts
to per diem rates. Since the start of this conversion program, approximately
twenty Percent (20%) of hospitals of WCCT's network of hospitals have been
converted. Hospital costs can best be controlled when medical management assures
that hospital care is appropriate, proceeds in an efficient manner, and
hospitalized members are moved to more appropriate care settings as soon as
clinically sound. New contracts have been developed for home care and skilled
nursing facilities, and competitive skilled nursing facility level rates have
been included in hospital contracts for use when members do not require
hospital-level care.
At December 31, 1999, the WellCare HMOs contract with 70 hospitals. Also, there
are seven letters of agreement with various 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. In general, 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, throughout 1999, have continued to contract 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 who covers all of the service areas of the
WellCare HMOs, including, at December 31, 1999, a network of approximately 1,300
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
depend in large part on the Company's ability to predict, quantify, and manage
medical expenses. The Company's use of claims management procedures has proven
to be an effective means to measure and project incurred medical costs on a
timely basis throughout 1999. The expense is based in part on estimates,
including an accrual for medical services incurred but not yet reported
("IBNR"). A daily inventory of hospital days and patient stays by product line
is maintained and reviewed by medical management. Claims are entered and scanned
to the claims system and 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 as charges and
evaluated. Ongoing studies conducted for all product lines, provide 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 identified. Moreover, procedures are 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 estimate its IBNR more effectively.
The Company believes that the process of trending the ultimate resolution of
paid, pended and payable claims allows the Company to effectively and
efficiently analyze trends, changes in payments and utilization patterns
allowing the Company to respond to medical costs on a proactive versus a
reactive basis. Although the Company continues its efforts to make this
estimating process more accurate, there can be no assurance that IBNR reserve
currently recorded will be sufficient to cover medical expenses ultimately
incurred.
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 to help indicate where management improvement
efforts need to be directed.
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 and improving quality by identifying cost-effective treatment procedures
(See "Business - Quality Improvement"). The Company uses the review services of
the National Committee for Quality Assurance ("NCQA"), an independent
organization created to help oversee responses to external demands for
accountability over the managed health care industry. NCQA accreditation is a
nationally recognized standard.
In 1996, WCNY received a certificate of one-year accreditation from the NCQA.
The NCQA performed its subsequent annual review in 1997 and, in February 1998,
again awarded WCNY with its one-year certificate of accreditation. The NCQA
completed another review of WCNY in March 1999. In June 1999, WCNY received
notification that they did not satisfactorily meet the standards of the March
1999 NCQA review. Currently WCNY is assessing the review results reported by the
NCQA, and developing an appropriate plan of action to expediently correct the
deficiencies noted.
CO-PAYMENTS
To promote member participation in controlling health care costs, the WellCare
HMOs require co-payments by its non-governmental program members for most office
visits and some other services. The member makes these co-payments directly to
the physician or other provider ranging from $3 to $20 per office visit, and $25
to $50 for emergency room treatment. Certain contracts also require members to
pay co-payments for inpatient hospital services.
POINT-OF-SERVICE AND PPO PRODUCT
The HMOs offer a point-of-service ("POS") product to its commercial members,
allowing them to select providers outside of the HMOs' provider network. When a
member uses a POS product, the member is required to make a higher co-payment
and satisfy a deductible.
In addition, WellCare has established a preferred provider organization ("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.
As of June 1999, GHI transaction closing date, these products are only available
through WCCT.
MARKETING
At December 31, 1999, WellCare maintained a marketing staff of approximately 47
full time equivalent staff ("FTEs") dedicated to selling WellCare's various
products and benefit plans. Those 47 FTEs were allocated as follows: 46 for
Medicaid and Child Health Plus and 1 for Medicare+Choice. As a result of the
closing of the GHI transaction in June 1999 involving the sale of WCNY's
commercial business, the twenty-five (25) employees formerly allocated to
marketing WCNY's commercial group products, became employees of GHI. WCCT does
not currently conduct marketing for commercial business. All administrative
employees are paid by Comprehensive Health Management, Inc. in accordance with
contract specifications. Comprehensive Health Care, Inc. is responsible for
paying the administrative fees for over five hundred(500) employees.
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 New York DOH. Additionally, the Company monitors its Plan
marketing staff 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.
The Child Health Plus program is a state-subsidized commercial product regulated
and supervised by both the State Departments of Health and Insurance. Marketing
plans, including enrollment activities and all materials must be approved by the
Department of Health prior to their use. Marketing activities, consistent with
applicable rules and guidelines, include direct mail, provider assisted
outreach, community-based organization partnerships, health fairs, and media
campaigns.
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. Currently WCNY does not voluntarily perform marketing
for Medicare products. Currently, WCNY voluntarily eased marketing as per
agreement with Health Care Finance Agency ("HCFA").
WCNY also offers a supplemental coverage plan for Medicare beneficiaries through
existing employer groups who provide contributed benefit programs to retirees.
Marketing, when conducted, 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 in each of the last two years.
However, WCNY did not satisfy the requirements for passing the 1999 NCQA review
(see Business - Quality of Care Programs). The quality improvement program is
designed to maintain and continually improve the delivery of proper medical care
and includes:
o 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
o Quality of care reviews, which identify issues affecting HMO members,
including physician availability, physician treatment patterns and the
structure and content of medical records;
o 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;
o 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 complaint 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
Before WCNY sold its commercial business to GHI in June 1999, WellCare
maintained a presence in four distinct New York managed-care markets. WCCT
maintained a presence throughout 1999 in the state of Connecticut. WellCare's
four New York markets are defined as Greater Hudson Valley, Capital District,
Southern Tier and New York City/Westchester County. The Connecticut service area
covers the entire state and is considered WellCare's fifth regional market.
WellCare's Medicaid, Child Health Plus, and Medicare products are sold in New
York State exclusively.
Each of these markets presents distinct challenges and opportunities to
establish a competitive selling edge and create revenue growth. WellCare
competes in its five markets, which encompass over 300,000 businesses, 15
million people and more than 40 managed-healthcare competitors. These
competitors range in size from a start-up of 5,000 covered members to large
market leaders like Cigna, Aetna and Blue Cross & Blue Shield with millions of
covered lives. Each market has different primary competitors for WellCare and,
therefore, requires a different strategic approach relative to price, network
and product in order to succeed. In connection with the GHI transaction,
WellCare and WCNY have agreed to not engage in commercial HMO business in New
York for a period of one-year following the June 1999 closing (see Business -
GHI transaction). Wellcare holds less than a 1%(percent)share of the HMO market
for each line of business making Wellcare one of the smaller players in the HMO
industry.
MANAGEMENT INFORMATION SYSTEMS
In connection with the "Patel" and "GHI" transactions, the Company sold or
assigned substantially all of its computer hardware and software to GHI. Under
the terms of the GHI transaction, the Company will have access to historical
data for reporting purposes for a period of three years. The company has
transitioned to Diamond 950 C/S system for all data processing/MIS requirements
under the terms of the newly executed management agreements with Comprehensive
Health Management, Inc. ("Comprehensive"), an affiliate of Dr. Patel.
Management is confident that the Company's computer operations, systems and
related operating procedures are adequate to meet its business needs. The
Company's information processing and backup systems, as well as security
policies, practices and procedures are evaluated by management on a regular
basis and revised as required.
GOVERNMENT REGULATION
Federal and State governments continue to enact new laws effecting the
healthcare industry. Legislative and regulatory proposals are also under
consideration. The laws and proposals may have a material impact concerning
various features of the health care system. Some of these measures may have an
adverse effect on the Company's health care business; however, at this time
WellCare can not predict the extent of this impact, if any.
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.
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. This reserve 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, 1999, WCNY had required cash reserves of approximately $3.7 million and a
contingent reserve of approximately $4.1 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 WCNY to maintain a
net worth of 50% to 100% of the contingent reserve.
After giving effect to the reported results for 1999, at December 31, 1999 WCNY
had a statutory net worth of approximately $2.03 million. 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. At December 31, 1999
WCNY has not been notified by NYSID regarding restrictions or revocation.
In April 1999, WCNY agreed to 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 May and June 1999, the Company consummated a number of transactions
which brought WCNY within the 50% to 100% revised contingent reserve
requirement, as permitted by NYSID. The completed transactions included:
o an equity investment of $5 million; (see Business-Patel Transaction)
o In June 1999, the Company loaned WCNY $5 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.
o sale of WCNY's commercial enrollment for approximately $5 million (see
Business-GHI Transaction); o settlement of provider claims at amounts
significantly lower than the estimated liability of approximately
$33.5 million (see Business-Providers Settlement Transaction);
o re-negotiation and settlement of approximately $5.4 million of
mortgage debt (see Business-Key Bank and Premier Bank Transactions);
and,
o the conversion of the $15 million subordinated convertible note into
senior convertible preferred stock of the Company (see Business-1818
Fund Transaction).
As a result of these transactions, the State of New York did not exercise that
right.
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 statutory surplus of $2.4 million based on Regulatory Action
Level Risk Based Capital criteria defined by the NAIC. WCCT is not in compliance
with the statutory net worth requirements having a statutory net worth of
approximately ($0.2) million. At March 20, 2000, the State of Connecticut
Insurance Department authorized WCNY to issue a $ 738,746 Promissory Surplus
note to WCCT to assist WCCT in meeting their regulatory net capital
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 1997 and 1998 the Company made capital contributions to WCCT totaling
$1,143,000 in an effort to bring its statutory net worth to meet the then
required minimum of $1 million. However, at December 31, 1998, WCCT was not in
compliance with the statutory net worth requirement having a statutory net worth
of approximately $.6 million, including an account receivable from the Company
of approximately $.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. Comprehensive loaned WCNY $850,000, as a
subordinated loan, in September 1999 in a separate transaction. The full amount
of the loan was in turn issued as a subordinated loan from WCNY to WCCT. This
transaction in conjunction with other WellCare transactions, provided
substantial remedy to WCCT in meeting the Connecticut DOI statutory net worth
requirement.
Legislation by both New York State and Connecticut requires HMOs to pay
undisputed claims within 45 days of receipt. Prior to January 1, 2000, New York
State imposed a $500 penalty on late payments made on "clean" claims. Effective
January 1, 2000 New York State has passed legislation to impose a stringent
penalty of $5,000 per claim penalty for the "clean" claims not paid within 45
days, while Connecticut Statute requires interest payments. Because of the
system transition as described in "Management Information System", during 1999
WCNY and WCCT did not meet the above payment requirements on a timely basis and
in December 1999 paid approximately $35,000 to settle such penalties. During the
first quarter of 2000, the Company is current with the above payment
requirements. The Company has not included amounts due for interest payments for
the year ended December 31, 1999 and Management believes that amounts due
consist of immaterial amounts that have not been disclosed in the Company's
December 31, 1999 financial statements.
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. Effective February 2, 1999, the
Company transferred all of the outstanding capital stock of WCCT to WCNY. The
Insurance Commissioner of Connecticut granted an exemption to this requirement
because the ultimate control of WCCT remains with WellCare through its
wholly-owned subsidiary, WCNY, and WellCare asserted its intention to fund and
maintain WCCT's statutory net worth at a level equal or greater than the minimum
levels currently required. The approval of the acquisition of control of WCCT by
Dr. Patel, in June 1999 received regulatory approval on September 30, 1999.
Under New York law, transactions between a holding company and a controlled HMO
must be fair and equitable. Any transaction that involves 5% or more of WCNY's
assets requires prior approval. Dr. Patel's equity investment in WellCare,
received approval from the New York State regulators, on June 11, 1999.
RECENT STATE LEGISLATION
New York enacted a new law establishing a right for health care consumers to
obtain an external review of determinations made by HMOs and insurers when
coverage of health care has been denied on the grounds that the service is not
medically necessary or that such service is experimental or investigational and
establishing standards for the certification of the external review agents. In
addition, the law requires provider contracts to include an explanation of
provider payment methodologies; the time periods for provider payments; the
information to be relied upon to calculate payments and adjustments; and the
process to be employed to resolve disputes concerning provider payments. The law
became effective July 1, 1999.
New York also enacted a law expanding the Child Health Plus program for
eligible children up to age 19. The law increased covered services, beginning
early in 1999 with provision for: emergency, preventive and routine dental care;
speech and hearing services; emergency, preventive and routine vision care
including eyeglasses; inpatient mental health, alcohol and substance abuse
services; and durable medical equipment, hearing devices, wheelchairs and leg
braces. The measure also provides free coverage for children in families with
incomes less than 160% of the federal poverty level; lowers monthly premium
contributions for families between 160% and 222% of the federal poverty level;
eliminates co-payments for services; and provides for the development of local
public education and outreach. The legislation expands Medicaid coverage by
increasing Medicaid coverage for children from birth through age 18 with a
family income of up to 133% of the net federal poverty level. It also provides
Medicaid eligible children with 12 months of continuous coverage; and increases
income eligibility for children from 100% to 133% of the net federal poverty
level.
The measure also includes fraud and abuse provisions for Medicaid and Child
Health Plus by providing for a tax refund intercept to collect adjudicated
overpayments. Furthermore, it increases the penalties for repeat violations for
filing false Medicaid claims; and the expansion of anti-kickback provisions to
include individuals as well as Medicaid providers. Lastly, the law requires HMOs
with more than 60,000 members including Child Health Plus or Medicaid members to
implement a compliance program (State Public Health Law - ss.4414) to prevent,
detect and address instances of fraud and abuse. The legislation provides a
waiver of this requirement if the HMO has established an anti-fraud compliance
program pursuant to the State Insurance Law ss.409.
In 1998, New York enacted a law requiring the current Consumer Guide published
by the State Insurance Department. This guide ranks health plans based on the
ratio of complaints found to be valid and the ratio of appeals made through the
grievance and Utilization Review process, including the number of times a health
plan reverses a decision. The publication includes changes that took effect on
September 1, 1999. They comprise the following: the rate of physician board
certification; provider turnover rates; the percentage of enrollees who have
been seen for ambulatory or preventive care visits during the previous three
years of enrollment; and methods used to compensate providers. Also included are
accreditation status of plans and indices of quality, including rates of
mammography, prostate and cervical cancer screening, prenatal care, and
immunization. In addition to providing other information collected through the
Health Plan Employer Data Information Set (HEDIS); and the results of a consumer
satisfaction survey conducted by the State Superintendent of Insurance.
Penalties of up to $10,000 may be imposed on insurers and HMOs which fail to
respond to the New York State Insurance Department inquiries in a timely manner
and in good faith.
Effective January 1, 1997, the Health Care Reform Act ("HCRA") allowing, for the
first time, all private health care payers to negotiate payment rates for
inpatient hospital services expired on December 31, 1999. Previously, only HMOs
could negotiate rates for these services. A soon to be issued State Report
evaluating the implementation of HCRA will include recommendations regarding
this Act. As this Act expired in 1999, action regarding HCRA is under review and
consideration at the 1999 Legislative Session by the New York State Legislature.
Connecticut legislation extended the filing deadline by two months for HMOs to
submit to the Insurance Commissioner that data required by the National
Committee for Quality Assurance (NCQA) for its Health Plan Employer Data and
Information Set (HEDIS). This data must now be filed by July 1 of each year,
rather than May 1 as previously required. Due to restructuring of WCCT
operations, they are behind in filing required statutory reports.
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.
The potential for federal legislation and regulations, which may be subject to
adoption, may have an adverse affect on the Company's health care business. The
Company is unable to discern the impact of enactment of legislative and
regulatory changes to its health care product environment at this time. However,
an adverse affect may be realized through:
o reduced premiums,
o the company's ability to manage its medical costs,
o increased medical costs and operating expenses,
o regulation of levels and permitted lines of business,
o business practice regulation,
o imposed financial assessments, and
o exposure to lawsuits.
WCNY's Full Risk Medicare product is subject to regulation by the Health Care
Financing Administration ("HCFA"). Regulations also cover, among other things,
quality care; limitations on enrollment and compliance with requirements
established by peer review organizations contracting with HCFA.
Medicare+Choice (Part C) Legislation and the Balanced Budget Act of 1997 have
impacted current Risk contractors. Beginning in 1999, Medicare beneficiaries
will have more options for health care coverage (PSO, PPO, MSAs), and HCFA is
continuing to undertake an educational effort paid for by Medicare managed care
plans. Another major impact will be realized through the changes to the rate
methodology, and new time frames for submitting rate and benefit filings.
RECENT FEDERAL LEGISLATION
Federal legislation was newly passed pertaining to the Health Insurance
Portability and Accounting Act ("HIPAA") relating to the privacy of health
information and other related matters concerning the Company's administration of
health and associated benefit plans. These regulations are under current review,
to assess any expense impact in connection with compliance to the final adopted
regulations.
In 1999, the federal government stated plans to phase in risk adjustments to its
premium payments commencing over a five-year period starting January 1, 2000.
Full assessment regarding this plan, has not been determined by the Company at
this time. Consideration of offsets must be reviewed, particularly in the areas
applicable to premium reductions, user fees and risk adjustments as they relate
to supplemental premiums and benefit provisions included in the Company's
products. The Company's Management does not believe that further disclosure is
needed.
ITEM 2. PROPERTIES
At December 31, 1999, WellCare's executive offices are located in at, Park West
I building at Hurley Avenue in Kingston, New York. Park West I comprise
approximately 27,000 square feet of office space with annual rental expense of
$162,000.
In June 1999, Wellcare Development, Inc.("WCD") agreed to transfer ownership of
all of the Company's real property to the mortgagees of those properties in
consideration for the mortgagees relieving the Company of any liability under
the mortgages (see Business-Key Bank and Premier Bank Transactions).
The Company leases the following properties for WCNY: approximately 14,100
square feet in Newburgh, New York, approximately 1,200 square feet in Albany,
New York, and approximately 1,250 square feet in Binghamton, New York, at an
annual expenses of approximately $262,000, $17,550 and $17,700, respectively. In
turn, the Company subleases approximately 4,100 square feet in Newburgh, to an
unrelated health care providers with an annual rental of approximately $109,900.
The Company leases approximately 5,000 square feet of office space in North
Haven, Connecticut, for WCCT, at an annual rental expense of approximately
$75,000.
The lease costs for WCNY and WCCT are paid by Comprehensive Health Management,
Inc. in accordance with the existing management agreements between CHM and WCNY,
and between CHM and WCCT.
