Note: Significant transactions occurred in 1999, which materially changed the Company's structure and operations. See discussion in Item 1.
The Company's consolidated financial statements have been prepared assuming that the Company will continue as a going concern. The Company has incurred recurring losses from operations, has a working capital deficit, a shareholders' deficiency, failed to achieve the minimum statutory equity requirements of the State of New York Insurance Department and has failed to maintain the minimum risk based capital requirements of the State of Connecticut Insurance Department. These factors raise substantial doubt about its ability to continue as a going concern (See Consolidated Financial Statements).
The results of operations depend significantly 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. Medical management maintains a daily inventory of hospital days and patient stays by product line.
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. Although the Company continues to improve the IBNR reserve process, and believes the IBNR estimates at the December 31, 2001 are adequate, there can be no assurance that IBNR reserve currently recorded will be sufficient to cover medical expenses ultimately incurred.
Year Ended December 31, ------------------------------------ 2001 2000 1999 -------- -------- -------- Revenue: Premiums earned 99.5% 97.0% 98.2% Interest and other income 0.5 3.0 1.8 -------- -------- -------- Total revenue 100.0 100.0 100.0
Medical Expenses. Medical expenses increased approximately $11.5 million or 16.4% from $70.1 million in 2000 to $81.6 million in 2001. The increase in medical expenses was principally due to the increase in the Company's Medicaid and Child Health Plus lines of business as discussed above. Medical expenses as a percentage of premiums earned (medical expense ratio) decreased from 91.9% in 2000 to 84.3% in 2001. The decrease in the medical expense ratio was primarily a result of the change in the mix of the Company's business as discussed above as well as changes in the WCNY's provider network contracts. In addition, overall premium increases on FirstChoice's enrolled commercial and WCNY's Medicare members contributed to the decrease in the medical expense ratio.
General and Administrative (G&A) Expenses. G&A expenses increased $3.7 million to $17.0 million in 2001 from $13.3 million in 2000. The increase in G&A expenses was primarily due to the increase in administrative costs associated with managing the additional membership resulting from the acquisition of FirstChoice's Medicaid line of business, net of a decrease in bad debt expense. G&A expenses as a percentage of total revenues (G&A expense ratio) increased 0.6% to 17.5% in 2001 from 16.9% in 2000. The increase in the G&A expense ratio was principally due to the increase in WCNY's marketing costs as WCNY resumed its marketing activities in October 2000. WCNY voluntarily suspended marketing and enrollment of its Medicaid and Child Health Plus products from April to October 2000.
Interest Expense. Interest expense increased $458,000 from $174,000 in 2000 to $632,000 in 2001. The increase in interest expense was primarily due to an increase in the Company's average notes payable balance during 2001. The Company borrowed an additional $3.1 million in notes payable from affiliates during 2001.
Premiums Earned. Premiums earned decreased $34.3 million to $76.2 million in 2000 from $110.5 million in 1999, a decrease of 31.0%. The decrease in premiums earned was primarily due to the overall decrease in membership from prior year. WCNY's commercial business was sold to GHI in June 1999, which accounted for approximately $20.0 million of the decrease. In April 2000, WCNY ceased marketing and enrollment of its Medicaid and Child Health Plus products, which resulted in a decrease in of approximately 5,500 members and $2.9 million. WCNY's Medicare premiums earned decreased approximately $3.0 million, as the Company did not market this product line. FirstChoice's net decrease in premiums earned was approximately $8.7 million, which consisted of a decrease of approximately $18.4 million in the commercial line of business as membership decreased from 13,300 members in 1999 to 2,800 in 2000, and an increase of approximately $9.7 million from the acquisition of the Medicaid line of business in October 2000. The acquired Medicaid book of business contributed approximately 24,000 members.
Interest and Other Income. Interest and other income increased $0.4 million to $2.4 million in 2000 from $2.0 million in 1999, an increase of 20.0%. The increase was attributed principally to an insurance reimbursement of $776,000 relating to the Securities Litigation against the Company's former Chief Executive Officer and Vice President of Finance and Chief Financial Officer (see Note 13 of Notes to Consolidated Financial Statements), net of a decrease in interest income of $347,000.
Medical Expenses. Medical expenses decreased $31.7 million from $101.8 million in 1999 to $70.1 million in 2000, a decrease of 31.1%. This decrease was primarily the result of a decrease in membership. Medical expenses as a percentage of premiums earned (medical expense ratio) decreased slightly from 92.1% in 1999 to 91.9% in 2000.
