SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
COMMISSION FILE NO. 0-21684
THE WELLCARE MANAGEMENT GROUP, INC.
(Exact Name of Registrant as specified in its charter)
NEW YORK 14-1647239
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization Identification Number)
PARK WEST/HURLEY AVENUE EXTENSION, KINGSTON, NY 12401
(Address of principal executive offices)
(914) 338-4110
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
requiring to file such report(s), and (2) has been subject to such filing
requirements for the past 90 days. YES[ ] NO [X]
The number of Registrant's shares outstanding on June 30, 2000 was 38,697,940
shares of common stock, $.01 par value, and 313,555 shares of Class A common
stock, $.01 par value.
<PAGE>
THE WELLCARE MANAGEMENT GROUP, INC. AND SUBSIDIARIES
INDEX TO FORM 10-Q
Item 1 Financial Statements
Condensed Consolidated Balance Sheets at June 30, 2000
(Unaudited) and December 31, 1999 3
Condensed Consolidated Statements of Operations (unaudited)
for the Three Months and Six Months Ended June 30, 2000 and
1999 5
Condensed Consolidated Statements of Cash Flows (unaudited)
for the Six Months Ended June 30, 2000 and 1999 6
Condensed Consolidated Statement of Shareholders' Equity
(unaudited)for the Six Months Ended June 30, 2000 8
Notes to Condensed Consolidated Financial Statements 9
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations 13
PART II - OTHER INFORMATION
Item 1 Legal Proceedings 15
Item 2 Changes in Securities 15
Item 3 Submission of Matters to a Vote of Security Holders 17
Item 4 Other Information 17
Item 5 Exhibits and Reports on Form 8-K 17
Signatures 18
Index to Exhibits 19
<PAGE>
THE WELLCARE MANAGEMENT GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
JUNE 30, DECEMBER 31,
2000 1999
------------- ------------
(unaudited)
ASSETS
CURRENT ASSETS:
Cash $ 973 $ 7,235
Short-term investments 8 5
Accounts receivable (net of allowance
for doubtful accounts of $933 in
2000 and $434 in 1999) 4,520 4,385
Advances to participating providers 891 586
Other receivables (net of allowances
for doubtful accounts of $500 in
2000 and $500 in 1999) 1,549 2,414
Taxes receivable 284 284
Prepaid expenses and other
current assets 478 782
------- -------
TOTAL CURRENT ASSETS 8,703 15,691
------- -------
PROPERTY AND EQUIPMENT (net of
accumulated depreciation and
amortization of $4,731 in 2000
and $4,304 in 1999) 750 756
OTHER ASSETS:
Restricted cash 3,773 3,773
Other non-current assets (net of
allowance for doubtful accounts
of $1,376 in 2000 and $1,376 in 1999 85 103
------- -------
TOTAL $13,311 $20,323
======= =======
<PAGE>
JUNE 30, DECEMBER 31,
2000 1999
------------- ------------
(unaudited)
LIABILITIES AND SHAREHOLDERS'
EQUITY/(DEFICIENCY IN ASSETS)
CURRENT LIABILITIES:
Current portion of long-term debt $ 850 $ 850
Medical costs payable 11,115 18,280
Accounts payable 288 359
Accrued expenses and other 512 1,384
Unearned income 2,310 2,258
------- -------
TOTAL CURRENT LIABILITIES 15,075 23,131
------- -------
LONG-TERM LIABILITIES: -- --
------- -------
TOTAL LIABILITIES 15,075 23,131
------- -------
COMMITMENTS AND CONTINGENCIES
CAPITAL DEFICIENCY
Class A common stock ($.01 par value;
1,109,292 shares authorized,
313,555 shares issued and
outstanding in 2000 and 1999,
respectively) 3 3
Common stock ($.01 par value; 75,000,000
shares authorized, 38,697,940 and
38,697,940 shares issued in 2000 and
1999, respectively) 386 386
Additional paid-in capital 54,590 54,585
Accumulated deficit (60,655) (61,693)
Accumulated other comprehensive income 2 1
Statutory reserve 4,112 4,112
------- -------
(1,562) (2,606)
------- -------
Treasury stock (at cost; 12,850 shares
of common stock in 2000 and 1999) (202) (202)
------- -------
TOTAL CAPITAL DEFICIENCY (1,764) (2,808)
------- -------
TOTAL $13,311 $20,323
======= =======
See accompanying notes to condensed consolidated financial statements.