As a result of various business transactions completed in June 1999 (see
Business-Business Developments), the Company believes its current and future
needs will be significantly reduced. The Company is in the process of
consolidating its administrative functions and will be vacating substantially
all of the space previously occupied in the owned facilities. The Company
continues to evaluate its needs, and believes sufficient space is available for
its current and future requirements.
ITEM 3. LEGAL PROCEEDINGS
CLASS ACTION SECURITIES LITIGATION
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").
Three additional 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,
Deloitte and Touche, LLP, 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 who provided coverage to
the Company and the individual defendants. The settlement agreement received
Federal Court approval in January 2000. The Company expects to recoup from the
insurance carrier the expenses related to fees it paid to the attorneys
representing the Company and the individual defendants, less the Company's
insurance deductible. However, a receivable has not been accrued because the
recovery amount was not determinable at December 31, 1999.
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 Litigation, totaling $1,261,537 were recorded in the Company's
financial statements for the years 1996 through 1999.
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 cooperated throughout 1999 and 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. WellCare management understands, the Securities and
Exchange Commission has no plans to continue its investigation. The Company has
readily complied with all previous information requests...
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 Bulletin Board system,
effective September 9, 1998, under the symbol "WELL". Previously, the common
stock had been listed on the NASDAQ Small Cap Market, since October 30, 1997,
and prior to that on the NASDAQ National Market. The following table sets forth
the closing high and low bid 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. Over the counter market quotations reflect inter-dealer prices,
without retail mark-up, mark-down or commission and may not necessarily
represent actual transactions.
HIGH LOW
---- ---
1999
----
First Quarter 2 1/32 9/16
Second Quarter 1 3/16
Third Quarter 15/16 1/4
Fourth Quarter 4 5/8 11/32
1998
----
First Quarter 3 7/16 2 5/32
Second Quarter 3 1/8 1 29/32
Third Quarter 2 1/2 1/2
Fourth Quarter 1 11/16 1/4
On March 31, 2000, there were approximately 233 and 1 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 never paid cash dividends on its capital stock. The Company 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).
Mandatory conversion of senior convertible preferred stock (series A) held by
Dr. Patel (see Business-Patel Transaction) and senior convertible preferred
stock (series B) held by the Fund (see Business-1818 Fund Transaction) was
transacted on September 30, 1999 without issuance of shares. After giving effect
to the Class A common stock conversion without the issuance of shares (see
Business-Class A common stock conversion transaction) and the mandatory
conversion of the preferred series A and B stocks, there were 38,697,940 shares
of common stock outstanding. At this conversion Dr. Patel owned 19,780,115
shares of common stock which represented fifty-one (51%) percent of the
aggregate number of shares outstanding in the combined classes (see
Business-Capital Structure - Stock Conversions). Dr. Patel transferred 4% of his
shareholder ownership to other shareholders of the Company.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following selected financial data have been derived from the Company's
audited consolidated financial statements for the noted years and periods ended
December 31st 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, 1999 is derived from
the consolidated financial statements of the Company which have been audited by
BDO Seidman , LLP, independent auditors. BDO Seidman, LLP was approved, by the
Company's Board of Directors on January 5, 2000, as the Company's independent
auditors (see Exhibits-Form 8K). The year-end consolidated financial statements
and footnotes thereto, audited by BDO Seidman, LLP, are included elsewhere
herein this Form 10K (See "Consolidated Financial Statements").
The selected financial data in the table as of December 31, 1998 and 1997, and
for the periods ended December 31, 1998, 1997,1996 and 1995, are derived from
the consolidated financial statements of the Company which have been audited by
Deloitte & Touche, LLP, independent auditors. Deloitte & Touche, LLP were
dismissed as the Company's independent auditors for the year ending December 31,
1999.. This action was approved by the Company's Board of Directors on January
5, 2000 (see Exhibits- Form 8K).
STATEMENT OF OPERATIONS DATA:
(in millions, except per share data)
Year Ended December 31,
-----------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
Revenue: ($) ($) ($) ($) ($)
Premiums earned 110.5 142.7 142.1 157.2 144.5
Interest and other income 2.0 1.7 1.8 3.9 8.0
------ ------ ------ ------ ------
Total revenue 112.5 144.4 143.9 161.1 152.5
------ ------ ------ ------ ------
Expenses:
Medical expenses 101.8 129.5 126.3 136.0 115.6
General and administrative
expenses 22.7 32.6 34.5 39.3 30.3
Depreciation and
amortization expenses 1.1 6.0 3.6 3.3 2.3
Interest and other expenses 3.6 1.7 1.7 2.4 1.6
------ ------ ------ ------ ------
Total expenses 129.2 169.9 166.0 180.9 149.8
------ ------ ------ ------ ------
(Loss)income before
extraordinary gain
and income taxes (16.7) (25.4) (22.1) (19.8) 2.8
Provision(benefit)for
Income taxes (2.2) 5.5 -- (8.0) 1.1
------ ------ ------ ------ ------
Net loss(income) before
extraordinary item (14.5) (30.9) (22.1) (11.8) 1.7
Extraordinary gain, net of
tax of $2.2 16.1 -- -- --
------ ------ ------ ------ ------
Net income(loss) 1.6 (30.9) (22.1) (11.8) 1.7
Preferred deemed dividend (3.0) -- -- --
------ ------ ------ ------ ------
Net income(loss) available
to common shareholders (1.4) (30.9) (22.1) (11.8) 1.7
====== ====== ====== ====== ======
Year Ended December 31,
-----------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
Basic: ($) ($) ($) ($) ($)
Income/(loss) per share
Before extraordinary item (1.13) (4.36) (3.52) (1.87) 0.27
====== ====== ====== ====== ======
Extraordinary gain 1.04 -- -- -- --
====== ====== ====== ====== ======
Net income (loss) available
To common shareholders (0.09) (4.36) (3.52) (1.87) 0.27
====== ====== ====== ====== ======
Weighted average shares
of common stock outstanding 15,489 7,081 6,299 6,296 6,250
====== ====== ====== ====== ======
Diluted:
Income/(loss) per share
Before extraordinary item (1.13) (4.36) (3.52) (1.87) 0.26
====== ====== ====== ====== ======
Extraordinary gain 1.04 -- -- -- --
====== ====== ====== ====== ======
Net income (loss) available
To common shareholders (0.09) (4.36) (3.52) (1.87) 0.26
====== ====== ====== ====== ======
Weighted average shares
of common stock outstanding 15,489 7,081 6,299 6,296 6,250
====== ====== ====== ====== ======
Balance Sheet Data:
(in thousands)
Year Ended December 31,
-----------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
($) ($) ($) ($) ($)
Working capital/(deficiency) (7,440) (26,055) (5,115) 11,172 12,733
Total assets 20,323 29,939 52,538 71,340 72,011
Long term debt -- 15,078 25,852 26,467 19,209
Total liabilities 23,131 57,647 54,389 51,066 40,207
(Capital deficiency)
Shareholders' equity (2,808) (27,708) (1,851) 20,274 31,804
-------------------------
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 auditors' report states that "the
Company's recurring losses from operations, working capital deficit, capital
deficiency and failure to maintain 100% of the contingent reserve requirement
for New York State and Connecticut Department of Insurance 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. (see Business-Forward Looking Statements)
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. (see Business-Government
Regulation)
GENERAL OVERVIEW
The Company has achieved net income in 1999 but sustained net operating losses
in 1998 and 1997. At December 31, 1999, the Company has a working capital
deficiency of $7.4 million. At December 31, 1999, WCNY and WCCT were not in
compliance with the statutory net worth requirements in New York and
Connecticut, respectively. The consummation of certain transactions in March
2000 has provided the Company with capital sufficient to meet its statutory
compliance requirement. (See Business-Business Developments)
For the next few months, Management is focusing on improving customer service
and bringing the company to operational profitability. To achieve these goals,
we are working to strengthen its provider network for both WCNY and WCCT. We
will put more emphasis on marketing in WCNY's Health Choice (Medicaid) and Child
Health plus Products. The Medicare line of business will be reevaluated for
profitability by each county. Also, for WCCT, we will start marketing only in
the counties where our provider networks support the competitive pricing and
servicing to our members. For a short period, we may see a significant drop in
the membership in WCCT.
Once we achieve the above stability, Management plans to expand its product
offerings in both the New York and Connecticut markets. These expansions may
include re-entering into the commercial market in New York and applying to HCFA
in order to offer the Medicare line of business in the State of Connecticut. We
will expand these product portfolios only after stringent evaluation of market
and profitability for the company.
Resources for raising external capital are limited due to past history of the
company and the overall market sensitivity of the HMO business. Under the
circumstances, the expansion goals will be only achieved through the cash flows
generated by the company's current operations. In event of cash shortage, the
company will have to implement various costs cutting measures, including but not
limited to reducing work force, reducing commissions paid to brokers and agents
and the selling of certain assets. Also, the company may have to raise financing
through banks and other capital markets.
WellCare's principal source of revenue is premiums earned from the WellCare
HMOs. Other revenue consists principally of interest and rental income. Premiums
earned represented 98.2% of the Company's total revenue for the year ended
December 31, 1999, and were less than the percentage recognized in 1998, after
having declined in 1999 by 22.6%. In 1999, the average annual increase in WCCT
commercial membership was offset by the decrease in WCNY commercial membership
(see Business-GHI Transaction).
The Company's ability to achieve profitability is dependent on the facts
discussed above and on reducing its medical expenses as a percentage of its
premium revenue (the "medical loss ratio" or "MLR"). Although WellCare has
initiated programs to reduce the MLR, the actions have not yet generated
improvements sufficient to return the Company to profitability. Effective
January 1999, WCNY did not renew its Medicare Risk contract in four counties
(approximately 4,000 members) after reviewing its medical loss ratio in each of
these counties. Effective June 1, 1999, WCNY sold its commercial business,
including approximately 25,000 members, to GHI (see Business-GHI transaction).
The results of operations depend in large part on the Company's ability to
predict, quantify and manage medical costs. Medical expenses consist of hospital
charges, physician fees and related health care costs for its members. Medical
expenses also include estimates for medical services 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. A daily inventory of hospital days and patient stays by
product line is maintained by medical management. Claims are entered and scanned
into the claims system and then are 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 charge rates and
evaluated.
Ongoing studies for the three product lines provide 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 estimated. Moreover, procedures are 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 and 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. The Company's recording of IBNR
during 1999 and the first quarter of 2000 has, in retrospect, been for amounts
less than subsequently incurred based on the actual settlement of claims.
Although the Company continues its efforts to make this estimating process more
accurate, and believes the IBNR estimates in the December 31, 1999 consolidated
financial statements are adequate, there can be no assurance that IBNR reserve
currently recorded will be sufficient to cover medical expenses ultimately
incurred.
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. The Company also conducts
reviews of hospital inpatient and outpatient services, and educational programs
on effective managed care for its providers.
RESULTS OF OPERATIONS
The following table provides certain statement of operations data expressed as a
percentage of total revenue and other statistical data for the years indicated:
YEAR ENDED DECEMBER 31,
--------------------------
1999 1998 1997
---- ---- ----
Statement of Operations Data:
Revenue:
Premiums earned 98.2% 98.8% 98.8%
Interest and other income 1.8 1.2 1.2
----- ----- -----
Total revenue 100.0 100.0 100.0
Expenses:
Hospital services 33.6 29.2 25.1
Physician services 52.5 57.9 58.5
Other medical services 4.4 2.6 4.2
----- ----- -----
Total medical expenses 90.5 89.7 87.8
General and administrative 20.1 22.6 24.0
Depreciation and amortization 1.0 4.1 2.5
Interest and other expenses 3.2 1.2 1.1
----- ----- -----
Total expenses 114.8 117.6 115.4
Loss before extraordinary
item and income taxes (14.8) (17.6) (15.4)
(Benefit) provision for
income taxes (2.0) 3.8 --
----- ----- -----
Net loss before extraordinary
item (12.8) (21.4) (15.4)
Extraordinary gain, net of tax 14.2 -- --
----- ----- -----
Net income(loss) 1.4 (21.4) (15.4)
Preferred deemed dividend (2.6) -- --
----- ----- -----
Net loss available
to common shareholders (1.2)% (21.4)% (15.4)%
===== ===== =====
Unaudited Statistical Data:
HMO member months enrollment 655,985 854,909 901,295
Medical loss ratio(1) 92.1% 90.7% 88.8%
General and administrative
ratio(2) 20.1% 22.6% 24.0%
-------------------------
(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 expenses in 1998 include $730,216 of interest
expense relating to "Prompt Pay" payments.
(2) General and administrative expenses as a percentage of total revenue.
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
Premiums earned in 1999 decreased by 22.6%, or $32.2 million, to $110.5 from
$142.7 million in 1998. Commercial premium revenue decreased 29.6%, or $20.6
million primarily resulting from the sale of WCNY's commercial line of business.
The decrease in commercial premium revenue in WCNY exceeded the annual average
membership and corresponding premium revenue in WCCT's commercial line of
business. Medicare premium revenue decreased 7.9%, or $2.5 million, because of
11.0% decrease in member months. Medicaid premium revenue decreased 21.4% or
$9.1 million, because of an approximate 50% decrease in member months. Interest
income remained relatively consistent, and is primarily on float balance at
company's operating accounts.
Medical expense decreased 21.4%, or $27.7 million, to $101.8 million in 1999 and
increased as a percentage of premiums earned (the "medical loss ratio") from
90.7% in 1998 to 92.1% in 1999
General and administrative ("G&A") expenses decreased 31.0% or $10.0 million, to
$22.7 million in 1999 from $32.6 million in 1998, and decreased as a percentage
of total revenue (the G&A ratio") to 20.1% in 1999 from 22.6% in 1998. Included
in G&A in 1998 is an expense of $2.8 million to reduce Property & Equipment to
its net realizable value. The decrease resulted primarily from reductions in the
provision for doubtful receivables ($3.1 million), marketing related costs ($1.9
million), and payroll and payroll related costs resulting from staff reductions
and associated operating costs brought about by consummation of the
Comprehensive and GHI Transactions (see Business-Business Developments).
Depreciation and amortization decreased approximately $4.9 million, or 80.9%,
primarily because the Company has disposed the majority of its fixed assets and
sold its WCNY's Commercial books of business to GHI. Interest expense increased
106.1% to $3.6 million due to the subordinated convertible debt inducement (See
Business-Business Development).
Extraordinary income of approximately $18 million consists of claims settlement
income. The claims settlement income resulted from settlement of commercial
claims at forty-five percent of the accrued settlement amounts incurred prior to
May 1, 1999.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
Premiums earned in 1998 increased by 0.4%, or $0.6 million, to $142.7 from
$142.1 million in 1997. Commercial premium revenue decreased 17.8%, or $14.8
million, because of a 16.2%, or $13.5 million, decrease in membership and a 1.9%
decrease in average rates. Medicaid premium revenue increased 7.3%, or $2.1
million, because of a 5.3%, or $1.5 million, increase in member months, and a
1.9% increase in average rates. The 1998 Medicaid premium revenue is net of a
reduction of approximately $1.2 million to reflect retroactive reductions
attributable to 1997 ($0.4 million) and 1996 ($0.8 million). Medicare premium
revenue increased 45.6% or $13.3 million, because of a 39% or $11.4 million
increase in member months and an increase in average member rates of 4.7%.
Interest income remained relatively consistent, and is primarily on amounts due
the Company by Primergy, as more fully discussed in Note 5 of "Notes to the
Consolidated Financial Statements", which amounts have been fully reserved.
Medical expense increased 2.6%, or $3.2 million, to $129.5 million in 1998,
increased 8.1% on a PMPM basis, and increased as a percentage of premiums earned
(the "medical loss ratio") from 88.8% in 1997 to 90.7% in 1998. The 1998 medical
expense includes a $3.7 million charge for adverse development relating to 1997
and 1996 medical claims, less a credit of $0.8 million relating to the New York
State distribution of surplus market stabilization pool funds relating to years
1993 to 1996. Medical expense for 1997 included a charge of $2.5 million for
adverse development relating to medical claims reserves for 1996; a $1.7 million
charge for the estimated liability related to NYSID's audit of the demographic
pool payments and assessments for the years 1993-1996; and a reduction of $0.4
million for various adjustments related to prior periods. The 1997 medical
expense does not reflect the $3.5 million of adverse development expense
recorded in subsequent periods.
General and administrative ("G&A") expenses decreased 5.3% or $1.9 million, to
$32.6 million in 1998 from $34.5 million IN 1997, and decreased as a percentage
of total revenue (the G&A ratio") to 22.6% in 1998 from 24.0% in 1997. Included
in G&A in 1998 is an expense of $2.8 million to reduce Property & Equipment to
its net realizable value. The decrease resulted primarily from reductions in the
provision for doubtful receivables ($3.1 million), marketing related costs ($1.9
million), and payroll and payroll related costs resulting from staff reductions
in January 1998 ($0.6 million), partially offset by increases relating to Y2K
compliance ($0.5 million) and broker commissions for WCCT ($0.5 million).
Depreciation and amortization increased approximately $2.4 million, or 65.6%,
primarily because the Company amortized the remaining preoperational costs ($0.4
million), and amortized additional goodwill ($2.3 million). This reflects the
Company's assessment of the value of these assets at December 31, 1998. Interest
expense increased 4.7% to $1.7 million due to the increased interest on the
Note.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1999, the Company had a working capital deficiency of $7.4
million. At December 31, 1998 and December 31, 1997, the Company had working
capital deficiencies of $26.1 and $5.1 million, respectively. The decreased
deficiency is attributable primarily to the provider settlement agreements. The
Company's requirements for working capital are principally to meet current
obligation, 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 was dependent upon the successful consummation of certain
transactions which would provide capital sufficient to meet its financial
obligations, including statutory compliance, and its achieving a return to
profitability (see Business-Business Developments).
Net cash (used in)provided by operating activities in 1999 was approximately
($10.0) million as compared to approximately $3.4 million in 1998. In 1997, net
cash used in operating activities was approximately $4.8 million. Cash used in
1999 operating activities primarily resulted from an increase in medical costs
payable of $10.1 million, a decrease in unearned premium revenue of $4.5
million, an increase in accounts receivable of $ 2.1 million, net income of $
1.6 million and reductions of restricted cash requirements in WCNY of $1.5
million.