General and Administrative (G&A) Expenses. G&A expenses decreased $10.5 million to $13.3 million in 2000 from $23.8 million in 1999. G&A expenses as a percentage of total revenues (G&A expense ratio), decreased from 21.1% in 1999 to 16.9% in 2000. The decrease in G&A expenses and the G&A expense ratio was primarily the result of the management agreement with Comprehensive Health Management, Inc., which resulted in savings of approximately $5.3 million, the reduction in administrative costs associated with FirstChoice's Commercial operation which resulted in savings of approximately $2.1 million, and a decrease in legal fees of approximately $1.0 million.
Despite the relatively stable inflation rate in the general economy, the health care industry has experienced a significantly higher rate of inflation associated with providing health care services in recent years. The Company utilizes various cost control measures as well as increasing premiums as appropriate to reduce the negative effects of inflation. The Company has significantly increased premiums for its FirstChoice commercial line of business as well as member premiums for its WCNY Medicare line of business. There is no assurance that the Company will be successful in reducing the negative effects of inflation associated with providing health care services.
As part of the Company's plan to bring its net worth into compliance with the State of New York's and the State of Connecticut's requirements, approximately $3.3 million in surplus notes was infused into WCNY on March 8, 2002. WCNY in turn infused the $3.3 million into its subsidiary, FirstChoice, to bring FirstChoice's net worth just below the Regulatory Action Level of $2.8 million as required under RBC. Upon the completion of a review by a third party consulting actuary engaged by the State of Connecticut Insurance Department, the Company will have thirty days to infuse additional funds to bring its net worth up to the Company Action Level of $3.2 million under RBC. The Company action level is the minimum amount of surplus required under RBC. Upon such infusion, WCNY is able to admit a value for its investment in FirstChoice in the amount of up to 50% of its own statutory net worth, which will be out of compliance with its minimum statutory net worth requirement by approximately $285,000. Management will need to arrange to infuse the $285,000 into WCNY by April 30, 2002 to bring WCNY into compliance with the NYSID's adjusted minimum statutory net worth. In the event that the WellCare HMOs fail to comply with their minimum statutory net worth requirements, they may be subject to, but not limited to, regulatory control by the respective state departments of insurance.
In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 141 ("SFAS 141"), "Business Combinations." SFAS 141 requires the purchase method of accounting for business combinations initiated after June 30, 2001 and eliminates the pooling-of- interests method. Goodwill and certain intangible assets with indefinite useful lives will remain on the balance sheet and not be amortized. The Company implemented SFAS 141 on July 1, 2001 and has determined that there is no impact on its consolidated financial position or results of operations.
Schedule I - Condensed Financial Information of the Registrant 56 Schedule II - Valuation and Qualifying Accounts 59
We have audited the accompanying consolidated balance sheets of WellCare Management Group, Inc. and subsidiaries (the "Company") as of December 31, 2001 and 2000, and the related consolidated statements of operations, shareholders' deficiency, and cash flows for each of the two years in the period ended December 31, 2001. Our audits also included the financial statement schedules listed in the Index at Item 14 (a) 2. These financial statements and financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statements and financial statement schedules based on our audits.
To the Board of Directors and Shareholders of The WellCare Management Group, Inc. Tampa, Florida
In our opinion, such consolidated financial statements present fairly, in all material respects, the Company's results of operations and cash flows for the year ended December 31, 1999 in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the financial statement schedules for the year ended December 31, 1999, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly in all material respects the information set forth therein.
The Wellcare Management Group, Inc. ("WellCare" 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 members for a predetermined, prepaid fee.
Well Care Administration, Inc. ("WCA") (formerly Agente Benefit Consultants, Inc. ("ABC")) was 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. WCA was rendered inactive after June 1999 as the Company's pharmacy, vision care, dental care and other specialty care benefit programs were contracted with third party venders and were subsequently dissolved in October 2000.
In June 1999, Group Health Incorporated ("GHI") purchased WCNY's commercial business, consisting mainly of other assets and goodwill associated with member lives, for approximately $5.0 million (the "GHI Transaction"). During 1999, the Company recorded a gain of $352,000 in connection with the sale. As stipulated and agreed upon in the GHI Transaction, WCNY did not engage in commercial HMO business in New York for a period of one year from the June 1, 1999 closing date.
