e424b4
Filed Pursuant
to Rule 424(B)(4)
Registration No. 333-125680
PROSPECTUS
6,500,000 Shares
COMMON STOCK
The selling stockholders named in this prospectus are
offering an aggregate of 6,500,000 shares of our common
stock. WellCare Health Plans, Inc. will not receive any of the
proceeds from the sale of shares being sold by the selling
stockholders.
Our common stock is listed on the New York Stock Exchange
under the symbol WCG. On June 29, 2005, the
last sale price for the common stock as reported on the New York
Stock Exchange was $36.25.
Investing in our common stock involves risks. See
Risk Factors beginning on page 8.
PRICE $35.50
A SHARE
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Per Share | |
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Total | |
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Price to Public
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$ |
35.5000 |
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$ |
230,750,000 |
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Underwriting Discounts and Commissions
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$ |
1.6863 |
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$ |
10,960,950 |
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Proceeds to Selling Stockholders
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$ |
33.8137 |
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$ |
219,789,050 |
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TowerBrook Investors L.P., one of the selling stockholders in
this offering, has granted the underwriters the right to
purchase up to an additional 975,000 shares to cover
over-allotments.
The Securities and Exchange Commission and state securities
regulators have not approved or disapproved these securities, or
determined if this prospectus is truthful or complete. Any
representation to the contrary is a criminal offense.
Morgan Stanley & Co. Incorporated, on behalf of the
underwriters, expects to deliver the shares to purchasers on or
about July 6, 2005.
MORGAN STANLEY
June 29, 2005
TABLE OF CONTENTS
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F-1 |
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You should rely only on the information contained in this
prospectus. We and the selling stockholders have not authorized
anyone to provide you with information that is different from
that contained in this prospectus. The selling stockholders are
offering to sell, and seeking offers to buy, shares of common
stock only in jurisdictions where offers and sales are
permitted. The information contained in this prospectus is
accurate only as of the date of this prospectus, regardless of
when this prospectus is delivered or when any sale of our common
stock occurs.
i
PROSPECTUS SUMMARY
This summary highlights selected information contained
elsewhere in this prospectus. It does not contain all of the
information that may be important to you. You should read the
following summary together with the more detailed information
regarding our company, the common stock being sold in this
offering and our consolidated and combined financial statements,
including the notes to those statements, appearing elsewhere in
this prospectus.
Our Business
We arrange for the delivery of healthcare services, also known
as managed care services, targeted exclusively to
government-sponsored healthcare programs, focusing on Medicaid
and Medicare. We have centralized core functions, such as claims
processing and medical management, combined with marketing and
provider relationships tailored to the local markets where we
operate. We believe that this approach allows us to provide
high-quality, affordable healthcare services to our members and
offer cost-saving opportunities to the states we serve, while
maintaining mutually beneficial relationships with our providers
and our regulators. We also believe that our approach to the
delivery of managed care services will allow us to effectively
grow our business, through organic growth, geographic expansion
and acquisitions.
We currently operate health plans in Florida, New York,
Illinois, Indiana, Connecticut, Louisiana and Georgia, serving
approximately 765,000 members as of March 31, 2005. In
Florida, as of March 31, 2005, we served approximately
530,000 members, and operated the two largest Medicaid managed
care plans. In New York, we served approximately 75,000
members as of March 31, 2005. In June 2004, we acquired
Harmony Health Systems, Inc., a provider of Medicaid managed
care plans in Illinois and Indiana, and as of March 31,
2005, our Harmony operations in Illinois and Indiana had
approximately 68,000 and 58,000 members, respectively. Our
Connecticut operations had approximately 33,000 members as of
March 31, 2005. We have launched start-up health plans in
Louisiana and in Georgia to offer our Medicare product lines.
We are the largest provider of Medicaid managed care services in
the State of Florida, where we also operate a large Medicare
plan. As of June 30, 2003, the State of Florida had
approximately 2.2 million Medicaid enrollees, according to
the federal governments Centers for Medicare &
Medicaid Services, or CMS, which includes beneficiaries under
the Supplemental Security Income, or SSI, and the Temporary
Assistance to Needy Families, or TANF, programs. Florida also
had 2.9 million Medicare enrollees, the second largest
population of any state, as of June 30, 2003. Based on our
history of providing quality managed care services in Florida,
we believe we are well positioned to continue increasing our
membership in the state.
We also operate Medicaid and Medicare plans in New York and
Connecticut. While we believe both New York and Connecticut are
attractive markets, we believe that the New York market
opportunity is substantial, with approximately 3.6 million
Medicaid and 2.8 million Medicare enrollees as of
June 30, 2003.
We plan to leverage our approach to the delivery of managed care
programs by expanding our Medicaid, Medicare and other products
in our current markets and in additional counties and states.
Our Markets and Opportunities
The market for government-sponsored healthcare programs in the
United States is large and growing. As of June 30, 2003,
Medicaid covered approximately 42.7 million enrollees and
Medicare covered approximately 41.1 million enrollees,
according to CMS. Enrollment in Medicaid managed care programs
has grown rapidly in recent years, from 13.3 million, or
40% of enrollees, in 1996 to 25.3 million, or 59.1% of
enrollees, in 2003, according to CMS. In particular, New York
and Florida, areas in which we have substantial operations, have
the second and fourth largest populations of Medicaid enrollees
with 3.6 and 2.2 million enrollees, respectively, as of
June 30, 2003. In 2002, total Medicaid spending in New York
and Florida was approximately $36.3 billion and
$9.9 billion, respectively. CMS estimates that healthcare
expenditures will continue to increase over the next decade at
an average annual rate of 7.3%, growing to a projected $3.4
trillion by 2013.
1
Dual-Eligible and SSI Beneficiaries. Health plans such as
ours that serve beneficiaries who are eligible to receive both
Medicare and Medicaid benefits, also known as dual-eligibles,
receive higher premiums for those members. In addition, the SSI
population, which is comprised of aged, blind and disabled
individuals, account for a disproportionately large percentage
of Medicaid expenditures relative to its size as a result of
their health needs. According to The Kaiser Commission on
Medicaid and the Uninsured, the SSI population in 2002, on a
nationwide basis, comprised only approximately 25% of the total
number of Medicaid participants while accounting for
approximately 70% of total Medicaid expenditures. We also
believe the SSI population represents an attractive growth
opportunity for us due to the relatively low concentration of
managed health care plans that currently provide benefits to the
SSI population in the markets where we currently provide
Medicaid services and our history of successfully serving these
populations.
Markets for Medicare Part D Coverage. The Medicare
Modernization Act of 2003, or MMA, included a significant
expansion of the Medicare program to include a new federal
prescription drug benefit beginning in 2006. The Henry J. Kaiser
Family Foundation estimates that in 2006, there will be
approximately 29 million eligible beneficiaries, or
approximately 67% of the estimated 43 million total
Medicare eligible population, who are likely to seek
prescription drug coverage pursuant to Medicare Part D.
They may obtain this coverage through a Medicare Advantage plan
that offers Part D coverage or through a stand-alone
prescription drug plan, or PDP. In addition, the United States
Department of Health and Human Services estimates that in 2006,
approximately 11 million Medicare beneficiaries will
receive low income subsidies, including dual-eligible subsidies.
Our Competitive Advantages
We operate health plans focused on government-sponsored
healthcare programs. We believe the following are among our key
competitive advantages:
Leading Market Presence. We are the leading Medicaid
provider in Florida, with an approximately 53% market share of
Medicaid managed care enrollees. As a result of our acquisition
of Harmony in 2004, we are also the leading provider of Medicaid
managed care services in Illinois. Nationally, we have
approximately 711,000 Medicaid members, as of March 31,
2005. We believe our strong market position provides us with
numerous strategic advantages, including enhanced economies of
scale, extensive provider networks in our core markets, strong
relationships with state and local government agencies and the
ability to provide a broad range of government-sponsored
healthcare programs.
Diversified Government Healthcare Programs. We offer
managed care services for a diversified range of government
programs, including Medicaid programs such as the State
Childrens Health Insurance Program, or SCHIP, SSI and TANF
programs and Medicare programs. This approach helps reduce the
impact of rate reductions or other adverse changes affecting any
one program. We believe that our experience in serving a broad
range of enrollees in Medicaid, Medicare and related programs
positions us to capitalize on growth opportunities within the
market for government-sponsored healthcare programs.
Exclusive Focus on Government Healthcare Programs. We are
focused on designing and operating our business to serve our
government programs constituents, including members, providers
and regulators. We believe this allows us to build our provider
networks with a focus on our target populations, and allows us,
in large part, to contract with our providers using the Medicaid
and Medicare fee schedules as a benchmark, which are generally
lower than commercial rates. Our approach to contracting has
allowed us to build strong provider networks that have been
designed to provide the necessary care to our members, based on
specific benefit designs, in the appropriate healthcare setting.
We also target our sales and marketing efforts directly to
individuals and communities, rather than employers and other
groups targeted by commercial plans. We have developed internal
regulatory affairs expertise which we believe allows us to work
more effectively with CMS, the states and other regulators that
govern our programs and services.
Centralized and Scalable Operations. We have centralized
our medical management programs, claims processing, member
services, information technology, regulatory compliance and
pharmacy benefits programs. Centralizing these functions and
operating on a single platform permit management to better
assess and
2
control medical costs. Our administrative and information
services have been designed to be scalable to accommodate
growth, while allowing targeted marketing and provider services
tailored to local markets.
Localized, Disciplined Sales and Marketing Efforts. Our
sales force is designed to target the diverse ethnic, cultural
and linguistic composition of the communities we serve with over
six different languages spoken. Through the strong relationships
our sales people have with community leaders and healthcare
providers, we are able to reach out directly to
Medicaid-eligible populations and encourage them to join our
plans, giving us an advantage over plans that must rely
primarily on mandatory assignments. We believe that our sales
efforts are enhanced by targeted marketing designed to
strengthen our local brands. We believe these marketing programs
enhance our leading brands, such as HealthEase and Staywell in
Florida, and will allow us to further penetrate the Medicare
market. Our sales and marketing team also provides us with
increased flexibility as we assess potential new markets. We
believe that we have developed the requisite infrastructure and
expertise to succeed in both mandatory and non-mandatory
Medicaid managed care states.
Strong Relationships with Government Agencies. We work
closely with the government agencies that regulate us and help
develop the products and services that we offer. We believe that
our relationships with these government agencies enable us to
deliver high-quality, affordable healthcare services to our
members and create cost savings opportunities for the states in
which we operate, many of which currently are facing budgetary
pressures. As a result of our ability to provide quality,
cost-effective services, we believe government agencies will
remain committed to the growth of managed care as a means to
control rising healthcare expenditures.
Partnerships with Providers. We seek to enter into
mutually beneficial arrangements with our providers, which help
them to develop their practices. We strive to provide quality
service and to be a low hassle partner in developing and
maintaining strong relationships with our providers. As a result
of this approach, we have established broad provider networks
that included, as of March 31, 2005, over 27,000 physicians
and specialists and approximately 392 hospitals.
Integrated Medical Management. We employ a coordinated,
integrated approach to medical management in order to provide
appropriate care to our members, contain costs and ensure
efficient delivery within the network. Our focus is to ensure
that members receive the appropriate care in a timely manner and
in the appropriate healthcare delivery setting. Key elements of
our medical management strategy include a focus on preventative
care, careful management of outpatient, inpatient and other
services and case and disease management. We believe that this
approach allows us to improve medical outcomes for our members,
resulting in cost savings for the states in which we operate.
Our Growth Strategy
Our objective is to be the leading provider of managed care
services for government-sponsored healthcare programs. To
achieve this objective, we intend to:
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expand our Medicaid business within existing markets; |
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leverage our established Medicaid businesses to develop Medicare
plans; |
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enter new markets through internal growth, geographic expansions
and acquisitions; and |
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provide Medicare prescription drug benefit coverage beginning in
January 2006. |
Additional Considerations
We arrange for the delivery of healthcare services through a
limited number of contracts with government agencies, and any
termination of, or failure to renew, our existing government
contracts could materially reduce our revenues and
profitability. Because the premiums we receive are established
by contract, our profitability depends in large part on our
ability to predict and effectively manage the costs of
healthcare services delivered to our members. In addition, our
operating results depend significantly on Medicaid and Medicare
program funding, premium levels, eligibility standards,
reimbursement levels and other regulatory requirements
established by the federal government and the governments of the
states in which we operate.
3
We are subject to extensive government regulation, and any
violation of the laws and regulations applicable to us could
adversely affect our operating results. Our operating results
are also heavily dependent on the continued profitability of our
operations in Florida, which account for a significant portion
of our revenues. For a discussion of these and other risks
relating to our business and an investment in our common stock,
see Risk Factors beginning on page 8.
Our Company
We were formed in May 2002 to acquire the WellCare group of
companies. In July 2002, we completed the acquisition of our
current businesses through two concurrent transactions. In the
first, we acquired our Florida operations, including our
WellCare of Florida and HealthEase subsidiaries, in a stock
purchase from several individuals. In the second transaction, we
acquired The WellCare Management Group, Inc., a publicly-traded
holding company and the parent company of our New York and
Connecticut operations, through a merger of that company into a
wholly-owned subsidiary of ours. See Managements
Discussion and Analysis of Financial Condition and
Operations Corporate History and Acquisitions.
From inception to July 2004, we operated through a holding
company that was a limited liability company. In July 2004,
immediately prior to the closing of our initial public offering,
that company was merged into a Delaware corporation and we
changed our name to WellCare Health Plans, Inc.
Our principal executive offices are located at
8725 Henderson Road, Renaissance One, Tampa, Florida 33634,
and our telephone number is (813) 290-6200. We maintain a
website at www.wellcare.com. Information contained on our
website is not incorporated by reference into this prospectus,
and you should not consider information contained on our website
to be part of this prospectus.
References in this prospectus to WellCare,
we, our, and us, for periods
prior to July 2004, refer to WellCare Holdings LLC, and after
July 2004, refer to WellCare Health Plans, Inc., together in
each case with our subsidiaries and any predecessor entities
unless the context suggests otherwise.
The WellCare trademark and design appearing in this prospectus
are registered trademarks of The WellCare Management Group,
Inc., one of our wholly-owned subsidiaries.
4
The Offering
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Common stock offered by the selling stockholders |
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6,500,000 shares |
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Over-allotment option offered by TowerBrook Investors L.P., one
of the selling stockholders |
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975,000 shares |
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Common stock to be outstanding after the offering |
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39,120,131 shares |
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Use of proceeds |
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We will not receive any proceeds from the sale of shares by the
selling stockholders. See Use of Proceeds. |
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New York Stock Exchange symbol |
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WCG |
Except as otherwise noted, the number of shares to be
outstanding after this offering excludes:
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2,659,120 shares of common stock issuable upon the
exercise of outstanding options, of which 416,734 shares
were exercisable as of June 6, 2005 with a weighted average
exercise price of $5.95 per share; |
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2,763,407 shares of common stock reserved for future
issuances under our equity incentive plan; and |
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387,714 shares of common stock reserved for future
issuances under our employee stock purchase plan. |
Except as otherwise noted, all information in this prospectus
is based on the assumption that the underwriters do not exercise
their over-allotment option.
5
SUMMARY CONSOLIDATED AND COMBINED FINANCIAL DATA
The following table sets forth our summary financial data. This
information should be read in conjunction with our financial
statements and the related notes and Managements
Discussion and Analysis of Financial Condition and Results of
Operations included elsewhere in this prospectus.
WellCare, as it existed prior to the July 31, 2002
acquisition of the WellCare group of companies, is referred to
as Predecessor. From and after July 31, 2002,
WellCare is referred to as Successor.