MANAGEMENT'S PLAN FOR EXPANSION AND PROFITABILITY:
WellCare has made major strides in improving its financial conditon during the
year 1999. Management plans to expand the membership in Child Health Plus and
Medicaid line of business in WCNY upon commencement of marketing in the fourth
quarter of 2000 . Both of these lines of business have been profitable in the
year 1999. On the other hand, management is taking a cautious approach in WCNY's
Medicare line of business and WCCT's Comercial line of business. Also, the cost
cutting measures and management's agreement with Comprehensive has allowed the
Company to reduce its expense for administrative costs.
THE YEAR 2000
The Company's computer operations, systems and related operating procedures are
adequate to meet its business needs. The Company's information processing and
backup systems, as well as security policies, practices and procedures are
evaluated by management on a regular basis and revised as required.
The Company sold or assigned substantially all of its computer equipment in June
1999 (see Business-Patel and GHI Transactions). The Company has also contracted
with a related party to have all of its data processing/MIS requirements managed
by an outside source (see Business-Comprehensive Transaction). The Company did
not experience any Y2K problems.
MEDICAL COST INFLATION AND PROFITABILITY RISK
The Company's profitability depends, in part, on the continued process of
successfully integrating and efficiently restructuring existing and acquired
health care operations. The success and efficiency factors associated with this
process include, however not limited to the following:
o Effective and timely integration of management, information systems,
and products,
o Health care industry expertise and method applied throughout a more
extensive membership base, and
o The elimination and consolidation of duplicate administrative and
customer service functions.
Medical costs had continued to rise at a higher rate than expected throughout
1999 and into the year 2000. Factors which have contributed to cost increases
comprise increases in the areas of utilization, provider contract rates and
non-contracted provider charges. Additional factors include enactment of adverse
legislation and regulation, applicable health practice and medical technology
changes and other unexpected increased cost factors. The Company believes its
premiums increases, capitation arrangements and other cost control measures
mitigate, but do not wholly offset, the effects of medical cost inflation on its
operations. However, the inability to increase premiums could negatively impact
the Company's future earnings.
Other medical cost concerns regard cost for actual medical claims exceeding
estimates,thereby having negative reserve implications. Periodic estimates using
historical claim experience and applicable adjustments of medical claims payable
are reflected and determined through IBNR. Definitive understanding of cost
factors concerning the medical claim payable analysis process is imperative, as
the primary key for this estimation process is application of historical claim
experience and comprehensive judgement. The Company is cognizant to the fact
that the estimation process is greatly affected by changes in medical cost
trends and claim payment patterns. This is especially discernable through the
Company's ability to react accordingly to unexpected changes, either directly or
indirectly, affecting this process.
ITEM 7A. QUANTITIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company is exposed to minimal interest rate risk primarily through its
short-term investments and not through its borrowing activities because in June
1999, the Company retired its long-term debt. This included conversion into
equity by The 1818 Fund II, L.P. (see Business-1818 Fund Transaction); and,
settlement by the Company of its mortgages with Key Bank and Premier National
Bank (see Business-Key Bank and Premier Bank Transactions). There were no
fluctuations in interest rates for these obligations between December 31, 1998
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 (see
Business-Business Developments).
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
The 1999 Consolidated Financial Statements and report of the Company's
independent certified public accountants are included in Item 14.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
On January 5, 2000 the Company filed Form 8K, Current Report, pursuant to
section 13 or 15(d) of the Securities Exchange Act of 1934. The purpose of this
filing was to report a dismissal of the registrant's certifying accountant in
accordance to Item 304 of Regulation S-K (Sec. 229.304) of the Securities Act of
1933.
Deloitte & Touche LLP was previously the independent auditor for The WellCare
Management Group, Inc. Effective December 30, 1999, Deloitte & Touche LLP was
dismissed from such capacity.
Deloitte & Touche's report on the Company's financial statements for the years
ended December 31, 1997 & 1998 did state that there was substantial doubt about
the Company's ability to continue as a going concern. The auditor's statement
was based upon the Company's recurring losses from operations, working capital
deficit, deficiency in assets and failure to maintain 100% of the contingent
reserve requirements of the New York State Department of Insurance. Other than
this , Deloitte & Touche's report on the Company's financial statements for 1998
and 1997 did not contain an adverse opinion or disclaimer of opinion, and was
neither qualified nor modified as to uncertainty, audit scope, or accounting
principles.
The Company's decision to dismiss Deloitte & Touche as its independent auditors
was recommended and approved by its Board of Directors.
Deloitte & Touche LLP had a disagreement with the Company's previous management
during the 1997 audit. The disagreement concerned the need for a valuation
allowance relating to deferred tax assets of the Company. The Company adhered to
Deloitte & Touche's request that an investment banker's opinion be obtained as
to the valuation of certain assets, which could be sold by the Company. Pursuant
to a tax planning strategy, the matter was resolved to the satisfaction of
Deloitte & Touche LLP. If Deloitte & Touche LLP had not been satisfied as to
this disagreement, their report on the Company's financial statements for the
year ended December 31, 1997 would have made reference to this matter.
Deloitte & Touche LLP discussed the above noted matter with the Company's
previous Board of Directors. The Company has given authorization to Deloitte &
Touche LLP to respond fully to the inquiries of BDO Seidman LLP regarding the
afforementioned disagreement.
Other than the resolved matter noted above, there were no other disagreements
with Deloitte & Touche LLP concerning the Company's two most recent fiscal years
and any subsequent period preceding their dismissal on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope or
procedure, where the noted disagreement(s), if not resolved to the satisfaction
of Deloitte & Touche LLP, would have caused them to make reference to the
subject matter of disagreement(s) in connection with their opinion.
During the Company's two most recent fiscal years and any subsequent interim
period preceding such dismissal, the Company has had no reportable events as
defined in Item 304 (a) (1) (v) of Regulation S-K.
At January 5, 2000 the Company filed Form 8K, Current Report, pursuant to
section 13 or 15(d) of the Securities Exchange Act of 1934. The purpose of this
filing was to report the engagement of the Company's certifying accountant in
accordance to Item 304 of Regulation S-K (Sec. 229.304) of the Securities Act of
1933.
For the year ending December 31, 1999, BDO Seidman LLP was engaged by The
WellCare Management Group, Inc. as its independent auditor. The engagement of
BDO Seidman LLP was approved by the Company's Board of Directors. Deloitte &
Touche LLP was dismissed as the Company's auditors, as noted above, effective
December 30, 1999. The dismissal was reported by the Company on Form 8K, filed
on January 5, 2000.
During the past two fiscal years and any subsequent interim period prior to
engaging BDO Seidman LLP, the Company has not consulted BDO Seidman, LLP
regarding: (i) either the application of accounting principles to a specified
transaction, either completed or proposed; or the type of audit opinion that
might be rendered on the financial statements of the Company, or (ii) any matter
that was either the subject of a disagreement (as defined in Item 304 (a) (1)
(iv) of Regulation S-K) or a reportable event (as defined in Item 304 (a) (1)
(v) of Regulation S-K).
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
AS OF MARCH 31, 2000, THE EXECUTIVE OFFICERS AND DIRECTORS OF THE COMPANY ARE:
NAME AGE POSITION
---- --- --------
Kiran C. Patel, M.D. 51 Chairman of the Board,
President, Chief Executive Officer
and Secretary(2)
Mark D. Dean, D.D.S. 59 Director(1);(2)
Sandip I. Patel 33 General Counsel
Pradip C. Patel 48 Director(2)
Rupesh R. Shah 38 Director
Kenneth M. Rossman 42 Chief Accounting Officer
Hitesh P. Adhia 36 Interim Chief Financial Officer
-------------------------
(1) Member, Audit Committee
(2) Member, Compensation Committee
KIRAN C. PATEL, M.D., age 51, was named as the Chairman of the Board, President
and Chief Executive Officer of the Company, and became a director of the Company
effective June 11, 1999. He was also named as the Chairman of the Board, Chief
Executive Officer and a director of WellCare of New York, Inc. ("WCNY") as of
June 11, 1999. Dr. Patel has been a practicing physician (cardiologist) from
1982 to the present, and currently continues to practice in Tampa, Florida.
Additionally, Dr. Patel is the majority shareholder and since 1988 to the
present, shoulders the administrative responsibilities of Well Care HMO, Inc.,
an unrelated State of Florida licensed Health Maintenance Organization. Dr.
Patel is a graduate of SMT, N.H.L. Municipal Medical College, India, and did his
Internal Medicine Residency and Cardiology Fellowship in the New York, New
Jersey area. Dr. Patel is the brother of Pradip C. Patel.
MARK D. DEAN, D.D.S., age 59, has been a director of the Company since 1984. Dr.
Dean has been a dentist in private practice since 1966.
SANDIP I. PATEL, age 33, became the General Counsel of the Company effective
June 11, 1999. He was also named as the General Counsel of WCNY, as of June 11,
1999. Mr. Patel has been a practicing attorney for the past 7 years, being
employed throughout this time by Patel, Moore & O'Connor, P.A. and currently
Sandip I. Patel, P.A. He is a graduate of the University of Georgia with a
degree in finance and accounting, and received his Juris Doctorate from Stetson
University College of Law.
PRADIP C. PATEL, age 48, became a director of the Company effective June 11,
1999. He was also named as a director of WCNY as of June 11, 1999. Mr. Patel has
been in the health care industry, in a management position, for over 10 years
and is currently a shareholder in and since 1986 the President of Well Care HMO,
Inc., an unrelated State of Florida licensed Health Maintenance Organization. He
is a graduate of the Gujaret University, India and received his MBA from Eastern
Michigan University. Mr. Patel is the brother of Dr. Kiran C. Patel.
RUPESH R. SHAH, age 38, became a director of the Company effective June 11,
1999. Mr. Shah has been in the health care industry, in a management position,
for over 10 years and is currently a shareholder in and is the Chief Executive
Officer of Well Care HMO, Inc., an unrelated State of Florida licensed Health
Maintenance Organization, since 1994. He is graduate of St. Xavier's College,
Gujaret University, India and Rollwala Computer Science, Gujaret University,
India. Mr. Shah is the brother-in-law of Dr. Kiran C. Patel.
HITESH P. ADHIA, age 36, became a director of the Company effective June 11,
1999. Prior to becoming a director, Mr. Adhia was and is currently a consultant
to the Company. He resigned his directorship effective September 30, 1999. On
August 10, 1999, Mr. Adhia was appointed and accepted the position of acting
Chief Financial Officer and Treasurer. Mr. Adhia has been in the finance and
accounting industry for the past 9 years. He has been an accountant in private
practice since 1993. Previously, Mr. Adhia was a financial accountant with
Florida Farm Bureau Insurance Company from February 1991 to January 1996; an
independent consultant from 1996 through June 10, 1999 and a systems analyst
with Arthur Andersen & Company, from August 1990 to October 1990. He is a
graduate of the University of South Florida with a degree in Business
Administration and a Masters in Accounting. Mr Adhia is a CPA licensed in the
State of Florida.
KENNETH M. ROSSMAN, AGE 42, became Chief Accounting Officer in May 2000. Prior
to becoming Chief Accounting Officer, Mr. Rossman was the controller of the
Company from December 1999 through April 2000, a Manager at Garcia & Ortiz, PA
from 1998 through 1999 and the Controller and Chief Financial Officer of
International Administrative Services, Inc. from 1994 through February 1998.
Prior to 1994, Mr. Rossman was employed by Coopers & Lybrand, PA and Arthur
Anderson, PA from 1984 through 1990.
THE FOLLOWING WERE EXECUTIVE OFFICERS AND DIRECTORS OF THE COMPANY DURING 1999
BUT PRIOR TO DECEMBER 31, 1999 RESIGNED:
NAME AGE POSITION
---- --- --------
Robert W. Morey, Jr. 63 Chairman of the Board(1)
Joseph R. Papa 56 President, Chief Executive Officer,
Chief Operating Officer and
Director(1)
Craig S. Dupont 45 Vice President/Chief Financial
Officer and Director
Mary Lee
Campbell-Wisley 50 Secretary; President, Chief
Executive Officer and Executive
Director(WCNY);and Director
Henry Suarez 33 Treasurer and Director(2)
Charles E. Crew, Jr. 48 Director(1)
Adele B. Reiter 46 Vice President of Legal and
Governmental Affairs
Alan B. Bernstein, M.D. 48 Chief Medical Director
John E. Ott, M.D. 63 Executive Vice President and
Director(2)
Thomas A. Curtin 37 Vice President of Sales
and Marketing
Walter W. Grist 59 Director(2)
Lawrence C. Tucker 57 Director(3)
-------------------------
(1) Member, Executive Committee
(2) Member, Audit Committee
(3) Member, Compensation Committee
ROBERT W. MOREY, JR., age 63, who was Chairman of the Board since April 30,
1996, resigned as Chairman and director, effective February 25, 1999, which
resignation was accepted by the Board of Directors on February 23, 1999.
Previously, he was also Chief Executive Officer from April 1996 until he
resigned in August 1997. Since 1972, Mr. Morey has served as President and
Chairman of RWM Management Company, Inc., a management firm founded by Mr. Morey
which is engaged in, among other things, financial counseling and reinsurance
underwriting of catastrophic health coverage for the managed care industry. Mr.
Morey was engaged in corporate banking, investment banking and the institutional
brokerage business from 1962 to 1972. Mr. Morey received a B.A. in Economics
from Yale University in 1958 and an M.B.A. from Harvard Graduate School of
Business in 1962.
JOSEPH R. PAPA, age 56, had 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. Mr. Papa resigned all of these positions,
effective January 15, 1999, and continues as a consultant to the Company through
July 1999. Mr. Papa's resignation as director was accepted by the Board of
Directors on January 12, 1999. 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.
CRAIG S. DUPONT, age 45, was named, effective January 16, 1999, to the
additional positions of: Acting President/Chief Executive Officer and director
of the Company; President, Chairman and director of WCNY; and President,
Executive Director, Treasurer and director of WellCare of Connecticut,
Inc.("WCCT"). Mr. Dupont has been Vice President/Chief Financial Officer and
Treasurer of the Company. He has also been Treasurer of WCNY and WCCT since May
1, 1998. Mr. Dupont resigned all positions effective August 18, 1999. Mr. Dupont
has over twenty years experience in the health care industry. Previously, Mr.
Dupont was Vice President, Finance of Physicians Health Services, Inc. since
January 1997, Controller and Corporate Secretary of Qualmed Health & Life
Insurance Co. from September 1995 to January 1997, Director of Financial and
Medical Analysis of Aetna Health Plans from 1993 to 1995, and Chief Financial
Officer and Treasurer for Aetna Health Plan of Southern California from 1990 to
1993. He is a graduate of California State University/Long Beach with a B.S. in
Business Administration. He is a Certified Public Accountant in California and
Connecticut.
MARY LEE CAMPBELL-WISLEY, age 50, became director of the Company, effective
February 25, 1999, and Secretary of the Company, effective March 25, 1999;
President and Chief Executive Officer of WCNY, effective February 16, 1999; and
Vice President of Operations of WCCT, effective May 12, 1998. She had been
Executive Director/COO of WCNY, since January 1997 and director of WCCT since
December 1997. Ms. Campbell-Wisely resigned all positions effective November 30,
1999. Ms. Campbell-Wisley has over 15 years experience in the health care
industry. 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 0rganizations. 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. Ms. Campbell-Wisley
earned a B.A. from SUNY at Fredonia, a B.S.N. from D'Youville College in Buffalo
and an M.B.A. from St. Bonaventure University.
HENRY SUAREZ, age 33, was named as Treasurer and became a director of the
Company effective June 11, 1999. He was also named as Treasurer and a director
of WCNY, as of June 11, 1999. Mr. Suarez resigned all positions effective
November 15, 1999. Mr. Suarez has been in the banking and finance industry for
the past 10 years. He is currently the President of Suarez Financial Group,
Inc., a banking and financial consulting firm. Previously, Mr. Suarez was Senior
Vice President, Private Client Group - Tampa Manager, for NationsBank from
February 1996 to February 1999; Vice President, Commercial Lending for
SouthTrust Bank from March 1995 to February 1996; Senior Financial Accountant
for Soloman Brothers from January 1992 to March 1995; and a Commercial Lending
Officer with Citizens and Southern Bank from May 1989 to January 1992. He is a
graduate of Florida State University with a degree in accounting and finance.
CHARLES E. CREW, JR., age 48, has been a director of the Company since 1987. Mr.
Crew resigned his position as Director effective September 30, 1999. Mr. Crew
has been employed with General Electric since 1977, where he has been Vice
President of Commercial Operations for the Plastics Business since 1994.
ADELE A. REITER, age 46, had been Vice President of Legal and Governmental
affairs since March 1998 and until her resignation, effective February 21, 1999.
Ms. Reiter joined the Company in April 1995 as part-time in-house legal counsel,
became full-time in-house legal counsel in August 1996, and was appointed as a
Vice President in July 1997. Previously, Ms. Reiter was employed by a Kingston,
New York cardiology medical practice and served on the Board of Directors of
several local non-profit organizations. She received her B.A. from State
University of New York at Stony Brook in 1993 and a Juris Doctor from Temple
University School of Law in May 1976.
ALAN B. BERNSTEIN, M.D., age 48, had been Chief Medical Officer of WellCare
since September, 1998 and until his resignation, effective May 21, 1999. He has
over ten years of managed care experience serving in senior medical and
administrative positions. Previously, he was Chief Medical Officer of UtiliMed,
Inc. in Chicago since 1997, Senior Vice President for Medical Affairs/Chief
Medical Officer with NYLCare Health Plans from May 1995 to October 1996, and
Chairman, Department of Pediatrics at The Newton-Wellesley Hospital,
Massachusetts from October 1993 until May 1995. Dr. Bernstein graduated from the
University of Rochester, New York, earning a B.A. in Biology. He graduated from
New York University School of Medicine earning his M.D., and received his M.P.H.
from University of California, Berkeley.
JOHN E. OTT, M.D., age 63, had been Executive Vice President of the Company
since June 1996 and a director since October 1995 and until his resignation,
effective June 11, 1999. 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 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.
THOMAS A. CURTIN, age 37, had been the Vice President of Sales and Marketing for
WellCare since October, 1997 and Secretary and director of WCCT, since March 1,
1999. Mr. Curtin resigned all of these positions, effective June 7, 1999. For
the prior twelve years, Mr. Curtin has been involved in sales management in the
managed care industry. Prior to WellCare, he was with 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 B.S. in Business and Economics.
