The following table sets forth certain information as of December 31, 2000, relating to the Company's principal facilities:
APPROXIMATE FACILITY LOCATION SQUARE FEET - -------- -------- ----------- Executive Offices - Leased (1) Kingston, New York 27,000 Sales Office - Leased (2) Albany, New York 1,800 Sales Office - Leased (2) Bronx, New York 10,000 Sales Office - Leased (3) New Haven, Connecticut 3,800
(1) Used by WCNY and WCMG. (2) Used by WCNY. (3) Used by FirstChoice.
The following discussion and analysis should be read in conjunction with the Consolidated Financial Statements and Notes thereto included elsewhere herein.
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.
Ongoing studies for the Company's Medicaid, Medicare, and commercial lines of businesses 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 more effectively.
The following table provides certain Statement of Operations data expressed as a percentage of total revenue and other statistical data for the years indicated:
General and administrative expenses 15.5 18.2 20.8 Depreciation and amortization expenses 0.5 1.0 4.1 Bad debt expense 1.5 1.9 1.8 Interest and other expenses 0.2 3.2 1.2 -------- -------- -------- Total expenses 106.2 114.8 117.6 -------- -------- -------- Loss before extraordinary item and income taxes (6.2) (14.8) (17.6) (Benefit) provision for income taxes - (2.0) 3.8 -------- -------- -------- Net loss before extraordinary item (6.2) (12.8) (21.4) Extraordinary gain, net of tax - 14.2 - -------- -------- -------- Net (loss) income (6.2) 1.4 (21.4) Preferred stock deemed dividend - (2.6) - -------- -------- -------- Net loss available to common shareholders (6.2)% (1.2)% (21.4)% ======== ======== ========
Unaudited Statistical Data: Member months enrollment 441,886 655,985 854,909 Medical loss ratio (1) 91.2% 92.1% 90.7% General and administrative expense ratio (2) 17.0% 20.1% 22.6%
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.
GENERAL AND ADMINISTRATIVE (G&A) EXPENSES. G&A expenses decreased $9.4 million to $13.3 million in 2000 from $22.7 million in 1999. G&A expenses as a percentage of total revenues (G&A expense ratio), decreased from 20.1% in 1999 to 17.0% 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.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization decreased $0.7 million from $1.1 million in 1999 to $0.4 million in 2000. The decrease was primarily a result of the Patel Transaction in 1999. At which time, the Company transferred ownership of the two real properties securing two mortgages to their respective lenders in lieu of foreclosure. Additionally, included in GHI's purchase of the Company's commercial line of business in New York, were certain equipment and furniture and fixtures.
MEDICAL EXPENSES. Medical expenses decreased 21.4%, or $27.7 million, to $101.8 million in 1999. This decrease was primarily the result of a decrease in membership due to the sale of the WCNY's Commercial line of business. Medical expenses 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. 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).
Despite the relatively stable inflation rate in the general economy, the health care industry has experienced significantly a 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.
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133 establishes accounting and reporting standards for derivative instruments and hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. The accounting for changes in the fair value of a derivative (that is, gains and losses) depends upon the intended use of the derivative and resulting designation. In July 1999, FASB issued SFAS No. 137, Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of SFAS No. 133, which postponed the effective date of the SFAS No. 133 for one year. In June 2000, FASB issued SFAS No. 138, Accounting for Certain Derivative Instruments and Certain Hedging Activities, and amendment to SFAS No. 133. The Company adopted SFAS 133 on January 1, 2001. The adoption of SFAS No. 133 did not have a material impact on the Company's financial position or results of operations.
