10-Q/A 1 q12001a.txt SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q/A QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2001 Commission File No. 000-21684 THE WELLCARE MANAGEMENT GROUP, INC. (Exact name of registrant as specified in its charter.) New York 14-1647239 ------------------------ -------------------------------- (State of Incorporation) (IRS Employer Identification No.) 280 Broadway, 3rd floor, Newburgh, NY 12550 ------------------------------------------------ (Address of principal executive office) (845) 338-4110 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Class Outstanding at May 11, 2000 ----- --------------------------- Common stock, par value $0.01 per share 38,807,977 Class A common stock, par value $0.01 per share 313,555 2 Note: This 10-Q/A amends Item 1, Condensed Consolidated Financial Statements, to correct a typographic error on the Condensed Consolidated Balance Sheets. The dates were changed from "March 31, 2000" to "March 31, 2001" and from "December 31, 1999" to "December 31, 2000". THE WELLCARE MANAGEMENT GROUP, INC. AND SUBSIDIARIES INDEX PAGE PART I FINANCIAL INFORMATION NUMBER Item 1 Condensed Consolidated Financial Statements: Condensed Consolidated Balance Sheets at March 31, 2001 (Unaudited) and December 31, 2000 3 Unaudited Condensed Consolidated Statements of Operations for the Three Months Ended March 30, 2001 and 2000 4 Unaudited Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2001 and 2000 5 Notes to Condensed Consolidated Financial Statements 6 3 THE WELLCARE MANAGEMENT GROUP, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (In $ Thousands)

See Notes to Condensed Consolidated Financial Statements 4 THE WELLCARE MANAGEMENT GROUP, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (In $ Thousands, Except Per Share Amounts) (Unaudited) Three Months Ended March 31, -------------------------- 2001 2000 ------------ ------------ Revenue: Premiums earned $ 23,736 $ 18,675 Interest and other income - net 311 499 ------------ ------------ Total revenue 24,047 19,174 Expenses: Medical expenses 19,620 15,825 General and administrative expenses 3,906 2,718 Depreciation and amortization 105 156 Interest expense 115 - ------------ ------------ Total expenses 23,746 18,699 ------------ ------------ Income before income taxes 301 475 Income taxes - - ------------ ------------ Net income $ 301 $ 475 ============ ============ Earnings per share: Net income before income taxes - basic and diluted $ 0.01 $ 0.01 Weighted average shares outstanding - basic and diluted 38,795 39,011 See Notes to Condensed Consolidated Financial Statements 5 THE WELLCARE MANAGEMENT GROUP, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In $ Thousands) (Unaudited)

See Notes to Condensed Consolidated Financial Statements 6 THE WELLCARE MANAGEMENT GROUP, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) 1. Description of Business The Wellcare Management Group, Inc. ("Wellcare" or the "Company"), a New York corporation, owns, operates and provides management services to health maintenance organizations ("HMO"). 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. The accompanying unaudited condensed consolidated financial statements include the Company's wholly owned subsidiaries, Wellcare of New York, Inc. ("WCNY") and FirstChoice HealthPlans of Connecticut, Inc. ("FirstChoice"). 2. Basis of Presentation The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles accepted in the United States of America for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, certain information and footnote disclosures normally included in annual financial statements prepared in accordance with generally accepted accounting principles have been omitted. These unaudited condensed consolidated financial statements should be read in conjunction with the Company's audited consolidated financial statements for the year ended December 31, 2000 included in the Company's Form 10-K filed with the Securities and Exchange Commission on June 15, 2001. In the opinion of management, the consolidated financial statements include all adjustments (consisting only of normal recurring adjustments) considered necessary to present fairly the financial position of the Company as of March 31, 2001 and the results of its operations and its cash flows for the respective three months ended March 31, 2001 and 2000. Interim results for the three months ended March 31, 2001 are not necessarily indicative of results that may be expected for the year ending December 31, 2001. 3. Summary of Significant Accounting Policies New Accounting Pronouncement. 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, an 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, because the Company does not have derivative instruments and does not engage in hedging activities. In December 1999, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial Statements", which provided guidance related to revenue recognition based on interpretations and practices followed by the SEC. SAB No. 101 was effective for the Company'' fourth quarter 2000, and required the Company to report any changes in revenue recognition as a cumulative change in accounting principle at the time of implementation. The Company is in compliance with the provisions of SAB No. 101, and adoption of the provisions did not have an impact on the Company's consolidated financial statements. Reclassification - Certain amounts in the 2000 condensed consolidated financial statements have been reclassified to conform to the 2001 presentation. 