WALTER W. GRIST, age 59, had been a director of the Company since February 1997.
He resigned effective January 20, 1999, which resignation was accepted by the
Board of Directors on January 20, 1999. For more than the past five years, Mr
Grist has been a Senior Manager of Brown Brothers Harriman & Co., a company
engaged in providing financial advisory and merger and acquisition related
services, which is the general partner of The 1818 Fund II, L.P., a New York
limited partnership which is the holder of the 6% subordinated convertible note
due December 31, 2002 in the principal amount of $20 million issued by the
Company (see "Certain Relationships and Related Transactions"). Mr. Grist serves
on the Board of Directors of Computerized Medical Systems, Inc., Steri-Oss, Inc.
and VAALCO Energy , Inc. Mr. Grist graduated with a B.S. degree in Business
Administration from New York University in 1965.
LAWRENCE C. TUCKER, age 56, had been a director of the Company since January
1996. He resigned effective January 20, 1999, which resignation was accepted by
the Board of Directors on January 20, 1999. For more than the past 25 years, Mr.
Tucker has been employed by Brown Brothers Harriman & Co., a company engaged in
providing financial advisory and merger and acquisition related services, having
served as general partner of that firm since 1979. Brown Brothers Harriman &
Co., is the general partner of The 1818 Fund II, L.P., a New York limited
partnership which is the holder of the 6% subordinated convertible note due
December 31, 2002 in the principal amount of $20 million issued by the Company.
(See "Certain Relationships and Related Transactions.") Mr. Tucker also serves
as director of WorldCom, Inc., Riverwood Holding, Inc., National Healthcare
Corporation and VAALCO Energy, Inc. Mr Tucker received a B.S. degree in
Engineering from Georgia Institute of Technology in 1964 and an M.B.A. from the
Wharton School of the University of Pennsylvania in 1996.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth a summary of the compensation for 1999, 1998 and
1997 earned by (i) the Company's Chief Executive Officer during 1999; (ii) each
of the four most highly compensated executive officers who were serving as an
executive officer at the end of 1999, other than the Chief Executive Officer,
and whose compensation during 1999 exceeded $100,000; and (iii) the Company's
Acting President/Chief Executive Officer, who commenced employment on May 1,
1998, whose compensation on an annual basis would have required disclosure in
the table below:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG- TERM COMPENSATION
------------------------
ANNUAL COMPENSATION AWARDS
-------------------------------------------
NAME AND OTHER ANNUAL COMMON STOCK ALL OTHER
PRINCIPAL YEAR SALARY BONUS COMPENSATION UNDERLYING COMPENSATION
POSITION ($) ($) ($) OPTIONS (#) ($)
----------------- ---- ------- ----- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
KIRAN C. PATEL,M.D. 1999 $ 0
Chairman of the Board,
President, Chief
Executive Officer,
and Secretary(1)
JOSEPH R. PAPA 1999 $120,000 -- -- -- --
President, Chief 1998 $311,538 -- * 130,000(2) $5,457(5)
Executive Officer, 1997 $300,000 -- * 200,000 $5,457(5)
Chief Operating
Officer and Director(2)
CRAIG S. DUPONT 1999 $200,000
Acting President/Chief 1998 $ 97,298 -- * 50,000(3) --
Executive Officer, 1997 -- -- -- -- --
Vice President and
Chief Financial
Officer, Treasurer and
Director(3)
MARY LEE CAMPBELL- 1999 $190,000
WISLEY 1998 $164,423 $45,000 * -- 1,085(5)
Secretary; President 1997 $129,942 -- 19,050(6) 45,000 688(5)
and Chief Executive
Officer of WellCare of
New York, Inc. and
Director(4)
</TABLE>
-------------------------
* Represents less than 10% of annual salary and bonus.
(1) Dr. Patel became Chairman of the Board, President, Chief Executive Officer
and Secretary on June 11, 1999, whereby, Dr. Patel, M.D., 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
(see Business-Patel Transaction).
(2) Mr. Papa resigned as President, Chief Executive Officer and director,
effective January 15, 1999, and simultaneously entered into a Consulting
Agreement with the Company. Under the terms of the Consulting Agreement,
Mr. Papa received a monthly fee of $24,000, through April 15, 1999, and
then a monthly fee of $12,000 through July 15, 1999.
(3) Mr. Dupont was named Acting President/Chief Executive Officer, and
director, effective January 16, 1999. He resigned all positions effective
August 18, 1999. Mr. Dupont was employed under an agreement with the
Company, effective May 1, 1998, which provides an annual base salary of
$150,000, amended to $200,000 per annum, effective January 16, 1999 upon
his assuming the additional duties of Acting President/ Chief Executive
Officer. Additionally, the Company provides Mr. Dupont with an automobile
allowance of $550 per month. In addition, on May 13, 1998, Mr. Dupont was
granted five-year incentive options to purchase 50,000 shares of common
stock of the Company at $1.91 per share. Under the agreement, in the event
of termination of employment by the Company without cause prior to May 16,
2000, the Company shall continue to pay Mr. Dupont his base salary for six
months.
(4) Ms. Campbell-Wisley was appointed as President and Chief Executive Officer
of WellCare of New York, Inc., effective February 16, 1999; elected
director of the Company, effective February 25, 1999; and elected Secretary
of the Company, effective March 25, 1999. She resigned all her positions
effective November 30, 1999. Ms. Campbell-Wisely was employed under a
three-year agreement with the Company effective January 29, 1997, which
provides for an annual base salary of $145,000. Effective February 16,
1999, the annual base salary was increased to $190,000. Ms. Campbell-Wisley
was entitled to a bonus of $47,500 if she remains in the employ of the
Company until September 1, 1999. Additionally, under the agreement, the
Company provides Ms. Campbell-Wisley with an automobile allowance of $550
per month. Under the agreement, on January 29, 1997, Ms. Campbell-Wisley
was granted five-year incentive options to purchase 34,285 shares of the
Company's common stock at $8.75 per share and five-year non-incentive
options to purchase 10,715 shares of the Company's common stock at an
exercise price equal to $8.75.
(5) Represents group life insurance premium payment.
(6) Resigned January 15, 2000
EMPLOYMENT AGREEMENTS
Mr. Rupesh R. Shah is employed under an agreement with Comprehensive Health
Management, Inc. Additionally, Mr. Shah will hold a position on the Company's
Board of Directors. As of October 5, 1999, Mr. Shah was granted seven-year
incentive options to purchase 2,000,000 shares of common stock of the Company at
$0.375 per share. Under the agreement, Mr. Shah will be able to exercise 1/7th
of the total incentive options granted at annual intervals from the grant date.
In the event of termination of employment by the Company prior to all incentive
options becoming exercisable, the balance of the unexercisable options will be
terminated.
Mr. Pradip C. Patel is employed under an agreement with Comprehensive Health
Management, Inc. Additionally, Mr. Patel has assumed the duties of Director of
the Company. As of October 5, 1999, Mr. Patel was granted seven-year incentive
options to purchase 2,000,000 shares of common stock of the Company at $0.375
per share. Under the agreement, Mr. Patel will be able to exercise 1/7th of the
total incentive options granted at annual intervals from the grant date. In the
event of termination of employment by the Company prior to all incentive options
becoming exercisable, the balance of the unexercisable options will be
terminated.
SECTION 16 PROXY STATEMENT DISCLOSURE
Section 16 of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), requires that officers, directors and holders of more than 10% of the
Common Stock (collectively, the "Reporting Persons") file reports of their
trading in the Company's equity securities with the Securities and Exchange
Commission. Based upon a review of Section 16 forms filed by the Reporting
Persons during the last fiscal year, the Company believes that the Reporting
Persons complied with the applicable Section 16 filing requirements, except as
follows (i) Dr. Patel has not filed his Form 3; (ii) Mr. Rupesh Shah has not
filed his Form 3; (iii) Mr. Sandip Patel has not filed his Form 3; (iv) Mr. P.C.
Patel has not filed his Form 3; and, (v) Mr. Hitesh Adhia has not filed his Form
3. Dr. Patel, Rupesh Shah, Sandip Patel, P.C. Patel and Hitesh Adhia expect to
file Section 16 forms by June 30, 2000;.
DIRECTOR COMPENSATION
During 1999, all directors who were not employees of the Company, received a fee
of $500 for each meeting of the Board of Directors attended, plus reimbursement
of their expenses, and an additional $500 for each meeting of the Audit
Committee or Compensation Committee attended.
MEETINGS AND COMMITTEES
The Executive Committee has all of the powers of the Board not otherwise
delegated to the Audit or Compensation Committees and, until their resignation
as directors subsequent to December 31, 1998, was comprised of Messrs. Morey,
Papa and Tucker. There were no meetings of the Executive Committee in 1999. The
Company is currently considering new appointees to fill openings in the
Executive Committee derived from member resignations.
The Audit Committee as of September 30, 1999 was comprised of Mr. Adhia, Dr.
Dean and Dr. Kiran Patel, meets with the Company's independent auditors to
review the scope of their annual audit, the adequacy of the Company's system of
internal controls, and the sufficiency of its financial reporting. As of March
31, 2000, the audit committee is comprised of Dr. Dean. There was one (1)
meeting of the Audit Committee during 1999. Mr. Grist was on the committee until
his resignation as a director, effective January 20, 1999. Mr. Ott was appointed
to the committee, effective March 12, 1999, and subsequently resigned. As of
March 31, 2000, the audit committee is comprised solely of Dr. Dean.
The Compensation Committee as of September 30, 1999 was comprised of Dr. Kiran
Patel, Dr. Dean, and Mr. Pradip C. Patel. It establishes the compensation
program for the Chief Executive Officer, recommends to the Board of Directors,
in consultation with the Chief Executive Officer, a general compensation program
for all officers; and, administers the Company's 1993 Incentive and
Non-Incentive Stock Option Plan and the Company's 1996 Non-Incentive Executive
Stock Option Plan. There were three (3) meetings of the Compensation Committee
during 1999.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION IN COMPENSATION
DECISIONS
NONE.
INDEMNIFICATION OF OFFICERS AND DIRECTORS
Through December 31, 1999, the Company has incurred legal fees for Edward A.
Ullmann and Marystephanie Corsones, the Company's former Chief Executive Officer
and former Chief Financial Officer, respectively, in the aggregate of
approximately $1,261,537, to indemnify such individuals for legal fees and
expenses incurred in connection with their defense of the Class Action
Securities Litigation in which the Company and such individuals are defendants.
The litigation, which is described in Item 3, Legal Proceedings, was settled in
January 2000 for $2.5 million with Federal Court approval. The Company expects
to recoup the related fees it paid to the attorneys representing these
individuals, from the insurance carrier which provided coverage to the
individual defendants, less the Company's insurance deductible.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of March 31, 2000, certain information with
regard to the beneficial ownership of the common stock of the Company as of the
date hereof by (i) each shareholder who is known by the Company to beneficially
own in excess of five percent (5%) of the outstanding shares of common stock or
Class A common stock, (ii) each director, (iii) each of the executive officers
named in the Summary Compensation Table, and (iv) all executive officers and
directors as a group. The percent of total has been calculated assuming the
conversion of both Series A and Series B senior convertible preferred stock into
common shares, as well as the conversion of all Class A into common stock,
except for 313,555 shares owned by Robert W. Morey. Series A and Series B senior
convertible preferred stock were deemed converted on September 30, 1999. In
connection with the Patel closing, Mr. Morey has given a two-year proxy in favor
of Dr. Patel to vote Mr. Morey's shares of Class A common stock.
<TABLE>
<CAPTION>
PERCENT OF TOTAL
-------------------------------
SENIOR
SERIES A CLASS A CONVERTIBLE CLASS A TOTAL
NAME COMMON COMMON(11) PREFERRED COMMON COMMON VOTE
---- ------ ---------- --------- ------- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Kiran C. Patel, M.D. (1)(2) -- 19,780,115 -- 100.0% 51.6% 51.0%
Mark D. Dean, D.D.S. (3)(4) -- 72,921 -- -- * *
Pradip C. Patel(1)(7)(8) -- 545,705 -- -- 1.3 1.3
Rupesh R. Shah(1)(7)(8) -- 545,705 -- -- 1.3 1.3
Sandip I. Patel(1)(7) -- 161,195 -- -- * *
The 1818 Fund II, L.P. (5)(6) -- 11,250,000 -- -- 29.1 26.9
Brown Brothers Harriman & Co
(5)(6) . -- 11,250,000 -- -- 29.1 26.9
T. Michael Long (5)(6) -- 11,250,000 -- -- 29.1 26.9
Lawrence C. Tucker (5)(6) -- 11,250,000 -- -- 29.1 26.9
All current executive officers
and directors as a group --
(4 persons)(2)(4)(8) -- 20,944,446 100.0% -- 55.4 51.2
</TABLE>
-------------------------
* Less than 1%
(1) Address is 6800 North Dale Mabry Highway, Suite 268, Tampa, FL 33614
(2) In June 1999, Dr. Patel purchased shares of a newly authorized series of
senior convertible preferred stock (Series A) for $5 million, which
provides Dr. Patel with 55% of WellCare's voting power. The preferred stock
is subject to mandatory conversion into common stock upon the amendment in
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. The investment by Dr. Patel in WellCare was approved by New
York State regulators on June 11, 1999.
(3) Address is 62 Riverview, Port Ewen, New York 12466.
(4) Includes 19,446 shares of common stock owned by Dr. Dean's wife, and 4,862
shares of common stock owned by Dr. Dean's son. Dr. Dean disclaims
beneficial ownership of the shares owned by his wife and son.
(5) Address is 59 Wall Street, New York, New York 10005.
(6) Brown Brothers Harriman & Co. ("BBH & Co."), a general partner of The 1818
Fund II, L.P. (the "Fund"), have designated Messrs. T. Michael Long and
Lawrence C. Tucker, either individually or jointly, as the sole and
exclusive partners of BBH & Co. having voting and investment power with
respect to the Note and the common stock issued upon conversion of the
shares. By virtue of BBH & Co.'s relationship with the Fund, BBH & Co. may
be deemed to beneficially own 11,250,000 shares of common stock. By virtue
of the resolution adopted by BBH & Co. designating Messrs. Long and Tucker,
either individually or jointly, as the sole and exclusive partners of BBH &
Co. having voting and investment power with respect to the shares, and the
common stock issuable upon conversion of the Notes, Messrs. Long and Tucker
may each be deemed to beneficially own 11,250,000 shares of common stock.
(7) These shares of common stock were issued from Dr. Patel's converted Series
A Preferred Stock to the designated party.
(8) Includes 285,714 shares of common stock which are held under an option
which can be converted within 60 days.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Certain transactions previously discussed in this Annual Report Form 10-K may be
characterized for notation in this Item 13. These transactions are referenced
herein this Annual report as follows:
o Patel and GHI Transactions; Part I, Business-Business Developments,
o Comprehensive Transaction; Part I, Business-Business Developments,
o 1818 Fund Transaction; Part I, Business-Business Developments,
o Class A Common Stock Conversion Transaction; Part I, Business-Business
Developments, and
o Series A Convertible Preferred Stock Conversion; Part I, Capital
Structure-Stock Conversions.
Effective July 1996, WCNY entered into an Agreement with Bienestar, Inc.
("Bienestar"), an unconsolidated affiliate whereby Bienestar provided consulting
and educational services related to wellness and integrated health services. In
November 1997, the Company decided not to renew the agreement. WellCare had
acquired 70% of Bienestar in 1996 and, in December 1996, sold its entire
interest to Mr. Ullmann, the Company's former Chief Executive Officer and
President, for $84,000. This amount was payable in three equal annual
installments, commencing in November 1996, with interest at the rate of 8% per
annum. In June 1999, the Company forgave the remaining unpaid balance of
$56,000.
<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
See Index 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>
SIGNATURE
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 May,
2000.
The WellCare Management Group, Inc.
By: /s/ Kiran C. Patel
-------------------------------------
Name: Kiran C. Patel
Title: Chairman of the Board, President
and Chief Executive 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 May 31, 2000.
Signature Title
--------- -----
/s/ Kiran C. Patel, M.D. Chairman of the Board, President
----------------------------- and Chief Executive Officer
Kiran C. Patel, M.D.
/s/ Pradip C. Patel Director
-----------------------------
Pradip C. Patel
/s/ Rupesh R. Shah Director
-----------------------------
Rupesh R. Shah
<PAGE>
WELLCARE MANAGEMENT GROUP, INC.
CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<PAGE>
WELLCARE MANAGEMENT GROUP, INC.
Independent Certified Public Accountants Report
Independent Certified Public Accountants Report
Consolidated Balance Sheets as of December 31, 1999 and 1998
Consolidated Statements of Operations for the years ended
December 31, 1999, 1998 and 1997
Consolidated Statements of Capital Deficiency for the years
ended December 31, 1999, 1998 and 1997
Consolidated Statements of Cash Flows for the years ended
December 31, 1999, 1998 and 1997
Notes to Consolidated Financial Statements
<PAGE>
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS REPORT
To the Board of Directors and Shareholders of
The Well Care Management Group, Inc.
Tampa, Florida
We have audited the accompanying consolidated balance sheet of the Well Care
Management Group, Inc (the "Company") as of December 31, 1999, and the related
consolidated statements of operations, capital deficiency and cash flows for the
year ended December 31, 1999. Our audit 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
audit.
We conducted our audit 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 audit provides 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,
1999, and the results of its operations and its cash flows for the year ended
December 31, 1999 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 consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Notes 1n and
21 to the consolidated financial statements, the Company's recurring losses from
operations, working capital deficit, capital deficiency and failure to maintain
100% of the contingent reserve requirement of the New York State and Connecticut
Departments of Insurance raise substantial doubt about its ability to continue
as a going concern. Management's plans concerning these matters are also
described in Note 21. The consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
BDO Seidman, LLP
Miami, Florida
April 12, 2000
<PAGE>
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS REPORT
To the Board of Directors and Shareholders of
The Well Care Management Group, Inc.
Kingston, New York
We have audited the accompanying consolidated balance sheet of the Well Care
Management Group, Inc (the "Company") as of December 31, 1998, and the related
consolidated statements of operations, capital deficiency and cash flows for
each of the two years in the period ended December 31, 1998. Our audit 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 audit.
