THE
WELLCARE
MANAGEMENT
GROUP, INC.
1999 Annual Report
<PAGE>
TABLE OF CONTENTS
Letter to Shareholders 3
Selected Consolidated Financial Data 4
Management's Discussion and Analysis of Financial Condition
and Results of Operations 6
Report of BDO Seidman, LLP, Independent Auditors 13
Report of Deloitte & Touche, LLP, Independent Auditors 14
Consolidated Balance Sheets as of December 31, 1999 and 1998 15
Consolidated Statements of Operations for the years ended
December 31, 1999, 1998, and 1997 17
Consolidated Statements of Capital Deficiency for the years
ended December 31, 1999, 1998, and 1997 18
Consolidated Statements of Cash Flows for the years ended
December 31, 1999, 1998, and 1997 20
Notes to Consolidated Financial Statements 21
Safe Harbor Statement under the Private Securities Litigation Reform Act of
1995: Certain statements in this Annual Report are forward-looking statements
and are not based on historical facts but are management's projections or best
estimates. Actual results may differ from these projections due to risks and
uncertainties. These risks and uncertainties include a variety of factors,
including but not limited to the following: the Company's ability to continue as
a going concern; the inability to meet HMO statutory net worth requirement for
WCNY or WCCT; the absence of a commercial line of business in WCNY until at
least June, 2000; that increased regulation will increase health care expenses;
that increased competition in the Company's markets or change in product mix
will unexpectedly reduce premium revenue; that the Company will not be
successful in increasing membership growth; that there may be adverse changes in
Medicare and Medicaid premium rates set by federal and state governmental
agencies; that health care cost in any given period may be greater than expected
due to unexpected incidence of major cases, natural disasters, epidemics,
changes in physician practices, and new technologies; that the Company will be
unable to successfully expand its operations into New York City, Westchester
County and the State of Connecticut; and that major health care providers will
be unable to maintain their operations and reduce or eliminate their accumulated
deficits.
<PAGE>
LETTER TO SHAREHOLDERS
June 27, 2000
To our Shareholders:
To say that the last twelve months have been among the most challenging of my
life is an understatement. Last winter, I set out with my management team to
turn WellCare, a company with a negative net worth in excess of $35 million,
into a viable and profitable organization. Achieving this daunting goal has
demanded all of my 35 years skills of education and practice in the art of
medicine and the strategies of business, and perhaps more.
As of June 11, 1999, we have SETTLED A SIGNIFICANT portion of the company's
OUTSTANDING CLAIMS AND LIABILITIES including, but not limited to, the mortgages,
real and personal property leases, provider claims and legal liabilities. While
we are, in my estimation, six months behind in our self imposed targeted goals,
we have TAKEN TREMENDOUS GROUND on our way to revitalizing company operations
TOWARD PERFORMANCE AND PROFIT.
QUALITY, COST-EFFECTIVE MEDICAL CARE for patients has been A GOAL of mine since
I began practicing medicine many years ago. Our work with WellCare is a
fulfillment of not only my beliefs, but ALSO THE FUTURE OF OUR COMPANY. The
management team and I have formulated a plan to create a leading managed care
organization. We have outlined our vision to the providers and employees of
WellCare who are enthusiastic about the long-term plan. The comprehensive
partnership, "Five P", partners with Providers, Physicians, Patients (members),
Payors and the Plan to deliver caring, quality and affordable healthcare to
every citizen of New York and Connecticut.
A partnership among the "Five Ps" is a critical element for positioning our
company as one of the most successful in New York and Connecticut. We have
strived to provide our partners with better tools, such as a new Management
Information System. We are launching new training initiatives to assist our
physicians in the plan and plan benefits to serve our patients better. We are
RESEARCHING a way to help providers, physicians and patients access accurate and
TIMELY INFORMATION VIA AN INTERACTIVE INTERNET-BASED SYSTEM.