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Predecessor | |
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Successor | |
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Year Ended | |
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Seven-Month | |
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Five-Month | |
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Three Months Ended | |
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December 31, | |
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Period Ended | |
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Period Ended | |
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Year Ended December 31, | |
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March 31, | |
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July 31, | |
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December 31, | |
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2000 | |
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2001 | |
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2002 | |
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2002 | |
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2003 | |
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2004 | |
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2004 | |
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2005 | |
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(in thousands, except per unit/share data) | |
Consolidated and Combined Statements of Income (Loss):
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Revenues:
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Premium:
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Medicaid
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$ |
272,497 |
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$ |
451,210 |
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$ |
329,164 |
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$ |
267,911 |
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$ |
740,078 |
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$ |
1,055,000 |
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$ |
216,120 |
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$ |
309,210 |
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Medicare
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72,992 |
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233,626 |
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170,073 |
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120,814 |
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288,330 |
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334,760 |
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84,560 |
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106,656 |
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Other(1)
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80,430 |
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55,027 |
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17,976 |
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9,928 |
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14,444 |
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1,136 |
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570 |
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Total premium
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425,919 |
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739,863 |
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517,213 |
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398,653 |
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1,042,852 |
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1,390,896 |
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301,250 |
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415,866 |
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Investment and other income
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5,548 |
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10,421 |
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2,819 |
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3,152 |
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3,130 |
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4,307 |
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586 |
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3,015 |
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Total revenues
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431,467 |
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750,284 |
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520,032 |
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401,805 |
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1,045,982 |
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1,395,203 |
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301,836 |
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418,881 |
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Expenses:
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Medical benefits:
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Medicaid
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202,876 |
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364,293 |
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274,672 |
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222,007 |
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609,233 |
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851,153 |
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183,062 |
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257,996 |
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Medicare
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78,542 |
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219,505 |
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145,768 |
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107,384 |
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238,933 |
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275,348 |
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67,969 |
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86,930 |
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Other(2)
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86,818 |
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53,708 |
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14,484 |
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12,372 |
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12,887 |
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(941 |
) |
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|
404 |
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Total medical benefits
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368,236 |
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637,506 |
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434,924 |
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341,763 |
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861,053 |
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1,125,560 |
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251,435 |
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344,926 |
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Selling, general and administrative
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70,050 |
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86,279 |
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54,492 |
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45,384 |
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|
126,106 |
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|
171,257 |
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|
36,791 |
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|
51,248 |
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Depreciation and amortization
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1,913 |
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2,234 |
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|
1,239 |
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|
|
3,734 |
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|
8,159 |
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|
|
7,715 |
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1,659 |
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|
2,042 |
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Interest
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|
1,785 |
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|
|
2,860 |
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|
|
1,446 |
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|
|
1,462 |
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|
|
10,172 |
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10,165 |
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|
2,265 |
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|
3,205 |
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Total expenses
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441,984 |
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728,879 |
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492,101 |
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392,343 |
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1,005,490 |
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|
|
1,314,697 |
|
|
|
292,150 |
|
|
|
401,421 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
(10,517 |
) |
|
|
21,405 |
|
|
|
27,931 |
|
|
|
9,462 |
|
|
|
40,492 |
|
|
|
80,506 |
|
|
|
9,686 |
|
|
|
17,460 |
|
Income tax
expense(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,805 |
|
|
|
16,955 |
|
|
|
31,256 |
|
|
|
3,864 |
|
|
|
6,820 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$ |
(10,517 |
) |
|
$ |
21,405 |
|
|
$ |
27,931 |
|
|
$ |
4,657 |
|
|
$ |
23,537 |
|
|
$ |
49,250 |
|
|
$ |
5,822 |
|
|
$ |
10,640 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1.70 |
|
|
|
|
|
|
$ |
0.29 |
|
|
Net income per share diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1.56 |
|
|
|
|
|
|
$ |
0.27 |
|
Net income attributable per common unit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable per unit basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
0.09 |
|
|
$ |
0.66 |
|
|
|
|
|
|
$ |
0.15 |
|
|
|
|
|
|
Net income attributable per unit diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
0.08 |
|
|
$ |
0.60 |
|
|
|
|
|
|
$ |
0.13 |
|
|
|
|
|
Pro forma net income per common
share:(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
0.82 |
|
|
|
|
|
|
$ |
0.19 |
|
|
|
|
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
0.73 |
|
|
|
|
|
|
$ |
0.16 |
|
|
|
|
|
Pro forma common shares
outstanding:(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21,466,300 |
|
|
|
|
|
|
|
22,454,244 |
|
|
|
|
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23,937,664 |
|
|
|
|
|
|
|
26,200,158 |
|
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, | |
|
As of March 31, | |
|
|
| |
|
| |
|
|
2000 | |
|
2001 | |
|
2002 | |
|
2003 | |
|
2004 | |
|
2004 | |
|
2005 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Operating Statistics:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medical benefits ratio
consolidated(5)
|
|
|
86.5 |
% |
|
|
86.2 |
% |
|
|
84.8 |
% |
|
|
82.6 |
% |
|
|
80.9 |
% |
|
|
83.5 |
% |
|
|
82.9 |
% |
|
Medical benefits ratio
Medicaid(5)
|
|
|
74.5 |
% |
|
|
80.7 |
% |
|
|
83.2 |
% |
|
|
82.3 |
% |
|
|
80.7 |
% |
|
|
84.7 |
% |
|
|
83.4 |
% |
|
Medical benefits ratio
Medicare(5)
|
|
|
107.6 |
% |
|
|
94.0 |
% |
|
|
87.0 |
% |
|
|
82.9 |
% |
|
|
82.3 |
% |
|
|
80.4 |
% |
|
|
81.5 |
% |
|
Medical benefit ratio
other(5)
|
|
|
107.9 |
% |
|
|
97.6 |
% |
|
|
96.2 |
% |
|
|
89.2 |
% |
|
|
|
|
|
|
70.9 |
% |
|
|
|
|
|
Selling, general and administrative expense
ratio(6)
|
|
|
16.2 |
% |
|
|
11.5 |
% |
|
|
10.8 |
% |
|
|
12.1 |
% |
|
|
12.3 |
% |
|
|
12.2 |
% |
|
|
12.2 |
% |
|
Members consolidated
|
|
|
317,000 |
|
|
|
374,000 |
|
|
|
470,000 |
|
|
|
555,000 |
|
|
|
747,000 |
|
|
|
581,000 |
|
|
|
765,000 |
|
|
Members Medicaid
|
|
|
256,000 |
|
|
|
323,000 |
|
|
|
420,000 |
|
|
|
512,000 |
|
|
|
701,000 |
|
|
|
537,500 |
|
|
|
711,000 |
|
|
Members Medicare
|
|
|
20,000 |
|
|
|
35,000 |
|
|
|
42,000 |
|
|
|
42,000 |
|
|
|
46,000 |
|
|
|
43,000 |
|
|
|
54,000 |
|
|
Members commercial
|
|
|
41,000 |
|
|
|
16,000 |
|
|
|
8,000 |
|
|
|
1,000 |
|
|
|
|
|
|
|
500 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, | |
|
As of March 31, | |
|
|
| |
|
| |
|
|
2000 | |
|
2001 | |
|
2002 | |
|
2003 | |
|
2004 | |
|
2004 | |
|
2005 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(in thousands) | |
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$ |
107,730 |
|
|
$ |
129,791 |
|
|
$ |
146,784 |
|
|
$ |
237,321 |
|
|
$ |
397,627 |
|
|
$ |
198,799 |
|
|
$ |
340,745 |
|
|
Total assets
|
|
|
173,007 |
|
|
|
221,456 |
|
|
|
409,504 |
|
|
|
497,107 |
|
|
|
799,036 |
|
|
|
472,340 |
|
|
|
833,349 |
|
|
Long-term debt (including current
maturities)(7)
|
|
|
1,174 |
|
|
|
154 |
|
|
|
156,295 |
|
|
|
135,755 |
|
|
|
184,200 |
|
|
|
132,442 |
|
|
|
183,800 |
|
|
Total liabilities
|
|
|
180,186 |
|
|
|
199,411 |
|
|
|
334,587 |
|
|
|
397,530 |
|
|
|
490,405 |
|
|
|
366,681 |
|
|
|
512,961 |
|
|
Total stockholders/members equity
(deficit)(8)
|
|
|
(7,179 |
) |
|
|
22,045 |
|
|
|
74,917 |
|
|
|
99,577 |
|
|
|
308,631 |
|
|
|
105,659 |
|
|
|
320,388 |
|
|
|
(1) |
Other premium revenue relates to our commercial business, which
is no longer operated. |
(2) |
Other medical benefits relates to our commercial business, which
is no longer operated. |
(3) |
Income tax expense was not recorded by the Predecessor because
its tax structure included entities that had elected
subchapter S status under the Internal Revenue Code, the
income of which was taxed at the stockholder level, as well as
entities that were subject to tax, but did not generate tax
liabilities or benefits due to operating losses. Pro forma tax
expense for each of the years 2000, 2001, and the seven months
ended July 31, 2002 at an estimated tax rate of 42% (our
effective tax rate as the Successor) is $0, $8,990, and $11,731,
respectively. |
(4) |
Pro forma net income per share is computed using the pro forma
weighted average number of common shares outstanding, which
gives effect to the automatic conversion of all outstanding
common units of WellCare Holdings, LLC into shares of common
stock of WellCare Health Plans, Inc. upon the closing of our
initial public offering. For a discussion of the difference
between pro forma net income per common share and net income
attributable per common unit, see Note 1 to the
consolidated financial statements of WellCare Health Plans, Inc. |
(5) |
Medical benefits ratio represents medical benefits expense as a
percentage of premium revenue. |
(6) |
Selling, general and administrative expense ratio represents
selling, general and administrative expense as a percentage of
total revenue and excludes depreciation and amortization expense
for purposes of determining the ratio. |
(7) |
Long-term debt (including current maturities) at March 31,
2005 includes total short and long-term debt of $183,141 plus
the unamortized portion of the discount on the term loan of $659. |
(8) |
Total stockholders/members equity
(deficit) reflects stockholders equity for
Predecessor and for Successor as of March 31, 2005 and
reflects limited liability company membership interests during
2002 and 2003. |
7
RISK FACTORS
This offering and an investment in our common stock involve a
high degree of risk. You should carefully consider the following
risks and all other information contained in this prospectus
before purchasing our common stock. If any of the following
risks actually occur, our business, financial condition and
results of operations could be materially and adversely
affected, the value of our stock could decline, and you may lose
all or part of your investment. The risks and uncertainties
described below are those that we currently believe may
materially affect our company. Additional risks and
uncertainties not presently known to us or that we currently
deem immaterial also may impair our business operations.
Risks Related to Our Business
If our government contracts are not renewed or are
terminated, our business could be substantially impaired.
We provide our Medicaid, Medicare, SCHIP and other services
through a limited number of contracts with state, federal or
local government agencies. These contracts generally have terms
of one or two years and are subject to nonrenewal by the
applicable agency. All of our government contracts are
terminable for cause if we breach a material provision of the
contract or violate relevant laws or regulations. In addition,
our right to add new members may be suspended by a government
agency if it finds deficiencies in our provider network or
operations. For the year ended December 31, 2004, the
percentage of our total premium revenue that we derived from our
Medicaid contracts in Florida, New York, Illinois, Indiana and
Connecticut was 55%, 9%, 4%, 3% and 5%, respectively and the
percentage derived from our Medicare contracts was 24%. For the
three-month period ended March 31, 2005, the percentage of
total premium that we derived from our Medicaid contracts in
Florida, New York, Illinois, Indiana and Connecticut was 50%,
9%, 6%, 5% and 4%, respectively. The percentage derived from our
Medicare contracts was 26%. We no longer operate a commercial
line of business.
Our contracts with the states are subject to cancellation or a
potential freeze on enrollment by the state in the event of the
unavailability of state or federal funding. In some
jurisdictions, a cancellation or enrollment freeze may be
immediate and in other jurisdictions a notice period is
required. Some of our contracts are also subject to termination
or are eligible for renewal through annual competitive bids. We
may face increased competition as other plans attempt to enter
our markets through the contracting process.
If we are unable to renew, or to successfully rebid or compete
for any of our government contracts, or if any of our contracts
are terminated, our business could be substantially impaired. If
any of those circumstances were to occur, we would likely pursue
one or more alternatives, including seeking to enter into
contracts in other geographic markets, seeking to enter into
contracts for other services in our existing markets, or seeking
to acquire other businesses with existing government contracts.
If we were unable to do so, we could be forced to cease
conducting business. In any such event, our revenues would
decrease materially.
Because our premiums, which generate most of our revenues,
are fixed by contract, we are unable to increase our premiums
during the contract term if our corresponding medical benefits
expense exceeds our estimates.
Most of our revenues are generated by premiums consisting of
fixed monthly payments per member. These payments are fixed by
contract, and we are obligated during the contract period, which
is generally one or two years, to provide or arrange for the
provision of healthcare services as established by state and
federal governments. We have less control over costs related to
the provision of a mandatory set of healthcare services than we
do over our selling, general and administrative expense.
Historically, our medical benefits expense as a percentage of
premium revenue has fluctuated. For example, our medical
benefits expense was 84.8% of our combined premium revenue in
2002, 82.6% in 2003, 80.9% in 2004 and 82.9% for the three-month
period ended March 31, 2005. If our medical benefits
expense exceeds our estimates, we will be unable to adjust the
premiums we receive under our current contracts, and our profits
may decline.
8
Reductions in funding for government healthcare programs
could substantially reduce our profitability.
All of the healthcare services we offer are through
government-sponsored programs, such as Medicaid and Medicare. As
a result, our profitability is dependent on continued funding
for government healthcare programs at or above current levels.
For example, the premium rates paid by each state to health
plans like ours differ depending on a combination of factors
such as upper payment limits established by the state and
federal governments, a members health status, age, gender,
county or region, benefit mix and member eligibility categories.
Future Medicaid premium rate levels may be affected by continued
government efforts to contain medical costs or state and federal
budgetary constraints. Many of the states in which we operate
are currently experiencing fiscal challenges leading to
significant budget deficits. According to the National
Association of State Budget Officers, Medicaid spending consumed
21.4% of the average states budget in 2003, representing
the second largest expenditure. According to the Congressional
Budget Office, total state spending on Medicaid increased 9.5%
in 2004. Some states may find it difficult to continue paying
the current rates to Medicaid health plans. Changes in Medicaid
funding, for example, may lead to reductions in the number of
persons enrolled in or eligible for Medicaid, reductions in the
amount of reimbursement or elimination of coverage for certain
benefits such as pharmacy, behavioral health or other benefits.
In some cases, changes in funding could be made retroactive in
which case we may be required to return premiums already
received or receive reduced future payments.
All of the states in which we operate are presently considering,
or recently have considered, legislation or regulations that
would reduce reimbursement rates, payment levels, benefits
covered or the number of persons eligible for Medicaid. For
example, the Illinois state legislature recently approved budget
legislation directing the state Medicaid agency to renegotiate
its contracts with managed care plans such as ours to
significantly reduce premiums. The state Medicaid agency
recently notified us of its proposed premium reductions, and we
are continuing to negotiate with the agency to determine the
final premium applicable to our Illinois Medicaid health plans.
While we cannot predict the final outcome of our negotiations,
if the planned premium reductions are implemented as initially
proposed by the state Medicaid agency, it would substantially
reduce our revenues and could cause our Illinois Medicaid
operations to become unprofitable. As a result, we cannot assure
you that we will continue operating a Medicaid managed care plan
in Illinois. In addition, reductions in Medicaid payments in
other states, similar to those that may be imposed in Illinois,
could substantially reduce our revenues and our net income and
negatively affect our profitability.
Recently, federal budget cuts and proposed reforms have been
announced that, if implemented, would reduce the federal share
of Medicaid funding over a four-year period commencing in 2007
by roughly 2% per year, or an aggregate of
$10.0 billion. It is uncertain whether the overall level of
spending on the Medicaid program will be reduced or whether the
federal budget cuts and proposed reforms will adversely affect
our profitability.
Federal budgetary constraints also may limit premiums payable
under our Medicare plans. For example, as a result of the
Balanced Budget Act of 1997, annual increases on premiums paid
to many Medicare+Choice (now known as Medicare Advantage) plans
were subject to a 2% cap, even though overall Medicare
healthcare expenses were increasing at a higher rate. Moreover,
recent changes in Medicare pursuant to the MMA permit premium
levels for certain plans to be established through competitive
bidding, with Congress retaining the ability to limit increases
in premium levels established through bidding from year to year.
We are subject to extensive government regulation, and any
violation of the laws and regulations applicable to us could
reduce our revenues and profitability and otherwise adversely
affect our operating results.
Our business is extensively regulated by the federal government
and the states in which we operate. The laws and regulations
governing our operations are generally intended to benefit and
protect health plan members and providers rather than
stockholders. The government agencies administering these laws
and regulations have broad latitude to enforce them. These laws
and regulations, along with the terms of our government
contracts, regulate how we do business, what services we offer,
and how we interact with our
9
members, providers and the public. We are subject, on an ongoing
basis, to various governmental reviews, audits and
investigations to verify our compliance with our contracts and
applicable laws and regulations. An adverse review, audit or
investigation could result in one or more of the following:
|
|
|
|
|
forfeiture or recoupment of amounts we have been paid pursuant
to our government contracts; |
|
|
|
imposition of significant civil or criminal penalties, fines or
other sanctions on us and/or our key employees; |
|
|
|
loss of our right to participate in government-sponsored
programs, including Medicaid and Medicare; |
|
|
|
damage to our reputation in various markets; |
|
|
|
increased difficulty in marketing our products and services; |
|
|
|
inability to obtain approval for future service or geographic
expansion; and |
|
|
|
loss of one or more of our licenses to act as an insurer, health
maintenance organization or third party administrator or to
otherwise provide a service. |
Because we receive payments from federal and state governmental
agencies, we are subject to various laws, including the Federal
False Claims Act, which permit the federal government to
institute suit against us for violations and, in some cases, to
seek treble damages, penalties and assessments. Many states,
including states where we currently do business, likewise have
enacted parallel legislation. In addition, private citizens,
acting as whistleblowers, can sue as if they were the government
under a special provision of the Act.