We conducted our audit 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 audit provides 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,
1998, and the results of its operations and its cash flows for each of the two
years in the period ended December 31, 1998 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 consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Notes 1n and
21 to the consolidated financial statements, the Company's recurring losses from
operations, working capital deficit, deficiency in assets and failure to
maintain 100% of the contingent reserve requirement of the New York State
Department of Insurance raise substantial doubt about its ability to continue as
a going concern. Management's plans concerning these matters are also described
in Note 21. The consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
Deloitte & Touche, LLP
New York, New York
May 11, 1999
<PAGE>
WELL CARE MANAGEMENT GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands of dollars, except share data)
<TABLE>
<CAPTION>
December 31, 1999 1998
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 7,235 $ 6,393
Short-term investments - available for sale 5 2
Accounts receivable (net of allowance for doubtful accounts of
$434 in 1999 and $2,808 in 1998) 4,385 2,240
Notes receivable (net of allowance for doubtful accounts of
$1,889 in 1999 and $7,774 in 1998) -- 56
Advances to participating providers 586 56
Other receivables (net of allowance for doubtful accounts
of $500 in 1999 and $- in 1998) 2,414 1,378
Taxes receivable 284 284
Prepaid expenses and other current assets 782 541
Property and equipment disposed of in 1999 -- 5,564
--------------------------------------------------------------------------------------------------------------------
Total current assets 15,691 16,514
PROPERTY AND EQUIPMENT, net 756 2,145
OTHER ASSETS
Restricted cash 3,773 5,286
Notes receivable (net of allowance for doubtful accounts of
$1,108 in 1999 and $1,108 in 1998) -- --
Goodwill (net of amortization of $5,299 in 1998) -- 4,431
Other non-current assets (net of allowance for doubtful accounts
of $1,376 in 1999 and $1,376 in 1998 and accumulated
amortization of $- in 1999 and $1,241 in 1998) 103 1,563
--------------------------------------------------------------------------------------------------------------------
$ 20,323 $ 29,939
--------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
WELL CARE MANAGEMENT GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands of dollars, except share data)
<TABLE>
<CAPTION>
December 31, 1999 1998
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LIABILITIES AND CAPITAL DEFICIENCY
CURRENT LIABILITIES
Current portion of long-term debt $ 850 $ 5,791
Medical costs payable 18,280 26,404
Accounts payable 359 1,321
Accrued expenses and other 1,384 2,286
Unearned income 2,258 6,767
--------------------------------------------------------------------------------------------------------------------
Total current liabilities 23,131 42,569
LONG-TERM LIABILITIES
Long-term debt and other, less current portion -- 15,078
--------------------------------------------------------------------------------------------------------------------
Total liabilities 23,131 57,647
--------------------------------------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES
CAPITAL DEFICIENCY
Series A voting preferred stock ($ .01 par value; 100,000 shares
authorized, none issued and outstanding) -- --
Series B non-voting preferred stock ($.01 par value; 100,000
shares authorized, none issued and outstanding) -- --
Class A common stock ($.01 par value; 1,109,292 shares
authorized, 313,555 and 994,302 shares issued and
outstanding in 1999 and 1998, respectively) 3 10
Common stock ($.01 par value; 75,000,000 and 20,000,000
shares authorized, 38,697,940 and 6,567,940 shares issued
and outstanding in 1999 and 1998, respectively) 386 65
Additional paid-in capital 54,585 31,612
Accumulated deficit (61,693) (65,884)
Accumulated comprehensive income 1 1
Statutory reserve 4,112 6,695
--------------------------------------------------------------------------------------------------------------------
(2,606) (27,501)
PLUS:
Notes receivable from shareholders -- (5)
Treasury stock (at cost; 12,850 shares of common stock
in 1999 and 1998) (202) (202)
--------------------------------------------------------------------------------------------------------------------
Total capital deficiency (2,808) (27,708)
--------------------------------------------------------------------------------------------------------------------
$ 20,323 $ 29,939
====================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
WELL CARE MANAGEMENT GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands of dollars, except per share data)
<TABLE>
<CAPTION>
Years ended December 31, 1999 1998 1997
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUE:
Premiums earned $ 110,516 $ 142,742 $ 142,115
Administrative fee income 198 21 --
Interest and investment income 693 1,189 1,234
Other income 1,102 497 521
--------------------------------------------------------------------------------------------------------------------
Total revenue 112,509 144,449 143,870
--------------------------------------------------------------------------------------------------------------------
EXPENSES:
Medical expenses 101,798 129,494 126,251
General and administrative expenses 22,659 32,641 34,485
Depreciation and amortization expense 1,147 6,001 3,624
Interest expense 3,565 1,730 1,652
--------------------------------------------------------------------------------------------------------------------
Total expenses 129,169 169,866 166,012
--------------------------------------------------------------------------------------------------------------------
Loss before income taxes and extraordinary item (16,660) (25,417) (22,142)
(Benefit) provision for income taxes (2,152) 5,441 --
--------------------------------------------------------------------------------------------------------------------
Net loss before extraordinary item (14,508) (30,858) (22,142)
Extraordinary gain, net of tax of $2,152 16,116 -- --
--------------------------------------------------------------------------------------------------------------------
Net income (loss) 1,608 (30,858) (22,142)
Preferred stock deemed dividend (3,043) -- --
--------------------------------------------------------------------------------------------------------------------
Net loss available to common shareholders $ (1,435) $ (30,858) $ (22,142)
--------------------------------------------------------------------------------------------------------------------
Loss per share before extraordinary item - basic and diluted $ (1.13) $ (4.36) $ (3.52)
--------------------------------------------------------------------------------------------------------------------
Extraordinary gain - basic and diluted $ 1.04 $ -- $ --
--------------------------------------------------------------------------------------------------------------------
Net loss available to common shareholders - basic and diluted $ (0.09) $ (4.36) $ (3.52)
--------------------------------------------------------------------------------------------------------------------
Weighted average shares of common stock outstanding 15,489 7,081 6,299
====================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
WELL CARE MANAGEMENT GROUP, INC.
CONSOLIDATED STATEMENTS OF CAPITAL DEFICIENCY
(In thousands of dollars)
<TABLE>
<CAPTION>
Class A Accumulated
and Compre-
Class B Class A Additional Accumu- hensive
Preferred Common Common Paid-in ulated Income/
Years ended December 31, 1999, 1998 and 1997 Stock Stock Stock Capital Deficit (Loss)
--------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1996 $ -- $ 14 $ 49 $ 26,624 $ (12,121) (11)
Conversion of Class A common shares to
common shares -- (3) 3 -- -- --
Adjustment to treasury stock -- -- -- -- -- --
Repayments/reclassification of shareholders'
notes - net -- -- -- -- -- --
Net loss -- -- -- -- (22,142) --
Other comprehensive income - unrealized
holding gains -- -- -- -- -- 11
Comprehensive loss -- -- -- -- -- --
Transfer to statutory reserve -- -- -- -- (724) --
--------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 -- 11 52 26,624 (34,987) --
Conversion of subordinated convertible
note into common shares -- -- 12 4,988 -- --
Conversion of Class A common shares
to common shares -- (1) 1 -- -- --
Net loss -- -- -- -- (30,858) --
Other comprehensive income -
unrealized holding gains -- -- -- -- -- 1
Comprehensive loss -- -- -- -- -- --
Transfer to statutory reserve -- -- -- -- (39) --
--------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1998 -- 10 65 31,612 (65,884) 1
Conversion of subordinated convertible
note and accrued interest into preferred
stock 1 -- -- 15,240 -- --
Subordinated convertible debt inducement -- -- -- 3,046 -- --
Preferred stock issued for cash 1 -- -- 4,999 -- --
Conversion of preferred stock to common
shares (2) -- 314 (312) -- --
Conversion of Class A common shares to
common shares -- (7) 7 -- -- --
Net income -- -- -- -- 1,608 --
Other comprehensive income -
unrealized holding gains -- -- -- -- -- --
Comprehensive income -- -- -- -- -- --
Repayment of loan receivable -- -- -- -- -- --
Transfer from statutory reserve -- -- -- -- 2,583 --
--------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1999 $ -- $ 3 $ 386 $ 54,585 $ (61,693) 1
================================================================================================================================
</TABLE>
<PAGE>
WELL CARE MANAGEMENT GROUP, INC.
CONSOLIDATED STATEMENTS OF CAPITAL DEFICIENCY
(In thousands of dollars)
<TABLE>
<CAPTION>
Total
(Capital
Notes Deficiency)
Statutory Receivable- Treasury Shareholders'
Reserve Shareholders Stock Equity
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance, December 31, 1996 $ 5,932 $ (6) $ (207) 20,274
Conversion of Class A common shares to common shares -- -- -- --
Adjustment to treasury stock -- -- 5 5
Repayments/reclassification of shareholders' notes
- net -- 1 -- 1
Net loss -- -- -- (22,142)
Other comprehensive income - unrealized holding
gains -- -- -- 11
Comprehensive income (loss) -- -- -- (22,131)
Transfer to statutory reserve 724 -- -- --
----------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 6,656 (5) (202) (1,851)
Conversion of subordinated convertible
note into common shares -- -- -- 5,000
Conversion of Class A common shares to common
shares -- -- -- --
Net loss -- -- -- (30,858)
Other comprehensive income-unrealized holding gains -- -- -- 1
Comprehensive income (loss) -- -- -- (30,857)
Transfer to statutory reserve 39 -- -- --
----------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1998 6,695 (5) (202) (27,708)
Conversion of subordinated convertible note and
accrued interest into preferred stock -- -- -- 15,241
Subordinated convertible debt inducement -- -- -- 3,046
Preferred stock issued for cash -- -- -- 5,000
Conversion of preferred stock to common shares -- -- -- --
Conversion of Class A common shares to common
shares -- -- -- --
Net income -- -- -- 1,608
Other comprehensive income-unrealized holding gains -- -- -- --
Comprehensive income (loss) -- -- -- 1,608
Repayment of loan receivable -- 5 -- 5
Transfer from statutory reserve (2,583) -- -- --
----------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1999 $ 4,112 $ -- $ (202) (2,808)
======================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
WELL CARE MANAGEMENT GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands of dollars)
<TABLE>
<CAPTION>
Years ended December 31, 1999 1998 1997
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $ 1,608 $(30,858) $(22,142)
Adjustments to reconcile net income (loss) to net cash
(used in) provided by operating activities:
Depreciation and amortization 1,147 6,001 3,624
Decrease (increase) in deferred taxes -- 5,441 --
Interest expense on inducement 3,046 -- --
Loss on impaired assets -- 2,812 --
Loss (gain) on sale of assets and other (218) 1 103
Extraordinary gain on claim settlements (18,268) -- --
Changes in assets and liabilities:
Decrease (increase) in accounts receivable - net (2,145) 4,562 1,331
Decrease (increase) in accounts receivable -
non-current-net -- 225 530
Decrease (increase) in other receivables - net (1,036) 3,328 732
Decrease (increase) in taxes receivable/payable -- -- 6,885
Decrease (increase) in prepaid expenses and other 590 (19) (122)
Decrease in restricted cash 1,513 485 896
Decrease (increase) in advances to participating providers (531) 2,804 (540)
(Increase) in other non-current assets - excluding
preoperational costs and accounts and other receivables -- (205) (89)
Increase (decrease) in accounts payable and accrued expenses (1,370) (1,303) 1,230
Increase (decrease) in medical costs payable 10,145 9,083 1,356
Increase (decrease) in unearned income (4,509) 1,083 1,436
-----------------------------------------------------------------------------------------------------------------------
Net cash (used in)provided by operating activities (10,028) 3,440 (4,770)
-----------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Proceeds from sale of assets 5,015 -- --
Purchase of property and equipment (56) (657) (314)
Proceeds from notes receivable 61 -- --
Decrease in notes receivable -- 745 653
Sale of investments -- 101 811
Other investing activities - net -- 1 11
-----------------------------------------------------------------------------------------------------------------------
Net cash provided by investing activities 5,020 190 1,161
-----------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Repayment of notes payable and long-term debt -- (605) (898)
Proceeds from issuance of stock and treasury stock - net -- -- 5
Proceeds from issuance of preferred stock 5,000 -- --
Proceeds from loan 850 -- --
Other financing activities - net -- -- 1
-----------------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by financing activities 5,850 (605) (892)
-----------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 842 3,025 (4,501)
Cash and cash equivalents, beginning of period 6,393 3,368 7,869
-----------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 7,235 $ 6,393 $ 3,368
=======================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
WELL CARE MANAGEMENT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. Well Care Management Group, Inc. ("Well Care" 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.
Well Care 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.
In prior years, WCNY 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 with
different equity owners. Effective June 1997, the Alliances converted into
IPAs by establishing new corporations. 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 cost
of all health care services provided to 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 arrangements. Pursuant to the terms of the
restructured arrangement, WCNY reassumed the risk for certain previously
capitated services, and reduced the capitation rate paid for certain
services which continued to be provided by the IPAs. 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 substance abuse, which WCNY
capitated through contracts with certain other regional integrated delivery
systems.
Each IPA, in turn, capitates its 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' fees 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.
In April 1998, WCNY entered into service agreements with four IPAs wholly
owned by Primergy, Inc. ("Primergy") (see Note 5). These agreements amended
and restated the prior agreements with two professional corporations
managed by Primergy. Consistent with the prior agreements, the new
agreements grant the IPAs the exclusive right to contract with primary care
physicians in a six county geographic region in the mid-Hudson Valley. The
term of the agreements is ten years, subject to earlier termination under
certain conditions, including following a failure of the parties to
renegotiate rates in the event that a potential investor (the "Investor")
did not exercise its right to acquire Primergy. In July 1998, following
expiration of the Investor's option to purchase Primergy, WCNY notified
Primergy of its intent to renegotiate rates. Since a new agreement has not
been reached within 120 days after June 30, 1998, either the Company or the
respective IPA has the 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.
In October 1998, WCNY entered into a service agreement with a fifth IPA
owned by Primergy to provide non-exclusive service in the Capital District
region. Subsequently, the Company entered into discussions with Primergy
and another potential investor ("New Investor") whereby the New Investor
expressed an interest in acquiring Primergy, repaying certain of the debt
owed to the Company by Primergy, amending certain terms of the IPA service
agreements, and obtaining the right to manage certain aspects of WCNY's
business relating to its relationships with the IPAs owned by Primergy.
These discussions have not resulted in the consummation of any transaction
involving the Company, nor can there be any assurance that a transaction
will be consummated in the future.
In January 1999, WCNY amended the service agreements with the IPAs owned by
Primergy to add Medicare risk as a product for which the IPAs would arrange
for the provision of physician primary care and specialty services and
certain other agreed upon health care services.
Well Care of Connecticut, Inc. ("WCCT"), a wholly-owned subsidiary of WCNY,
operates as an IPA model HMO in the state of Connecticut. Under this type
of arrangement, agreements are entered into with IPAs and Physicians Health
Organizations ("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 "Well Care HMOs."
Well Care Administration, Inc. ("WCA") (formerly Agente Benefit
Consultants, Inc. ("ABC")) is a wholly-owned subsidiary that administered
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 until June 1999. After June 1999, WCA no longer administers the
Company's pharmacy, vision care, dental care and other specialty care
programs. WCA was rendered inactive after June 1999.
Well Care Development, Inc. ("WCD") is a wholly-owned subsidiary formed to
acquire, own and develop real estate. WCD was rendered inactive as of June
1999.
Well Care University ("WCU"), a division of Well Care, was formed to focus
on: strategic planning, training and research and development for Well Care
and others within the managed care/health care arena. WCU's operations were
eliminated during 1997 and WCU has been dormant since December 31, 1998.
Bienestar, Inc. ("Bienestar"), was an unconsolidated affiliate until
December 17, 1996, at which time Well Care 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.
The Company terminated its arrangement with Bienestar in November 1997.
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 the commercial line of
business, for both WCNY and WCCT, are determined on an annual basis using
community rating principles as required by the Insurance Department for
each state. WCNY's commercial line of business was sold in June 1999 and
the community rating principles did not apply to WCNY at December 31, 1999.
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. WCCT is 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, the New York State Insurance Department ("NYSID") determined that
WCNY was not in compliance with the requirement to settle these differences
within twelve months (see Note 20).
Accounts receivable include approximately $0 and $198,000 at December 31,
1999 and 1998, respectively, which represented the excess of subscriber
premiums accrued based on approved community rates over amounts actually
billed under guaranteed rates, net of an allowance for doubtful amounts of
approximately $0 and $1,376,000, respectively.
d. Administrative and Management Fees - Administrative and management fees
received in advance are deferred and recognized as income over the period
in which services are rendered.
e. 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 believes the IBNR estimates in
the consolidated financial statements are adequate; however, there can be
no assurance that actual health care claims costs will not exceed such
estimates.
f. Reinsurance - The Well Care HMOs insure excess loss for health care claims
under policies with a reinsurance company. 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. Effective December 1, 1998, the
deductibles for commercial, Medicaid and Medicare Full-Risk products are
$85,000, $115,000, and $100,000, respectively. From November 1995 through
October 1996, the deductible for commercial health care claims was
$115,000. The deductible decreased to $85,000 in November 1996 and has
remained at $85,000 through December 31, 1999.
Effective September 1995, WCNY initially 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. Effective for 1998, the quota
share arrangement with its reinsurer was terminated.
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.
Reinsurance premiums charged to medical expenses in the accompanying
consolidated financial statements amounted to approximately $407,076,
$573,000, and $585,000, in 1999, 1998, and 1997, respectively. Reinsurance
recoveries of approximately $393,480 $563,000, and $1,747,000, in 1999,
1998, and 1997, respectively, have been recognized as a reduction in
medical expenses.
Included in other receivables at December 31, 1999 and 1998, were amounts
recoverable from the reinsurers of approximately $245,000 and $354,000,
respectively.
g. Short-term Investments - The Company has determined that the securities
included in short-term investments might be sold prior to maturity. Such
investments have, therefore, been classified as available for sale. The
basis for available for sale securities is market value. Unrealized gains
and losses are reported as a component of capital deficit until realized.
h. 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.
i. 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
2 to 15 years.
j. 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.