Independent Auditors' Report 25 Consolidated Balance Sheets - December 31, 2000 and 1999 28 Consolidated Statements of Operations for the years ended December 31, 2000, 1999, and 1998 29 Consolidated Statements of Shareholders' Deficiency for the years ended December 31, 2000, 1999, and 1998 30 Consolidated Statements of Cash Flows for the years ended December 31, 2000, 1999, and 1998 32 Notes to Consolidated Financial Statements 33
We have audited the accompanying consolidated balance sheet of the WellCare Management Group, Inc. and subsidiaries (the "Company") as of December 31, 1999, and the related consolidated statements of operations, shareholders' deficiency and cash flows for the year ended December 31, 1999. We have also audited the financial statement schedules for the year ended December 31, 1999 listed in the accompanying index. 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 auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements and schedules 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 and schedules 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 their operations and their 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.
To the Board of Directors and Shareholders of The WellCare Management Group, Inc. Kingston, New York
We have audited the accompanying consolidated statement of operations, shareholders' deficiency and cash flows of The WellCare Management Group, Inc. and subsidiaries (the "Company") for the year ended December 31, 1998. Our audit also included the financial statement schedules for the year ended December 31, 1998 listed in the index at Item 14. These consolidated financial statements and financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedules based on our audit.
THE WELLCARE MANAGEMENT GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (In $ Thousands, Except Per Share Amounts)
THE WELLCARE MANAGEMENT GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' DEFICIENCY (In $ Thousands)
THE WELLCARE MANAGEMENT GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In $ Thousands)
THE WELLCARE MANAGEMENT GROUP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements
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 Greater Hudson River Valley, Capital District, Southern Tier and New York/Westchester County. 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 HMO enrollees. The HMO also contracts directly with individual primary care physicians or physician groups for health care services not contracted through the IPAs.
As a condition to the closing of the Patel transaction, the holders of 680,747 shares of Class A common stock, which has ten 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 share of Class A common stock outstanding, gave a two year proxy in favor of Dr. Patel to vote Mr. Morey's shares of Class A common stock.
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, 2000 and 1999, the Company maintained accruals of $2.1 million and $4.4 million respectively, pertaining to this transaction, of which $1.1 million and $2.9 million, respectively was included in non-current liabilities.
As a further condition to the successful closing of the Patel transaction, in June 1999, The 1818 Fund II, L.P. (the "Fund"), the general partner of which is Brown Brothers Harriman & Co., converted $15.0 million in subordinated note, plus accrued interest (8%) of approximately $0.8 million into 100,000 shares of senior convertible preferred stock ("Series" B) of the Company, which was then converted into 10.0 million shares of Common Stock. In connection with the conversion of the Series B preferred stock, the Company recorded interest expense of approximately $3.0 million relating to the fair value of the shares received in excess of the shares issuable at a conversion price of $8.00 per share.
PRINCIPLES OF CONSOLIDATION - The accompanying consolidated financial statements include its wholly owned subsidiaries, Wellcare of New York, Inc. ("WCNY") and Wellcare of Connecticut, Inc. ("FirstChoice"). All significant intercompany accounts and transactions have been eliminated.
CASH AND CASH EQUIVALENTS - The Company considers all demand deposits, overnight investments, and highly liquid investments with a maturity of three months or less to be cash equivalents. The Company includes all cash overdrafts in accounts payable.
ADVANCES TO PROVIDERS - Advances to providers consist principally of amounts advanced 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.
PROPERTY AND EQUIPMENT - Property and equipment is stated at cost net of accumulated depreciation. Depreciation is computed by the straight-line method over the estimated useful lives of the assets, which range from 5 to 10 years. During 2000, the Company changed the estimated useful life of certain property and equipment from five years to a range of three to ten years. The Company believes that estimated useful lives ranging from three to ten years more appropriately reflects the timing of the economic benefits to be received from such assets. During 2000, the impact to operations due to the change in estimated useful lives was a decrease in depreciation expense by approximately $521,000.
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.
REVENUE RECOGNITION - Premiums from subscribers are recorded as income 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. 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.
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. Management has evaluated the contracts currently in place and determined that no accrual was necessary at December 31, 2000, 1999, and 1998.
STOCK-BASED COMPENSATION - As permitted by SFAS No. 123, Accounting for Stock-Based Compensation, the Company has elected to recognize stock-based compensation under Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and to disclose in the notes to consolidated financial statements the effects of SFAS No. 123 as if its fair value recognition provisions were adopted. See Note 9.