For example, the U.S. Department of Health and Human
Services Office of the Inspector General, Office of Audit
Services, which we refer to as the OIG, recently initiated an
audit of one of our Florida plans. This audit is part of a
national review by the OIG of Medicare Advantage plans to
determine whether they used payment increases consistent with
the requirements of the MMA. Under the MMA, when a Medicare
Advantage plan receives a payment increase, it must enhance
benefits, reduce beneficiary premiums or cost sharing, put
additional payment amounts in a benefit stabilization fund, or
use the additional payment amounts to stabilize or enhance
access. As the OIG audit is currently in its initial stage, we
cannot assure you what the findings of the audit will be and
whether there will be any adverse effect on us.
Any adverse review, audit or investigation could reduce our
revenues and profitability and otherwise adversely affect our
operating results. See Restrictions on our
ability to market would adversely affect our revenue.
If we are unable to manage medical benefits expense
effectively, our profitability will likely be reduced or we
could cease to be profitable.
Our profitability depends, to a significant degree, on our
ability to predict and effectively manage our costs related to
the provision of healthcare services. Relatively small changes
in the ratio of our expenses related to healthcare services to
the premiums we receive, or medical benefits ratio, can create
significant changes in our financial results. Factors that may
cause medical benefits expense to exceed our estimates include:
|
|
|
|
|
an increase in the cost of healthcare services and supplies,
including pharmaceuticals, whether as a result of inflation or
otherwise; |
|
|
|
higher than expected utilization of healthcare services; |
|
|
|
periodic renegotiation of hospital, physician and other provider
contracts; |
|
|
|
the occurrence of catastrophes, major epidemics, terrorism or
bio-terrorism; |
|
|
|
changes in the demographics of our members and medical trends
affecting them; and |
|
|
|
new mandated benefits or other changes in healthcare laws,
regulations and/or practices. |
10
Because of the relatively high average age of the Medicare
population, medical benefits expense for our Medicare plans may
be particularly difficult to control. According to CMS, from
1967 to 2002, Medicare healthcare expenses nationwide increased
on average by 13.2% annually.
Although we have been able to manage our medical benefits
expense through a variety of techniques, including various
payment methods to primary care physicians and other providers,
advance approval for hospital services and referral
requirements, medical management and quality management
programs, upgraded information systems, and reinsurance
arrangements, we may not be able to continue to manage these
expenses effectively in the future. If our medical benefits
expense increases, our profits could be reduced or we may not
remain profitable. For example, a hypothetical 1% increase in
our medical benefits ratio would have reduced our earnings
before income taxes for the years ended December 31, 2003
and 2004 and the three-month period ended March 31, 2005 by
$10.4 million, $14.5 million, and $4.0 million,
respectively.
We maintain reinsurance to protect us against severe or
catastrophic medical claims, but we cannot assure you that such
reinsurance coverage currently is or will be adequate or
available to us in the future or that the cost of such
reinsurance will not limit our ability to obtain it.
Additionally, we have submitted an application with CMS to
provide Medicare Prescription Drug Benefit services, which we
refer to as Medicare Part D. If our application is
approved, these new benefits will be effective for our members
and any additional members we may enroll effective on
January 1, 2006. We cannot assure you that we will be able
to implement these new services and manage this new business
profitably, which may negatively impact our operating results
and our future profitability.
We expect to incur significant expenses in the remainder of
2005 in connection with the implementation of our PDP
operations, which will have an adverse effect on our near-term
operating results.
We recently received conditional approval from CMS to provide
stand-alone prescription drug plans, known as PDPs, under
Medicare Part D. In addition, in June 2005, we filed bids
with CMS that include our benefit plan designs and proposed
rates for PDPs in all 34 regions established by CMS. These new
benefits will become effective in January 2006 for members who
elect to enroll beginning in the fall of 2005 and for certain
dual-eligible members who are automatically enrolled in Medicare
Part D. We have begun to incur expenses to upgrade and
improve our infrastructure, technology and systems to manage our
new PDP operations. We expect to incur significant expenses
during the remainder of 2005 as we prepare to begin providing
PDP benefits in January 2006. In particular, our expenses to
date and the additional expenses that we expect to incur for the
remainder of 2005 in connection with the implementation of our
PDP operations have related, and will relate, to the following:
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hiring and training of personnel to establish and manage
systems, operations, regulatory relationships and materials; |
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systems development costs (including hardware, software and
development resources); |
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fielding sales inquiry calls and creating and mailing sales
materials to interested parties; |
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enrolling new members; |
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developing and distributing member materials (e.g., ID cards,
member handbooks); and |
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handling customer service calls. |
We expect that these initial expenses will adversely affect our
net income in the remainder of 2005. However, the level of
expenses we incur during 2005, and in particular during the
fourth quarter of 2005, in connection with the implementation of
our PDP operations will depend on the level of demand for our
PDP benefit plans. If potential prescription drug beneficiaries
find our plan offerings appealing, and we receive a significant
amount of inquiries and requests for enrollment materials, we
anticipate that our costs to launch our PDP operations during
2005 will increase significantly and will materially adversely
affect our net income for the remainder of 2005, including
possibly resulting in a net loss for the fourth quarter.
11
If state regulatory agencies require a higher statutory
capital level for our existing operations or if we are subject
to additional capital requirements as we pursue new business
opportunities, we may be required to make additional capital
contributions which would negatively impact our cash flows and
liquidity.
Our operations are conducted through subsidiaries in various
states. These subsidiaries are subject to state regulations
that, among other things, require the maintenance of minimum
levels of statutory capital, as defined by each state. One or
more of these states may raise the statutory capital level from
time to time. For instance, New York has proposed a 150%
increase in reserve requirements. Other states may elect to
adopt risk-based capital requirements based on guidelines
adopted by the National Association of Insurance Commissioners.
Currently, our operations in Illinois, Indiana, Connecticut,
Louisiana and Georgia are subject to those requirements. Our
subsidiaries are also subject to their state regulators
general oversight powers. Regardless of whether they adopt the
risk-based capital requirements, these state regulators can
require our subsidiaries to maintain minimum levels of statutory
net worth in excess of amounts required under the applicable
state laws if they determine that maintaining such additional
statutory net worth is in the best interests of our members. The
proposed increase in reserve requirements to which our New York
managed care plan is subject would materially increase our
reserve requirements in New York. Our subsidiaries also may be
required to maintain higher levels of statutory net worth due to
the adoption of risk-based capital requirements by other states
in which we operate. In addition, as we continue to expand our
plan offerings in new states or pursue new business
opportunities, such as our strategy to offer Medicare
Part D coverage, we may be required to make additional
statutory capital contributions. In either case, our liquidity
and cash flows could be materially reduced, which could harm our
ability to implement our business strategy, for example, by
hindering our ability to make debt service payments on amounts
drawn from our credit facilities.
We cannot assure you that we will be successful in securing
new business opportunities such as our plans to provide PDP
coverage and to provide Medicaid services in Georgia.
We recently received conditional approval from CMS to provide
PDP coverage beginning on January 1, 2006. In June 2005, we
filed bids with CMS that include our benefit plan designs and
proposed rates for PDPs in all 34 regions established by
CMS. Our ability to provide these services, however, is subject
to CMS granting final approval of our bids. In addition, we
recently became licensed in the State of Georgia to offer
Medicaid services to beneficiaries and have applied to the state
to offer Medicaid services. In order to begin providing Medicaid
services in the state, our application must be approved by the
State of Georgia. We have not yet been notified by the state of
its decision with respect to our application. If the application
is approved, we expect to expend significant resources to build
our infrastructure to pursue the Medicaid business in Georgia.
However, we cannot assure you that we will obtain all the
requisite governmental and regulatory approvals, whether in
existing or new markets, that are typically necessary to pursue
new businesses in our industry, including the PDP business and
the Medicaid business in Georgia. In addition, even if we obtain
the necessary regulatory approvals, licenses and permits, the
costs of pursuing the new business may prove prohibitively
expensive relative to expected revenues. Although we recently
filed PDP bids for all 34 regions, we are not obligated to
offer PDP benefits in all regions, and we may be unable to, or
may ultimately choose not to, provide PDP benefits in one or
more regions. If we are unable to pursue new opportunities or we
reduce the scope of coverage we provide, our ability to grow
will be adversely impacted.
Our failure to estimate incurred but not reported medical
benefits expense accurately will affect our reported financial
results.
Our medical benefits expense includes estimates of medical
claims incurred but not reported, or IBNR. We, together with our
internal and consulting actuaries, estimate our medical cost
liabilities using actuarial methods based on historical data
adjusted for payment patterns, cost trends, product mix,
seasonality, utilization of healthcare services and other
relevant factors. Actual conditions, however, could differ from
those we assume in our estimation process. We continually review
and update our estimation methods and the resulting reserves and
make adjustments, if necessary, to medical benefits expense when
the criteria used to determine IBNR change and when actual claim
costs are ultimately determined. Due to the uncertainties
associated with the factors used in these assumptions, the
actual amount of medical benefits expense that we incur may be
materially more than the amount of IBNR originally estimated. If
our estimates of IBNR are
12
inadequate in the future, our reported results of operations
will be negatively impacted. Further, our inability to estimate
IBNR accurately may also affect our ability to take timely
corrective actions, further exacerbating the extent of any
adverse effect on our results.
We derive a substantial portion of our revenues and profits
from operations in Florida, and legislative or regulatory
actions, economic conditions or other factors that adversely
affect those operations could materially reduce our revenues and
profits.
For the years ended December 31, 2003 and 2004 and the
three-month period ended March 31, 2005, our Florida health
plans accounted for 86.0%, 79.2% and 74.6%, respectively, of our
total premium revenues. If we are unable to continue to operate
in Florida, or if our current operations in any portion of
Florida are significantly curtailed, our revenues will decrease
materially. Our reliance on our operations in Florida could
cause our revenues and profitability to change suddenly and
unexpectedly, depending on legislative or regulatory actions,
economic conditions and similar factors. For example, in 2004,
Florida tightened the re-certification requirements for members
enrolled in its Healthy Kids SCHIP program, making it more
difficult for members to remain in the program. As a result, our
membership in this program has declined. In addition, the
Florida legislature recently considered Medicaid reform
legislation, but ultimately determined instead to adopt a pilot
program limited to two counties of the state. Under the pilot
program, Medicaid-eligible participants will be able to choose
to enroll in Medicaid coverage through employer-sponsored and
other private plans that compete directly with managed care
plans. However, the pilot program cannot be implemented until
the Florida Medicaid agency obtains both a federal Medicaid
waiver and further specific authorization from the Florida
legislature and therefore we expect any implementation of the
pilot program will not occur before the latter part of 2006.
Accordingly, we cannot predict the impact the pilot program
would have on our business if it should ultimately be
implemented or expanded through the enactment of additional
legislation. Further, if the pilot program is implemented, we
may face increased competition from new providers of Medicaid
services in these areas of Florida, including employer-sponsored
and other private plans, which could materially reduce our
revenues and would harm our overall operating results.
Our limited operating history as a stand-alone entity makes
evaluating our business and future prospects difficult.
We were formed in May 2002 to acquire the WellCare group of
companies. Until the closing of that acquisition in July 2002,
the companies that comprise our Florida operations had operated
as a closely-held business, and our New York and Connecticut
businesses had operated as subsidiaries of a public company, the
majority stockholders of which were the owners of the Florida
operations. Almost all of the senior members of our current
management have joined us recently, including Todd S. Farha, our
President and Chief Executive Officer. Our limited operating
history under current management may not be adequate to enable
you to fully assess our future prospects.
We may not be able to sustain our high rates of historic
growth.
From December 31, 2000 to December 31, 2004, our
membership grew at an average annual rate of 24%, and from
March 31, 2004 to March 31, 2005, our membership grew
by 32%, of which approximately 17% represented organic growth.
An important aspect of our strategy is continued growth in our
existing markets. We may not be able to sustain our high
historical growth rates, which would impair our ability to
implement this strategy. For example, we already have a large
share of the Medicaid managed care market in Florida, and the
Florida Medicaid market is highly penetrated. These factors may
limit our ability to continue to increase our membership in
Florida, which is our largest market. If we are unable to
continue to increase our membership in the states in which we
currently operate, we may not be able to successfully implement
our growth strategy.
We may be unsuccessful in implementing our growth strategy if
we are unable to make or finance other acquisitions on favorable
terms or integrate the businesses we acquire into our existing
operations.
Acquisitions of contract rights and other health plans are an
important element of our growth strategy. We may be unable to
identify and complete appropriate acquisitions rapidly enough,
if at all, to meet our or our investors expectations for
future growth. For example, many of the other potential
purchasers of contract
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rights and plans have greater financial resources than we have.
The market price of businesses that operate Medicaid plans has
generally increased recently, which may increase the amount we
are required to pay to complete future acquisitions and some of
our competitors may be willing to pay more for these businesses
than we are. In addition, we are generally required to obtain
regulatory approval from one or more state agencies when making
acquisitions, which may require a public hearing. This is the
case regardless of whether we already operate a plan in the
state in which the business to be acquired is located. We may be
unable to comply with these regulatory requirements for an
acquisition in a timely manner, or at all. Moreover, some
sellers may insist on selling assets that we do not want, such
as commercial lines of business, or transferring their
liabilities to us as part of the sale of their companies or
assets. Even if we identify suitable acquisition targets, we may
be unable to complete acquisitions or obtain the necessary
financing for these acquisitions on terms favorable to us, or at
all.
Further, to the extent we complete acquisitions, we may be
unable to realize the anticipated benefits from acquisitions
because of operational factors or difficulties in integrating
the acquisitions with our existing businesses. This may include
the integration of:
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additional employees, whom we refer to as associates, who are
not familiar with our operations; |
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new provider networks, which may operate on terms different from
our existing networks; |
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additional members, who may decide to transfer to other
healthcare providers or health plans; |
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disparate information, claims processing and record keeping
systems; and |
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accounting policies, including those which require a high degree
of judgment or complex estimation processes, such as estimates
of medical claims incurred but not reported, accounting for
goodwill, intangible assets, stock-based compensation and income
tax matters. |
For all of the above reasons, we may not be able to successfully
implement our acquisition strategy.
We may be unable to expand into some geographic areas without
incurring significant additional costs.
We are likely to incur additional costs if we enter states or
counties where we do not currently operate. Our rate of
expansion into other geographic areas may also be inhibited by:
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the time and costs associated with obtaining a health
maintenance organization license to operate in the new area or
the expansion of our licensed service area, if necessary; |
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our inability to develop a network of physicians, hospitals and
other healthcare providers that meets our requirements and those
of government regulators; |
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competition, which increases the costs of recruiting members; |
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the cost of providing healthcare services in those
areas; and |
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demographics and population density. |
Accordingly, we may be unsuccessful in entering other
metropolitan areas, counties or states.
Ineffective management of our growth may adversely affect our
results of operations, financial condition and business.
Depending on acquisition and other opportunities, we expect to
continue to increase our membership and to expand into other
markets. In 2003, we had total revenue of approximately
$1.0 billion. In 2004, we had total revenue of nearly
$1.4 billion, and for the three-month period ended
March 31, 2005, our total revenue exceeded
$418 million. Continued rapid growth could place a
significant strain on our management and on other resources. Our
ability to manage our growth may depend on our ability to
strengthen our management team and attract, train and retain
skilled associates, and our ability to implement and improve
operational, financial and management information systems on a
timely basis. If we are unable to manage our growth effectively,
our financial condition and results of operations could be
materially and adversely affected. In addition, due to the
initial substantial costs related to potential acquisitions,
rapid growth could adversely affect our short-term profitability
and liquidity.
14
The MMA makes changes to the Medicare program that could
reduce our profitability and increase competition for our
existing and prospective members.
On December 8, 2003, President Bush signed the MMA. This
legislation makes significant changes to the Medicare program
and is complex and wide-ranging. There are numerous provisions
in the legislation that will influence our Medicare business. We
believe that many of these changes will benefit the managed care
sector. However, the new bidding process for determining rates,
expanded benefits and shifts in certain coverage
responsibilities pursuant to the Act may increase competition
and create uncertainties, including the following:
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The Act increases reimbursement for Medicare Advantage plans,
formerly known as the Medicare+Choice plan, in 2004 and 2005.
Higher reimbursement rates may increase the number of plans that
participate in the program, creating new competition that could
adversely affect our profitability. |
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Beginning in 2006, plans may offer various products, including
Preferred Provider Organizations, or PPOs, pursuant to the Act.