Effective December 31, 1998, the Company expensed all previously
unamortized preoperational costs.
k. Goodwill - Goodwill represents the excess of the purchase price over the
fair value of the net assets of acquired entities. As a result of its
evaluation, and in light of the June 1999 transaction with an unrelated
party, the Company wrote off in 1998 approximately $2,323,000 to reduce the
remaining unamortized goodwill to its net realizable value. The remaining
balance was sold as part of one of the June 1999 transactions (See Note 2).
l. 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 1999, 1998, and 1997, were approximately $344,000, $978,000, $2,226,000,
respectively.
m. 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.
n. 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.
The Company had working capital deficiencies of $7.4 million and $26.1
million at December 31, 1999 and 1998, respectively. The working capital
deficiencies are attributable primarily to the cash operating losses
incurred by the Company during 1998 and 1999.
The Company's financial statements have been prepared assuming the Company
will continue as a going concern. The independent certified public
accountants report states that "the Company's recurring losses from
operations, working capital deficit, deficiency in assets, and failure to
maintain 100% of the contingent reserve requirements for the New York State
and Connecticut Departments of Insurance raise substantial doubt about its
ability to continue as a going concern" (See Note 21).
In June 1999, the Company consummated a number of significant transactions.
(see Note 20).
o. Stock-Based Compensation - Statement of Financial Accounting Standards
("SFAS") No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"),
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 17).
p. Earnings Per Share - Net income (loss) per share - Basic is computed using
weighted average number of common shares outstanding for the applicable
period. Net income (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 (See Note 16).
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. Asset Impairments - The Company periodically reviews the carrying value of
certain of its assets in relation to historical results, current business
conditions and trends to identify potential situations in which the
carrying value of assets may not be recoverable. If such reviews indicate
that the carrying value of such assets may not be recoverable, the Company
would estimate the undiscounted sum of the expected future cash flows of
such assets or analyze the fair value of the asset, to determine if such
sum or fair value is less than the carrying value of such assets to
ascertain if a permanent impairment exists. If a permanent impairment
exists, the Company would determine the fair value by using quoted market
prices, if available, for such assets, or if quoted market prices are not
available, the Company would discount the expected future cash flows of
such assets.
s. Current Accounting Pronouncements - In June 1998, the Financial Accounting
Standards Board Issued SFAS No. 133, Accounting for Derivative Instruments
and Hedging Activities. SFAS No. 133 requires companies to recognize all
derivative contracts as either assets or liabilities in the balance sheet
and to measure them at fair value. If certain conditions are met, a
derivative may be specifically designated as a hedge, the objective of
which is to match the timing of gain or loss recognition on the hedging
derivative with the recognition of (i) the changes in the fair value of the
hedged asset or liability that are attributable to the hedged risk or (ii)
the earnings effect of the hedged forecasted transaction. For a derivative
not designated as a hedging instrument, the gain or loss is recognized in
income in the period of change. SFAS 133 is effective for all fiscal
quarters of fiscal years beginning after June 15, 1999. Pursuant to SFAS
No. 137, the effective date has been changed to all fiscal quarters of
fiscal years beginning after June 15, 2000.
Historically, the Company has not entered into derivatives contracts either
to hedge existing risks or for speculative purposes. Accordingly, the
Company does not expect adoption of the new standard to affect its
financial statements.
t. Reclassifications - Certain amounts in the 1998 and 1997 consolidated
financial statements have been reclassified to conform to the 1999
presentation.
2. SALE OF COMMERCIAL LINE OF BUSINESS
In June 1999, WCNY sold its commercial line of business, consisting mainly
of other assets and goodwill associated with member lives, to Group Health
Incorporated ("GHI") for $5 million ("GHI transaction"). The Company
received $4 million at closing and $1 million was placed in escrow pending
a determination of the total number of WCNY commercial members in June
1999. If the commercial membership was at least 25,000 members, all of the
$1 million would be released from escrow. Final measurement date for the
June membership count was August 31, 1999. The actual disbursement from the
escrow was approximately $793,000 plus pro-rata share of interest income
earned on the escrow account. The remaining $207,000 was netted against a
non-related receivable due from GHI. As a result, during 1999, the Company
recorded a gain of approximately $352,000 in connection with the sale.
3. MEDICAL EXPENSE
a. Medical expense includes estimates for 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.
In 1998, the Company recorded medical expense of approximately $3.7 million
relating to 1997 ($3.5) and 1996 ($0.2) medical claims in excess of the
IBNR estimates previously recorded. In 1997, the Company recorded medical
expense of approximately $1.9 million for 1996 medical expenses in excess
of IBNR previously recorded.
b. In April 1998, NYSID announced the distribution of approximately $110
million in accumulated New York State market stabilization 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 $800,000 reduction in medical expense in 1998, with a
corresponding reduction in liability to the New York State demographic
pool. As part of this distribution, NYSID indicated its intent to limit
1998 individual and small group rate increases to less than ten percent
(10%).
c. During 1997, the Company expensed approximately $1.7 million relating to
NYSID's 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.
d. In prior years, two entities which were predecessors to the regional health
care delivery networks (the "Alliances"/"IPAs") with which WCNY contracted
to provide health care services to WCNY's members, 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, Chief Executive Officer
and President of the Company, had guaranteed, in his individual capacity,
two loans each in the amount of $2,700,000, made by banks to these two
entities, the proceeds of which were used to fund the aggregate payments of
$4,712,000 referred to above.
The Company subsequently restated its 1994 consolidated financial
statements to reflect the higher medical expenses, and established a
medical expense accrual. As there were no specific accounts payable by the
Company, this accrual is being reduced concurrently with the pay down of
the bank loans, with a simultaneous reduction in medical expense. A
reduction of medical expense of approximately $435,000 was recorded in
1997. There was no reduction of medical expense for 1998 and 1999. The
remaining principal balance is $0 at December 31, 1999.
e. WCNY had arrangements with several medical practices (the "medical sites")
owned by the principal shareholder of Primergy, Inc. ("Primergy") (see Note
5) for the promotion of WCNY's access to primary care medical services at
these medical sites. WCNY had made advances to the practices ($150,000 in
1997, $2,388,763 in 1996 and $710,000 in 1995), and as a result of
operating losses at the practices and the uncertainty of their ability to
repay these advances, WCNY had previously fully reserved these receivables.
During the second half of 1997, the principal shareholder of Primergy
entered negotiations to sell these medical sites to unrelated third
parties. Due to the continuing losses at these medical sites and their
importance in providing medical services to a significant number of WCNY
members, Well Care determined that it was in the best interests of WCNY's
members and Well Care to continue to subsidize the medical sites to avoid
service disruptions to WCNY's members. As a result, Well Care made
additional advances to these medical sites, to meet operating expenses, of
approximately $583,000 in the second half of 1997, and approximately
$166,000 in the first quarter of 1998, which amounts have been expensed in
1997 and 1998, respectively, as bad debt expense. The medical sites were
subsequently sold in 1998 and 1999.
As of December 31, 1999, WCNY also has unpaid notes receivable from these
medical sites of approximately $1,889,000, which have been fully reserved
(see Note 9).
f. The Alliances described in Notes 1a and 20a commenced operations in 1994.
Based on information provided to the Company by the Alliances/IPAs, the
Alliances/IPAs have operated at an accumulated deficit, from inception
through December 31, 1999, 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 Well Care
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 Primergy and the Investor referred to in
Note 5; 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 Primergy in December 1995, which
was guaranteed by the former Chairman of the Board of Directors, 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 Well Care believed that this withhold program, together
with general changes in the management of the Alliances/IPAs, and the
introduction of new provider reimbursement schedules should enable the
Alliances/IPAs to maintain their operations and reduce their accumulated
deficit.
The Company has been advised by counsel that it would have no financial
liability to providers with whom the Alliances/IPAs had contracted for
services rendered in the event the Alliances/IPAs were unable to maintain
their operations. Further, the Company has direct contracts with providers
which would require the providers to continue medical care to members on
the financial terms similar to those in the Alliances/IPAs' agreement with
providers, in the event that the Alliances/IPAs were unable to maintain
their operations. Although there is no contractual obligation, in the event
of continuing losses or increasing deficit by the Alliances/IPAs, the
Alliances/IPAs may request increased capitation rates from the Company.
Management of the Company does not believe that such additional financial
or increased contractual capitation rates should be required by the
Alliances/IPAs and has no intention to agree to such terms if requested by
the Alliances/IPAs beyond the contractual increases described in Note 1a.
4. ACQUISITION OF MANAGED CARE ADMINISTRATORS, INC. ("MCA")
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. Part of the purchase price was an annual payment to MCA, equal
to twenty percent (20%) of the pre-interest, pre-tax income generated by
the acquired assets. There was no earn out in any of the years subsequent
to the purchase and, in 1998, the Company paid MCA $75,000 in settlement of
any future payments.
5. SALE OF WELL CARE MEDICAL MANAGEMENT, INC. ("WCMM")
In June 1995, the Company contributed approximately $5.1 million to its
wholly-owned subsidiary, WCMM, which was then 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, 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 Primergy, which option was canceled in 1996. The note receivable
bears interest at a rate equal to prime plus 2%, with interest payable
monthly through July 31, 2000. Primergy has paid only interest through
January 1996 (see Note 9).
The Company 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% 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, Primergy executed the promissory note for $2.1 million,
bearing interest at the rate of prime plus 2%, 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, Well Care entered into an
agreement with Primergy whereby Well Care 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 period, 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 Well Care 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 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 $.8
million for 1998 accrued interest not paid at December 31, 1998. All
amounts due to the Company from Primergy are fully reserved at December 31,
1998.
In February 1999, the Company entered into a letter of intent to settle its
outstanding indebtedness with Primergy and to amend the five IPA service
agreements with the IPA's owned by Primergy. A transaction was not
consummated.
Consequently, in July 1999, the Company entered into an agreement with
Primergy, ProMedco of the Hudson Valley, Inc. and ProMedco Management
Company to settle its outstanding indebtedness with Primergy. The agreement
stipulated a $425,000 cash payment to the Company at closing; as well as,
requiring a release to the Company from Primergy for approximately $325,000
in past Quality and Utilization incentive payments due to Primergy.
Additionally, Primergy has agreed to pay $2 per member per month for the
period commencing from August 31, 2000 and ending on July 31, 2002 for the
members assigned to Primergy IPAs by IPA Service Agreements by the
contracted IPAs and is guaranteed by ProMedco Management Company.
Furthermore, any and all Quality and Utilization based compensation to the
Primergy IPAs was eliminated from the contract. The Primergy IPAs contract
period was reduced and currently will terminate on July 31, 2002.
6. SHORT-TERM INVESTMENTS
The value of short-term investments is as follows:
Gross
---------------------------
Unrealized Unrealized Market
Cost Gains Losses Value
--------------------------------------------------------------------------------
At December 31, 1999
Equity securities $ 3,387 $ 1,234 $ -- $ 4,621
--------------------------------------------------------------------------------
Total $ 3,387 $ 1,234 $ -- $ 4,621
--------------------------------------------------------------------------------
At December 31, 1998
Equity securities $ 1,264 $ 787 $ -- $ 2,051
--------------------------------------------------------------------------------
Total $ 1,264 $ 787 $ -- $ 2,051
--------------------------------------------------------------------------------
7. OTHER RECEIVABLES
Other receivables at December 31, 1999 and 1998 consist of the following:
1999 1998
--------------------------------------------------------------------------------
Receivable from third-party insurers $ 120,000 $ 154,000
Reinsurance receivable 245,000 354,000
New York State Pools receivable 543,000 433,000
Pharmacy rebate receivable -- 188,000
Contributions receivable -- 24,000
Insurance claim receivable 218,000 --
Third party receivable 489,000 --
Other 799,000 225,000
--------------------------------------------------------------------------------
$ 2,414,000 $ 1,378,000
================================================================================
8. PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1999 and 1998, consists of the
following:
Estimated
useful life
1999 1998 (in years)
--------------------------------------------------------------------------------
Land $ -- $ 888,000
Land improvements -- 448,000
Buildings and building improvements -- 6,389,000 7 to 15
Leasehold improvements -- 444,000 2 to 5
Computer equipment and software 3,486,000 5,613,000 5
Furniture, fixtures and equipment 1,883,000 1,685,000 5 to 7
--------------------------------------------------------------------------------
Total 5,369,000 15,467,000
Less accumulated depreciation and
amortization 4,613,000 7,758,000
--------------------------------------------------------------------------------
756,000 7,709,000
Less amounts classified as property
and equipment disposed of in 1999 -- 5,564,000
--------------------------------------------------------------------------------
$ 756,000 $ 2,145,000
================================================================================
In June 1999, the Company agreed to transfer ownership of certain real
property to the mortgagee of those properties in consideration of the
mortgagees relieving the Company of any liability for any deficiency
between the amount of the mortgage balances and the value of the property
(see Note 12). In 1998, the Company recorded a loss on impairment of assets
of approximately $2.8 million, with a corresponding reduction in buildings
and building improvements, to adjust the net carrying value of the assets
to the amount of the mortgage balances.
Included in computer equipment and furniture, fixtures and equipment is
equipment financed through capital leases aggregating approximately
$2,574,000 at December 31, 1999 and 1998, respectively. Accumulated
amortization relating to assets financed through capital leases was
approximately $2,574,000 and $2,272,000 at December 31, 1999 and 1998,
respectively.
9. NOTES RECEIVABLE
Notes receivable of approximately $1,889,000 and $1,417,000 at December 31,
1999 and 1998, respectively, represent advances made to six medical sites
to enhance WCNY's provider network (see Note 3e). The notes are
collateralized by first liens on all cash, accounts receivable, inventory,
and all office and medical equipment owned by each of the medical sites.
The notes require monthly principal and interest payments, at a rate of
7.5% per annum and mature on January 1, 2001. As no payments have been
received since March 1997, a reserve of $1,889,000 in 1999 and $793,000 in
1998 was established for unpaid principal and interest. The owner of the
medical sites sold the practices in 1998 and 1999, with the proceeds in
escrow. The net proceeds, if any, from such sales will be used to repay the
notes.
10. OTHER NON-CURRENT ASSETS
Other non-current assets at December 31, 1999 and 1998, consist of the
following:
1999 1998
--------------------------------------------------------------------------------
Capitalized costs incurred in connection
with placement of subordinated
convertible note - net $ -- $ 624,000
Long term portion of:
Receivables from third-party insurers -- 616,000
Deposits and other - net 103,000 323,000
--------------------------------------------------------------------------------
$ 103,000 $ 1,563,000
================================================================================
11. LIABILITY FOR MEDICAL COSTS PAYABLE
Activity in the medical costs payable liability is summarized as follows:
1999 1998
--------------------------------------------------------------------------------
Balance, beginning of year $ 26,404,000 $ 17,321,000
Incurred related to:
Current year 91,002,000 126,137,000
Prior years 4,369,000 3,357,000
--------------------------------------------------------------------------------
Total incurred 95,371,000 129,494,000
--------------------------------------------------------------------------------
Paid and settled related to:
Current year 102,185,000 100,663,000
Prior years 1,310,000 19,748,000
--------------------------------------------------------------------------------
Total paid 103,495,000 120,411,000
--------------------------------------------------------------------------------
Balance, end of year $ 18,280,000 $ 26,404,000
================================================================================
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 classified as IBNR.
The 1999 medical expenses does not include a charge for adverse development
relating to 1998 and prior year medical claims.
The 1998 medical expenses include a $3.7 million charge for adverse
development relating to 1997 and prior year medical claims, and a credit of
$0.8 million for New York State distribution of surplus market
stabilization pool funds relating to years 1993-1996.
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 3c) and a $0.4
million credit relating to the 1994 restatement (see Note 3d).
12. LONG-TERM DEBT
Long-term debt, at December 31, consists of the following:
1999 1998
--------------------------------------------------------------------------------
Subordinated Note Payable -
Comprehensive Health
Management, Inc; principal due
on demand; interest at 8 1/2% per
annum $ 850,000 $ --
Subordinated Convertible Note
The 1818 Fund II, L.P.; principal
due December 31, 2002; interest at
8% per annum, payable quarterly (See
Note 13) -- 15,000,000
Mortgage Payable - Key Bank of New
York; $4,610,000; interest at base rate
(7.75% at December 31, 1998);
payable monthly with a balloon of
$3,574,000 due January 1, 2000.
Secured by real estate, buildings,
fixtures and assignment of all leases. -- 3,834,000
Mortgage Payable - Key Bank of New
York; first mortgage of $862,500; -- 699,000
interest at base rate (7.75% at
December 31, 1998); payable monthly
with a balloon of $631,000 due March
1, 2000. Secured by property located
in Saugerties.
Mortgage Payable - Premier National
Bank; first mortgage of $280,000;
interest at 7.25%; balloon payment of
$727,000 due February 1, 1999. -- 731,000
Mortgage Payable - Premier National
Bank; first mortgage of $335,000
interest at prime rate (7.75% at
December 31, 1998); payable monthly
with a balloon of $260,500 due March
1, 2001 -- 300,000
Capitalized Lease Obligations; due
through 2002; monthly payments
ranging from $3,100 to $9,100 with
interest ranging from 6.5% to 10.9%;
secured by equipment. -- 305,000
--------------------------------------------------------------------------------
Total debt 850,000 20,869,000
Less current portion 850,000 5,791,000
--------------------------------------------------------------------------------
Long-term portion $ -- $ 15,078,000
================================================================================
In July 1997, Key Bank (the "Bank") notified the Company that it considered
the Company not in compliance with the Target Loan to Value Ratio provided
for in two of its mortgages, with outstanding balances, at that time, of
approximately $4.9 million (approximately $4.5 million at December 31,
1998.). 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 the Bank would
consider the Company in default of the mortgage notes. A default would
require the Company to pay a higher interest rate on the outstanding
obligations, among other potential penalties. The Company disagreed with
the Bank's valuation methodology and informed the Bank of this
disagreement.
At December 31, 1998, the Company was not in compliance with certain
financial covenants contained in the loan documents.
In June 1999, the Company reached separate settlements with the Bank and
Premier National Bank ("Premier"), whereby the Company agreed to transfer
ownership of the mortgaged properties to the Bank and Premier,
respectively, in settlement of the outstanding mortgages amounting to
approximately $5,500,000 (Note 8). Assets were exchanged as settlement for
liabilities amounting to approximately $5,400,000. A loss of approximately
$100,000 was charged to operations.