<PAGE>
THE WELLCARE MANAGEMENT GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
------------------- ------------------
2000 1999 2000 1999
-------- -------- ------- --------
<S> <C> <C> <C> <C>
REVENUE:
Premiums earned $ 17,525 $ 31,063 $36,200 $65,171
Interest income 106 224 196 503
Other income - net 1,870 86 1,906 111
-------- -------- ------- -------
TOTAL REVENUE 19,501 31,373 38,302 65,785
-------- -------- ------- -------
EXPENSES:
Medical expenses 15,686 31,705 31,512 60,799
General and administrative
expenses 2,936 8,053 5,653 15,576
Depreciation and amortization
expense 280 253 436 642
Interest expense 36 210 36 630
-------- -------- ------ -------
TOTAL EXPENSES 18,938 40,221 37,637 77,647
-------- -------- ------ -------
INCOME(LOSS) BEFORE INCOME TAXES
& EXTRAORDINARY GAIN 563 (8,848) 665 (11,862)
INCOME TAX BENEFIT -- (1,055) (41) (1,055)
-------- -------- ------- -------
Net Income(loss) before extraordinary
item 563 (7,793) 706 (10,807)
Extraordinary gain, net of tax
of $0 and 1055 for the three months ended
June 30, 2000 and 1999, respectively and
$41 and $1,055 for the six months ended
June 30, 2000 and 1999, respectively. -- 7,905 332 7,905
-------- -------- ------- -------
NET INCOME (LOSS) $ 563 $ 112 $ 1,038 $(2,902)
======== ======== ======= =======
Preferred Stock Deemed Dividend -- (3,043) -- (3,043)
-------- -------- ------- -------
NET INCOME (LOSS) AVAILABLE TO COMMOM
SHAREHOLDERS $ 563 $(2,931) $ 1,038 $(5,945)
======== ======== ======= =======
INCOME (LOSS) AVAILABLE TO COMMOM
SHAREHOLDERS PER SHARE -BEFORE INCOME TAXES &
EXTRAORDINARY GAIN-BASIC AND DILUTED $ 0.01 $ (1.44) $ 0.02 $ (0.91)
======== ======== ======= =======
EXTRAORDINARY GAIN-BASIC AND
DILUTED $ -- $ 1.05 $ 0.01 $ 0.52
======== ======== ======= =======
INCOME (LOSS) AVAILABLE TO COMMON SHAREHOLDERS
PER SHARE - BASIC AND DILUTED $ 0.01 $ (0.39) $ 0.03 $(0.39)
======== ======== ======= =======
Weighted average shares of
common stock outstanding 39,011 7,562 39,011 15,124
======== ======== ======= =======
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE>
THE WELLCARE MANAGEMENT GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
SIX MONTHS ENDED JUNE 30,
---------------------------
2000 1999
---- ----
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income (loss) $ 1,038 $ (2,902)
Adjustments to reconcile net
loss to net cash (used)
by operating activities -
Depreciation and amortization 436 642
Extraordinary gain on claim
settlements (373) (8,960)
Interest Expense Inducement -- 3,046
Changes in assets and liabilities:
(Increase)/decrease in accounts
receivable, net (135) 43
Increase/(decrease)in medical cost payable (6,792) 13,909
(Increase)/decrease in other receivables 865 (444)
(Decrease)in accounts payable, accrued
expenses and other current liabilities (943) (641)
Decrease in prepaid expenses and other 304 380
(Decrease)/increase in unearned income 52 (2,888)
(Increase)in advances to
participating providers (305) (646)
Setup of Provider Pool Escrow -- (10,000)
Due from GHI Membership Escrow -- (1,000)
Other - net 18 --
-------- --------
NET CASH USED IN OPERATING
ACTIVITIES (5,835) (9,461)
-------- --------
CASH FLOWS FROM INVESTING
ACTIVITIES-
(Purchase)Disposal of property &
equipment (429) 583
Change in WCNY Restricted Cash Requirement -- 2,394
Proceed from Sale of Assets -- 5,015
Purchase of investments (3) --
-------- --------
NET CASH USED IN INVESTING
ACTIVITIES (432) 7,992
-------- --------
<PAGE>
THE WELLCARE MANAGEMENT GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
SIX MONTHS ENDED JUNE 30,
---------------------------
2000 1999
---- ----
CASH FLOW FROM FINANCING
ACTIVITIES-
Issuance of Series A Preferred stock -- 5,000
Contribution of additional paid in
capital 5 --
-------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES 5 5,000
-------- --------
NET (DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS (6,262) 3,531
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 7,235 6,393
-------- --------
CASH AND CASH EQUIVALENTS,
END OF PERIOD $ 973 $ 9,924
======== ========
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION:
Income taxes paid $ -- $ --
Interest paid -- 100
See accompanying notes to condensed consolidated financial statements.