In June 1999, as a condition to the successful closing of the Patel and the GHI transactions, various hospitals, physicians and other health care providers entered into settlement agreements to settle claims for services provided to WCNY HMO members through April 30, 1999. The various hospitals, physicians and other health care providers agreed to accept a payment of 30% of the balance owed by the Company to the provider in the year of settlement, plus 5% of the balance owed by the Company, payable on February 1 of the three years subsequent to the year of settlement if they continue to be participating WCNY providers. These claims are settled from a provider pool consisting of all the proceeds from the Patel and GHI transactions in addition to 80% of WCNY's premium receivables at April 30, 1999. For the year ended December 31, 1999, the Company recognized an extraordinary gain of $18.3 million due to the results of the completed provider settlements. At December 31, 2001 and 2000, the Company maintained accruals of $1.0 million and $2.1 million respectively, pertaining to this transaction, of which $1.0 million was included in non- current liabilities in 2000.
At December 31, 2001, FirstChoice's statutory deficit was approximately $792,000, which was not in compliance with the net worth requirement. Approximately $3.3 million in surplus notes was infused on March 8, 2002 to bring the FirstChoice's net worth just below the Regulatory Action Level of $2.8 million as required under RBC. Upon the completion of a review by a third party consulting actuary engaged by the Department, the Company will have thirty days to infuse additional funds to bring its net worth up to the Company Action Level of $3.2 million under RBC. The Company Action Level is the minimum amount of surplus required under RBC. In the event that FirstChoice fails to comply with the minimum surplus required under RBC, FirstChoice may be subject to, but not limited to, regulatory control by the Department.
At December 31, 2001, the Company's statutory net worth was approximately $742,000, which was not in compliance with the SNYID's adjusted minimum statutory net worth requirements. Approximately $3.3 million in surplus notes were infused into WCNY through its parent company, WCMG, on March 8, 2002. WCNY in turn infused the $3.3 million into its subsidiary, FirstChoice, to bring FirstChoice's net worth just below the Regulatory Action Level. Upon such infusion, WCNY will be able to admit a value for its investment in FirstChoice in the amount of up to 50% of its own statutory net worth or approximately $371,000. This infusion will bring WCNY's statutory net worth to approximately $1,113,000, which is in not compliance with the NYSID's adjusted minimum statutory net worth requirement. Management will need to arrange to infuse approximately $285,000 into WCNY by April 30, 2002 to bring WCNY into compliance with the NYSID's adjusted minimum statutory net worth. In the event that that WCNY fails to comply with the adjusted minimum statutory net worth requirement, WCNY may be subject to, but not limited to, regulatory control by the SNYID.
Cash and Cash Equivalents - The Company considers all demand deposits, overnight investments, and highly liquid investments with an original maturity of three months or less to be cash equivalents. The Company includes all cash overdrafts in accounts payable. The Company had cash overdrafts of approximately $1.2 million at December 31, 2000. There were no overdrafts at December 31, 2001.
Advances to Participating Providers - Advances to participating providers consist principally of amounts advanced to hospitals, which are under contract with the WellCare HMOs to provide medical services to plan members. Such advances provide funding to these providers for claims incurred but not yet reported or claims in the process of adjudication. The WellCare HMOs have the right to offset such advances against future claims payments.
Fair Value of Financial Instruments - The estimated fair value of amounts reported in the consolidated financial statements have been determined by using available market information and appropriate valuation methodologies. The carrying value of all current assets and current liabilities approximate their fair value because of their short-term nature.
Concentrations of Credit Risk - Financial instruments, which potentially subject the Company to concentration of credit risk, consist principally of cash equivalents and receivables. The Company limits the amount of credit exposure to each individual financial institution and places its temporary cash into investments of high credit quality. Concentrations of credit risk with respect to premium receivables are limited, as the majority of the Company's business is generated from government-sponsored programs. As of December 31, 2001 and 2000, management believes that the Company had no significant concentrations of credit risk.
Use of Estimates - The preparation of the consolidated financial statements, in conformity with accounting principles generally accepted in the United States of America, 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. Actual results could differ from those estimates.
Revenue Recognition - Premiums from subscribers are recorded as revenue in the period that subscribers are entitled to service. Premiums received in advance are deferred.