Comprehensive loaned WCNY $850,000, as a subordinated loan, in September
1999 in a separate transaction. The full amount of the loan was in turn
issued as a subordinated loan from WCNY to WCCT. This transaction in
conjunction with other Well Care transactions, provided substantial remedy
to WCCT in meeting the Connecticut DOT statutory net worth requirement.
As of December 31, 1999, the Company's subordinated long-term debt is due
on demand.
13. SUBORDINATED CONVERTIBLE NOTE
In January 1996, The Company completed a private placement of a
Subordinated convertible note in the principal amount of $20 million (the
"Note"), with The 1818 Fund II, L.P. (the "Fund"), a private equity fund
managed by Brown Brothers Harriman & Co. ("BBH & Co"). The Note and
underlying terms were amended in February 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"), subject to approval by the New York
State Department of Health ("DOH"). In May 1998, the DOH advised the
Company that such approval was not required, and the conversion into
1,250,000 shares was effective in May 1998. 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 anti-dilution adjustment.
In June 1999, the Fund converted the remaining $15 million Note, plus the
net of the accrued and unpaid interest of approximately $0.8 million and
the unamortized portion of the note facility fees of approximately $0.6
million, into newly authorized senior convertible Series B preferred stock
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 Well Care's common stock, at an effective conversion price of
$1.50 per share. The Company's certificate of incorporation was duly
amended to reflect the approved change in authorized shares of common stock
(See Note 15). For financial statement purposes, the issuance of the common
stock in exchange for the preferred stock has been reflected as of December
31, 1999, however, the physical transfer took place in April 2000.
In connection with the conversion of the Note, the company recorded
interest expense of approximately $3 million relating to the fair value of
the shares received in excess of the shares issuable pursuant to the
conversion terms of the 1998 Amendment, a conversion price of $8 per share.
14. INCOME TAXES
A reconciliation of the Federal statutory rate to the Company's effective
income tax rate is as follows:
Year ended December 31, 1999 1998 1997
--------------------------------------------------------------------------------
Federal statutory rate 34.0% 34.0% 34.0%
State income taxes - net of federal benefit 6.4 6.4 6.4
Expense on debt inducement 64.5 -- --
Income on claims settlement (105.2) -- --
Limitation of NOL carryforward due to
change in ownership 69.0 -- --
Other 113.3 -- --
Change in valuation allowance (182.0) -- --
--------------------------------------------------------------------------------
Effective rate --% 40.4% 40.4%
================================================================================
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, 1999 and 1998 are as follows:
December 31, 1999 1998
--------------------------------------------------------------------------------
Deferred tax assets:
Accounts and other receivables -
bad debt reserves $ 2,144,000 $ 6,070,000
Other 538,000 47,000
Net operating loss carry forward 3,893,000 16,109,000
--------------------------------------------------------------------------------
Total 6,575,000 22,226,000
--------------------------------------------------------------------------------
Deferred tax liabilities:
Depreciable assets -- 258,000
--------------------------------------------------------------------------------
Total -- 258,000
--------------------------------------------------------------------------------
Net before valuation allowance 6,575,000 21,968,000
Less: valuation allowance 6,575,000 21,968,000
--------------------------------------------------------------------------------
Net deferred tax asset $ -- $ --
================================================================================
The Company has net operating loss ("NOL") carryforwards in the amount of
approximately $9,636,000 expiring through 2019, after consideration of
limitations on their use imposed by Internal Revenue Code Section 382 as a
result of the change in the Company's ownership. As a result of this change
in ownership, the deferred tax asset in the amount of approximately
$16,109,000 was written off against the valuation allowance. However, the
Company's management is planning to apply for a private letter ruling with
respect to the manner in which this limitation is calculated. If the
Company were successful in obtaining such a ruling, the amount of the NOLs,
which may be recognizable in the future, would increase. While the amount
of any such increase is currently unknown, it is anticipated that it may
result in additional NOLs in the amount of approximately $6,949,000
becoming available. 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 may be
achieved in the future, in view of their size and length of the expected
recoupment period, the Company provided a 100% valuation allowance in 1999
and 1998, respectively, with respect to the deferred tax assets for 1999
and 1998.
15. PURCHASE/CONVERSION OF PREFERRED STOCK
On June 11, 1999, Dr. Kiran C. Patel, M.D. ("Dr. Patel"), purchased a
fifty-five (55%) percent ownership interest in the Company for $5 million.
As part of the purchase transaction, Dr. Patel received 100,000 shares (the
"Shares") of a newly authorized series of senior convertible preferred
stock ("Series A Convertible Preferred Stock"), which provided Dr. Patel
with 55% of Well Care's voting power. The preferred stock was subject to
mandatory conversion into common stock upon the amendment to Well Care's
certificate of incorporation to increase the number of authorized shares of
common stock from twenty (20) million to seventy-five (75) million. Due to
the excess of the fair value of the underlying common stock which totaled
approximately $8 million, over the purchase price, the Company recorded a
deemed dividend on the preferred stock totaling approximately $3 million.
The shares are subject to anti-dilution rights, whereby upon conversion Dr.
Patel will generally preserve his 55% interest in Well Care until there are
75 million shares of common stock issued and outstanding. In order to
preserve his 55% interest, Dr. Patel, at his option, will pay par value
($0.01 per share) for each common share subsequently purchased. The
difference of the fair value of the shares received over the par value will
be recorded as an expense in the period the shares are purchased.
As an additional condition to the closing of the Patel transaction, the
holders of 680,747 shares of Class A common stock, which has ten (10) votes
per share, agreed to convert their shares into shares of common stock on a
share-for-share basis. Mr. Robert W. Morey, the holder of 313,555 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.
During the annual shareholder's meeting held on September 30, 1999, the
Company received shareholders' and Board of Directors approval to increase
the number of authorized shares of common stock from twenty (20) million to
seventy-five (75) million. The Company's certificate of incorporation was
duly amended to reflect the approved change in authorized shares of common
stock.
Mandatory conversion of senior convertible preferred stock (Series A) held
by Dr. Patel and senior convertible preferred stock (Series B) held by the
Fund was immediately transacted. After giving effect to the Class A common
stock conversion and the mandatory conversion of the preferred Series A and
B stock, there was 38,697,940 shares of common stock and 313,555 shares of
Class A common stock outstanding. After this conversion Dr. Patel owned
21,449,253 shares of common stock. Dr. Patel transferred, in a private
transaction unrelated to the Company, 1,669,138 shares of common stock to
various business associates. After the transfer, Dr. Patel owned 19,780,115
shares of common stock which represented fifty-one (51%) percent of the
aggregate number of shares outstanding in the combined classes. For
financial statement purposes, the issuance of the common stock in exchange
for the preferred stock has been reflected as of December 31, 1999,
however, the physical transfer took place in April 2000.
16. EARNINGS PER SHARE
The 8% subordinated convertible note amounting to $15,000,000 is not
included in the computation of diluted Earnings Per Share (EPS) prior to
its conversion since its effect would be anti-dilutive. The note was
converted during 1999.
Options to purchase 4,000,000 shares of common stock at $0.375 per share,
were outstanding during 1999, but not included in the computation of
diluted EPS as the options were anti-dilutive. The options, which expire in
2006, were outstanding at December 31, 1999.
Options to purchase an additional 9,535 shares of common stock were
outstanding, but were not included in the computation of diluted EPS as the
options were anti-dilutive. The options, which have various expiration
dates, were outstanding at December 31, 1999.
17. STOCK OPTIONS
During 1999, 1998 and 1997, 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:
1999 1998 1997
--------------------------------------------------------------------------------
Outstanding, beginning of year 598,741 650,179 556,455
Exercised during the year -- -- --
Terminated during the year (589,206) (275,438) (106,368)
Granted during the year 4,000,000 224,000 200,092
--------------------------------------------------------------------------------
Outstanding, end of year 4,009,535 598,741 650,179
--------------------------------------------------------------------------------
Options exerciseable at year end 580,964 463,005 338,921
--------------------------------------------------------------------------------
Option price per share $ 0.375-24.50 $ 1.25-$24.50 $ 3.01-$24.50
--------------------------------------------------------------------------------
During 1999, the Company granted 4,000,000 options to purchase common stock
at an exercise price of $.375 per share. The options expire in ten years
and vest over a period of seven years. The fair value of the granted
options amounted to $.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. The President resigned, effective January 15,
1999, and his qualified options terminated April 15, 1999.
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, 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: 1999 1998 1997
--------------------------------------------------------------------------------
Outstanding, beginning of year 600,000 600,000 600,000
Exercised during the year -- -- --
Terminated during the year (600,000) -- --
Granted during the year -- -- --
--------------------------------------------------------------------------------
Outstanding, end of year -- 600,000 600,000
================================================================================
Options exercisable at year end -- 400,000 200,000
================================================================================
Option price per share $ -- $ 4.00-$6.25 $4.00-$6.25
================================================================================
In December 1997, the Company amended the exercise prices on the 600,000
options granted in 1996 to the Chairman of the Board. The options
terminated, effective February 25, 1999, upon the Chairman's resignation as
Chairman and Director.
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, since the exercise price equals or exceeds the fair
market value. 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 and net loss per share for the years ended December 31,
1999, 1998 and 1997 would have been adjusted to the pro forma amounts
below:
Year ended December 31, 1999 1998 1997
--------------------------------------------------------------------------------
Net income (loss):
As reported $ 1,608,000 $ (30,858,000) $ (22,142,000)
Pro forma $ 1,348,000 $ (33,272,000) $ (23,840,000)
Net income (loss):
As reported $ .10 $ (4.36) $ (3.52)
Pro forma $ .09 $ (4.70) $ (3.78)
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, 1999 1998 1997
--------------------------------------------------------------------------------
Dividend yield 0.0% 0.0% 0.0%
Expected volatility 45.8% 144.1% 70.3%
Risk-free interest rate (per annum) 6.0% 7.0% 6.2%
Expected lives (in years) 3.0 3.7 3.1
18. 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
$10,000 in 1999. 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. The Company contributed approximately $0, $58,000
and $85,000 for 1999, 1998 and 1997, respectively.
19. CONCENTRATIONS OF CREDIT
Financial instruments, which potentially subject the Company to
concentration of credit risk, consist primarily of investments in
short-term securities. Short-term securities are managed by professional
investment managers within the guidelines established by the Board of
Directors, which, as a matter of policy, limit the amounts that 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, 1999, management
believes that the Company has no significant concentrations of credit risk.
20. COMMITMENTS AND CONTINGENCIES
a. WCNY has entered into various contractual arrangements with the majority of
its primary care physicians and specialists through contracts with regional
health care delivery networks. These agreements call for capitating IPAs
comprised of specialists and primary care physicians. Under the agreements,
the company pays IPAs for medical services provided by primary care
physicians and specialists. IPAs in turn reimburse those providers for the
services that are provided by each physician. In the event the IPAs default
on their financial obligations, WCNY could be ultimately liable for
reimbursing the medical providers.
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. Deloitte and Touche
LLP, the Company's independent auditors during that period, 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. The actions
were dismissed pursuant to a court-approved settlement agreement. The time
for appealing the approval order has not elapsed as of the date of this
report.
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
received Federal Court approval in January 2000. 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. However, a receivable has not been accrued because
the recovery amount was not determinable at December 31, 1999.
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 Litigation, totaling $1,261,537 were recorded in the Company's
financial statements for the years 1996 through 1999.
c. As a condition to the successful closing of the Patel(Note 15) and GHI
(Note 2) transactions, various hospitals, physicians and other health care
providers entered into settlement agreements to settle claims for services
provided to WCNY HMO members incurred prior to May 1, 1999. The settlement
agreements stipulated that the various hospitals, physicians and other
health care providers accept a payment of 30% of the balance owed by the
Company to the provider in the year of settlement, plus 5% of the balance
owed by the Company, payable on February 1 of the three years subsequent to
the year of settlement, if they continue to be participating WCNY
providers. These claims are being settled from a provider pool consisting
of at least ten (10) million dollars, comprising all the proceeds from the
Patel and GHI transactions in addition to eighty (80) percent of WCNY's
premium receivables at April 30, 1999. WCNY, as stipulated, was able to use
the designated provider pool funds in excess of $10 million and up to $2.5
million, to meet statutory reserves.
During the year ended December 31, 1999, the Company recognized an
extraordinary gain of approximately $18 million due to the results of the
completed provider settlements.
d. 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, however, informed the government that it
will continue to cooperate fully in any way that it can in connection with
the ongoing investigation.
e. 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. The current management is unaware of any
ongoing investigation by the Securities and Exchange Commission.
f. 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.
g. Leases - Operating leases that have initial or noncancellable lease terms
in excess of one year are paid for through a management fee arrangement
with an affiliate (see Note 26).
21. GOING CONCERN, STATUTORY REQUIREMENTS AND DIVIDEND RESTRICTIONS
The Company's consolidated financials are presented on the going concern
basis, which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business.
For the next few months, Management is focusing on improving customer
service and bringing the company to operational profitability. To achieve
these goals, they are working to strengthen its provider network for both
WCNY and WCCT. They will put more emphasis on marketing in WCNY's Health
Choice (Medicaid) and Child Health Plus products. The Medicare line of
business will be reevaluated for profitability by each county. Also, for
WCCT, they will start marketing only in the counties where the provider
networks support the competitive pricing and servicing to their members.
For a short period, they may see a significant drop in the membership in
WCCT.
Once the Company achieves the above stability, Management plans to expand
its product offerings in both the New York and Connecticut markets. These
expansions may include re-entering into the commercial market in New York
and applying to HCFA in order to offer a Medicare line of business in the
State of Connecticut. They will expand these product portfolios only after
stringent evaluation of market and profitability for the Company.
Resources for raising external capital are limited due to past history of
the company and overall market sensitivity of the HMO business. Under the
circumstances, the expansion goals will be only achieved through the cash
flows generated by the company's current operations. In the event of cash
shortage, the Company will have to implement various costs cutting
measures, including but not limited to reducing work force, reducing
commissions to brokers and agents and the selling of certain assets. Also,
the Company may have to raise financing through banks and other capital
markets. The consolidated financial statements do not include any
adjustments to reflect the possible future effect on the recoverability of
assets and classification of liabilities that may result from the possible
inability of the Company to continue as a going concern. There is no
assurance that the Company will be able to achieve its recovery plan as
described above.
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, 1999 and 1998, Well Care had
required cash reserves of approximately $3.8 and $5.3 million,
respectively, and a contingent reserve of approximately $4.1 million and
$6.7 million, respectively. The cash reserve is not maintained in a
separate cash account. 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 1999 and 1998,
the Company forgave the management fees for WCNY in the amount of
approximately $.87 million and $ 1.4 million, respectively. In June 1997
and November 1997, the Company loaned $3.1 and $1.3 million, respectively,
to WCNY under the provisions of Section 1307. However, after giving effect
to the reported results for 1999, at December 31, 1999, WCNY had a negative
statutory net worth of approximately ($10) million. 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. 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 May and June 1999, the Company consummated a number
of transactions that brought WCNY within the 50% to 100% revised contingent
reserve requirement, as permitted by NYSID. The transactions include: an
equity investment of $5 million; sale of WCNY's commercial enrollment for
approximately $5 million; settlement of provider claims at 45% of 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 subordinated convertible note into senior
convertible preferred stock of the Company. As a result of these
transactions, Well Care anticipates that the State of New York would not
exercise that right.
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 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 December 31, 1998, WCCT was not in
compliance with the statutory net worth requirement having a statutory net
worth of approximately $600,000. 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 and other requirements. At September 23,
1999, the State of Connecticut Insurance Department authorized WCNY to
issue a $850,000 Surplus Equity Note Receivable to WCCT.
At December 31, 1999 WCCT is not in compliance with the statutory net worth
requirement having a statutory net worth of approximately $200,000. At
March 20, 2000, the State of Connecticut Insurance Department authorized
WCNY to issue a $738,746 Surplus Equity Note Receivable to WCCT. 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 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 3g) 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 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. WCNY believes it has directed its best efforts at
recouping these undercharges, and believes it will not be assessed any
additional penalty.
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 from October 1996 through 1999, the
Company loaned WCNY $14.8 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
cash infusions more than offset the examination's adjustment to WCNY's net
worth.
As a holding company, Well Care'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 Well Care'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.
22. SUPPLEMENTAL CASH FLOW DISCLOSURES
Cash paid during the year for (in thousands):
1999 1998 1997
--------------------------------------------------------------------------------
Income taxes $ -- $ -- $ --
Interest 502 1,131 1,101
During 1999, non-cash investing and financing activities included the $ 15
million note to common stock transfer and associated convertible debt
inducement interest (see Note 13) and the settlement of outstanding
mortgages in exchange for assets associated with the aforementioned
mortgages (see Note 12).
23. 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 receivables 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.
24. 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):
1999
1st 2nd 3rd 4th
--------------------------------------------------------------------------------
Total revenue $34,412 $31,373(1) $23,353(2) $23,371(3)
Total expenses 37,426 40,221 23,429 28,093
Loss from operations (3,014) (8,848) (76) (4,722)
Loss before
extraordinary item (3,014) (7,793) 287 (3,988)
Extraordinary item, net
of tax -- 7,905 2,715 5,496
Net income (loss) (3,014) 112 3,002 1,508
Preferred stock deemed
dividend -- (3,043) -- --
Net income (loss)
available to common
shareholders (3,014) (2,931) 3,002 1,508
Loss per share before
extraordinary item -
basic and diluted (0.40) (1.43) (0.04) (0.10)
Extraordinary item -
basic and diluted -- 1.05 0.34 0.14
Net income (loss)
available to common
shareholder - basic and
diluted (0.40) (0.39) 0.38 0.04
Weighted average shares
of common stock
outstanding 7,562 7,562 7,904 39,011
1998
------------------------------------------------------
1st 2nd 3rd 4th
--------------------------------------------------------------------------------
Total revenue $35,564 $38,477 $36,191 $34,217
Total expenses 36,782 40,959 39,140 52,985
Loss from operations (1,218) (2,482) (2,949) (18,768)
Net loss (1,218) (2,482) (2,949) (24,209)
Net loss per share-basic
and diluted (0.19) (0.36) (0.39) (3.21)
Each quarter is calculated as a discrete period and the sum of the four
quarters may not equal the full year amount. Additionally, due to the
convertible debt inducement, preferred stock deemed dividend and the tax
effect of the extraordinary gain, the 2nd and 3rd quarter information above
has been restated from the amounts previously reported.