INCOME TAXES - The Company accounts for income taxes under the asset and liability method as required by Statement of Financial Accounting Standard ("SFAS') No. 109, Accounting for Income Taxes. Under this method, deferred income taxes are recognized for the tax consequences of "temporary differences" by applying enacted statutory tax rates applicable to future years to differences between the financial statement carrying amounts and the tax basis of existing assets and liabilities. The effect of a tax rate change on deferred taxes is recognized in operations in the period that the change in the rate is enacted.
EARNINGS PER SHARE - Basic net income (loss) per share is computed using 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.
In prior years, the Company made advances to certain medical providers to enhance WCNY's provider network. The advances were recorded as notes receivable of approximately $2,997,000 at December 31, 1999. As no payments have been received since March 1997, the notes receivable were fully reserved in 1999. Due to the significant uncertainty of collectibility of these advances, the Company wrote off the notes receivable and valuation allowances in 2000.
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. A loss of approximately $100,000 was recorded in connection with this transaction. 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. As part of the Patel and GHI transactions, the leased equipment was either returned to the lessors or was assumed by GHI. 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.
The following table summarizes the activities of medical costs payable (in thousands):
Current year (55,472) (112,506) Prior year (12,782) (1,310) ------------ ------------ Total paid (68,254) (113,816) ------------ ------------ Balance, end of year $ 15,686 $ 14,386 ============ ============
During 2000, the Company experienced favorable claims expense related to its estimated reserves for claims payable at December 31, 1999. The accompanying financial statements reflect a $286,000 decrease in medical expenses for 2000 relating to a change in estimate on prior year claims liabilities.
A reconciliation of the federal statutory rate to the Company's effective income tax rate is as follows:
December 31, -------------------------- 2000 1999 ------------ ------------ Deferred tax assets: Accounts receivable and other receivables -
allowance for bad debt $ 81 $ 2,144 Other 6,546 538 Net operating loss carry forward 13,013 3,893 ------------ ------------ Total deferred tax asset before valuation allowance 19,640 6,575 Less valuation allowance 19,640 6,575 ------------ ------------ Net deferred tax asset $ - $ - ============ ============
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 is 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:
2000 1999 1998 ------------ ------------ ------------ Outstanding, beginning of year 4,009,535 598,741 650,179 Exercised during the year - - - Terminated during the year (7,535) (589,206) (275,438) Granted during the year - 4,000,000 224,000 ------------ ------------ ------------ Outstanding, end of year 4,002,000 4,009,535 598,741 ============ ============ ============
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, all of which are available for grant as of December 31, 2000, 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:
1999 1998 ------------ ------------ Outstanding, beginning of year 600,000 600,000 Exercised during the year - - Terminated during the year (600,000) - Granted during the year - - ------------ ------------ Outstanding, end of year - 600,000 ============ ============
The management fee for each Company ranges from 9.5% of premium revenue earned when there are less than 40,000 members to 7.5% of premium revenue earned when there are more than 80,000 members. In June 2000, the agreements were amended to generally provide CHM with enough revenue to cover its own costs related to the provision of management services to the Company and other affiliated HMOs. As a result of the amended agreements, the management fee was revised to reflect ranges of 11.5% of premium revenue earned when there are less than 40,000 members and 9.5% of premium revenue earned when there are more than 80,000 members. During 2000, CHM operated at a deficit of approximately $4.0 million and CHM is currently evaluating the adequacy of the current fee structure. Management anticipates that adjustments to the fee structure will occur during the next fiscal year to improve the cost recovery at CHM.
The Company has entered into various lease agreements for office space. As part of the management agreement, CHM makes payments to the lessors on behalf of the Company. The payments for leased space are an integral part of the management fee, and lease payments made by CHM to lessors amounted to approximately $619,000 and $332,000 during 2000 and 1999, respectively.