Medical Expenses - Medical expenses include estimates for physician services, hospital services, pharmacy expenses, and other 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 using actuarial techniques. 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.
Advertising Costs - Advertising costs, which include costs for certain marketing materials and development/implementation of public relations and marketing campaigns, are expensed as incurred.
Provision for Loss Contracts - It is the Company's policy to evaluate all contracts and recognize losses on contracts when estimated future health care costs and maintenance costs under a group of existing contracts will exceed anticipated future premiums and stop-loss insurance recoveries. Unpaid losses and loss adjustment expenses include an amount determined from individual case estimates and loss reports and an amount, based on past experience, for losses incurred but not reported. Such liabilities are necessary based upon assumptions and estimates and while management believes the amount is adequate, the ultimate liability may be in excess of or less than the amount provided. The methods for making such estimates and for establishing the resulting liability are continually reviewed by management and company actuaries and any adjustments are reflected in the period determined. Management has evaluated the contracts currently in place and has recorded a loss accrual of approximately $300,000 at December 31, 2001 relating to FirstChoice's Medicaid line of business. No loss accruals were considered necessary at December 31, 2000.
Earnings Per Share - Basic net income (loss) per share is computed using the weighted average number of common shares outstanding for the applicable period. Diluted net income (loss) per share reflects the potential dilutive effect of securities (which consist of stock options) that could share in earnings of the Company, unless the inclusion of these potential dilutive effects results in antidilution.
The liability for accrued medical costs payable includes management's estimate of amounts required to settle known claims, claims in the process of adjudication, and estimated claims incurred but not reported. Costs in excess of those anticipated could have a material adverse effect on the Company's results of operations.
The significant components of deferred taxes were as follows (in $ thousands):
The Company has net operating loss ("NOL") carry-forwards in the amount of approximately $72,280,000 expiring through 2021. Of this amount, approximately $37,800,000 of NOL carryforward has been limited by imposition of Section 382 of the Internal Revenue Code due to a change in the Company's ownership in 1999. The ability to realize the tax benefits associated with deferred tax assets and NOLs is reliant 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 recoup period, the Company provided a 100% valuation allowance in both 2001 and 2000 with respect to the deferred tax assets for 2001 and 2000 respectively.
In March 1993, the Company created the 1993 Incentive and Non-Incentive Stock Option Plan (the "1993 Stock Option Plan") to encourage selected employees, directors, and other persons who contribute materially to the Company's success. The 1993 Stock Option Plan was amended in October 1999, which allowed for an aggregate of 5,000,000 shares of the Company's common stock, par value $0.01 per share, to be reserved for issuance upon the exercise of options which may be granted from time to time in accordance with the 1993 Stock Option Plan. The options shall have a term of no more than ten 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 (i) 100% of the fair market value of the Company's common stock on the date of grant for Incentive Options (110% of the fair market value of the Company's common stock on the date of grant if made to a 10% owner) and (ii) 75% of the fair market value of the Company's common stock on the date of grant for Non-Incentive Options. The following is a summary of the transactions under the 1993 Stock Option Plan:
Options exercisable at year end 1,144,857 573,429 580,964 Weighted average fair value of Options granted during the year $ - $ - $ 0.25
Net loss available to common shareholders per share - basic and diluted: As reported $ (0.05) $ (0.13) $ (0.09) Pro forma (0.05) (0.13) (0.11)
Options to purchase 4,002,000, 4,002,000, and 4,009,535 shares of common stock were outstanding, but were not included in the computation of diluted earnings per share ("EPS") at December 31, 2001, 2000, and 1999, respectively, due to their anti-dilutive effect.
The 8% subordinated convertible note amounting to $15,000,000 is not included in the computation of 1999 diluted EPS prior to its conversion due to its anti-dilutive effect. The note was converted during 1999.
Well Care HMO, Inc., an affiliate of the majority shareholder, paid for director and officers and errors and omissions insurance policies and allocated the expense proportionately to various related entities. At December 31, 2000, WCNY owed Well Care HMO, Inc. approximately $123,000 for its proportionate share of the policy premiums. There were no such transactions during 2001.
The Company's majority shareholder has provided financing to the Company through various cash infusions from related enterprises. During 2001 and 2000, approximately $3.1 million and $4.4 million, respectively, in surplus notes were provided to the Company from enterprises controlled by the majority shareholder. The notes are due upon demand with interest accruing between 8.0% and 8.5% per annum. The cash infusions were primarily used by the Company to increase the statutory net equity of WCNY and FirstChoice during the respective years. See Note 6 for details.