<PAGE>
THE WELLCARE MANAGEMENT GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CAPITAL DEFICIENCY
FOR THE SIX MONTHS ENDED JUNE 30, 2000
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Class A Additional
Common Common Paid-In (Accumulated Statutory
Stock Stock Capital Deficit) Reserve
------ ----- ------- ------- -------
<S> <C> <C> <C> <C> <C>
BALANCE,
DECEMBER 31, 1999 $ 3 $ 386 $54,585 $(61,693) $ 4,112
Cash Contribution 5
Net Income $ 1,038
BALANCE,
JUNE 30, 2000 3 $ 386 $54,590 $(60,655) $ 4,112
</TABLE>
Accumulated
Other Total
Comprehensive Treasury Capital
Income/(Loss) Stock Deficiency
------------- ----- ----------
BALANCE,
DECEMBER 31, 1999 $ 1 $ (202) $ (2,808)
Cash Contribution 5
Other Comprehensive 1 1
Net Income 1,038
BALANCE,
JUNE 30, 2000 $ 2 $ (202) $ (1,764)
See accompanying notes to condensed consolidated financial statements.
<PAGE>
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with the instructions to Form 10-Q and, accordingly, do not
include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements and should be read in
conjunction with the audited consolidated financial statements and notes thereto
included in The WellCare Management Group, Inc.'s ("WellCare" or the "Company")
Annual Report on Form 10-K for the year ended December 31, 1999, which have been
audited by BDO Seidman, LLP, independent auditors, as indicated in their report
therein. The audit report includes an explanatory paragraph regarding certain
conditions which raise substantial doubt about the Company's ability to continue
as a going concern (refer to the Company's audited consolidated financial
statements and notes thereto included in the Company's Annual Report on Form
10-K for the year ended December 31, 1999, including Notes 1n and 21 therein and
Management's Discussion and Analysis of Financial Condition and Results of
Operations.) In the opinion of management, the accompanying unaudited interim
financial statements contain all adjustments necessary to present fairly the
financial position at June 30, 2000, and the results of operations and cash
flows for the interim period presented. Operating results for the interim period
may not necessarily be indicative of results that may be expected for the year
ending December 31, 2000.
2. MANAGEMENT AGREEMENTS
WellCare of New York, Inc. ("WCNY") and WellCare of Connecticut, Inc. ("WCCT")
have entered into management agreements with Comprehensive Health Management,
Inc. ("Comprehensive") an affiliate of Dr. Patel (majority shareholder of
"WellCare"), to manage their HMO operations. The management agreements with
Comprehensive are for a term of five (5) years, effective June 1, 1999 for WCNY
and October 1, 1999 for WCCT. The management fee to each HMO ranges from 7.5% of
the premium revenue when there are more than 80,000 members, to 9.5% of the
premium revenues when there are less than 40,000 members. Comprehensive covers
services for claims processing, customer service, utilization review, data
processing/MIS (including Y2K compliance expenses and costs), credentialing,
communication, provider relations, and day to day accounting. Comprehensive
provides financial reports to the HMOs and the appropriate regulatory agencies.
The fee does not cover other costs, such as certain marketing functions, legal
costs, extraordinary accounting and audit costs, D & O and E & O Insurance
Expenses, and any extraordinary costs. In March 2000 the management agreements
were reviewed to determine if the management agreements required management fee
adjustments to reflect revised estimated covered expenses. The Board approved a
2% management fee increase effective June 1, 2000. Subsequently, the approved
increase is under review to determine adequacy of the effective fee structure.
3. PROVIDER SETTLEMENT
Various hospitals, physicians and other health care providers have entered into
settlement agreements to settle claims for services provided to WCNY HMO members
through 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
providers. The Company had compiled the listing of remaining participating
providers and the first of the three 5% installments was paid to each
participating provider in February 2000. Each provider who has chosen to not be
a continuing provider, has forfeited the 5% annual installment payments due to
them had they remained a provider.