Medicare PPOs would allow their members more flexibility to
select physicians than the current plans, such as HMOs, which
often require members to coordinate with a primary care
physician. The Secretary of Health and Human Services created
26 regions for the Medicare PPO program. Regional Medicare
PPO plans will compete with local Medicare Advantage HMO plans
and may affect our current Medicare Advantage business. We do
not know how the creation of the regional Medicare program,
which is intended to provide further choice to beneficiaries,
will affect our Medicare Advantage business. |
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To participate in the regional Medicare Advantage PPO program
under the Act, a plan must meet certain requirements, including
having an adequate provider network throughout the region. The
Act provides some incentives for certain hospitals to join the
network. Although we currently do not anticipate participating
in any regional Medicare Advantage PPO programs, if in the
future we decide to participate in these programs, we cannot
assure you that we will be able to contract with a sufficient
number of providers throughout our regions to satisfy the
network adequacy requirements under the Act that would enable us
to participate in the regional product. |
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Beginning in 2006, the payments for the local Medicare Advantage
and regional Medicare Advantage plans will be based on a
competitive bidding process that may decrease the amount of
premiums paid to us or cause us to increase the benefits we
offer. |
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Beginning in 2006, organizations that offer Medicare Advantage
plans of the type we currently offer will be required to offer
prescription drug benefits. It is not known at this time whether
the governmental payments will be adequate to cover the costs
for this benefit. In addition, most Medicare Advantage enrollees
choosing to obtain prescription drug benefits will be required
to do so from their Medicare Advantage plan. Enrollees may
prefer a stand-alone drug plan and may disenroll from the
Medicare Advantage plan altogether in order to participate in a
stand-alone drug plan. Accordingly, the new Medicare Part D
prescription drug benefit could reduce our profitability and
membership enrollment following its implementation in 2006. |
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We recently received conditional approval from CMS to begin
offering PDPs in 2006 to Medicare beneficiaries who are not
enrolled in one of our Medicare Advantage plans. In addition, in
June 2005, we filed bids with CMS that include our benefit plan
designs and proposed rates for PDPs in all 34 regions
established by CMS. Because PDP plans are new to Medicare and to
the health insurance market generally, we do not know whether
the bids we have submitted will be competitive or will be
accepted. If our bids are accepted, we do not know whether we
will be able to operate our PDP operations profitably, and our
failure to do so could have an adverse effect on our results of
operations. |
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Some enrollees may have chosen our Medicare Advantage plan in
the past rather than a Medicare fee-for-service plan because of
the added drug benefit that we offer with our Medicare Advantage
plan. Following the implementation of the new prescription drug
benefit, Medicare beneficiaries will have the opportunity to
obtain a drug benefit without joining a managed care plan. As a
result, our Medicare Advantage membership enrollment may decline. |
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Beginning in 2006, individuals eligible for both Medicare and
Medicaid, or dual-eligibles, generally will receive their drug
coverage from Medicare rather than from Medicaid. Because
Medicaid will no longer be directly responsible for most drug
coverage for dual-eligibles, Medicaid payments to plans will be
reduced. We cannot predict whether this change in Medicaid
payments will have an adverse effect on our operating results. |
We may be unsuccessful in implementing our growth strategy,
or continuing to participate in certain Medicare programs, if we
are unable to meet submission and approval deadlines imposed by
CMS.
CMS has imposed rigorous deadlines for the filing and approval
of applications that are important to support our growth
strategy, especially in order for us to offer a new Medicare
Advantage plan in a new location, to expand an existing plan
into additional service areas, and to offer a prescription drug
plan under the new Medicare Part D program. For example, in
order for the Medicare Advantage applications that we timely
filed earlier this year to be effective in 2005 or 2006, our
applications must receive conditional approval by CMS this
summer, or the approval will not be effective before 2007.
Likewise, we recently filed bids with CMS that include our
benefit plan designs and proposed rates for PDPs in all 34
regions designated by CMS and need to receive final approval
from CMS by the fall in order to offer these plans beginning in
2006. In addition, CMS has imposed an annual deadline of the
first Monday of each June for submission of competitive bid
proposals for participation in the Medicare Advantage program
beginning in the following year, and may impose an even earlier
deadline for submission of some portions of the bid. As a
result, we must devote extensive resources to preparing and
timely filing applications, and we cannot assure you that any
applications we submit will be approved by the deadlines imposed
by CMS. If we are unable to submit these applications by the
applicable deadlines, or if CMS does not approve them in a
timely way, we may be unsuccessful in implementing our growth
strategy, or in continuing the participation of one or more of
our plans in the Medicare Advantage program, which could
materially adversely affect our revenues and profits.
Changes, other than the MMA, in federal funding mechanisms
also could reduce our profitability.
In addition to changes pursuant to the MMA, other changes in
federal funding mechanisms could reduce our profitability. For
example, as a part of the administrations 2004 budget
submission to Congress, the Department of Health and Human
Services announced principles for Medicaid reform. The proposal
would establish two capped allotments for states combining both
Medicaid and SCHIP funds, one for acute care and one for
long-term care. Under this proposal, all mandatory populations
and benefits would continue to be covered as required under
current law. States, however, would be given flexibility for
optional populations and benefits. The proposal would be revenue
neutral over a 10-year period, although states would receive
additional funds over the first seven years, with corresponding
funding reductions in years eight through 10.
The proposal was meant to provide increased flexibility to the
states in managing their Medicaid and SCHIP programs, in
particular in the design of benefit packages for optional
populations. Governors working in concert with the Department of
Health and Human Services were unable to reach agreement on
these principles and for the time being, Congress has not
considered the proposal. It is uncertain whether this proposal,
or a variation thereof, will eventually be enacted. Congress
instead passed a $20.0 billion fiscal relief program for
the states, which included a $10.0 billion increase in the
share of medical assistance expenditures provided to each
states Medicaid program, known as the Federal Medical
Assistance Percentage.
If the Departments proposal is ultimately enacted by
Congress and the number of persons enrolled in Medicaid or SCHIP
decreases in the states in which we operate or the scope of
benefits provided is reduced, or expanded without a
corresponding increase in payments made to us, our growth,
revenues and profitability could be reduced.
We are required to comply with laws governing the
transmission, security and privacy of health information, and we
have not yet determined what our total compliance costs will
be.
Regulations under the Health Insurance Portability and
Accountability Act of 1996, or HIPAA, require us to comply with
standards regarding the exchange of health information within
our company and with third parties, such as healthcare
providers, business associates, and our members. These
regulations include standards for common healthcare
transactions, such as claims information, plan eligibility, and
payment
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information; unique identifiers for providers (commencing May
2007) and employers; security; privacy; and enforcement. HIPAA
also provides that to the extent that state laws impose stricter
privacy standards than HIPAA privacy regulations, a state seeks
and receives an exception from the Department of Health and
Human Services regarding certain state laws, or state laws
concern certain specified areas, such state standards and laws
will not be preempted.
The Department of Health and Human Services finalized the
transaction standards on August 17, 2000. However, Congress
delayed for one year the transaction standards original
implementation deadline of October 16, 2002 for providers
such as us that submitted a compliance plan by the original
implementation deadline. In response to CMS guidance, we adopted
a contingency plan in July 2003, pursuant to which we continue
to process HIPAA standard transactions and also engage in legacy
transactions as appropriate. The Department issued the privacy
standards on December 28, 2000, and after certain delays,
the privacy standards became effective on April 14, 2001,
with a compliance date of April 14, 2003 for most covered
providers, including us. The security standards became effective
on April 21, 2003, with a compliance date of April 20,
2005 for most covered entities, including us. Sanctions for
failing to comply with the HIPAA health information provisions
include criminal penalties and civil sanctions.
We believe we have met the HIPAA deadlines for the adoption and
implementation of appropriate policies and procedures for
privacy and for transactions and code sets, and we are
implementing security policies and procedures to achieve
compliance with the security standards.
Given HIPAAs complexity, the recent effectiveness of
several final regulations, and the possibility that the
regulations may change and may be subject to changing and
perhaps conflicting interpretation, our ongoing ability to
comply with the HIPAA requirements is uncertain. Furthermore, a
states ability to promulgate stricter laws, and
uncertainty regarding many aspects of such state requirements,
make compliance with applicable health information laws more
difficult. For these reasons, we are unable to calculate
reliably what our total compliance costs will be.
Future changes in healthcare law may reduce our profitability
or liquidity.
Healthcare laws and regulations, and their interpretations, are
subject to frequent change. Changes in existing laws or
regulations, or their interpretations, or the enactment of new
laws or the issuance of new regulations could reduce our
profitability, among other things, by:
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imposing additional license, registration and/or capital
requirements; |
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increasing our administrative and other costs; |
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forcing us to undergo a corporate restructuring; |
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increasing mandated benefits; |
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limiting our ability to engage in inter-company transactions
with our affiliates and subsidiaries; |
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forcing us to restructure our relationships with
providers; or |
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requiring us to implement additional or different programs and
systems. |
Changes in state law also may adversely affect our
profitability. Laws relating to managed care consumer protection
standards, including increased plan information disclosure,
limits to premium increases, expedited appeals and grievance
procedures, third party review of certain medical decisions,
health plan liability, access to specialists, clean claim
payment timing, physician collective bargaining rights and
confidentiality of medical records either have been enacted or
continue to be under discussion. New healthcare reform
legislation may require us to change the way we operate our
business, which may be costly. Further, although we believe we
have exercised care in structuring our operations to attempt to
comply in all material respects with the laws and regulations
applicable to us, government officials charged with
responsibility for enforcing such laws and/or regulations have
in the past asserted and may in the future assert that we or
transactions in which we are involved are in violation of these
laws, or courts may ultimately interpret such laws in a manner
inconsistent with our interpretation. Therefore, it is possible
that future legislation and regulation and the interpretation of
laws and regulations could have a material adverse effect on our
ability to operate under the Medicaid, Medicare and SCHIP
programs and to continue to serve our members and attract new
members.
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Restrictions on our ability to market would adversely affect
our revenue.
Although we enroll some of our new members through automatic
enrollment programs and voluntary member enrollment, we rely on
our marketing and sales efforts for a significant portion of our
membership growth. All of the states in which we currently
operate permit marketing but impose strict requirements and
limitations as to the types of marketing activities that are
permitted. In Florida and New York, other Medicaid plans have
been prohibited from engaging in marketing activities for a
period of time after being found to have violated the
states requirements. While no such action is currently
pending or threatened by the State of Florida against us, from
time to time we have been cited, and in some cases fined, for
alleged marketing violations. Until recently, our New York
Medicare operations were prohibited from marketing as a result
of past audits and regulatory deficiencies we inherited when we
acquired our New York operations. In addition, in October 2004,
the State of Connecticut imposed a prohibition of marketing on
our Connecticut plan as the result of allegedly having engaged
in a repeated practice of marketing violations and suspended the
use of certain marketing practices while we developed a
corrective action plan. The state lifted the marketing
prohibition in November 2004 after imposing a monetary fine and
reviewing our initial corrective action plan. In response to
certain comments received from the state on our initial
corrective action plan, we have recently submitted an amended
corrective action plan and have implemented new procedures and
corrective measures pending the states consideration of
the amended plan. In circumstances where our marketing efforts
are prohibited or curtailed, our ability to increase or sustain
membership will be significantly harmed, which will adversely
affect our revenue.
Operational deficiencies related to our business may
adversely affect our operations or growth in certain markets.
Until recently, we were prohibited from marketing our Medicare
program in New York due to a number of deficiencies we inherited
when we acquired our New York operations. Although we have made
investments in our New York business to address these
deficiencies and are currently permitted to market our Medicare
health plan in New York, we continue to experience problems
related to these deficiencies, including gaps in our provider
network. Moreover, government regulators, members and providers,
and potential members and providers, may have a negative
perception of our New York health plans as a result of these
operational deficiencies. These issues may result in continued
heightened scrutiny by federal, state and/or county and city
regulators and may adversely affect the operations or growth of
our business in New York. In addition, the State of Connecticut
recently conducted an audit of the quality of and timely access
to the healthcare delivery services of our Connecticut
operations and identified specified quality deficiencies. We
have undertaken certain corrective actions in response to the
deficiencies noted in the audit findings. If our corrective
actions are not successful and we are not able to improve the
quality of our services in Connecticut, our growth plans and
operations in Connecticut may be adversely affected.
If we are unable to maintain satisfactory relationships with
our providers, our profitability could decline and we may be
precluded from operating in some markets.
Our profitability depends, in large part, upon our ability to
enter into cost-effective contracts with hospitals, physicians
and other healthcare providers in appropriate numbers in our
geographic markets and at convenient locations for our members.
In any particular market, however, providers could refuse to
contract, demand higher payments or take other actions that
could result in higher medical benefits expense. In some
markets, certain providers, particularly hospitals,
physician/hospital organizations or multi-specialty physician
groups, may have significant market positions or near
monopolies. If such a provider or any of our other providers
refuse to contract with us, use their market position to
negotiate contracts that might not be cost-effective or
otherwise place us at a competitive disadvantage, those
activities could adversely affect our operating results in that
market area. In the long term, our ability to contract
successfully with a sufficiently large number of providers in a
particular geographic market will affect the relative
attractiveness of our managed care products in that market and
could preclude us from renewing our Medicaid or Medicare
contracts in those markets or from entering into new markets.
18
Our provider contracts with network primary care physicians and
specialists generally have terms of one year, with automatic
renewal for successive one-year terms. We may terminate these
contracts for cause, based on provider conduct or other
appropriate reasons, subject to laws giving providers due
process rights. The contracts generally may be cancelled by
either party without cause upon 60 or 90 days prior written
notice. Our contracts with hospitals generally have terms of one
to two years, with automatic renewal for successive one-year
terms. We may terminate these contracts for cause, based on
provider misconduct or other appropriate reasons. Our hospital
contracts generally may be cancelled by either party without
cause upon 120 days prior written notice. We may be unable
to continue to renew such contracts or enter into new contracts
enabling us to serve our members profitably. We will be required
to establish acceptable provider networks prior to entering new
markets. Although we have established long-term relationships
with many of our network providers, we may be unable to maintain
those relationships or enter into agreements with providers in
new markets on a timely basis or under favorable terms. If we
are unable to retain our current provider contracts or enter
into new provider contracts timely or on favorable terms, our
profitability could decline.
If a state fails to renew its federal waiver application for
mandated Medicaid enrollment into managed care or such
application is denied, our membership in that state will likely
decrease.
A significant percentage of our Medicaid plan enrollment results
from mandatory Medicaid enrollment in managed care plans. States
may only mandate Medicaid enrollment into managed care through
CMS-approved plan amendments or under federal waivers or
demonstrations. Waivers and programs under demonstrations are
generally approved for two-year periods and can be renewed on an
ongoing basis if the state applies and the waiver request is
approved or renewed by CMS. We have no control over this renewal
process. If a state in which we operate does not renew its
mandated program or the federal government denies the
states application for renewal, our business would suffer
as a result of a likely decrease in membership.
We rely on the accuracy of eligibility lists provided by the
government to collect premiums, and any inaccuracies in those
lists could cause states to recoup premium payments from us,
which could reduce our revenues and profitability.
Premium payments that we receive are based upon eligibility
lists produced by the government. From time to time, states
require us to reimburse them for premiums that we received from
the states based on an eligibility list that a state later
discovers contains individuals who are not in fact eligible for
any government-sponsored program or are eligible for a different
premium category or a different program. Recently, for example,
we received a notice from the State of Florida concerning an
audit of individuals who are eligible under both Medicare and
Medicaid. The state contends that, because of inaccuracies in
the characterization of some of these individuals, we received
net overpayments that it is entitled to recoup from us. The
state has recently notified us that it will begin recouping some
of these net overpayments from our future Medicaid premiums, and
we are uncertain what the financial impact to us will be.
In addition to recoupment of premiums previously paid, we also
face the risk that a state could fail to pay us for members for
whom we are entitled to payment. Our profitability would be
reduced as a result of such reimbursement to the state or
failure of payment from the state if we had made related
payments to providers and were unable to recoup such payments
from the providers. We have established a reserve in
anticipation of recoupment by the states of previously paid
premiums, but ultimately our reserve may not be sufficient to
cover the amount, if any, of recoupments. If the amount of any
recoupments exceeds our reserves, our revenues and profits may
be materially harmed.
Our business depends on our information systems, and our
inability to effectively integrate, manage and keep secure our
information systems could disrupt our operations.
Our business is dependent on effective and secure information
systems that assist us in, among other things, monitoring
utilization and other cost factors, supporting our healthcare
management techniques, processing provider claims and providing
data to our regulators. Our providers also depend upon our
information systems for membership verifications, claims status
and other information. If we experience a
19
reduction in the performance, reliability or availability of our
information systems, our operations and ability to produce
timely and accurate reports could be adversely affected. In
addition, many of our key software applications are licensed
from third parties. If the owner of the software becomes
insolvent or is otherwise unable to support the software, our
operations could be adversely affected. Our operations could
also be adversely affected if the software owner is unwilling to
continue to support the software or charges materially increased
fees for such support.
Our disaster recovery plan, including disaster recovery and
emergency mode operations systems, was tested and implemented in
May 2004. We will not have a fully implemented business
continuity program until the end of 2005. Events outside our
control, including acts of nature, such as hurricanes,
earthquakes or fires, or terrorism, could significantly impair
our information systems and applications.
