Premiums earned. . . . . . . . . . . . . . . . . . . . . . . . . . . $144,518 $120,411 $72,905 $38,692 $25,317
Medical expenses . . . . . . . . . . . . . . . . . . . . . . . . . . 115,560 98,411 58,471 31,587 25,271
Depreciation and amortization expenses . . . . . . . . . . . . . . . 2,292 1,611
Interest and other expenses. . . . . . . . . . . . . . . . . . . . . 1,947 1,099 1,331
Income (loss) before extraordinary credit and cumulative effect of a change in accounting principle . . . . . . . . . . . . . . . . 1,673 3,459 3,585 1,352
Cumulative effect of a change in accounting principle: Accounting for income taxes . . . . . . . . . . . . . . . . . . . . - - - - - - 1,063
Extraordinary credit . . . . . . . . . . . . . . . . . . . . . . . .
Cumulative effect of a change in accounting principle. . . . . . . . - - - - - - 0.21
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . .
Shareholders' equity (deficit) (3) . . . . . . . . . . . . . . . . .
WellCare's principal source of revenue is premiums earned from the WellCare HMOs, while interest and other income consists of management and administrative fees, contributions, interest and investment income, reimbursements from certain third party insurers, rental income and miscellaneous service income. Premium revenues represent in excess of 94% of the Company's total revenue for the years ended December 31, 1995, 1994 and 1993 and have grown substantially since the Company's inception as a result of increases in both HMO membership and premium rates.
Medical expenses consist of the hospital charges, physician fees and related health care costs for its members. Medical expenses also include estimates of medical expenses 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. The Company believes the IBNR estimates in the Consolidated Financial Statements are adequate; however, there can be no assurance that actual health care claims costs will not exceed such estimates.
The Company seeks to control medical expenses through capitation arrangements with the Alliances and with non-Alliance primary care physicians, and through its quality assurance programs, utilization review and educational programs on effective managed care for its providers.
In March 1996, accounting personnel of the Company were informed that Mr. Edward A. Ullmann, then Chairman of the Board, Chief Executive Officer and President of the Company, (Mr. Ullmann resigned as Chairman and Chief Executive Officer on April 30, 1996), personally had guaranteed in his individual capacity two loans, each in the amount of $2,700,000, made by banks to these two entities, the proceeds of which were used to fund the aggregate payments of approximately $4,712,000 referred to above. After a review of the relevant circumstances, the Company elected to restate its 1994 financial statements by recording an additional $4,712,000 in medical expense and establishing an additional medical expense accrual. Since there are no specific amounts payable by the Company as a result of these transactions, the additional medical expense accrual will be accounted for as an offset to medical expense in future periods as these bank loans are paid down. A reduction of medical expense of approximately $1,738,000 was recorded in 1995 as a result of the reductions in the amounts of these bank loans.
Revenue: Premiums earned 94.5% 98.2% 95.5% Interest and other income 5.5 1.8 4.5 Total revenue 100.0 100.0 100.0 Expenses: Hospital services 20.0 19.2 21.5 Physician services 51.1 53.6 53.4 Other medical services 4.5 7.5 1.7 Total medical expenses 75.6 80.3 76.6 General and administrative 19.8 12.7 12.6 Depreciation and amortization 1.5 1.3 1.0 Interest and other expenses 1.3 0.9 1.8 Total expenses 98.2 95.2 92.0
Interest and other income increased 284.6%, or $6.2 million, to $8.3 million in 1995 due to increases in WellCare University revenues, management fees, insurance reimbursements and rental income.
Medical expenses increased 68.3% to $98.4 million in 1994 from $58.5 million in 1993, representing a 9.3% increase on a per member per month basis and an increase in the medical loss ratio to 81.7% in 1994 from 80.2% in 1993. As a result of a prior period restatement, medical expenses in 1994 were increased $4.7 million.
General and administrative (G&A) expenses increased 61.8% to $15.6 million in 1994 from $9.6 million in 1993, and increased slightly as a percentage of total revenue to 12.7% in 1994 from 12.6% in 1993. The increase in G & A expenses resulted primarily from increased marketing efforts and increased staffing to accommodate the growth of the Company's business, enhancement of information systems and physician recruitment activities.