4. PREMIUM REVENUE
Effective January 1, 1999, WCNY did not renew its Medicare Risk contracts in
four counties in New York. The Medicare enrollment in these counties was
approximately 4,000. Effective June 1, 1999, WCNY sold its certain assets
associated with commercial business, including approximately 25,000 members.
5. OTHER INCOME
Other income includes approximately $766,000 in recovery from D&O liability
insurance policy and approximately $350,000 from the estimated reduction of
demographic pool liability.
6. MEDICAL COSTS PAYABLE AND MEDICAL EXPENSES
a. Medical expense includes estimates for medical expenses incurred but
not yet reported ("IBNR") based on a number of factors, including hospital
admissions data and prior claims experience; adjustments, if necessary, are made
to medical expenses in the period the actual claims costs are ultimately
determined. The Company believes the IBNR estimates in the consolidated
financial statements are adequate; however, there can be no assurances that
actual health care claims will not exceed such estimates.
b. Medical Costs have continued to rise at a higher rate than expected
throughout 1999 and through the quarter ended June 30, 2000. Factors which have
contributed to cost increases include increase 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 terminology changes and other unexpected increased cost
factors. The company believes its premium increases, capitation arrangements and
other cost control measures mitigate, but do not wholly offset, the effects of
medical cost inflation on its operations. However, the inability to increase
premiums could negatively impact the Company's future earning capabilities.
7. INCOME TAXES
The company has reported continuing net losses in 1996, 1997, 1998, 1999 and net
income in the first and second quarter of 2000. The ability to realize the tax
benefits and tax expense associated with these losses and income, respectively,
is dependent upon the Company's ability to generate future taxable income from
operations and/or to effectuate successful tax planning strategies. Although
management believes that profitable operations will ultimately be achieved, the
Company has provided a 100% valuation allowance with respect to the deferred tax
assets in view of their size and length of the expected recoupment period. The
maximum utilization period for the NOL's are fifteen (15) and five (5) years for
New York and Connecticut, respectively. There can be no assurance however that
the Company will be able to realize the tax benefit associated with the past
losses. Also, the Internal Revenue Service regulations limits the use of NOL
benefits when there is more than 50% of change in ownership.
8. STATUTORY REQUIREMENTS
New York State certified HMOs are required to maintain a cash reserve equal to
the greater of 5% of expected annual medical costs or $100,000. Additionally,
except as described in the following paragraph, WCNY is required to maintain a
contingent reserve which must be increased annually by an amount equal to at
least 1% of statutory premiums earned limited, in total, to a maximum of 5% of
statutory premiums earned for the most recent calendar year and which may be
offset by the cash reserve. The cash reserve is calculated at December 31 of
each year and is maintained throughout the following calendar year. At June 30,
2000, WellCare had cash reserves of $3.8 million and a contingent reserve
of $4.1 million. In the event the contingent reserves 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.
At December 31, 1999 WCNY had a statutory net worth of approximately $(.7)
million, which at end of the current quarter stands at $.6 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. WCCT is subject
to similar regulatory requirements with respect to its HMO operations in
Connecticut. The Connecticut Department of Insurance requires that WCCT maintain
a minimum statutory reserve of $1 million. In addition, there is a Risk Based
Capital (RBC) requirement which requires reserve in the amount of $2.3 million.
WCCT is not in compliance with the RBC requirements.
Management has been meeting with the Connecticut department of Insurance
regarding the statutory net worth deficiency to develop a mutually agreeable
plan to bring WCCT into compliance with its statutory net worth requirement.
WCCT's statutory net worth is approximately $.2 million at June 30, 2000.
In August 1999, WCNY voluntarily agreed to cease marketing and enrollment of its
Medicare+Choice plan. A recent Health Care Financing Administration (HCFA) audit
report indicated that WCNY's Medicare+Choice plan did not meet HCFA requirements
in several areas including prompt payment provisions and effective and efficient
administration of the HCFA contract. WCNY is required to submit to HCFA a
corrective action plan that fully addresses all of the findings addressed in the
report. WCNY will not resume marketing and enrollment until such time as HCFA
notifies WCNY that its Medicare+Choice plan meets HCFA requirements. HCFA does
reserve the right to impose civil monetary penalties on WCNY pursuant to HCFA's
ongoing monitoring of WCNY's effort to regain compliance in the areas cited. No
fines have been levied through the first six months of 2000.