Our information systems and applications require continual
maintenance, upgrading and enhancement to meet our operational
needs. If we are unable to maintain or expand our systems, we
could suffer from, among other things, operational disruptions,
such as the inability to pay claims or to make claims payments
on a timely basis, loss of members, difficulty in attracting new
members, regulatory problems and increases in administrative
expenses.
Our business requires the secure transmission of confidential
information over public networks. Advances in computer
capabilities, new discoveries in the field of cryptography or
other events or developments could result in compromises or
breaches of our security systems and client data stored in our
information systems. Anyone who circumvents our security
measures could misappropriate our confidential information or
cause interruptions in services or operations. The Internet is a
public network, and data is sent over this network from many
sources. In the past, computer viruses or software programs that
disable or impair computers have been distributed and have
rapidly spread over the Internet. Computer viruses could be
introduced into our systems, or those of our providers or
regulators, which could disrupt our operations, or make our
systems inaccessible to our providers or regulators. We may be
required to expend significant capital and other resources to
protect against the threat of security breaches or to alleviate
problems caused by breaches. Because of the confidential health
information we store and transmit, security breaches could
expose us to a risk of regulatory action, litigation, possible
liability and loss. Our security measures may be inadequate to
prevent security breaches, and our business operations would be
adversely affected by cancellation of contracts and loss of
members if they are not prevented.
We may not have adequate intellectual property rights in our
brand names for our health plans, and we may be unable to
adequately enforce such rights.
Our success depends, in part, upon our ability to market our
health plans under our brand names, including
WellCare, HealthEase,
Staywell and Harmony. While we hold
federal trademark registrations for the WellCare
trademark, we have not taken enforcement action to prevent
infringement of our federal trademark and have not secured
registrations of our other marks. Other businesses may have
prior rights in the brand names that we market under or in
similar names, which could limit or prevent our ability to use
these marks, or to prevent others from using similar marks. If
we are unable to prevent others from using our brand names, or
if others prohibit us from using them, our revenues could be
adversely affected. Even if we are able to protect our
intellectual property rights in such brands, we could incur
significant costs in doing so.
We encounter significant competition that may limit our
ability to increase or maintain membership in the markets we
serve, which may harm our growth and our operating results.
We operate in a highly competitive environment and in an
industry that is currently subject to significant changes due to
business consolidations, new strategic alliances and aggressive
marketing practices by other managed care organizations. We
compete for members principally on the basis of size, location
and quality of provider network, benefits provided, quality of
service and reputation. A number of these competitive elements
are partially dependent upon and can be positively affected by
financial resources available to a health plan. Many other
organizations with which we compete have substantially greater
financial and other resources than
20
we do. In addition, changes resulting from the MMA, or state
Medicaid reform or other initiatives, may bring additional
competitors into our market area. As a result, we may be unable
to increase or maintain our membership.
We have substantial debt obligations that could restrict our
operations.
We have a significant amount of outstanding indebtedness,
including, as of March 31, 2005, approximately
$158.1 million in borrowings under our senior secured
credit facilities and approximately $25.0 million in
outstanding debt to the parties that sold our Florida operations
to us. We have available borrowing capacity under our senior
secured revolving credit facility of approximately
$50.0 million, as of March 31, 2005. We may also incur
additional indebtedness in the future. Our substantial
indebtedness could have adverse consequences, including:
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increasing our vulnerability to adverse economic, regulatory and
industry conditions, and placing us at a disadvantage compared
to our competitors that are less leveraged; |
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limiting our ability to compete and our flexibility in planning
for, or reacting to, changes in our business and the industry in
which we operate; |
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limiting our ability to borrow additional funds for working
capital, capital expenditures, acquisitions and general
corporate or other purposes; and |
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exposing us to greater interest rate risk since the interest
rate on borrowings under our senior credit facilities is
variable. |
Our debt service obligations will require us to use a portion of
our operating cash flow to pay interest and principal on
indebtedness instead of for other corporate purposes, including
funding future expansion of our business and ongoing capital
expenditures. If our operating cash flow and capital resources
are insufficient to service our debt obligations, we may be
forced to sell assets, seek additional equity or debt capital or
restructure our debt. However, these measures might be
unsuccessful or inadequate in permitting us to meet scheduled
debt service obligations.
Restrictions and covenants in our credit facilities and
instruments governing our additional indebtedness may limit our
ability to make certain acquisitions and declare dividends.
The documents governing our senior secured credit facilities and
our indebtedness to the parties that sold our Florida operations
to us contain various restrictions and covenants, including
prescribed fixed charge coverage and leverage ratios and
limitations on capital expenditures and acquisitions, that
restrict our financial and operating flexibility, including our
ability to make certain acquisitions and declare dividends
without lender approval.
Our failure to comply with covenants in our debt instruments
could result in our indebtedness being immediately due and
payable and the loss of our assets.
Our indebtedness to the parties that sold our Florida operations
to us is secured by a pledge of 51% of the outstanding capital
stock of our subsidiary, WCG Health Management, Inc., which is
the indirect parent corporation of all of our operating
subsidiaries. Our credit facilities are similarly secured by a
pledge of stock of our operating subsidiaries, as well as a
pledge of substantially all of the assets of our non-regulated
entities. If we fail to pay any of our indebtedness when due, or
if we breach any of the other covenants in the instruments
governing our indebtedness, one or more events of default,
including cross-defaults among multiple portions of our
indebtedness, could result. These events of default could permit
our creditors to declare all amounts owing to be immediately due
and payable. If we were unable to repay indebtedness owed to our
secured creditors, they could proceed against the collateral
securing that indebtedness.
21
We may not be able to retain our executive officers, and the
loss of any one or more of these officers and their managed care
expertise would adversely affect our business.
Our operations are highly dependent on the efforts of our
President and Chief Executive Officer and our other senior
executives, each of whom has been instrumental in developing our
business strategy and forging our business relationships.
Although some of our executives have entered into employment
agreements with us, these agreements may not provide sufficient
incentives for those executives to continue their employment
with us. In particular, we recently amended and restated our
employment agreement with Mr. Farha, our President and
Chief Executive Officer. Mr. Farhas employment
agreement expires in June 2010 and renews automatically for
successive one-year terms unless earlier terminated by us or
Mr. Farha. While we believe that we could find
replacements, the loss of the leadership, knowledge and
experience of Mr. Farha and our other executive officers
could adversely affect our business. Replacing many of our
executive officers might be difficult or take an extended period
of time because a limited number of individuals in the managed
care industry have the breadth and depth of skills and
experience necessary to operate and expand successfully a
business such as ours. We do not currently maintain key-man life
insurance on any of our executive officers other than our
President and Chief Executive Officer, and such insurance may
not be sufficient to cover the costs of recruiting and hiring a
replacement Chief Executive Officer or the loss of his services.
Our success is also dependent on our ability to hire and retain
qualified management, technical and medical personnel. We may be
unsuccessful in recruiting and retaining such personnel, which
could adversely affect our operations.
Claims relating to medical malpractice and other litigation
could cause us to incur significant expenses.
Our providers involved in medical care decisions may be exposed
to the risk of medical malpractice claims. A small percentage of
these providers do not have malpractice insurance. Due to
increased costs or inability to secure malpractice insurance,
the percentage of physicians who do not have malpractice
insurance may increase, particularly in Florida, our largest
market. Although our network providers are independent
contractors, claimants sometimes allege that a managed care
organization such as us should be held responsible for alleged
provider malpractice, particularly where the provider does not
have malpractice insurance, and some courts have permitted that
theory of liability; however, the Florida legislature has
enacted legislation that has partially limited liability of
managed care organizations for provider malpractice. In
addition, managed care organizations may be sued directly for
alleged negligence, such as in connection with the credentialing
of network providers or for alleged improper denials or delay of
care. In addition, Congress and several states have considered
or are considering legislation that would expressly permit
managed care organizations to be held liable for negligent
treatment decisions or benefits coverage determinations.
From time to time, we are party to various other litigation
matters, some of which seek monetary damages. We cannot predict
with certainty the eventual outcome of any pending litigation or
potential future litigation, and we might incur substantial
expense in defending these or future lawsuits or indemnifying
third parties with respect to the results of such litigation.
We maintain errors and omissions insurance with a policy limit
of $10 million and other insurance coverage and, in some
cases, indemnification rights that we believe are adequate based
on industry standards. However, potential liabilities may not be
covered by insurance or indemnity, our insurers or indemnifying
parties may dispute coverage or may be unable to meet their
obligations, or the amount of our insurance or indemnification
coverage may be inadequate. We cannot assure you that we will be
able to obtain insurance coverage in the future, or that
insurance will continue to be available on a cost-effective
basis, if at all. Moreover, even if claims brought against us
are unsuccessful or without merit, we would have to defend
ourselves against such claims. The defense of any such actions
may be time-consuming and costly and may distract our
managements attention. As a result, we may incur
significant expenses and may be unable to effectively operate
our business.
22
Growth in the number of Medicaid eligibles may be
counter-cyclical, which could adversely affect our operating
results when general economic conditions are improving.
The number of persons eligible to receive Medicaid benefits may
grow more slowly or even decline if economic conditions continue
to improve. Therefore, improvements in general economic
conditions may cause our membership levels to decrease, thereby
causing our operating results to suffer, which could lead to
decreases in our stock price during periods in which stock
prices in general are increasing.
Negative publicity regarding the managed care industry may
harm our business and operating results.
In the past, the managed care industry has received negative
publicity. This publicity has led to increased legislation,
regulation, review of industry practices and private litigation
in the commercial sector. These factors may adversely affect our
ability to market our services, require us to change our
services and increase the regulatory burdens under which we
operate, further increasing the costs of doing business and
adversely affecting our operating results.
If state regulators do not approve payments of dividends and
distributions by our affiliates to us, our liquidity could be
materially impaired.
We operate our business principally through our health plan
subsidiaries, which generally are subject to laws and
regulations that limit either the amount of dividends and
distributions that they can pay to us or the amount of fees that
may be paid to affiliates of our health plan subsidiaries
without prior approval of, or notification to, state regulators.
The discretion of the state regulators, if any, in approving or
disapproving a dividend is not clearly defined. Health plans
that declare non-extraordinary dividends must usually provide
notice to the regulators in advance of the intended distribution
date of a non-extraordinary dividend. If the regulators were to
deny or significantly restrict our subsidiaries requests
to pay dividends to us or to pay fees to the affiliates of our
health plan subsidiaries, the funds available to our company as
a whole would be limited, which could harm our ability to
implement our business strategy. For example, we could be
hindered in our ability to make debt service payments on amounts
drawn from our credit facilities. None of our health plan
subsidiaries paid any dividends during 2002, 2003, 2004 or the
three months ended March 31, 2005. However, the aggregate
amounts our Florida health plan subsidiaries could have paid us
at December 31, 2002, 2003 and 2004 and March 31, 2005
without approval of the regulatory authorities were $2,215,000,
$568,000, $7,170,000 and $19,163,000, respectively, assuming no
dividends had been paid during the respective periods. No
dividends were available to be paid from our New York and
Connecticut health plan subsidiaries during those periods.
Moreover, the proposed increase in reserve requirements in New
York may further hinder the ability of our New York managed care
plan to pay dividends.
Recently enacted changes in securities laws and regulations
are likely to increase our costs.
The Sarbanes-Oxley Act of 2002, which became law in July 2002,
as well as new rules subsequently implemented by the Securities
and Exchange Commission, have required changes in some of our
corporate governance practices. In addition, the New York Stock
Exchange has adopted revisions to its requirements for listed
companies. We expect these new rules, and interpretations of
these rules, to increase our legal and financial compliance
costs, and to make some activities more difficult, time
consuming and/or costly. We also expect these new rules to make
it more difficult and expensive for us to obtain director and
officer liability insurance, and we may be required to accept
reduced coverage or incur substantially higher costs to obtain
coverage. These new rules could also make it more difficult for
us to attract and retain qualified members of our board of
directors, particularly to serve on our audit committee, and
executive officers.
23
Risks Related to this Offering
A public market for our common stock has existed only for a
limited period of time and our stock price is volatile and could
decline, which could result in a substantial loss on your
investment.
The market price of our common stock could fluctuate
significantly as a result of:
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state and federal budget decreases; |
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adverse publicity regarding health maintenance organizations,
other managed care organizations and health insurers in general; |
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government action regarding eligibility; |
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changes in government payment levels; |
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changes in state mandatory programs; |
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changes in expectations of our future financial performance or
changes in financial estimates, if any, of public market
analysts; |
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announcements relating to our business or the business of our
competitors; |
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conditions generally affecting the managed care industry or our
provider networks; |
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the success of our operating or acquisition strategy; |
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the operating and stock price performance of other comparable
companies; |
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the termination of any of our contracts; |
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regulatory or legislative changes; and |
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general economic conditions, including inflation and
unemployment rates. |
Investors may not be able to resell their shares of our common
stock following periods of volatility because of the
markets adverse reaction to that volatility. Our stock may
not trade at the same levels as the stock of other healthcare
companies, and the market in general may not sustain its current
prices.
A substantial number of shares will become eligible for sale
in the near future, which could cause our common stock price to
decline significantly.
In connection with this offering, we, along with our executive
officers, directors and certain of our stockholders, have
agreed, subject to limited exceptions, not to sell or transfer
any shares of common stock for 90 days after the date of
the offering without the underwriters consent. However,
the underwriters may release these shares from these
restrictions at any time. In evaluating whether to grant such a
request, the underwriters may consider a number of factors with
a view toward maintaining an orderly market for, and minimizing
volatility in the market price of, our common stock. These
factors include, among others, the number of shares involved,
recent trading volume and prices of the stock, the length of
time before the lock-up expires and the reasons for, and the
timing of, the request. We cannot predict what effect, if any,
market sales of shares held by any stockholder or the
availability of these shares for future sale will have on the
market price of our common stock.
A total of 1,306,079 shares not subject to lock-up
agreements will be available for sale on July 7, 2005
pursuant to Rule 144. A total of approximately
13,689,079 shares of common stock may be sold in the public
market by existing stockholders 90 days after the date of
this prospectus, the expiration date for the lock-up agreements
entered into in connection with this offering, pursuant to
Rule 144 under federal securities laws. Additionally, as of
June 6, 2005, we had outstanding options to purchase
2,659,120 shares of our common stock, of which 416,734 were
exercisable, at a weighted average exercise price of
$5.95 per share. From time to time, we may issue additional
options to associates, non-employee directors and consultants
pursuant to our equity incentive plans. Sales of substantial
amounts of our common stock in the public market after the
24
completion of this offering, or the perception that such sales
could occur, could adversely affect the market price of our
common stock and could materially impair our future ability to
raise capital through offerings of our common stock. See
Shares Eligible for Future Sale below for a more
detailed description of the timing and availability of shares
becoming eligible for sale after this offering.
The concentration of our capital stock ownership upon the
completion of this offering will likely limit your ability to
influence corporate matters.
TowerBrook Investors L.P. (f/k/a Soros Private Equity Investors
LP), or TowerBrook, owned 42.8% of our outstanding capital stock
as of June 6, 2005. Upon completion of this offering,
TowerBrook will beneficially own 27.4% of our outstanding
capital stock, or 25.0% if the underwriters exercise their
over-allotment option in full. In addition, as of June 6,
2005, our executive officers and directors together beneficially
owned approximately 9.1% of our outstanding capital stock
(excluding shares owned by TowerBrook which may be deemed to be
beneficially owned by one of our directors). Upon completion of
this offering, our executive officers and directors will
together beneficially own approximately 7.9% of our outstanding
capital stock (excluding shares owned by TowerBrook which may be
deemed to be beneficially owned by one of our directors). The
chairman of our board of directors is one of five members of the
investment committee of the general partner of TowerBrook and
one of two controlling members of the general partner of that
general partner. As such, he may be deemed to have shared
investment power with respect to TowerBrooks investments,
including its holdings of our stock. As a result of
TowerBrooks holdings of our stock, the chairman of the
board may have the ability to influence our management and
affairs and determine the outcome of matters submitted to
stockholders for approval, including the election and removal of
directors, amendments to our charter, approval of any
equity-based employee compensation plan and any merger,
consolidation or sale of all or substantially all of our assets.
The concentration of our capital stock ownership, as well as
provisions in our charter documents and under Delaware law,
could discourage a takeover that stockholders may consider
favorable and make it more difficult for you to elect directors
of your choosing.
Upon completion of this offering, TowerBrook will beneficially
own 10,733,784 shares of our common stock, representing
27.4% of the voting power of our common stock, assuming the
underwriters do not exercise their over-allotment option. As a
result, it will be difficult for holders of our common stock to
approve a takeover of our company, or to approve the election of
our directors, without TowerBrooks approval.
In addition, provisions of our certificate of incorporation,
bylaws and provisions of applicable Delaware law may discourage,
delay or prevent a merger or other change in control that a
stockholder may consider favorable. These provisions could also
discourage proxy contests, make it more difficult for you and
other stockholders to elect directors of your choosing and cause
us to take other corporate actions that you may consider
unfavorable.