All of these initiatives, along with our ongoing product improvement efforts,
will continue to move us along the path of growth and profitability.
As long as we stay true to our vision of quality care and service for members
and providers, I am confident WellCare will be one of the most
provider/member-friendly health plans in the country.
Throughout the coming years, as we get back into the commercial market and
experience new growth in Medicaid and Medicare plans, there is much for us all
to be excited about for the future.
I thank you for your partnership along the way to success.
Sincerely,
/s/ Kiran C. Patel, M.D.
------------------------
Kiran C. Patel, M.D.
Chairman, President & CEO
<PAGE>
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
------------------------
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
Consolidated Financial Statements and Notes thereto included elsewhere herein.
The Company's financial statements have been prepared assuming that the Company
will continue is 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.
Interestexpense 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.
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).
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).
INDEPENDENT AUDITORS' 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. 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.
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>
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. 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.
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
----------------------------------------------------------------------------------------------------------------
Total $ 20,323 $ 29,939
----------------------------------------------------------------------------------------------------------------
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
----------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31, 1999 1998
----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
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)
----------------------------------------------------------------------------------------------------------------
Total $ 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
AND ACCUMULATED
CLASS B CLASS A ADDITIONAL COMPREHENSIVE
PREFERRED COMMON COMMON PAID-IN ACCUMULATED 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," 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. 33 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 million) and 1996 ($0.2 million) 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 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 cost 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)
1999
1ST 2ND 3RD 4TH
--------------------------------------------------------------------------------
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 month
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>
BOARD OF DIRECTORS
KIRAN C. PATEL, M.D., Chairman
The WellCare Management, Group, Inc.
MARK D. DEAN, D.D.S., Director
Dentist in Private Practice
PRADIP C. PATEL, Director
President
Well Care HMO, Inc.
RUPESH R. SHAH, Director
CEO
Well Care HMO, Inc.
EXECUTIVE OFFICERS
KIRAN C. PATEL, M.D.
Chairman, President and CEO
KENNETH M. ROSSMAN
Chief Accounting Officer
SANDIP I. PATEL, ESQ.
General Counsel
RUPESH SHAH
Executive Director
TRANSFER AGENT AND REGISTRAR
American Stock Transfer & Trust Company
40 Wall Street, 46th Floor, New York, New York 10005
Attn: Shareholder Relations (718) 921-8210
FORM 10-K REPORT
Shareholders may receive, without charge, a copy of The WellCare Management
Group, Inc. 10-K Annual Report submitted to the Securities and Exchange
Commission by writing to: Investor Relations, The WellCare Management Group,
Inc. Park West/Hurley Avenue Extension, Kingston, NY 12401
MARKET INFORMATION
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 sale prices for the common stock for each quarter of
the last two calendar years. There is no trading market for the Company's Class
A common stock.
HIGH LOW
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 222 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 not paid cash dividends on its capital stock and does not
anticipate paying any cash dividends on its common stock or Class A common stock
in the foreseeable future.
INDEPENDENT PUBLIC ACCOUNTANTS
BDO Seidman, LLP
100 S.E. 2nd Street, Suite 2200
Miami, Florida 33131 (305) 381-8000
<PAGE>
THE WELLCARE MANAGEMENT GROUP, INC.
CORPORATE HEADQUARTERS
Park West/Hurley Avenue Extension, Kingston, New York 12401 (914) 338-4110
WELLCARE OF NEW YORK, INC.
Park West/Hurley Avenue Extension, Kingston, New York 12401 (914) 338-4110
350 Meadow Avenue, Newburgh, New York 12550 (914) 566-0700
220 Washington Avenue Extension, Albany, New York 12203 (518) 452-0717
3209 Vestal Parkway East, Vestal, New York 13850 (607) 770-1444
WELLCARE OF CONNECTICUT, INC.
127 Washington Avenue, North Haven, Connecticut 06473 (203) 239-9522