In April 2000, WCNY voluntarily ceased marketing and enrollment of its Medicaid
and Child Health Plus products. Management made the decision to temporarily
cease the marketing and enrollment in the Child Health Plus and Healthy Choice
Products to allow WCNY to fully evaluate the current operations and implement a
business strategy that will assure WCNY Medicaid members of a high level of
quality service and care. WCNY plans on re-marketing the Child Health Plus and
Healthy Choice products within the ninety - day period thereafter.
9. COMMITMENTS AND CONTINGENCIES
a. WCNY has entered into various contractual arrangements with a 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 (12) separate actions filed in Federal Court (the
"Securities Litigations"). An additional three directors were also named in one
of these actions. Plaintiffs sought to recover damages allegedly caused by the
Company's defendants' violations of federal securities laws with regard to the
preparation and dissemination to the investing public of false and misleading
information concerning the Company's financial condition.
In July 1996, the Securities Litigations were consolidated in the United States
District Court for the Northern District of New York, and an amended
consolidating complaint (the "Complaint") was served in August 1996. The
Complaint did not name the three additional directors. The Company's auditor,
however, was named as an additional defendant. In October 1996, the Company
filed a motion to dismiss the consolidated amended complaint against the Company
as well as the individual defendants. The Company's auditor likewise filed its
own motion to dismiss. By Memorandum Decision and Order (the "Order"), entered
in April 1997, the Court (i) granted the auditor's motion to dismiss and ordered
that the claims against the auditors be dismissed with prejudice; and (ii)
denied the motion to dismiss brought by the individual defendants. Because the
Order did not specifically address the Company's motion to dismiss, in May 1997,
the Company moved for reconsideration of its motion to dismiss and dismissal of
all claims asserted against it. On reconsideration, the judge clarified his
previous ruling expanding it to include a denial of the Company's motion as
well. Following the Court's decision, the Company filed its answer and defense
to the Complaint. In September 1997, the plaintiffs' class was certified and the
parties thereafter commenced the discovery process of the litigation. The
actions were dismissed pursuant to a court-approved settlement agreement. The
time for appealing the approval order has not elapsed as of June 30, 2000.
In May 1999, the Company entered into a settlement agreement for $2.5 million,
all of which is being funded by the insurance carrier which provided coverage to
the individual defendants. The settlement agreement is subject to Federal Court
approval. The Company expects to recoup from the insurance carrier a portion of
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 June 30, 2000.
c. Other - The Company is involved in litigation regarding 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.
10. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of financial instruments including short-term investments,
advances to participating providers, other receivables - net, restricted cash,
other non-current assets - net, accounts payable and accrued expenses
approximate their fair values.
The fair value of notes receivable consisting primarily of advances to medical
practices, is not materially different from the carrying value for financial
statement purposes. In making this determination, the Company used interest
rates based on an estimate of the credit worthiness of each medical practice.
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
Consolidated Financial Statements and Notes thereto, included in the quarterly
report and with the Company's Annual Report on Form 10-K for the year ended
December 31, 1999.
The Company's financial statements have been prepared assuming that the Company
will continue as a going concern. The auditors' report on the Company's 1999
financial statements 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 the New York State and
Connecticut Departments of Insurance at December 31, 1999 raise substantial
doubt about its ability to continue as a going concern." Certain statements in
this Form 10-Q are forward-looking statements within the meaning of the
securities laws 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 for at least one year; that increased regulation will increase health care
expenses; that increased competition in the Company's markets or change in
product mix will unexpectedly reduce premium revenue; that the Company will not
be successful in increasing membership growth; that there may be adverse changes
in Medicare and Medicaid premium rates set by federal and state governmental
agencies; that health care cost in any given period may be greater than expected
due to unexpected incidence of major cases, natural disasters, epidemics, change
in physician practices, and new technologies; that the Company will be unable to
successfully expand its operations into New York City, Westchester County and
the States of Connecticut; and that major health care providers will be unable
to maintain their operations and reduce or eliminate their accumulated deficits.