25
FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements that
address, among other things, market acceptance of our products
and services, expansion into new markets, product development,
our ability to finance growth opportunities, our ability to
respond to changes in government regulations, sales and
marketing strategies, projected capital expenditures, liquidity
and availability of additional funding sources. These statements
may be found in the sections of this prospectus entitled
Prospectus Summary, Risk Factors,
Managements Discussion and Analysis of Financial
Condition and Results of Operations, Our
Business and in this prospectus generally. In some cases,
you can identify forward-looking statements by terminology such
as may, will, should,
expects, plans, anticipates,
believes, estimates,
predicts, potential,
continues or the negative of such terms or other
comparable terminology. You are cautioned that matters subject
to forward-looking statements involve risks and uncertainties,
including economic, regulatory, competitive and other factors
that may affect our business. We undertake no obligation beyond
that required by law to update publicly any forward-looking
statements for any reason, even if new information becomes
available or other events occur in the future.
Our actual results may differ materially from those indicated by
forward-looking statements as a result of various important
factors including the expiration, cancellation or suspension of
our HMO contracts by the federal or state governments, the
withdrawal by CMS of our conditional approval to provide PDP
coverage, the rejection by CMS of our bids, or our failure to be
selected to provide Medicaid services in Georgia. In addition,
our results of operations and projections of future earnings
depend in large part on accurately predicting and effectively
managing health benefits and other operating expenses. A variety
of factors, including competition, changes in healthcare
practices, changes in federal or state laws and regulations or
their interpretations, inflation, provider contract changes,
changes in or terminations of our contracts with government
agencies, new technologies, government-imposed surcharges, taxes
or assessments, reduction in provider payments by governmental
payors, major epidemics, disasters and numerous other factors
affecting the delivery and cost of healthcare, such as major
healthcare providers inability to maintain their
operations, may in the future affect our ability to control our
medical costs and other operating expenses. Governmental action
or business conditions could result in premium revenues not
increasing to offset any increase 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.
Furthermore, if we are unable to accurately estimate incurred
but not reported medical costs, our profitability may be
affected. Due to these factors and risks, no assurance can be
given with respect to our future premium levels or our ability
to control our future medical costs.
From time to time, legislative and regulatory proposals have
been made at the federal and state government levels related to
the healthcare system, including but not limited to limitations
on managed care organizations, including benefit mandates, and
reform of the Medicaid and Medicare programs. Such legislative
and regulatory action could have the effect of reducing the
premiums paid to us by governmental programs or increasing our
medical costs. We are unable to predict the specific content of
any future legislation, action or regulation that may be enacted
or when any such future legislation or regulation will be
adopted. Therefore, we cannot predict accurately the effect of
such future legislation, action or regulation on our business.
26
USE OF PROCEEDS
All the shares in the offering are being sold by the selling
stockholders. We will not receive any of the proceeds from the
sale of shares being sold by the selling stockholders.
PRICE RANGE OF COMMON STOCK
Our common stock has been listed for trading on the New York
Stock Exchange under the symbol WCG since our
initial public offering on July 1, 2004. Prior to that time
there was no public market for our common stock. The following
table sets forth, for each of the periods listed, the high and
low closing sales prices of our common stock, as reported on the
New York Stock Exchange.
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2004
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Third Quarter ended September 30, 2004
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$ |
20.80 |
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$ |
17.91 |
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Fourth Quarter ended December 31, 2004
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$ |
34.62 |
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$ |
19.17 |
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2005
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First Quarter ended March 31, 2005
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37.95 |
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27.80 |
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Second Quarter (through June 29, 2005)
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36.25 |
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28.31 |
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The last reported sale price of our common stock on the New York
Stock Exchange on June 29, 2005 was $36.25 per share.
As of June 28, 2005, we had approximately 52 holders of
record of our common stock, including record holders and
individual participants in a security position listing.
DIVIDEND POLICY
We have never paid cash dividends on our common stock. We
currently intend to retain any future earnings to fund the
development and growth of our business, and we do not anticipate
paying any cash dividends in the foreseeable future.
Our ability to pay dividends is dependent on our receipt of cash
dividends from our subsidiaries. Laws of the states in which we
operate or may operate, as well as requirements of the
government-sponsored health programs in which we participate,
limit the ability of our subsidiaries to pay dividends to us. In
addition, the terms of our credit facility and other
indebtedness prohibit the payment of dividends to our
stockholders. Any future determination to pay dividends will be
at the discretion of our board of directors and will depend
upon, among other factors, our results of operations, financial
condition, capital requirements and contractual restrictions.
27
SELECTED CONSOLIDATED AND COMBINED FINANCIAL DATA
You should read the following selected financial data in
conjunction with our financial statements and related notes and
Managements Discussion and Analysis of Financial
Condition and Results of Operations included elsewhere in
this prospectus. We derived the combined statements of
operations data for the year ended December 31, 2000 and
the balance sheet data as of December 31, 2000 from the
unaudited financial statements of our Predecessor. We derived
the combined statements of operations for the year ended
December 31, 2001, and the seven-month period ended
July 31, 2002, and the balance sheet data as of
December 31, 2001 from the audited financial statements of
our Predecessor. We derived the consolidated statements of
operations data for the five-month period ended
December 31, 2002 and the years ended December 31,
2003 and 2004, and the balance sheet data as of
December 31, 2002, 2003 and 2004, from our audited
consolidated financial statements. We derived the consolidated
statements of operations data for the three-month periods ended
March 31, 2004 and 2005, and the balance sheet data as of
March 31, 2004 and 2005, from our unaudited consolidated
financial statements. Operating results for the three months
ended March 31, 2005 are not necessarily indicative of
operating results to be expected for the full year.
Our acquisition of the WellCare group of companies as of
July 31, 2002 was accounted for using the purchase method
of accounting, as described in Note 2 to our consolidated
and combined financial statements included elsewhere in this
prospectus. Accordingly, the combined results of operations and
financial condition at dates prior to July 31, 2002 are not
comparable to the consolidated results of operations and
financial condition after that date.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor | |
|
Successor | |
|
|
| |
|
| |
|
|
Year Ended | |
|
Seven-Month | |
|
Five-Month | |
|
|
|
Three Months Ended | |
|
|
December 31, | |
|
Period Ended | |
|
Period Ended | |
|
Year Ended December 31, | |
|
March 31, | |
|
|
| |
|
July 31, | |
|
December 31, | |
|
| |
|
| |
|
|
2000 | |
|
2001 | |
|
2002 | |
|
2002 | |
|
2003 | |
|
2004 | |
|
2004 | |
|
2005 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(in thousands, except per unit/share data) | |
Consolidated and Combined Statements of Income (Loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premium:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medicaid
|
|
$ |
272,497 |
|
|
$ |
451,210 |
|
|
$ |
329,164 |
|
|
$ |
267,911 |
|
|
$ |
740,078 |
|
|
$ |
1,055,000 |
|
|
$ |
216,120 |
|
|
$ |
309,210 |
|
|
Medicare
|
|
|
72,992 |
|
|
|
233,626 |
|
|
|
170,073 |
|
|
|
120,814 |
|
|
|
288,330 |
|
|
|
334,760 |
|
|
|
84,560 |
|
|
|
106,656 |
|
|
Other(1)
|
|
|
80,430 |
|
|
|
55,027 |
|
|
|
17,976 |
|
|
|
9,928 |
|
|
|
14,444 |
|
|
|
1,136 |
|
|
|
570 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total premium
|
|
|
425,919 |
|
|
|
739,863 |
|
|
|
517,213 |
|
|
|
398,653 |
|
|
|
1,042,852 |
|
|
|
1,390,896 |
|
|
|
301,250 |
|
|
|
415,866 |
|
Investment and other income
|
|
|
5,548 |
|
|
|
10,421 |
|
|
|
2,819 |
|
|
|
3,152 |
|
|
|
3,130 |
|
|
|
4,307 |
|
|
|
586 |
|
|
|
3,015 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
431,467 |
|
|
|
750,284 |
|
|
|
520,032 |
|
|
|
401,805 |
|
|
|
1,045,982 |
|
|
|
1,395,203 |
|
|
|
301,836 |
|
|
|
418,881 |
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medical benefits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medicaid
|
|
|
202,876 |
|
|
|
364,293 |
|
|
|
274,672 |
|
|
|
222,007 |
|
|
|
609,233 |
|
|
|
851,153 |
|
|
|
183,062 |
|
|
|
257,996 |
|
|
Medicare
|
|
|
78,542 |
|
|
|
219,505 |
|
|
|
145,768 |
|
|
|
107,384 |
|
|
|
238,933 |
|
|
|
275,348 |
|
|
|
67,969 |
|
|
|
86,930 |
|
|
Other(2)
|
|
|
86,818 |
|
|
|
53,708 |
|
|
|
14,484 |
|
|
|
12,372 |
|
|
|
12,887 |
|
|
|
(941 |
) |
|
|
404 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total medical benefits
|
|
|
368,236 |
|
|
|
637,506 |
|
|
|
434,924 |
|
|
|
341,763 |
|
|
|
861,053 |
|
|
|
1,125,560 |
|
|
|
251,435 |
|
|
|
344,926 |
|
Selling, general and administrative
|
|
|
70,050 |
|
|
|
86,279 |
|
|
|
54,492 |
|
|
|
45,384 |
|
|
|
126,106 |
|
|
|
171,257 |
|
|
|
36,791 |
|
|
|
51,248 |
|
Depreciation and amortization
|
|
|
1,913 |
|
|
|
2,234 |
|
|
|
1,239 |
|
|
|
3,734 |
|
|
|
8,159 |
|
|
|
7,715 |
|
|
|
1,659 |
|
|
|
2,042 |
|
Interest
|
|
|
1,785 |
|
|
|
2,860 |
|
|
|
1,446 |
|
|
|
1,462 |
|
|
|
10,172 |
|
|
|
10,165 |
|
|
|
2,265 |
|
|
|
3,205 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
441,984 |
|
|
|
728,879 |
|
|
|
492,101 |
|
|
|
392,343 |
|
|
|
1,005,490 |
|
|
|
1,314,697 |
|
|
|
292,150 |
|
|
|
401,421 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
(10,517 |
) |
|
|
21,405 |
|
|
|
27,931 |
|
|
|
9,462 |
|
|
|
40,492 |
|
|
|
80,506 |
|
|
|
9,686 |
|
|
|
17,460 |
|
Income tax
expense(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,805 |
|
|
|
16,955 |
|
|
|
31,256 |
|
|
|
3,864 |
|
|
|
6,820 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$ |
(10,517 |
) |
|
$ |
21,405 |
|
|
$ |
27,931 |
|
|
$ |
4,657 |
|
|
$ |
23,537 |
|
|
$ |
49,250 |
|
|
$ |
5,822 |
|
|
$ |
10,640 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1.70 |
|
|
|
|
|
|
$ |
0.29 |
|
|
Net income per share diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1.56 |
|
|
|
|
|
|
$ |
0.27 |
|
28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor | |
|
Successor | |
|
|
| |
|
| |
|
|
Year Ended | |
|
Seven-Month | |
|
Five-Month | |
|
|
|
Three Months Ended | |
|
|
December 31, | |
|
Period Ended | |
|
Period Ended | |
|
Year Ended December 31, | |
|
March 31, | |
|
|
| |
|
July 31, | |
|
December 31, | |
|
| |
|
| |
|
|
2000 | |
|
2001 | |
|
2002 | |
|
2002 | |
|
2003 | |
|
2004 | |
|
2004 | |
|
2005 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(in thousands, except per unit/share data) | |
Net income attributable per common unit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable per unit basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
0.09 |
|
|
$ |
0.66 |
|
|
|
|
|
|
$ |
0.15 |
|
|
|
|
|
|
Net income attributable per unit diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
0.08 |
|
|
$ |
0.60 |
|
|
|
|
|
|
$ |
0.13 |
|
|
|
|
|
Pro forma net income per common
share:(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
0.82 |
|
|
|
|
|
|
$ |
0.19 |
|
|
|
|
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
0.73 |
|
|
|
|
|
|
$ |
0.16 |
|
|
|
|
|
Pro forma common shares
outstanding:(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21,466,300 |
|
|
|
|
|
|
|
22,454,244 |
|
|
|
|
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23,937,664 |
|
|
|
|
|
|
|
26,200,158 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, | |
|
As of March 31, | |
|
|
| |
|
| |
|
|
2000 | |
|
2001 | |
|
2002 | |
|
2003 | |
|
2004 | |
|
2004 | |
|
2005 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Operating Statistics:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medical benefits ratio
consolidated(5)
|
|
|
86.5 |
% |
|
|
86.2 |
% |
|
|
84.8 |
% |
|
|
82.6 |
% |
|
|
80.9 |
% |
|
|
83.5 |
% |
|
|
82.9 |
% |
|
Medical benefits ratio
Medicaid(5)
|
|
|
74.5 |
% |
|
|
80.7 |
% |
|
|
83.2 |
% |
|
|
82.3 |
% |
|
|
80.7 |
% |
|
|
84.7 |
% |
|
|
83.4 |
% |
|
Medical benefits ratio
Medicare(5)
|
|
|
107.6 |
% |
|
|
94.0 |
% |
|
|
87.0 |
% |
|
|
82.9 |
% |
|
|
82.3 |
% |
|
|
80.4 |
% |
|
|
81.5 |
% |
|
Medical benefit ratio
other(5)
|
|
|
107.9 |
% |
|
|
97.6 |
% |
|
|
96.2 |
% |
|
|
89.2 |
% |
|
|
|
|
|
|
70.9 |
% |
|
|
|
|
|
Selling, general and administrative expense
ratio(6)
|
|
|
16.2 |
% |
|
|
11.5 |
% |
|
|
10.8 |
% |
|
|
12.1 |
% |
|
|
12.3 |
% |
|
|
12.2 |
% |
|
|
12.2 |
% |
|
Members consolidated
|
|
|
317,000 |
|
|
|
374,000 |
|
|
|
470,000 |
|
|
|
555,000 |
|
|
|
747,000 |
|
|
|
581,000 |
|
|
|
765,000 |
|
|
Members Medicaid
|
|
|
256,000 |
|
|
|
323,000 |
|
|
|
420,000 |
|
|
|
512,000 |
|
|
|
701,000 |
|
|
|
537,500 |
|
|
|
711,000 |
|
|
Members Medicare
|
|
|
20,000 |
|
|
|
35,000 |
|
|
|
42,000 |
|
|
|
42,000 |
|
|
|
46,000 |
|
|
|
43,000 |
|
|
|
54,000 |
|
|
Members commercial
|
|
|
41,000 |
|
|
|
16,000 |
|
|
|
8,000 |
|
|
|
1,000 |
|
|
|
|
|
|
|
500 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, | |
|
As of March 31, | |
|
|
| |
|
| |
|
|
2000 | |
|
2001 | |
|
2002 | |
|
2003 | |
|
2004 | |
|
2004 | |
|
2005 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(in thousands) | |
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$ |
107,730 |
|
|
$ |
129,791 |
|
|
$ |
146,784 |
|
|
$ |
237,321 |
|
|
$ |
397,627 |
|
|
$ |
198,799 |
|
|
$ |
340,745 |
|
|
Total assets
|
|
|
173,007 |
|
|
|
221,456 |
|
|
|
409,504 |
|
|
|
497,107 |
|
|
|
799,036 |
|
|
|
472,340 |
|
|
|
833,349 |
|
|
Long-term debt (including current
maturities)(7)
|
|
|
1,174 |
|
|
|
154 |
|
|
|
156,295 |
|
|
|
135,755 |
|
|
|
184,200 |
|
|
|
132,442 |
|
|
|
183,800 |
|
|
Total liabilities
|
|
|
180,186 |
|
|
|
199,411 |
|
|
|
334,587 |
|
|
|
397,530 |
|
|
|
490,405 |
|
|
|
366,681 |
|
|
|
512,961 |
|
|
Total stockholders/members equity
(deficit)(8)
|
|
|
(7,179 |
) |
|
|
22,045 |
|
|
|
74,917 |
|
|
|
99,577 |
|
|
|
308,631 |
|
|
|
105,659 |
|
|
|
320,388 |
|
|
|
(1) |
Other premium revenue relates to our commercial business, which
is no longer operated. |
(2) |
Other medical benefits relates to our commercial business, which
is no longer operated. |
(3) |
Income tax expense was not recorded by the Predecessor because
its tax structure included entities that had elected
subchapter S status under the Internal Revenue Code, the
income of which was taxed at the stockholder level, as well as
entities that were subject to tax, but did not generate tax
liabilities or benefits due to operating losses. Pro forma tax
expense for each of the years 2000, 2001, and the seven months
ended July 31, 2002 at an estimated tax rate of 42% (our
effective tax rate as the Successor) is $0, $8,990, and $11,731,
respectively. |
(4) |
Pro forma net income per share is computed using the pro forma
weighted average number of common shares outstanding, which
gives effect to the automatic conversion of all outstanding
common units of WellCare Holdings, LLC into shares of common
stock of WellCare Health Plans, Inc. upon the closing of our
initial public offering. For a discussion of the difference
between pro forma net income per common share and net income
attributable per common unit, see Note 1 to the
consolidated financial statements of WellCare Health Plans, Inc. |
(5) |
Medical benefits ratio represents medical benefits expense as a
percentage of premium revenue. |
(6) |
Selling, general and administrative expense ratio represents
selling, general and administrative expense as a percentage of
total revenue and excludes depreciation and amortization expense
for purposes of determining the ratio. |
(7) |
Long-term debt (including current maturities) at March 31,
2005 includes total short and long-term debt of $183,141 plus
the unamortized portion of the discount on the term loan of $659. |
(8) |
Total stockholders/members equity
(deficit) reflects stockholders equity for
Predecessor and for Successor as of March 31, 2005 and
reflects limited liability company membership interests during
2002 and 2003. |
29
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis of the
financial condition and results of operations of WellCare in
conjunction with Selected Consolidated and Combined
Financial Data and WellCares combined and
consolidated financial statements and related notes appearing
elsewhere in this prospectus. The following discussion contains
forward-looking statements that involve risks, uncertainties and
assumptions that could cause our actual results to differ
materially from managements expectations. Factors that
could cause such differences include those set forth under
Risk Factors, Forward-Looking
Statements, Business and elsewhere in this
prospectus.