Depreciation and amortization increased by $.9 million, or 111.7%, in 1994 from 1993 as a result of amortization of the goodwill originating from the purchase of the assets and liabilities of Mid-Hudson and depreciation associated with increased levels of capital expenditures.
Approximately $1.1 million of the net income for 1993 was attributable to the cumulative effect of the Company's adoption of Financial Accounting Standards Board Statement No. 109 "Accounting for Income Taxes" effective January 1, 1993 (See Note 12 of "Notes to Consolidated Financial Statements").
Net cash used by operating activities in 1995 was approximately $9.3 million compared to net cash provided by operating activities in 1994 of approximately $1.0 million. The use of cash by operating activities in 1995 was due primarily to increases of $6.5 million and $3.6 million in trade and other receivables, respectively. The increase in trade receivables is attributable, for the most part, to a $5.6 million increase in amounts due from New York State related to premiums for Medicaid recipients; payment for substantially all of which has been received to date. The increase in other receivables is primarily due to receivables associated with contributions made on behalf of WellCare University. Cash used for capital expenditures was approximately $1.6 million during 1995 primarily used for expanding and upgrading the Company's information systems. 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, WCNY is required to maintain a contingent reserve which must be increased annually by an amount equal to at least 1% of premiums earned limited, in total, to a maximum of 5% of premiums earned for the most recent calendar year and which may be offset by the cash reserve. The cash reserve is calculated at December 31 of each year and is maintained throughout the following calendar year. At December 31, 1995, WellCare had required cash reserves of $8.2 million and a contingent reserve of $4.4 million which was fully offset by the cash reserve. In the event the contingent reserve exceeds the required cash reserve, the excess of the contingent reserve over the required cash reserve would be required to be maintained.
In June 1995, Key Bank of New York increased the limit on an unsecured working capital line-of-credit to $15.0 million, $6.1 million of which was outstanding at May 14, 1996. The line expires on May 31, 1997. In response to the Company's late filing of its Annual Report on Form 10-K with the Securities and Exchange Commission, during April 1996 Key Bank froze all borrowing under the Company's $15.0 million revolving line of credit pending submission of the Company's audited financial statements. In addition, Key Bank granted the Company a waiver of any and all financial covenants for the period ending December 31, 1995 and March 31, 1996. The Company is in the process of retiring a portion of the outstanding line and renegotiating the line-of-credit with Key Bank. It is anticipated that the new terms will be finalized prior to June 30, 1996, (See Notes 11 and 21 of "Notes to Consolidated Financial Statements").
At December 31, 1995, none of the original $2.44 million purchase price for Mid-Hudson was outstanding. This note was paid in two installments of $500,000 plus accrued interest of 6% per annum on June 30, 1995 and December 31, 1995, respectively (See Note 3 of "Notes to Consolidated Financial Statements").
In June 1995, the Company contributed approximately $5.1 million of its then wholly-owned subsidiary, WellCare Medical Management, Inc. ("WCMM") which was engaged in managing physician practices, and then sold WCMM for cash of $.6 million and note receivable of $5.1 million. A gain of approximately $144,000 was deferred pending the repayment of the note. The buyer ("Buyer") was newly formed to acquire WCMM and, as of May 14, 1996, approximately 11% of the Buyer's equity was directly or indirectly held by current or recent directors, officers or employees of WellCare. The Buyer is in the business of managing medical practices and providing related consultative services. The Buyer has entered into agreements to manage the Alliances (See Notes 1a, 2 and 17 of "Notes to Consolidated Financial Statements"). The Company has a five year option to acquire the Buyer at any time at a price determined by a formula based on the Buyer's results of operations. The Company is in the process of renegotiating the terms of this option.
Recent pronouncements of the Financial Accounting Standards Board ("FASB"), which are not required to be adopted at this date, include Statements of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123") and SFAS No. 121. "Accounting for Impairment of Long-Lived Assets to be Disposed Of ("SFAS 121"), which are effective for fiscal years beginning after December 15, 1995. The adoption of SFAS 123 and SFAS 121 is not expected to have a material impact on the Company's consolidated financial position or results of operations.