2002 $ 327,020 2003 206,252 2004 142,483 2005 97,488 2006 - Thereafter - ---------- $ 773,243 ==========
The Company is currently in negotiations with a former provider group regarding a number of outstanding and disputed claims. During 2000, the Company established an escrow account of $450,000 relating to this matter, which is included in restricted cash in the financial statements. The total amount in dispute, which is under discussion for settlement but has not been settled as of December 31, 2001, is approximately $104,000. A formal offer of settlement has been received from the attorney for the provider group for the amount in question and the Company has since agreed to accept the proposed terms. A loss provision of $104,000 has been accrued in the financial statements as of December 31, 2001.
In December 2001, the State of New York Department of Health ("DOH") issued its report on the second stage review of WCNY's Child Health Plus Program. Based on the review findings, the DOH projected that the Company owed approximately $1.1 million due to billing and processing errors. The Company disputed some of the findings and worked with the DOH to resolve the billing and processing errors. The DOH reviewed the disputed findings and revised its projection to $617,000. The Company has recorded the $617,000 in its 2001 financial statements.
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 purposes 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. As of December 31, 2001 and 2000, no amounts have been accrued to the consolidated financial statements regarding the resolution of this investigation.
On July 31, 1996 and October 3, 1996 the Securities and Exchange Commission ("SEC") 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 SEC. As of December 31, 2001 and 2000, no amounts have been accrued to the consolidated financial statements regarding the resolution of this investigation.
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 & 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.
The Company conducts a significant portion of its HMO business with federal and state sponsored programs. As part of their participation, the Company is subject to legislative and regulatory change, which is beyond management's control. Management continues to monitor these changes in reimbursement levels and has made no provisions to the financial statements for these contingencies.
The Company is a party to service agreements with five IPAs owned by Primergy (the "Primergy IPAs"). Accordingly, the Settlement Agreement further required Primergy to pay $2 per member per month for the period commencing from August 31, 2000 to July 31, 2002 for members assigned to the Primergy IPAs. Such payment is guaranteed by Promedco's Management Company. The Primergy IPAs' contract period was reduced and currently will terminate on July 31, 2002. In 2000, the Company recognized approximately $118,000 in income pertaining to this settlement. Such amount is included in "Other income - net" in the 2000 financial statements. Primergy filed for bankruptcy in April 2001. Based on the executed contracts with the IPAs, WCNY is not liable for the IPAs' liabilities; however, in the event the IPAs default on their financial obligations, the provider network could be materially affected. This matter did not have a material effect on the Company's provider network.
The State of Connecticut Insurance Department (the "Department") requires that stipulated amounts of surplus be maintained at all times. The Company must maintain a minimum net worth equal to the greater of: (A) $1,000,000; or (B) 2% of its annual premium revenues as reported on the most recent annual financial statement filed with the Department on the first $150,000,000 of premium revenues plus 1% of annual premium revenues in excess of $150,000,000. The Risk-Based Capital ("RBC") requirements for health care centers were adopted through a regulation promulgated by the Department effective January 31, 2000. The main purpose of the regulation is to provide a tool for insurance regulators to evaluate the capital of insurers. FirstChoice filed an RBC report as of December 31, 2001 on March 1, 2002. At December 31, 2001, FirstChoice's statutory deficit was approximately $792,000, which was not in compliance with the net worth requirement. Approximately $3.3 million in surplus notes was infused on March 8, 2002 to bring the FirstChoice's net worth just below the Regulatory Action Level of $2.8 million as required under RBC. Upon the completion of a review by a third party consulting actuary engaged by the Department, the Company will have thirty days to infuse additional funds to bring its net worth up to the Company Action Level of $3.2 million under RBC. The Company Action Level is the minimum amount of surplus required under RBC.
WCNY is required to accumulate and maintain a contingent reserve fund, which shall be increased in an amount equal to at least 5% of the net premium income of the Company during the calendar year, until such reserve fund is at least equal to $50,000. The contingent fund at the end of any calendar year shall not exceed 5% of the net premium income of such calendar year. WCNY is also required to establish a deposit in the form of an escrow account for the protection of enrollees that may consist of cash or be otherwise financed through bond or other means acceptable to the State of New York Insurance Department ("SNYID"). This deposit shall be equal to the greater of (1) 5% of the estimated expenditures for health care services for the year, or (2) $100,000. At December 31, 2001 and 2000, WCNY had a required cash reserve of approximately $2.2 million and $2.5 million, respectively, and a required contingent equity reserve of approximately $2.8 million for both years.