Overview
We provide managed care services targeted exclusively to
government-sponsored healthcare programs, focusing on Medicaid
and Medicare. As of March 31, 2005, we operated health
plans in Florida, New York, Illinois, Indiana, Connecticut,
Louisiana and Georgia, serving approximately 765,000 members.
The following tables summarize our membership by state and our
membership by program as of the dates indicated.
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
March 31, | |
|
|
2004 | |
|
2005 | |
|
|
| |
|
| |
State |
|
Total Members | |
|
Total Members | |
|
|
| |
|
| |
Florida
|
|
|
532,000 |
|
|
|
530,000 |
|
New York
|
|
|
69,000 |
|
|
|
75,000 |
|
Illinois
|
|
|
67,000 |
|
|
|
68,000 |
|
Indiana
|
|
|
45,000 |
|
|
|
58,000 |
|
Connecticut
|
|
|
34,000 |
|
|
|
33,000 |
|
Louisiana
|
|
|
|
|
|
|
600 |
|
|
|
|
|
|
|
|
|
|
|
747,000 |
|
|
|
764,600 |
|
|
|
|
|
|
|
|
Program
|
|
|
|
|
|
|
|
|
Medicaid
|
|
|
701,000 |
|
|
|
711,000 |
|
Medicare
|
|
|
46,000 |
|
|
|
53,600 |
|
|
|
|
|
|
|
|
|
|
|
747,000 |
|
|
|
764,600 |
|
|
|
|
|
|
|
|
We recently became licensed to offer Medicaid services to
beneficiaries in Georgia and have submitted applications to
provide Medicaid services in the state. We also recently became
licensed to offer Medicare services to beneficiaries in Georgia
and received approval from CMS to provide Medicare services in
certain counties in the state. As of March 31, 2005, we did
not have any members in Georgia.
We were formed in May 2002 to acquire the WellCare group of
companies. Until the closing of that acquisition in July 2002,
the companies that comprise our Florida operations had operated
as closely-held businesses, and our New York and Connecticut
businesses had operated as subsidiaries of a public company.
Results of operations beginning July 31, 2002 reflect our
operations under current management.
We enter into contracts generally on an annual basis with
government agencies that administer health benefits programs. We
receive premiums from state and federal agencies for the members
that are assigned to or have selected us to provide healthcare
services under each benefit program. The amount of premiums we
receive for each member is fixed, although it varies according
to demographics, including the government program, and the
members geographic location, age and sex.
Our largest expense is the cost of medical benefits that we
provide, which is based primarily on our arrangements with
healthcare providers. Our profitability depends on our ability
to predict and effectively manage medical benefits expense
relative to the fixed premiums we receive. Our arrangements with
providers fall into two broad categories: capitation
arrangements, where we pay the providers a fixed fee per member,
30
and fee-for-service and risk-sharing arrangements, where we
assume all or part of the risk of the cost of the healthcare
provided. Generally, capitation payments represent less than 20%
of our total medical benefits expense. Other components of
medical benefits expense are variable and require estimation and
ongoing cost management.
Estimation of medical benefits expense is our most significant
critical accounting estimate. See Critical
Accounting Policies.
We use a variety of techniques to manage our medical benefits
expense, including payment methods to providers, referral
requirements, quality and disease management programs,
reinsurance and member co-payments and premiums for some of our
Medicare plans. However, national healthcare costs have been
increasing at a higher rate than the general inflation rate, and
relatively small changes in our medical benefits expense
relative to premiums that we receive can create significant
changes in our financial results. Additionally, changes in
healthcare laws, regulations and practices, levels of use of
healthcare services, competitive pressures, hospital costs,
major epidemics, terrorism or bio-terrorism, new medical
technologies and other external factors could reduce our ability
to manage our medical benefits expense effectively.
One of our primary management tools for measuring profitability
is our medical benefits ratio, the ratio of our medical benefits
expense to the premiums we receive. Changes in the medical
benefits ratio from period to period result from changes in
Medicaid and Medicare funding, changes in the mix of Medicaid
and Medicare membership, our ability to manage medical costs and
changes in accounting estimates related to incurred but not
reported claims. We use medical benefits ratios both to monitor
our management of medical benefits expense and to make various
business decisions, including what healthcare plans to offer,
what geographic areas to enter or exit and the selection of
healthcare providers. Although medical benefits ratios play an
important role in our business strategy, we may be willing to
enter into provider arrangements that might produce a less
favorable medical benefits ratio if those arrangements, such as
capitation or risk-sharing, would likely lower our exposure to
variability in medical costs.
Business Outlook
Medicare Prescription Drug Plan Benefits. We recently
received conditional approval from CMS to provide stand-alone
PDPs under Medicare Part D beginning in January 2006. In
addition, in June 2005, we filed bids with CMS that include our
benefit plan designs and proposed rates for PDPs in all 34
regions established by CMS. If our bids are approved by CMS, we
intend to focus on the PDP market, particularly on beneficiaries
who are dual eligibles, by applying our expertise in benefit
design, developing and managing prescription drug formularies
and marketing as well as our understanding of the health
conditions of Medicare beneficiaries, especially low-income
beneficiaries, and member demographics. As a result, we believe
that our PDP operations will comprise an important component of
our business in the future.
We have begun to incur expenses to upgrade and improve our
infrastructure, technology and systems to manage our new PDP
products. We expect that our expenses will increase
significantly during the remainder of 2005 as we prepare to
begin providing PDP benefits in January 2006. These expenses, a
significant portion of which we expect to incur during the
fourth quarter of 2005, will negatively impact our net income in
the remainder of 2005. The expenses we have incurred to date and
additional expenses we expect to incur in the remainder of 2005
have related, and will relate to, the following:
|
|
|
|
|
hiring and training personnel to establish and manage systems,
operations, regulatory relationships and materials; |
|
|
|
systems development costs (including hardware, software and
development resources); |
|
|
|
fielding sales inquiry calls and creating and mailing sales
materials to interested parties; |
|
|
|
enrolling new members; |
|
|
|
developing and distributing member materials (e.g., ID cards,
member handbooks); and |
|
|
|
handling customer service calls. |
31
The magnitude of expenses that we incur during the remainder of
2005, and in particular during the fourth quarter of 2005, in
connection with the implementation of our PDP operations will
depend on the level of demand for our PDP benefit plans. If PDP
beneficiaries find our plan offerings appealing, and we receive
a significant amount of inquiries and requests for enrollment
materials, we anticipate that our costs to launch our PDP
operations during 2005 will increase significantly and will
materially adversely affect our net income for the remainder of
2005, including possibly resulting in a net loss in the fourth
quarter. The actual amount of expenses and the impact on our net
income will depend largely on the level of interest and number
of inquiries from potential beneficiaries.
Our ability to administer profitably our PDP operations
beginning in 2006 will depend on a number of factors, including
our ability to attract members, to develop the necessary core
systems and processes and to manage our prescription drug
expenses. We expect that revenues from our PDP operations will
consist of monthly premiums that we will receive from CMS for
our members and monthly premiums that our members will pay us to
participate in our PDP plans. Eventually, we believe the costs
of prescription drugs that we anticipate providing to our
members commencing in 2006 will be the single most significant
expenditure of our PDP operations. PDP is a new
government-sponsored program and as with any potential new
product offerings, there is significant uncertainty of the
potential market size, consumer demand and medical benefits
ratio.
To encourage providers to participate in the PDP program, CMS
has agreed to provide risk corridors that are
expected to reduce the financial risk of participation in the
program by providing substantial protection to PDP providers
against losses that exceed certain targeted medical expense
levels. The risk corridors also are expected to recapture excess
profits that PDP providers otherwise might be able to realize,
thereby limiting the potential profitability of PDP operations.
It is anticipated that the initial risk corridors in 2006 and
2007 will provide more protection against excess losses to PDP
providers than will be available beginning in 2008 and future
years. In addition, we expect there will be a delay in obtaining
reimbursement from CMS for reimbursable losses pursuant to the
risk corridors. For example, if we incur losses in 2006 that
exceed certain targeted medical expense levels, we would not be
reimbursed by CMS until 2007. As a result, we expect there may
be a negative impact on our cash flows and financial condition
as a result of being required to finance excess losses until we
are reimbursed by CMS.
Georgia. We recently became licensed to offer Medicaid
services to beneficiaries in Georgia and have submitted
applications to provide Medicaid services in the state. If we
are awarded a Medicaid contract in Georgia, we expect to expend
significant resources in the remainder of 2005 to attract and
retain local management, to upgrade and improve our technology
and systems and to develop the necessary infrastructure to
manage our new Georgia business, which could negatively impact
our short-term financial performance. We cannot assure you that
we will be awarded any Medicaid contracts in Georgia. Even if we
were awarded Medicaid contracts in Georgia, we cannot assure you
that we will be able to operate our Georgia Medicaid business
profitably. In addition, we recently became licensed to offer
Medicare services to beneficiaries in Georgia and received
approval from CMS to provide Medicare services in certain
counties in the state, which may increase our operating expenses.
Florida Medicaid Capitation Rates. We are the largest
provider of Medicaid managed care services in the State of
Florida, and Florida represents our largest market with
approximately 530,000 out of our 765,000 members located there,
as of March 31, 2005. As a result, our Medicaid premium
revenues in Florida are a critical component of our total
revenues. The amount of premiums we receive in Florida depends
on several factors, including the rates set by Floridas
Medicaid agency. The Florida legislature recently approved a
2005-2006 budget appropriation and Floridas Medicaid
agency is in the process of establishing rates for the
twelve-month period from July 1, 2005 through June 30,
2006. By statute, the rates are required to be actuarially
sound. We are unable at this time to determine the impact that
the new rates will have on our revenues and profitability for
the second half of 2005.
Illinois Medicaid Managed Care Funding. We are the
largest provider of Medicaid managed care services in the State
of Illinois, where we had approximately 68,000 members as of
March 31, 2005. The Illinois state legislature recently
adopted budget legislation directing the state Medicaid agency
to renegotiate
32
its contracts with managed care plans such as ours to
significantly reduce premiums beginning on July 1, 2005.
The state Medicaid agency recently notified us of its proposed
premium reductions, and we are continuing to negotiate with the
agency to determine the final premium applicable to our Illinois
Medicaid health plans. While we cannot predict the final outcome
of our negotiations, if the planned premium reductions are
implemented as initially proposed by the state Medicaid agency,
it would substantially reduce our revenues beginning in the
second half of 2005, and could cause our Illinois Medicaid
operations to become unprofitable. As a result, we cannot assure
you that we will continue operating a Medicaid managed care plan
in Illinois.
Corporate History and Acquisitions
Our WellCare of Florida subsidiary was established in 1985 by a
group of physicians located in Tampa, Florida, and began
offering Medicaid managed care services in 1994 and Medicare
services in 2000. Our HealthEase subsidiary was formed in May
2000 to acquire the business of Tampa General Health Plan, Inc.,
including its HMO license and Medicaid members. HealthEase
subsequently acquired a Medicaid business from Humana, Inc. in
June 2000.
In July 2002, our current management acquired the WellCare group
of companies in two concurrent transactions. In the first
transaction, we acquired our Florida operations, including our
WellCare of Florida and HealthEase subsidiaries, in a stock
purchase from a number of individuals, including Dr. Kiran
C. Patel and Rupesh Shah, our Senior Vice President, Market
Expansion. The purchase price for this transaction consisted of:
|
|
|
|
|
$50 million in cash; |
|
|
|
the issuance of a senior subordinated promissory note in the
original principal amount of $53 million, subject to
adjustments for earnouts and other purchase price
adjustments; and |
|
|
|
warrants to purchase 1,859,704 shares of our common
stock. |
The purchase price was subject to adjustment in both 2003 and
2004, based upon a number of earnout and other calculations. In
February 2004, we entered into a settlement agreement with the
selling stockholders that fixed the amount of the purchase price
and principal balance of the note at $209.6 million and
$119.7 million, respectively. In May 2004, we entered into
a further agreement with the selling stockholders, pursuant to
which we prepaid $85.0 million of the principal balance of
the note, using proceeds from our new senior secured term loan
facility, and $3.0 million of the principal balance was
forgiven in consideration for the prepayment. See Certain
Transactions Other Agreements Amendment
and Settlement Agreement and Prepayment
Agreement.
In the second transaction, we acquired The WellCare Management
Group, Inc., a publicly-traded holding company and the parent
company of our New York and Connecticut operations, through a
merger of that company into a wholly-owned subsidiary of ours.
The purchase price for this transaction consisted of
approximately $7.72 million in cash.
In June 2004, we acquired Harmony Health Systems, Inc., a
provider of Medicaid managed care plans in Illinois and Indiana.
As a result of the acquisition, we increased our Medicaid
membership by approximately 84,000. The initial purchase price
for the acquisition was approximately $50.3 million in
cash, after deducting pre-closing distributions of cash by
Harmony to its equity holders and certain transaction expenses
incurred by Harmony or its shareholders. We also made a
subsequent payment of approximately $5.0 million in
June 2005 as an adjustment in the purchase price to account
for excess reserves for medical claims as of December 31,
2003.
From May 2002 until July 2004, we were organized as a Delaware
limited liability company, WellCare Holdings, LLC. Immediately
prior to our initial public offering, WellCare Holdings, LLC
merged with and into WellCare Group, Inc., a wholly-owned
subsidiary of WellCare Holdings, LLC. At that time, our name
changed to WellCare Health Plans, Inc. Each outstanding limited
liability company unit of WellCare Holdings, LLC was converted
into shares of common stock according to the relative rights and
preferences of such units and the initial public offering price
of the common stock offered.
We are currently identifying markets for potential acquisitions
or expansion that would increase our membership and broaden our
geographic presence. These potential acquisitions or expansion
efforts are at
33
various stages of internal consideration, and we may enter into
letters of intent, transactions or other arrangements supporting
our growth strategy at any time. However, we cannot predict when
or whether such transactions or other arrangements will actually
occur, and we may not be successful in completing potential
acquisitions.
Basis of Presentation
WellCare, as it existed prior to the July 31, 2002
acquisition of the WellCare group of companies, is referred to
as Predecessor. WellCare, as it existed on and after
July 31, 2002, is referred to as the Successor,
we or us.
The consolidated results of operations include the accounts of
the Successor and all of its subsidiaries. Significant
intercompany accounts and transactions have been eliminated.
The combined results of operations include all of the accounts
of the Predecessors entities under common control prior to
the July 31, 2002 acquisition of the WellCare group of
companies. Significant intercompany accounts and transactions
have been eliminated.
The combined results of operations of the Predecessor also do
not reflect the effects of our change in corporate structure and
management. The Predecessors combined financial results do
not reflect the effects of:
|
|
|
|
|
additional debt incurred by Successor management, which results
in increased interest expense; |
|
|
|
a C corporation tax structure, which results in taxes being
incurred by us, whereas previously, because the Predecessor had
an S corporation tax structure, taxes were incurred by the
stockholders; and |
|
|
|
accounting for amortization of the acquired intangible assets,
which resulted from the purchase of the businesses. |
In addition, due to prior managements preparation of the
Predecessor for sale, certain costs and expenses were
temporarily eliminated and opportunities to increase membership
were not pursued during the relevant time periods.
WellCare Holdings, LLC was taxed as a partnership for federal
income tax purposes. It was not included in the consolidated
federal tax return of its subsidiaries, which file as C
corporations. See Note 12 to the notes to the WellCare
Health Plans, Inc. audited combined and consolidated financial
statements appearing elsewhere in this prospectus.
Segments
We have two reportable business segments: Medicaid and Medicare.