7 THE WELLCARE MANAGEMENT GROUP, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements - Continued (Unaudited) 4. Claims Payable The following table summarizes the activities of medical costs payable (in thousands): March 31, December 31 2001 2000 -------------- -------------- Balance, beginning of period $ 15,686 $ 8,311 Total incurred: Current period 19,620 17,015 Prior period - (286) -------------- -------------- Total incurred 19,620 16,729 Paid and settled related to: Current period (10,573) (9,223) Prior period (11,053) (131) -------------- -------------- Total paid (21,626) (9,354) -------------- -------------- Balance, end of period $ 13,680 $ 15,686 ============== ============== 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. During the three months ended December 31, 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 the three months ended December 31, 2000 relating to a change in estimate on prior year claims liabilities. 5. Statutory Surplus Requirements Connecticut Requirements The State of Connecticut Insurance Department requires that stipulated amounts of surplus be maintained at all times. FirstChoice 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 State of Connecticut Insurance Department on the first $150,000,000 of premium revenues plus 1% of annual premium revenues in excess of $150,000,000. At March 31, 2001 FirstChoice's statutory net worth was approximately $1.9 million, which was in compliance with the net worth requirement. The Risk-Based Capital ("RBC") requirements for health care centers were adopted through a regulation promulgated by the State of Connecticut Insurance 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. During fiscal year 2001, FirstChoice's statutory net worth is required to be at the Regulatory Action Level of $2.2 million and FirstChoice is required to phase into the Company Action Level of $2.9 million by December 31, 2001. As of March 31, 2001, FirstChoice did not meet its RBC requirement. The State of Connecticut Insurance Department may take regulatory action against the Company, including but not limited to, placing the Company under regulatory control. As of June 15, 2001, the State of Connecticut Insurance Department has not taken any action. SB443, entitled An Act Concerning Statutory Accounting Procedures, was signed by the Governor of Connecticut on May 1, 2000, which required adoption of the Codification by the State of Connecticut for the preparation of statutory financial statements, effective January 1, 2001. The effect of the adoption of the Codification on FirstChoice's statutory capital and surplus as of March 31, 2001 was a decrease in statutory net worth of approximately $156,000. 8 THE WELLCARE MANAGEMENT GROUP, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements - Continued (Unaudited) 5. Statutory Surplus Requirements - Continued New York Requirements 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 March 31, 2001, WCNY was required maintain a cash reserve of approximately $2.5 million and a contingent equity reserve of approximately $2.8 million, as determined in the filing of the Annual Statement with the SNYID as of December 31, 2000. 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 March 31, 2001, the Company's statutory net worth was approximately $54,000, which was not in compliance with the SNYID's adjusted minimum statutory net worth requirements. However, in May 2001, $590,733 in surplus notes was infused into WCNY from Comprehensive Health Management of Florida, L.L.C., an affiliate of the majority shareholder. Comprehensive Health Management, Inc., also an affiliate of the majority shareholder, has committed to infuse $162,497 in surplus notes to WCNY by June 22, 2001. Management believes the infusion of these surplus notes will have cured the deficiency in meeting its minimum surplus requirements as of April 30, 2001. Failure to maintain compliance with the reserve requirement could cause SNYID to take action, which could include restriction or revocation of WCNY's license. The Risk-Based Capital ("RBC") requirements for health maintenance organizations have not been adopted by the New York legislature. However, the SNYID does require that a RBC report be filed with the SNYID for informational purposes by April 1 of each year. WCNY filed a RBC report as of December 31, 2000 on March 31, 2001. This report disclosed that WCNY did not meet the minimum RBC requirements and triggered a mandatory control level ("MCL") event, as defined in the National Association of Insurance Commissioners ("NAIC") model law for RBC. An MCL event occurred since the WCNY's total adjusted capital was below the mandatory control level. The SNYID may take regulatory action against WCNY as a result of filing this RBC report, including but not limited to placing the Company under regulatory control. As of June 