Notwithstanding the above, the SNYID has the authority to allow an HMO to maintain a net worth of 50% to 100% of the contingent reserve. On June 1, 1999, the majority shareholder submitted a program to the SNYID to restore the WCNY's contingency reserve to 100% of its required level over a three-year period ending June 1, 2002. In the interim, the SNYID has allowed WCNY to maintain a contingency reserve of no less than 50% of its required level. At December 31, 2001, the Company's statutory net worth was approximately $742,000, which was not in compliance with the SNYID's adjusted minimum statutory net worth requirements. Approximately $3.3 million in surplus notes were infused into WCNY through its parent company, WCMG, on March 8, 2002. WCNY in turn infused the $3.3 million into its subsidiary, FirstChoice, to bring FirstChoice's net worth just below the Regulatory Action Level. Upon such infusion, WCNY will be able to admit a value for its investment in FirstChoice in the amount of up to 50% of its own statutory net worth or approximately $371,000. This infusion will bring WCNY's statutory net worth to approximately $1,113,000, which is in not compliance with the NYSID's adjusted minimum statutory net worth requirement. Management will need to arrange to infuse approximately $285,000 into WCNY by April 30, 2002 to bring WCNY into compliance with the NYSID's adjusted minimum statutory net worth.
WCNY underwent an examination for the period from June 1, 1999 through September 30, 2000 conducted by the SNYID. The SNYID issued its report of examination findings on April 13, 2001, which stated that WCNY was insolvent in the amount of $1,465,680 its statutory minimum net worth requirement was impaired in the amount of $5,577,278 as of September 30, 2000. The Subsequent Events section of the report disclosed that $4,897,124 in cash was infused into the WCNY from October 1, 2000 through May 2, 2001 in the form of Section 1307 loans from Comprehensive Health Management, Inc. and Comprehensive Health Management of Florida, LLC, affiliated companies of the majority shareholder of WCMG. Management believes the cash infusion remedied the insolvency and capital impairment determined by the examination and reduced that statutory net worth impairment to $680,154 as of September 30, 2000. Additionally, during the exam certain recommendations were made by the SNYID to improve the Company's business processes. Management has reviewed and implemented the applicable recommendations.
Depreciation and Amortization: New York $ 373 $ 398 $ 968 Connecticut 18 17 27 Other - 5 152 ---------- ---------- ---------- Total $ 391 $ 420 $ 1,147 ========== ========== ==========
Interest Expense: New York $ 582 $ 174 $ - Connecticut - - - Other 50 - 3,565 ---------- ---------- ---------- Total $ 632 $ 174 $ 3,565 ========== ========== ==========
Net (Loss) Income: New York $ 1,265 $ (2,152) $ 7,041 Connecticut (3,059) (3,319) (1,576) Other (111) 592 (3,857) ---------- ---------- ---------- Total $ (1,905) $ (4,879) $ 1,608 ========== ========== ==========
(1) During the fourth quarter of 2001, several events significantly impacted the Company's results of operations. The Company recorded a $617,000 estimate relating to the State of New York Department of Health audit of WCNY's Child Health Plus line of business. The estimate relates to the audit period of February 2001 through July 2001, which the Company received preliminary notification of the findings in December 2001. The audit findings were not estimable in previous quarters. In January 2002, the Company was notified of a duplicate billing error, relating to WCNY's Child Health Plus line of business, of $443,000 from January 2000 through October 2001. The Company recorded this liability as of December 31, 2001. FirstChoice recorded an increase in its medical costs payable of approximately $1.0 million due to a change in estimate. The changes in the Company's claims payment pattern adversely impacted the actuarially determined medical costs payable.
THE WELLCARE MANAGEMENT GROUP, INC. AND SUBSIDIARIES Schedule I Condensed Financial Information of Registrant Condensed Statements of Operations ($ In Thousands)
THE WELLCARE MANAGEMENT GROUP, INC. AND SUBSIDIARIES Schedule II Valuation and Qualifying Accounts For the years ended December 31, 2001, 2000, and 1999 ($ In Thousands)