Legislative and regulatory proposals have been made at the federal and state
government levels related to the health care system, including but not limited
to limitations on managed care organizations (including benefit mandates) and
reform of the Medicare and Medicaid programs. Such legislative or regulatory
action could have the effect of reducing the premiums paid to the Company by
governmental programs or increasing the Company's medical costs or both. The
Company is unable to predict the specific content of any future legislation,
action or regulation that may be enacted or when any such future legislation or
regulation will be adopted. Therefore, the Company cannot predict the effect of
such future legislation, action or regulation on the Company's business.
OVERVIEW:
For the three months ended June 30, 2000, we generated net income of
approximately $563 thousand compared to a net income of approximately $112
thousand for the comparable 1999 period, which included an extraordinary gain of
approximately $9.0 million. For the six - month period ended June 30, 2000 and
1999, the Company had net income of $1.038 million and net income of $2.902
million. For the six - month period ended June 30, 2000 and 1999, there were one
time extraordinary gains of $373 thousand and approximately $9.0 million.
Excluding these extraordinary benefits, the Company had a net income of $665
thousand for the period ending June 30, 2000 and a net loss of approximately
$12.0 million for the period ending June 30, 1999.
REVENUES:
Premiums earned in the three months ended June 30, 2000 decreased by 43.56%, or
$13.54 million, to $17.53 million from $31.06 million in the three months ended
June 30, 1999.
Premiums earned in the six months ended June 30, 2000 decreased by 44.45 %, or
$28.97 million, to $36.20 million from $65.17 million in the six months ended
June 30,1999. The decrease in the periods ending June 30,2000 resulted
primarily from sale of WCNY Commercial business to GHI effective June 1, 1999,
WCNY not renewing its Medicare Risk contracts in four (4) counties in New York,
effective January 1, 1999 and voluntary cessation of marketing by WCNY and
WCCT.
OTHER INCOME:
For the three months and six month periods ended June 30, 2000, other income
includes approximately $766,000 in recovery from D&O liability insurance policy
and approximately $350,000 from the estimated reduction of demographic pool
liability.
MEDICAL EXPENSES:
Medical expenses decreased as a percentage of premiums earned (the "medical
loss ratio") from 102.07% in the three month period ending June 30,1999 to
89.51% for the same period in 2000. Medical expenses decreased as a percentage
of premiums earned from 93.29% in the six month period ending June 30, 1999
to 87.05% for the same period in 2000. Medical expenses and the medical loss
ratio for the three month period ending June 30, 2000 and six month period
ending June 30, 2000 are lower than 1999 because of a reduction in members in
2000, increased member enrollee rates in 2000 and Company wide efficiencies.
GENERAL AND ADMINISTRATIVE EXPENSES:
General and administrative (G&A) expenses decreased to $2.93 million in the
three month period ending June 30, 2000 compared to $8.05 million in the same
period in 1999 and decreased as a percentage of total revenue (the "G&A ratio")
to 15.05% in the three month period ending June 30,2000 from 25.67% in
the same period in 1999.
General and administrative expenses decreased to $ 5.65 million in the six month
period ending June 30, 2000 compared to $15.58 million in the same period in
1999 and decreased as a percentage of total revenue to 14.75% in the six month
period ending June 30, 2000 from 23.68% in the same period in 1999. The decrease
in G&A expenses in the three month period ending June 30, 2000 and the six
month period ending June 30, 2000 resulted primarily from a management agreement
with Comprehensive Health Management, Inc. as described in Note 2 of the
financial statements and a reduction in administrative costs associated with
WCCT's administration.
LIQUIDITY AND FINANCIAL RESTRUCTURING:
At June 30, 2000, the Company had a working capital deficiency of approximately
$6.4 million, excluding the cash reserve of $3.7 million required by New York
State which is classified as a non-current asset, compared to a working capital
deficiency of $12.1 million at June 30, 1999, excluding the cash reserve of $2.9
million. The decrease in deficiency is attributable primarily to various
financial restructuring transactions completed in June 1999. These transactions
include: an equity investment of $5 million; sale of WCNY's commercial business
for approximately $5 million; settlement of provider claims at amounts
significantly lower than the estimated liability of approximately $30.5 million;
renegotiations and settlement of approximately $5.4 million of mortgage debt;
and the conversion of the $15 million Note into senior convertible preferred
stock of the Company. After the conclusion of these transactions, the Company's
ongoing cash requirements has reduced because all long-term debt was retired,
the Company no longer provides commercial health care coverage in New York, its
space needs have been reduced substantially, and it has 136 employees compared
to 236 at June 30, 1999.