15, 2001, the SNYID has not taken any action. In March 1998, the National Association of Insurance Commissioners adopted the Codification of Statutory Accounting Principles (the Codification). The SNYID has adopted the Codification, with some modifications, through the adoption of Regulation 172. The purpose of the Codification is to enhance the consistency of the accounting treatment of assets, liabilities, reserves, income, and expenses of insurers, by setting forth the accounting practices and procedures to be followed in completing annual and quarterly financial statements required by law. The applicable modifications that will effect the preparation of the statutory financial statements for WCNY are as follows: 1) no limitation with respect to the amount of EDP Equipment to be admitted, with useful lives being recorded up to 10 years, 2) estimated Pharmaceutical Rebates may be included as admitted assets, and 3) unsecured Receivables from Health Care Providers are non-admitted, and include non-admitting deferred income taxes. The State of New York required adoption of the Codification for the preparation of statutory financial statements effective January 1, 2001. The effect of the adoption of the Codification on the WCNY's statutory capital and surplus as of March 31, 2001 was a decrease in statutory net worth of approximately $925,000 for WCNY. 9 THE WELLCARE MANAGEMENT GROUP, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements - Continued (Unaudited) 6. Commitments and Contingencies 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. 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. 7. Income Taxes The provisions for income tax benefit (expense) for the three months ended March 31, 2001 and 2000, respectively, were calculated through the use of the estimated annual income tax rates based on projected annualized income (loss). The Company estimated an effective tax rate of 0% during the three months ended March 31, 2001 and 2000, respectively, based on the Company's reported losses in 1998, 1999, and 2000. 8. Related Party Transactions Management Agreement WCNY and FirstChoice have entered into management agreements with Comprehensive Health Management, Inc. ("CHM"), a Company that was established by the majority shareholder to provide management, administrative services, and claims processing services to health maintenance organizations. During September 1999, WCNY and FirstChoice each executed a five-year management agreement with CHM to perform claims processing services, utilization review, payroll services, and most all of the administrative functions of the Company, excluding certain marketing functions. CHM is responsible for all the administrative employees' payroll and business expenses. Additionally, CHM is responsible for maintaining the claims related data processing equipment and software. 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. Management fees for the three months ended March 31, 2001 and 2000 were approximately $2,809,000 and $1,581,000, respectively, which were included in general and administrative expenses. At March 31, 2001 and December 31, 2000, the Company owed CHM approximately $305,000 and $223,000, respectively. 10 THE WELLCARE MANAGEMENT GROUP, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements - Continued (Unaudited) 8. Related Party Transactions - Continued Other In March and May 2001, $750,000 and $590,733 in surplus notes were infused into WCNY by Comprehensive Health Management of Florida, L.L.C. ("CHMF"), an affiliate of the majority shareholder of the Company. The surplus notes bear interest of 8% per annum and is payable on demand. Payments of interest and principle is restricted by the State of New York Insurance Department. In March 2001, CHMF issued a $500,000 note payable to the Company. The note payable bears interest of 8% per annum and is payable on demand. 9. Segment Reporting 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 past three fiscal years. 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. The following schedule presents information about the Company's segments for periods specified (in thousands): Three Months Ended March 31, -------------------------------- 2001 2000 -------------- -------------- Total Revenues: New York $ 12,977 $ 14,226 Connecticut 10,993 4,411 Corporate 77 537 -------------- -------------- Total 24,047 19,174 Net (Loss) Income: New York $ (30) $ (559) Connecticut 347 668 Corporate (16) 366 -------------- -------------- Total 301 475 March 31, December 31, 2001 2000 -------------- -------------- Total Assets: New York $ 10,012 $ 10,045 Connecticut 8,142 9,705 Corporate 235 370 -------------- -------------- Total 18,389 20,120 ============== ============== 11 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. THE WELLCARE MANAGEMENT GROUP, INC. Dated: July 13, 2000 /s/ Kiran C. Patel, M.D. ------------------------------------------ Kiran C. Patel, M.D. President and Chief Executive Officer (Principal Executive Officer) Dated: July 13, 2000 /s/ Carol K. McAllister ------------------------------------------ Carol K. McAllister Chief Accounting Officer (Principal Accounting Officer)

WELLCARE MANAGEMENT GROUP INC 10-Q/A