WellCare's executive offices are located in two adjacent buildings, at Hurley Avenue Extension, Kingston, New York, and the Company has offices in three other buildings in Kingston. It owns these buildings through its wholly-owned subsidiary, WellCare Development, Inc. These buildings have a combined space of approximately 75,200 square feet. Also approximately 2,700 square feet of this space has been converted to office suites and is leased to health care providers at an annual rental of approximately $49,100. The Company also leases approximately 10,000 square feet in Newburgh, New York, 3,100 square feet in Albany, New York, 750 square feet in Nyack, New York, 1,250 square feet in Binghamton, New York, and in 1995, began leasing 10,000 square feet in New York City, New York at annual rentals of approximately $243,100, $48,800, $23,100, $15,000, $180,000, respectively. The Company also subleases 4,100 square feet in Newburgh, New York and 2,100 square feet in Kingston, New York to health care providers at annual rentals of approximately $109,900 and $32,600, respectively.
In 1994, the Company, through WellCare Development, Inc., purchased four buildings. Three of the four buildings are located in Kingston, New York and the fourth is located in Saugerties, New York. The buildings located in Kingston, New York provide approximately 40,200 square feet of office space utilized by the Company's communication, information and member services divisions. The building located in Saugerties, New York provides approximately 10,000 square feet and has been converted into office suites leased to health care providers and a laboratory at annual rentals of approximately $111,500, $31,400 and $9,000, respectively.
Interest and other income. . . . . . . . . . . . . . . . . . . . . . 8,349 2,171 3,417 2,880 1,913
Total revenue. . . . . . . . . . . . . . . . . . . . . . . . . . . .
General and administrative expenses. . . . . . . . . . . . . . . . . 30,279 15,599 9,641 6,168 3,348
Total expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . 150,078 116,720 70,204 39,210 29,688
Provision for income taxes . . . . . . . . . . . . . . . . . . . . . 1,116 2,403 2,533 1,010
Extraordinary credit: Utilization of tax loss carry forward. . . . .
Net income (loss). . . . . . . . . . . . . . . . . . . . . . . . . . $1,673 $3,459 $4,648 $2,215 $(2,517)
Income (loss) before extraordinary credit and cumulative effect of a change in accounting principle. . . . . . . . . . . . . $0.27 $.056 $0.72 $0.32 $(0.71)
Net income (loss). . . . . . . . . . . . . . . . . . . . . . . . . . $0.27 $.056 $0.93 $0.52 $(0.71)
Working capital (deficiency) . . . . . . . . . . . . . . . . . . . .
Total liabilities. . . . . . . . . . . . . . . . . . . . . . . . . .
(1) Restated (2) During 1993, the Company acquired Mid-Hudson Health Plan, Inc. See Note 3 of the "Notes to Consolidated Financial Statements". (3) In 1992 and 1991, after deducting minority interest in subsidiary.
The following discussion and analysis should be read in conjunction with the Consolidated Financial Statements and notes thereto included elsewhere herein.
Prior to the fourth quarter of 1994, WellCare contracted directly with primary care physicians and specialists, capitating substantially all primary care physicians with a fixed monthly payment for each HMO member selecting the physician, with a portion allocated to risk-sharing accounts. Effective October 1, 1994, WCNY changed its capitation arrangements from capitating primary case physicians with attendant risk-sharing to capitating newly-established regional health care delivery networks (the "Alliances") comprised of the specialists and previously-capitated primary care physicians. The Alliances have operated at a deficit since inception and have recently instituted measures to reduce these deficits and achieve profitability. The Alliances could request additional funding from the Company, although management does not believe that such additional funding should be required and does not intend to agree to such additional funding if requested (See Note 17 a of "Notes to Consolidated Financial Statements" and "Business - Medical Cost Control - Physician Arrangements").
The Company's results of operations depend in large part on accurately predicting and effectively managing medical costs and other operating expenses. A variety of factors and risks, including competition, changes in health care practices, changes in federal or state laws and regulations or the interpretations thereof, inflation, provider contract changes, new technologies, government imposed surcharges, taxes or assessments, reductions in provider payments by governmental payors (including Medicare, whereby such reductions may cause providers to seek higher payments from private payors), major epidemics, disasters and numerous other factors affecting the delivery and cost of health care, may in the future affect the Company's ability to control its medical costs and other operating expenses. Governmental action (including downward adjustments to premium rates requested by the Company, which could result in adjusted rates lower than premium rates then in effect) or business conditions (including intensification of competition and the other factors described above) could result in premium revenues not increasing to offset increases in medical costs and other operating expenses. Once set, premiums are generally fixed for one year periods and, accordingly, unanticipated costs during such periods cannot be recovered through higher premiums. The expiration, suspension or termination of contracts to provide health coverage for governmental entities or other significant customers would also negatively impact the Company. Due to these factors and risks, no assurance can be given with respect to the Company's premium levels or its ability to control its medical costs.
Legislative and regulatory proposals have been made at the federal and state government levels related to the health care system, including but not limited to limitations on managed care organizations (including benefit mandates) and reform of the Medicare and Medicaid programs. Such legislative or regulatory action could have the effect of reducing the premiums paid to the Company by governmental programs or increasing the Company's medical costs. Specifically, pending federal budgetary action could reduce the premiums payable to the Company under the Medicare program as compared to previously announced levels; other pending legislation could have the result of reducing the premiums payable to the Company under state Medicaid programs. The Company is unable to predict the specific content of any legislation, action or regulation that may be enacted or when any such legislation or regulation will be adopted. Therefore, the Company cannot predict the effect of such legislation, action or regulation on the Company's business.