Net Cash used by operating activities was $5.8 million during the first half of
2000 as compared to $9.5 million for the first half of 1999. The cash used in
operations in the first half of 2000 resulted primarily from payment of medical
claims incurred in prior years.
Legislation by New York State and Connecticut requires HMOs to pay undisputed
claims within 45 days of date of receipt. In the first six months months of 1999
WCNY and WCCT continued to pay claims later than required. The Company records
as an expense the estimated interest it is required to pay, which management
believes is not material to the Company's results of operations.
New York State certified HMOs are required to maintain a cash reserve equal to
the greater of 5% of expected annual medical costs or $100,000. As mentioned in
Note 7 of the financial statements, the Company is not in compliance with the
cash reserve or statutory reserve requirements of the New York State Insurance
Department.
INFLATION
Medical costs have been rising at a higher rate than consumer goods as a whole.
The Company believes its premium increases, capitation arrangements and other
cost controls measures may mitigate, but do not wholly offset, the effects of
medical cost inflation on its operations and its inability to increase premiums
could negatively impact the Company's future earnings.
QUANTITIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company is exposed to interest rate risk primarily through its borrowing
activities and minimally through its short-term investments. Although there is
inherent risk for any investments and borrowings, the extent of this is not
quantifiable or predictable because of the restructuring of the Company as a
result of the June financial and operational restructuring transactions. The
Company has not entered into additional borrowing activities for the six months
ended June 30, 2000.
<PAGE>
PART II OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS
The Company and certain of its subsidiaries, including WCNY, have responded to
subpoenas issued in April and August 1997 from the United States District Court
for the Northern District of New York through the office of the United States
Attorney for that District. These subpoenas sought the production of various
documents concerning financial and accounting systems, corporate records, press
releases and other external communications. While the United States Attorney has
not disclosed the purpose of its inquiry, the Company has reason to believe that
neither its current management nor its current directors are subjects or targets
of the investigation. The Company has informed the government that it will
continue to cooperate fully in any way that it can in connection with the
ongoing investigation.
On July 31, 1996 and October 3, 1996, the Securities and Exchange Commission
issued subpoenas to the Company for the production of various financial and
medical claims information. The Company fully complied with both of these
subpoenas on August 21, 1996 and October 31, 1996, and with subsequent requests
for supplementation. It is management's understanding that the Securities and
Exchange Commission investigation is continuing. The current management is
unaware of any on-going investigation by the Securities and Exchange Commission.
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.
ITEM 2 CHANGES IN SECURITIES
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 from twenty (20) million to seventy - five million (75). 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 stocks,
there were 38,697,940 shares of common stock and 313,555 shares of Class A
common stock outstanding. At this conversion Dr. Patel owned fifty - one (51%)
percent of the aggregate number of shares outstanding in the combined classes.
Dr. Patel transferred 4% of his shareholder ownership to other shareholders of
the Company.
ITEM 3 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable
ITEM 4 OTHER INFORMATION
a. CHANGES IN CONTROL
Not Applicable
b. CHANGES IN DIRECTORS AND EXECUTIVE OFFICERS
Effective April 1, 2000, Hitesh Adhia resigned as Acting Chief Financial
Officer. Mr. Adhia will remain as consultant to the Company, effective April 1,
2000. Kenneth M. Rossman was appointed Chief Accounting Officer effective May 1,
2000.
ITEM 5 EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit 27 Financial Data Schedule
(b) Reports on Form 8-K
Not Applicable
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
The WellCare Management Group, Inc.
By: /s/ Kiran C. Patel, M.D.
--------------------------------------------
Kiran C. Patel, M.D.
Chairman of the Board, President and
Chief Executive Officer
(Principal Executive Officer)
By: /s/ Kenneth M. Rossman, CPA
--------------------------------------------
Kenneth M. Rossman, CPA.
Chief Accounting Officer
By: /s/ Pradip C. Patel
--------------------------------------------
Pradip C. Patel
Director
(Director)
By: /s/ Rupesh R. Shah
--------------------------------------------
Rupesh R. Shah
Director
(Director)
By: /s/ Dr. Mark Dean
--------------------------------------------
Dr. Mark Dean
Director
(Director)
Date: August 14, 2000
<PAGE>
INDEX TO EXHIBITS
All exhibits below are filed with this Quarterly Report of Form 10-Q:
EXHIBIT NUMBER
--------------
27 Financial Data Schedule