THE WELLCARE MANAGEMENT GROUP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements - Continued
Well Care HMO, Inc., an affiliate of the majority shareholder, paid for director and officers and errors and omissions insurance policies and allocates the expense proportionately to various related entities. As of December 31, 2000, WCNY owes Well Care HMO, Inc. approximately $123,000 for its proportionate share of the policy premiums.
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 the IPAs for medical services provided by primary care physicians and specialists. The IPAs in turn reimburse those providers for the services that are provided by each physician. ProMedco Hudson Valley ("ProMedco"), an IPA group that WCNY had contracted with filed 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. Management is currently evaluating its options on restructuring the physician network and various contingency plans with respect to individual physicians within the ProMedco IPAs.
Pursuant to management agreements with CHM, rental expenses are the responsibility of CHM. At December 31, 2000, the Company is the named lessee on certain non-cancelable operating lease obligations. Accordingly, future minimum lease payments under such non-cancelable operating leases are as follows:
The Company is not a party to any material pending legal proceedings. The Company at times does have routine litigation incidental to its business. In the opinion of the Company's management, such proceedings should not, individually or in the aggregate, have a material adverse effect on the Company's consolidated results of operations or consolidated financial condition.
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, 2000, 1999, and 1998, 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, 2000, 1999, and 1998, no amounts have been accrued to the consolidated financial statements regarding the resolution of this investigation.
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"). Additionally, 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.
The WellCare HMOs are subject to assessments from various high-risk insurance pools administered by the State of New York and Connecticut. The liabilities related to these pools are not estimable at December 31, 2000 with the exception of an assessment made by the Connecticut Small Employer Health Reinsurance Pool (the "Small Employer Pool"). During 2000, the Small Employer Pool assessed the Company approximately $500,000 relating to 1999 and 1998. This change in estimate was accrued in "accounts payable and accrued expenses" and was recorded as a decrease to net income of $500,000 in the 2000 financial statements.
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.
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. 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, 2000, WCNY had a required cash reserve of approximately $2.5 million and a required contingent equity reserve of approximately $2.8 million.
Furthermore, SB443, entitled An Act Concerning Statutory Accounting Procedures, was signed by the Governor of Connecticut on May 1, 2000, which will require adoption of the Codification by the State of Connecticut for the preparation of statutory financial statements, effective January 1, 2001. The Company estimates the adoption of the Codification will reduce FirstChoice's statutory capital and surplus as of January 1, 2001, by approximately $300,000.
Pro Forma (Unaudited) ------------------------- 2000 (1) 1999 (2) ----------- ----------- Total revenue $ 113,842 $ 156,304 Total expenses 118,728 172,043 Loss before extraordinary gain (4,886) (15,739) Extraordinary gain - 18,268 Net loss (4,886) 2,529 Preferred stock deemed dividend - (3,043) Net loss available to common shareholders (4,886) (514)
The Company is engaged principally in one line of business, the provision of health care coverage for enrolled members, which represents more than 97% of the consolidated revenues for the years ended December 30, 2000, 1999 and 1998. The Company operates in two geographic areas, the States of New York and Connecticut. The Company manages its business geographically, as the laws governing the HMO industry, which affect its strategy, are state specific. Included in the other segment in 1998 and partial year 1999, were results of WellCare Administration, Inc. and WellCare Development, Inc. (see Note 1). These two entities were rendered inactive as of June 1999 and were dissolved in October 2000. Significant transactions occurred in 1999, which materially changed the Company's structure and operations (see discussion in Note 1).
2000 1999 1998 ---------- ---------- ---------- Net (Loss) Income: New York $ (2,152) $ 7,041 $ (17,013) Connecticut (3,319) (1,576) (483) Other 592 (3,857) (13,362) ---------- ---------- ---------- Total (4,879) 1,608 (30,858) ========== ========== ==========
Selected unaudited date 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):
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 I Condensed Financial Information of Registrant Condensed Statements of Cash Flows (In Thousands)