In June 1999, Wellcare Development, Inc.("WCD") agreed to transfer ownership of all of the Company's real property to the mortgagees of those properties in consideration for the mortgagees relieving the Company of any liability under the mortgages (see Business-Key Bank and Premier Bank Transactions).
The lease costs for WCNY and WCCT are paid by Comprehensive Health Management, Inc. in accordance with the existing management agreements between CHM and WCNY, and between CHM and WCCT.
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.
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 ------ ------ ------ ------ ------
Preferred deemed dividend (3.0) -- -- -- ------ ------ ------ ------ ------ Net income(loss) available to common shareholders (1.4) (30.9) (22.1) (11.8) 1.7 ====== ====== ====== ====== ======
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 ====== ====== ====== ====== ======
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 - -------------------------
The Company's financial statements have been prepared assuming that the Company will continue as a going concern. The auditors' report states that "the Company's recurring losses from operations, working capital deficit, capital deficiency and failure to maintain 100% of the contingent reserve requirement for New York State and Connecticut Department of Insurance raise substantial doubt about its ability to continue as a going concern." (See Consolidated Financial Statements).
Certain statements in this Annual Report on Form 10-K are forward-looking statements and are not based on historical facts but are management's projections or best estimates. Actual results may differ from these projections due to risks and uncertainties. (see Business-Forward Looking Statements)
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.
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 ---- ---- ----
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
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 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.
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%.
Depreciation and amortization increased approximately $2.4 million, or 65.6%, primarily because the Company amortized the remaining preoperational costs ($0.4 million), and amortized additional goodwill ($2.3 million). This reflects the Company's assessment of the value of these assets at December 31, 1998. Interest expense increased 4.7% to $1.7 million due to the increased interest on the Note.
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.
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 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.
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
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.
The 1999 Consolidated Financial Statements and report of the Company's independent certified public accountants are included in Item 14.