(1) The following unusual items occurred in the second quarter of 1999: a)
inclusion of approximately $ 9 million in income from claim settlement
agreements on claims incurred prior to 5/1/99; b) inclusion of
approximately $3 million in expenses from interest on the convertible
debt inducement; c) inclusion of approximately $3 million for a
preferred stock dividend.
(2) The following unusual items occurred in the third quarter of 1999: a)
inclusion of approximately $ 3 million in income from claim settlement
agreements on claims incurred prior to 5/1/99; b) inclusion of income
of approximately $100 thousand from settlement of debt and
satisfaction of mortgages in foreclosure.
(3) The following unusual items occurred in the fourth quarter of 1999: a)
reversal of approximately $.58 million of previously recorded premium
revenues; b)write-off of previously unreserved accounts receivable of
$.21 million; c) inclusion of approximately $ 6 million in income from
claim settlement agreements on claims incurred prior to 5/1/99.
25. SUBSEQUENT EVENTS
The Company entered into a transfer agreement with Tampa General Health
Plan, Inc. dated January 3, 2000. The agreement stipulates that Tampa
General Health Plan, Inc. will transfer approximately five thousand (5,000)
members to the Company for a purchase price of $1,150,000. $1,000,000 of
the purchase price shall be payable at closing and $150,000 payable upon
the closing's one year anniversary.
In May 2000, Dr. Patel assumed the transaction personally from the Company
and the 5,000 members purchased will be part of an unrelated entity owned
by Dr. Patel.
26. MANAGEMENT AGREEMENT
WCNY and WCCT have entered into management agreements with Comprehensive
Health Management, Inc.("CHM"), an affiliate of Dr. Patel, to manage their
HMO administrative operations. The management agreements with CHM are for a
period of five years, subject to state department of insurance approval.
New York State Regulators approved the management agreement between WCNY
and Comprehensive on June 11, 1999. The Connecticut Department of Insurance
did not approve the Comprehensive management agreement with WCCT until
September 1999. The management fee for each HMO ranges from 7.5% of the
premium revenue earned when there are more than 80,000 members to 9.5% of
the premium revenue earned when there are less than 40,000 members. WCCT
has negotiated with CHM for a discounted management fee equal to 5.5% of
premium revenue earned. Under the management agreements, CHM will cover
claim processing service costs, utilization review, administrative function
payroll services, equipment and maintenance costs, software development and
administrative costs. Management fees for the period ended December 1999
were approximately $3,046,000.
<PAGE>
SCHEDULES
THE WELLCARE MANAGEMENT GROUP, INC.
SCHEDULE I
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED BALANCE SHEETS
AS OF DECEMBER 31, 1999 AND 1998
(in thousands)
1999 1998
-------- --------
ASSETS
CURRENT ASSETS:
Cash $ 90 $ 58
Short-term investments 4 2
Accounts and other receivables - net 35 214
Prepaid expenses and other
current assets - net 384 510
------- -------
TOTAL CURRENT ASSETS 513 784
PROPERTY AND EQUIPMENT - net 61 134
NOTES RECEIVABLE - LONG-TERM - net 17,283 12,177
OTHER ASSETS - net 2,252 2,041
------- -------
TOTAL $20,009 $15,136
======= =======
LIABILITIES AND DEFICIENCY IN ASSETS
CURRENT LIABILITIES:
Account and notes payable $ 305 $ 2,014
Current portion of long-term debt -- 36
Accrued expenses and other 1,142 2,026
------- -------
TOTAL CURRENT LIABILITIES 1,447 4,076
ADVANCES FROM SUBSIDIARIES 21,370 23,711
LONG-TERM DEBT -- 15,057
------- -------
TOTAL LIABILITIES 22,817 42,844
CAPITAL DEFICIENCY:
Common stock 389 75
Additional paid-in capital 54,585 31,612
Accumulated deficit (61,693) (65,884)
Accumulated other comprehensive income 1 1
Statutory reserve 4,112 6,695
------- -------
Less: (2,606) (27,501)
Notes receivable from shareholders -- 5
Treasury stock - at cost 202 202
------- -------
TOTAL (Capital Deficiency) (2,808) (27,708)
------- -------
TOTAL $20,009 $15,136
======= =======
<PAGE>
THE WELLCARE MANAGEMENT GROUP, INC.
CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT
SCHEDULE I
CONDENSED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(in thousands)
1999 1998 1997
-------- -------- --------
REVENUE:
Fee income $ 6,748 $ 11,896 $ 14,098
Interest income 1,521 1,697 2,502
Other income 186 52 137
-------- -------- --------
TOTAL REVENUE 8,455 13,645 16,737
-------- -------- --------
EXPENSES:
General and administrative
Expenses 5,750 17,842 18,483
Interest expense 3,548 1,221 1,123
Other expense - net -- 1 369
-------- -------- --------
TOTAL EXPENSES 9,298 19,064 19,975
-------- -------- --------
INCOME(LOSS) FROM OPERATIONS (843) (5,419) (3,238)
PROVISION FOR INCOME TAX -- 2,961 --
-------- -------- --------
LOSS BEFORE EQUITY
IN LOSS OF SUBSIDIARIES (843) (8,380) (3,238)
EQUITY IN INCOME (LOSS) OF
SUBSIDIARIES - NET OF TAX 2,451 (22,478) (18,904)
-------- -------- --------
NET INCOME(LOSS) 1,608 (30,858) (22,142)
PREFERRED STOCK DEEMED
DIVIDEND (3,043) -- --
-------- -------- --------
NET LOSS AVAILABLE TO
COMMON SHAREHOLDER $ (1,435) $(30,858) $(22,142)
======== ======== ========
<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, 1999, 1998 AND 1997
(in thousands)
1999 1998 1997
---- ---- ----
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net loss $ (843) $(8,380) $(3,238)
Depreciation and
amortization 128 1,671 353
Loss/(gain) on sale of assets (1) 1 16
Interest on debt inducement 3,046 -- --
Decrease in accounts receivable 179 1,543 107
Increase in advances
from subsidiaries -- 1,942 172
Other - net (2,476) 816 483
------- ------- -------
NET CASH PROVIDED BY(USED IN)
OPERATING ACTIVITIES 33 (2,407) (2,107)
------- ------- -------
CASH FLOWS FROM INVESTING
ACTIVITIES:
(Increase) decrease in notes
receivable (5,006) 730 (2,021)
Capital contributions to
subsidiaries - net -- (368) (775)
Sale of investments - net -- 101 817
Net Purchase (Sale) - equipment -- (5) (9)
------- ------- -------
NET CASH PROVIDED BY/
(USED IN)INVESTING ACTIVITIES (5,006) 458 (1,988)
------- ------- -------
CASH FLOWS FROM FINANCING
ACTIVITIES:
(Decrease)/increase in
long-term debt -- (34) (70)
Increase in accounts and
notes payable -- 1,685 2
Proceeds from issuance of
preferred stock 5,000 -- --
Other - net 5 -- 1
------- ------- -------
NET CASH PROVIDED BY
(USED IN) FINANCING
ACTIVITIES 5,005 1,651 (67)
------- ------- -------
NET (DECREASE)/INCREASE IN
CASH AND CASH EQUIVALENTS 32 (298) 4,162
CASH AND CASH EQUIVALENTS,
BEGINNING OF YEAR 58 356 4,518
------- ------- -------
CASH AND CASH EQUIVALENTS,
END OF YEAR $ 90 $ 58 $ 356
======= ======= =======
<PAGE>
THE WELLCARE MANAGEMENT GROUP, INC.
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(in thousands)
<TABLE>
<CAPTION>
BALANCE AT BALANCE AT
BEGINNING LESS: END OF
OF PERIOD ADDITIONS DEDUCTIONS PERIOD
--------- --------- ---------- ----------
<S> <C> <C> <C> <C>
YEAR ENDED
DECEMBER 31, 1999
Allowance for
doubtful accounts - Trade receivables $ 4,184 $ 1,522 $ 3,896 $ 1,810
Allowance for
doubtful accounts - Other receivables 1,957 -- 1,457 500
Allowance for
doubtful accounts - Notes receivable 8,882 568 6,453 2,997
-------- -------- -------- --------
Total $ 15,023 $ 2,090 $ 11,806 $ 5,307
======== ======== ======== ========
YEAR ENDED
DECEMBER 31, 1998
Allowance for
doubtful accounts - Trade receivables $ 3,555 $ 795 $ 166 $ 4,184
Allowance for
doubtful accounts - Other receivables 1,137 987 167 1,957
Allowance for
doubtful accounts - Notes receivable 8,096 793 7 8,882
-------- -------- -------- --------
Total $ 12,788 $ 2,575 $ 340 $ 15,023
======== ======== ======== ========
YEAR ENDED
DECEMBER 31, 1997
Allowance for
doubtful accounts - Trade receivables $ 3,365 $ 3,462 $ 3,292 $ 3,555
Allowance for
doubtful accounts -
Due from affiliates -- -- -- --
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
======== ======== ======== ========
</TABLE>
<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) (12)
3.1c Copy of Certificate of Amendment of the
Certificate of Incorporation of The
WellCare Management Group, Inc. filed
June 20, 1999 (16)
3.1d Copy of Certificate of Amendment to the
Certificate of Incorporation of The Wellcare
Management Group, Inc., filed October 11, 1999 (17)
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)
10.2e Copy of letter agreement, from Robert L. Plotz
dated June 7, 1999, whereby Registrant cancels
Promissory Note issued by Edward A. Ullman (16)
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)
10.16a Copy of Reinsurance Agreement, effective
November 1, 1993, between Registrant and
Preferred Life Insurance Company of New York (3)
10.16b Copy of Reinsurance Agreement Renewal
between Preferred Life Insurance Company of
New York and WCNY for Commercial and Point
of Service Enrollees, effective November 1, 1996 (15)
10.16c Copy of Reinsurance Agreement Renewal between
Preferred Life Insurance Company of New York and
WCNY - Medicaid (15)
10.16d Copy of Reinsurance Agreement Renewal between
Preferred Life Insurance Company of New York
and WellCare of Connecticut, Inc. ("WCCT"),
effective November 1, 1996 (15)
10.16e Copy of Reinsurance Agreement Renewal between
Preferred Life Insurance Company of New York and
WCNY - Medicare, effective November 1, 1996 (15)
10.16f Copy of Amendment to Reinsurance Agreement
Renewal between Preferred Life Insurance
Company of New York and WCNY for Commercial
and Point of Service Enrollees, effective
November 1, 1996 and Reinsurance Agreement
Renewal between Preferred Life Insurance
Company of New York and WCNY - Medicare,
effective November 1, 1996 (15)
10.16g Copy of Amendment to Reinsurance Agreement
Renewal between Preferred Life Insurance
Company of New York and WCNY - Medicaid (15)
10.16h Copy of Amendment to Reinsurance Agreement
Renewal between Preferred Life Insurance
Company of New York and WCCT, effective
November 1, 1996 (15)
10.16i Copy of Letter dated October 29, 1998
terminating coverage under Reinsurance
Agreement Renewal between Preferred Life
Insurance Company of New York and WCNY
for Commercial and Point of Service Enrollees
effective November 1, 1996, Reinsurance
Agreement Renewal between Preferred Life
Insurance Company of New York and WCNY -
Medicare effective November 1, 1996 and
Reinsurance Agreement Renewal between Preferred
Life Insurance Company of New York and WCNY -
Medicaid (15)
10.16j Copy of Letter dated October 29, 1998
terminating coverage under Reinsurance Agreement
Renewal between Preferred Life Insurance Company
of New York and WCCT, effective November 1, 1996 (15)
10.16k Copy of Reinsurance Agreement between Reliastar
Managing Underwriters, Inc. and Wellcare of New
York, Inc.
10.16l Copy of Reinsurance Agreement between Reliastar
Managing Underwriters, Inc. and Wellcare of
Connecticut, Inc.
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)
10.33b Copy of Employment and Consulting Agreement
dated March 3, 1997, between Registrant and
Marystephanie Corsones* (9)
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, 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. (12)
10.40c Copy of Amended and Restated 8% Subordinated
Convertible Note, between Registrant and The
1818 Fund II, L.P. (14)
10.41 Copy of 6% Subordinated Convertible Note
Due December 31, 2002, between Registrant
and The 1818 Fund II, L.P. (5)
10.41a Copy of Exchange Agreement between the Registrant
and The 1818 Fund II, L.P. (16)
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)
10.49a Copy of Amendment to Quota Share Reinsurance
Agreement between Registrant and Allianz Life
Insurance Company of North America dated
March 20, 1998 (13)
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* (12)
10.51 Copy of Employment Contract dated June 1, 1996,
and Stock Option Agreements between Registrant
and John E. Ott, M.D.* (7)
10.51a Copy of Amendment to Employment Agreement
dated June 1, 1998, between Registrant and
John E. Ott, M.D.* (14)
10.51b Copy of Voluntary Separation Agreement and
Release effective June 11, 1999, between
Registrant and John E. Ott, M.D.* (16)
10.52 Copy of Employment Agreement dated September 1,
1996, between Registrant and Joseph R. Papa* (8)
10.52a Copy of Consulting Agreement dated
January 15, 1999, between Registrant and
Joseph R. Papa Associates (16)
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* (12)
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)
10.58 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)
10.62 Amendment to Stock Option Agreement
between Robert W. Morey, Jr. and Registrant
for options to purchase 150,000 share of
Common Stock* (12)
10.63 Copy of an Agreement of Lease between Reckson
Operating Partnership, LP and WCD for the
Tarrytown office (12)
10.63a Copy of Surrender and Acceptance of Lease
dated May 11, 1999, between Registrant and
Reckson Operating Partnership, L.P. (16)
10.64 Copy of Severance Agreement dated April 3, 1998
between Registrant and Jack Sizer, M.D. (14)
10.65 Copy of IPA Service Agreement dated April 21,
1998, between WCNY and Columbia-Greene Health Care
Alliance IPA, Inc. (14)
10.66 Copy of IPA Service Agreement dated April 21,
1998, between WCNY and Dutchess Health Care
Alliance IPA, Inc. (14)
10.67 Copy of IPA Service Agreement dated April 21,
1998, between WCNY and Orange-Sullivan Health
Care Alliance IPA, Inc. (14)
10.68 Copy of IPA Service Agreement dated April 21,
1998, between WCNY and Ulster Health Care Alliance
IPA, Inc. (14)
10.69 Copy of Employment Agreement dated January 29,
1997, between Registrant and Mary Lee Campbell-
Wisley* (16)
10.69a Copy of Amendment to Employment Agreement dated
February 16, 1999, between Registrant and Mary Lee
Campbell-Wisley* (16)
10.70 Copy of Employment Agreement dated November 5,
1997, between Registrant and Thomas A. Curtin* (16)
10.71 Copy of Employment Agreement dated November 17,
1998, between Registrant and Adele B. Reiter, Esq.* (16)
10.72 Copy of Employment Agreement dated December 1, 1998
between Registrant and Alan Bernstein, M.D.* (16)
10.73 Copy of Employment Agreement dated December 1,
1998 between Registrant and Craig S. Dupont* (16)
10.73a Copy of Amendment to Employment Agreement dated
February 11, 1999, between Registrant and
Craig S. Dupont* (16)
10.74 Copy of Letter of Settlement dated June 9, 1999
between KeyBank National Association and KeyCorp.
Leasing Ltd., Registrant, WCNY, WCD and GHI HMO
Select Inc. (16)
10.76 Copy of Stock Purchase Agreement dated May 19, 1999
between Registrant and Kiran C. Patel, M.D. (16)
10.76a Copy of Amendment to Stock Purchase Agreement
dated May 19, 1999 between Registrant and
Kiran C. Patel, M.D. (16)
10.77 Form of Hospital Settlement Agreement between
Registrant, WCNY, Kiran C. Patel, M.D. HealthCare
Association of New York State, Northern Metropolitan
Hospital Association and the member hospital of HANYS
and/or Normet (16)
10.78 Form of Physician Settlement Agreement between
Registrant, WCNY, Kiran C. Patel, M.D., and the
Provider or Provider Group (16)
10.79 Form of May 27, 1999 letter to Class A Shareholders
of Registrant (16)
10.79a Copy of Voting Agreement dated June 9, 1999 between
Kiran C. Patel, M.D., and Robert W. Morey (16)
10.79b Copy of Irrevocable Proxy dated June 9, 1999 between
Kiran C. Patel, M.D., and Robert W. Morey (16)
10.80 Copy of Asset Purchase Agreement dated May 20, 1999
between WCNY and Group Health Incorporated (16)
10.81 Copy of Escrow and Security Agreement dated June 11,
1999 by Registrant, WCNY, Garfunkel, Wild & Travis,
P.C., Healthcare Association of New York State and
Northern Metropolitan Hospital Association, The
Medical Society of the State of New York and United
States Trust Company of New York (16)
10.82 Copy of Management Agreement dated June 11, 1999
between Comprehensive Health Management, Inc. and
WellCare of New York, Inc. (16)
10.83 Copy of Management Agreement dated June 11, 1999
between Comprehensive Health Management, Inc. and
WellCare of Connecticut, Inc. (16)
10.84 Copy of the Agreement dated July 30, 1999 between
Primergy, Inc., Promedco of the Hudson Valley, Inc.,
Promedco Management Company and Wellcare of New
York, Inc. and The Wellcare Management Group, Inc. (17)
11 Computation of Per Share Earnings
21 List of Subsidiaries
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.
(12) Incorporated by reference to the same exhibit in Registrant's Report on
Form 10-K for the year ended December 31, 1997.
(13) Incorporated by reference to the same exhibit in Registrant's Report on
Form 10-Q for the period ended March 31, 1998.
(14) Incorporated by reference to the same exhibit in Registrant's Report on
Form 10-Q for the period ended June 30, 1998.
(15) Incorporated by reference to the same exhibit in Registrant's Report on
Form 10-Q for the period ended September 30, 1998.
(16) Incorporated by reference to the same exhibit in Registrant's Report on
Form 10-K for the year ended December 31, 1998.
(17) Incorporated by reference to the same exhibit in Registrant's Report on
Form 10-Q for the period ended September 30, 1999.
* Denotes Management Contract or compensatory plan or arrangement required to
be filed as an exhibit to this Annual Report on Form 10-K.