In the second quarter of 1994, two entities which were predecessors to the Alliances (See Notes 1a and 17 of "Notes to Consolidated Financial Statements") made payments of approximately $2,879,000 to providers in connection with the close out of the 1993 group risk accounts and to resolve certain disputed amounts between the Company and certain providers, which payments might otherwise have been made by the Company. Additionally, these entities paid approximately $1,833,000 directly to the Company in payment of 1993 provider deficits which would otherwise have been due to the Company directly from the providers. As originally reported in its 1994 financial statements, the Company recorded the $1,833,000 received as a reduction of medical expense, and the Company did not record as medical expense, the $2,879,000 paid directly to the providers by these entities.
Income before income taxes and cumulative effect of a change in accounting principle 1.8 4.8 8.0 Provision for income taxes 0.7 2.0 3.3
Income before cumulative effect of a change in accounting principle 1.1 2.8 4.7 Cumulative effect of a change in accounting principle --- - - --- 1.4 Net income 1.1 % 2.8 % 6.1 % === === === Statistical Data:
HMO member months enrollment 1,046,559 918,542 596,281 Medical loss ratio (1) 80.0 % 81.7 % 80.2 % Administrative ratio (2) 19.8 % 12.7 % 12.6 %
(1) Medical expenses as a percentage of premiums earned; reflects the combined rates for commercial, Medicaid, full-risk Medicare and Medicare supplemental members. (2) General and administrative ratio as percentage of total revenue.
Year Ended December 31, 1995 Compared to Year Ended December 31, 1994 (Restated)
Premiums earned in 1995 increased 20.0%, or $24.1 million, to $144.5 million from $120.4 million in 1994, attributable to increases in HMO membership and in premium rates. Total member months increased 13.9% in 1995 to 1,046,559, accounting for $16.9 million of the increase in premiums earned. Premium rates increased 6.4% and .7% for commercial and Medicaid members, respectively and including the premium rates earned for full-risk Medicare members resulted in a 5.4% total weighted average increase and accounted for the $7.2 million balance of the increase in premiums earned.
General and administrative ("G&A") expenses increased 94.1%, or $14.7 million, to $30.3 million in 1995, and increased as a percentage of total revenue from 12.7% in 1994 to 19.8% in 1995. The increase in G&A expenses resulted primarily from the reserve established for the note and other receivables due from the buyer of WellCare Medical Management, Inc. (See Note 5 of "Notes to Consolidated Financial Statements"), increased staffing related to service area and product line expansion, non-payroll (contracted) services, marketing and tele-communications related activities, and an increase in the doubtful account reserve for trade accounts receivable.
Year Ended December 31, 1994 (Restated) Compared to Year Ended December 31, 1993
Premiums earned in 1994 increased 65.2% to $120.4 million from $72.9 million in 1993, attributable to increases in HMO membership and in premium rates. Total member months increased by 54.0% in 1994 to 918,542, of which approximately 22.6% was attributable to a full year of membership for members transferred by Mid-Hudson Health Plan, ("Mid-Hudson") to WCNY, as compared to less than full year of membership in 1993, accounting for $39.4 million of the $47.5 million increase in premiums earned. Premium rates increased 7.6% and 5.6% for commercial and Medicaid members, respectively, accounting for the $8.1 million balance of the increase in premiums earned.
On January 19, 1996, the Company announced the completion of a private placement of a 6% subordinated convertible note in the principal amount of $20,000,000 (the "Note") due December 31, 2002, with The 1818 Fund II, L.P., a private equity fund managed by Brown Brothers Harriman & Co. The Company has utilized a part of the net proceeds of this private placement to retire a portion of the Company's debt. The Company anticipates utilizing the balance of the proceeds for general corporate purposes as well as a potential replacement for the Company's credit line. As of May 14, 1996, the Company was in negotiations with the holder of this Note to amend certain terms, including the conversion price (See "Certain Relationships and Related Transactions").
At December 31, 1995, the Company had working capital of $12.7 million, excluding the $8.2 million cash reserve required by New York State which is classified as a non-current asset, compared to working capital of $4.7 million, excluding the $6.6 million cash reserve, at December 31, 1994; the increase was attributable primarily to borrowing on the line-of-credit which is classified as a long-term liability. The Company believes that the net proceeds from the Note referred to above, together with cash on hand, cash generated from operations and available borrowing will be sufficient to meet the Company's capital requirements for in excess of twelve months.
Between April 1, 1996, and May 14, 1996, the Company, as well as two of its officers who also are directors, were named as defendants in eight separate purported class actions filed in the United States District Courts for the Northern and Southern Districts of New York. The complaints in these actions are virtually the same, alleging the defendants violated the federal securities laws. A ninth suit filed during the same period names as defendants the same parties, as well as three additional directors, two of whom are officers. Management is unable to predict the likelihood of its success on the merits of these cases, but has instructed counsel to defend vigorously. The Company has insurance in effect which may, at least in part, offset any costs to be incurred in these litigations.
The note receivable bears interest at a rate equal to prime plus 2% (10.5% at December 31, 1995) with interest payable monthly through July 31, 1996 and, thereafter, principal and interest monthly through July 31, 2000. All required interest through December 31, 1995 has been paid. The Buyer is seeking additional financing, and is contractually obligated to pay the note receivable from such proceeds. Through May 14, 1996 such financing has not taken place. In view of the Buyer's operating losses and advances to the Alliances, the Company has obtained from certain of the Buyer's equity holders personal guarantees of the notes and pledges of collateral to secure these guarantees. Nevertheless, in view of the Buyer's financial condition and difficulties inherent in the collection of personal guarantees and realization of collateral, the Company has elected to fully reserve the note receivable at December 31, 1995. In addition, the Company has elected to fully reserve other receivables from the Buyer amounting to $744,000.