Medicaid, a state administered program, was enacted in 1965 to
make federal matching funds available to all states for the
delivery of healthcare benefits to eligible individuals,
principally those with incomes below specified levels who meet
other state specified requirements. Medicaid is structured to
allow each state to establish its own eligibility standards,
benefits package, payment rates and program administration under
broad federal guidelines. Most states determine threshold
Medicaid eligibility by reference to other federal financial
assistance programs including the TANF and SSI programs.
The TANF program provides assistance to low-income families with
children and was adopted to replace the Aid to Families with
Dependent Children program. The SSI program is a federal program
that provides assistance to low-income aged, blind or disabled
individuals. However, states can broaden eligibility criteria.
SCHIP, developed in 1997, is a federal/state matching program
that provides healthcare coverage to children not otherwise
covered by Medicaid or other insurance programs. SCHIP enables a
segment of the large uninsured population in the United States
to receive healthcare benefits. States have the option of
administering SCHIP through their Medicaid programs.
Medicare is a federal program that provides eligible persons
age 65 and over and some disabled persons a variety of
hospital and medical insurance benefits. Most individuals
eligible for Medicare are entitled to receive inpatient hospital
care without the payment of any premium, but are required to pay
a premium to the federal government, which is adjusted annually,
to be eligible for physician care and other services.
34
Under the Medicare Advantage program, managed care plans can
contract with CMS to provide health insurance coverage in
exchange for a fixed monthly payment per member that varies
based on the geographic areas in which the members reside. The
fixed monthly payment per member is subject to periodic
adjustments determined by CMS based upon a number of factors,
including retroactive changes in members status such as
Medicaid eligibility, and risk measures based on demographic
factors such as age, gender, county of residence and health
status. The weighting of the risk measures in the determination
of the amount of the periodic adjustments to the fixed monthly
payments is being phased in over time. These measures will have
their full impact on the calculation of those adjustments by
2007. Individuals who elect to participate in the Medicare
Advantage program are relieved of the obligation to pay some or
all of the deductible or coinsurance amounts required under the
traditional Medicare program. In the case of a Medicare
Advantage HMO, such as our plans, participating individuals are
generally required to use the service provided by the HMO
exclusively and may be required to pay a premium to the federal
Medicare program unless the HMO chooses to pay the premium as
part of its benefit package.
Critical Accounting Policies
In the ordinary course of business, we make a number of
estimates and assumptions relating to the reporting of our
results of operations and financial condition in conformity with
accounting principles generally accepted in the United States.
We base our estimates on historical experience and on various
other assumptions that we believe to be reasonable under the
circumstances. Actual results could differ significantly from
those estimates under different assumptions and conditions. We
believe that the accounting policies discussed below are those
that are most important to the portrayal of our financial
condition and results and require managements most
difficult, subjective and complex judgments, often as a result
of the need to make estimates about the effect of matters that
are inherently uncertain.
Revenue recognition. We generate revenues primarily from
premiums we receive from agencies of the federal government and
the states in which we operate to provide healthcare benefits to
our members. We receive a fixed premium per member per month to
provide healthcare benefits to our members pursuant to our
contracts in each of our markets. We generally receive premiums
in advance of providing services, and recognize premium revenue
during the period in which we are obligated to provide services
to our members. Premiums collected in advance are deferred and
reported as unearned premiums. Any amounts that have not been
received remain on the balance sheet classified as premiums
receivable. We also generate revenues from investments.
We experience adjustments to our revenues based on member
retroactivity. These retroactivity adjustments reflect changes
in the number and eligibility status of enrollees subsequent to
when revenue is billed. We estimate the amount of outstanding
retroactivity each period and adjust premium revenue
accordingly. The estimates of retroactivity adjustments are
based on historical trends, premiums billed, the volume of
member and contract renewal activity and other information. We
refine our estimates and methodologies based upon actual
retroactivity experienced. Retroactivity adjustments have not
been significant.
Estimating medical benefits expense and medical benefits
payable. The cost of medical benefits is recognized in the
period in which services are provided and includes an estimate
of the cost of medical benefits that have been incurred but not
yet reported. We contract with various healthcare providers for
the provision of certain medical care services to our members
and generally compensate those providers on a fee-for-service or
capitated basis or pursuant to certain risk-sharing
arrangements. Capitation represents fixed payments on a per
member per month basis to participating physicians and other
medical specialists as compensation for providing comprehensive
healthcare services. Participating physician capitation payments
for the three-month period ended March 31, 2005, years
ended December 31, 2004 and 2003 and five-month period
ended December 31, 2002, and the Predecessor seven-month
period ended July 31, 2002 and year ended December 31,
2001 were 11.5%, 13.8%, 11.0%, 10.2%, 10.2% and 10.3%,
respectively, of total medical benefits expense.
Medical benefits expense has two main components: direct medical
expenses and medically-related administrative costs. Direct
medical expenses include amounts paid to hospitals, physicians
and providers of
35
ancillary services, such as laboratory and pharmacy.
Medically-related administrative costs include items such as
case and disease management, utilization review services,
quality assurance and on-call nurses.
Medical benefits payable consists primarily of benefit reserves
established for reported and unreported claims, which are unpaid
as of the balance sheet date, and contractual liabilities under
risk-sharing arrangements, determined through an estimation
process utilizing company-specific, industry-wide, and general
economic information and data.
We have used the same methodology for estimating our medical
benefits expense and medical benefits payable since our
acquisition of the WellCare group of companies. Our policy is to
record managements best estimate of medical benefits
payable. Monthly, we estimate ultimate benefits payable based
upon historical experience and other available information as
well as assumptions about emerging trends, which vary by
business segment. The process for preparing the estimate
utilizes standard actuarial methodologies based on historical
data. These standard actuarial methodologies include, among
other factors, contractual requirements, historical utilization
trends, the interval between the date services are rendered and
the date claims are paid, denied claims activity, disputed
claims activity, benefit changes, expected health care cost
inflation, seasonality patterns and changes in membership. In
developing the estimate, we apply different estimation methods
depending on the month for which incurred claims are being
estimated. For the more recent months, which constitute the
majority of the amount of the medical benefits payable, we
estimate our claims incurred by applying observed trend factors
to the per member per month, or PMPM, costs for prior months,
which costs have been estimated using completion factors, in
order to estimate the PMPMs for the most recent months. We
validate our estimates of the most recent PMPMs by comparing the
most recent months utilization levels to the utilization
levels in older months, actuarial techniques that incorporate a
historical analysis of claim payments, including trends in cost
of care provided, and timeliness of submission and processing of
claims.
Also included in medical benefits payable are estimates for
provider settlements due to clarification of contract terms,
out-of-network reimbursement and claims payment differences, as
well as amounts due to contracted providers under risk-sharing
arrangements.
Many aspects of the managed care business are not predictable
with consistency. These aspects include the incidences of
illness or disease state (such as cardiac heart failure cases,
cases of upper respiratory illness, the length and severity of
the flu season, diabetes, the number of full-term versus
premature births, and the number of neonatal intensive care
babies). Therefore, we must rely upon our historical experience,
as continually monitored, to reflect the ever-changing mix,
needs and growth of our members in our trend assumptions. Among
the factors considered by management are changes in the level of
benefits provided to members, seasonal variations in
utilization, identified industry trends and changes in provider
reimbursement arrangements, including changes in the percentage
of reimbursements made on a capitated as opposed to a
fee-for-service basis. These considerations are aggregated in
trend in medical benefits expense. Other external factors such
as government-mandated benefits or other regulatory changes,
catastrophes, and epidemics may impact medical cost trends.
Other internal factors such as system conversions and claims
processing interruptions may impact our ability to accurately
predict estimates of historical completion factors or medical
cost trends. Medical cost trends potentially are more volatile
than other segments of the economy. Management is required to
use considerable judgment in the selection of medical benefits
expense trends and other actuarial model inputs.
We record reserves for estimated referral claims related to
healthcare providers under contract with us who are financially
troubled or insolvent and who may not be able to honor their
obligations for the costs of medical services provided by other
providers. In these instances, we may be required to honor these
obligations for legal or business reasons. Based on our current
assessment of providers under contract with us, such losses have
not been and are not expected to be significant.
Changes in estimates of medical benefits payable are primarily
the result of obtaining more complete claims information that
directly correlates with the claims and provider reimbursement
trends. Volatility in members needs for medical services,
provider claims submission and our payment processes results in
identifiable patterns emerging several months after the causes
of deviations from assumed trends occur. Since
36
our estimates are based upon per member, per month claims
experience, changes cannot typically be explained by any single
factor, but are the result of a number of interrelated
variables, all influencing the resulting experienced medical
cost trend. Deviations, whether positive or negative, between
actual experience and estimates used to establish the liability
are recorded in the period known.
The following table provides a reconciliation of the beginning
and ending balance of medical benefits payable for the following
periods:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor | |
|
Successor | |
|
|
| |
|
| |
|
|
Seven-Month | |
|
Five-Month | |
|
|
|
|
Period Ended | |
|
Period Ended | |
|
Year Ended | |
|
Year Ended | |
|
|
July 31, | |
|
December 31, | |
|
December 31, | |
|
December 31, | |
|
|
2002 | |
|
2002 | |
|
2003 | |
|
2004 | |
|
|
| |
|
| |
|
| |
|
| |
|
|
(in thousands) | |
Balances as of beginning of period
|
|
$ |
98,314 |
|
|
$ |
109,054 |
|
|
$ |
113,670 |
|
|
$ |
148,297 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Opening medical benefits payable related to Harmony Acquisition
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,160 |
|
Medical benefits incurred related to:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current period
|
|
|
436,444 |
|
|
|
348,079 |
|
|
|
884,703 |
|
|
|
1,151,948 |
|
|
Prior periods
|
|
|
(1,520 |
) |
|
|
(6,316 |
) |
|
|
(23,650 |
) |
|
|
(26,388 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
434,924 |
|
|
|
341,763 |
|
|
|
861,053 |
|
|
|
1,125,560 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medical benefits paid related to:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current period
|
|
|
(335,938 |
) |
|
|
(249,076 |
) |
|
|
(751,826 |
) |
|
|
(985,844 |
) |
|
Prior periods
|
|
|
(88,246 |
) |
|
|
(88,071 |
) |
|
|
(74,600 |
) |
|
|
(115,578 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
(424,184 |
) |
|
|
(337,147 |
) |
|
|
(826,426 |
) |
|
|
(1,101,422 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances as of end of period
|
|
$ |
109,054 |
|
|
$ |
113,670 |
|
|
$ |
148,297 |
|
|
$ |
190,595 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medical benefits payable recorded at December 31, 2003
developed favorably by approximately $26.4 million. The
favorable development was primarily due to realized medical
benefits expense trends that were less than initially assumed
trends. We initially assumed a medical benefits expense trend
increase of 6.9% and 3.4% for the Medicaid and Medicare
segments, respectively, at December 31, 2003. Based on
payments made subsequent to December 31, 2003, for the
dates of service prior to December 31, 2003, the realized
trends were an increase of 3.4% for the Medicaid segment and a
decrease of 3.2% for the Medicare segment.
Medical benefits payable recorded at December 31, 2002
developed favorably by approximately $23.7 million. This
favorable development was primarily due to realized medical
benefits expense trends that were less than initially assumed
trends. We initially assumed a medical benefits expense trend
increase of 7.8% and a decrease of 4.1% for the Medicaid and
Medicare segments, respectively, at December 31, 2002.
Based upon payments made subsequent to December 31, 2002,
for dates of service prior to December 31, 2002, the
realized trends were an increase of 4.5% for the Medicaid
segment and a decrease of 5.4% for the Medicare segment.
We believe that the amount of medical benefits payable as of
December 31, 2004 is adequate to cover our ultimate
liability for unpaid claims recorded as of that date; however,
actual claim payments and other items may differ from
established estimates. Assuming a hypothetical 1% difference
between our December 31, 2004 medical benefits ratio due to
changes between estimated medical benefits payable and actual
medical benefits payable, net income for the year ended
December 31, 2004 would have increased or decreased by
approximately $8.3 million and diluted earnings per share
would have increased or decreased by approximately
$0.26 per share.
Goodwill and intangible assets. We obtained goodwill and
intangible assets as a result of the acquisitions of our
subsidiaries. Goodwill represents the excess of the cost over
the fair market value of net assets acquired. Intangible assets
include provider networks, membership contracts, trademark,
noncompete
37
agreements, government contracts, licenses and permits. Our
intangible assets are amortized over their estimated useful
lives ranging from one to 26 years.
We evaluate whether events or circumstances have occurred that
may affect the estimated useful life or the recoverability of
the remaining balance of goodwill and other identifiable
intangible assets. We must make assumptions and estimates, such
as the discount factor, in determining the estimated fair
values. While we believe these assumptions and estimates are
appropriate, other assumptions and estimates could be applied
and might produce significantly different results.
We review goodwill and intangible assets for impairment at least
annually, or more frequently if events or changes in
circumstances occur that may affect the estimated useful life or
the recoverability of the remaining balance of goodwill or
intangible assets. Events or changes in circumstances would
include significant changes in membership, state funding,
medical contracts and provider networks. During the third
quarter ended September 30, 2004, we assessed the earnings
forecast for our two reporting units and concluded that the fair
value of the individual reporting units, based upon the expected
present value of future cash flows and other qualitative
factors, was in excess of net assets of each reporting unit. As
of March 31, 2005, we believe that there is no impairment
to the value of goodwill or intangible assets.
The purchase of our Florida subsidiaries was partially financed
through a contingent note payable to the former shareholders of
those subsidiaries, including Rupesh Shah, our Senior Vice
President, Market Expansion, and his spouse. The principal
amount of this note was subject to adjustment for various
contingencies including: the adequacy of the statutory capital
of certain subsidiaries, the actual medical benefits payable of
certain subsidiaries, the earnings (or losses) of certain
products and potential indemnifications under the purchase
agreement. Adjustments to the note resulted in a change in the
purchase price and the amount of goodwill acquired of
$41.6 million. See Corporate History and
Acquisitions.
In June 2004, we acquired Harmony Health Systems, Inc., a
provider of Medicaid managed care plans in Illinois and Indiana.
As a result of the acquisition, we increased our Medicaid
membership by approximately 84,000. The initial purchase price
for the acquisition was approximately $50.3 million in
cash, after deducting pre-closing distributions of cash by
Harmony to its equity holders and certain transaction expenses
incurred by Harmony or its shareholders. We also made a
subsequent payment of approximately $5.0 million in
June 2005 as an adjustment in the purchase price to account
for excess reserves for medical claims as of December 31,
2003. Goodwill and other intangibles associated with the Harmony
acquisition were $45.2 million after adjustment to reflect
the June 2005 payment discussed above.
Results of Operations
The following table sets forth the consolidated and combined
statements of income data, expressed as a percentage of revenues
for each period indicated. The pro forma combined year ended
December 31, 2002 amounts consist of combined financial
data from the Predecessor for the seven-month period ended
July 31,
38
2002 and from the Successor for the five-month period ended
December 31, 2002. The historical results are not
necessarily indicative of results to be expected for any future
period.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of Revenues | |
|
|
| |
|
|
Predecessor/Successor | |
|
Successor | |
|
|
| |
|
| |
|
|
|
|
|
|
Three Months | |
|
|
Pro Forma Combined | |
|
Consolidated | |
|
Consolidated | |
|
Ended | |
|
|
Year Ended | |
|
Year Ended | |
|
Year Ended | |
|
March 31, | |
|
|
December 31, | |
|
December 31, | |
|
December 31, | |
|
| |
|
|
2002 (combined) | |
|
2003 | |
|
2004 | |
|
2004 | |
|
2005 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premium
|
|
|
99.4% |
|
|
|
99.7% |
|
|
|
99.7% |
|
|
|
99.8% |
|
|
|
99.3% |
|
|
|
Investment and other income
|
|
|
0.6% |
|
|
|
0.3% |
|
|
|
0.3% |
|
|
|
0.2% |
|
|
|
0.7% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
100.0% |
|
|
|
100.0% |
|
|
|
100.0% |
|
|
|
100.0% |
|
|
|
100.0% |
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medical benefits
|
|
|
84.3% |
|
|
|
82.3% |
|
|
|
80.7% |
|
|
|
83.3% |
|
|
|
82.3% |
|
|
|
Selling, general and administrative
|
|
|
10.8% |
|
|
|
12.1% |
|
|
|
12.3% |
|
|
|
12.2% |
|
|
|
12.2% |
|
|
|
Depreciation and amortization
|
|
|
0.5% |
|
|
|
0.8% |
|
|
|
0.6% |
|
|
|
0.5% |
|
|
|
0.5% |
|
|
|
Interest
|
|
|
0.3% |
|
|
|
1.0% |
|
|
|
0.7% |
|
|
|
0.8% |
|
|
|
0.8% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
95.9% |
|
|
|
96.2% |
|
|
|
94.3% |
|
|
|
96.8% |
|
|
|
95.8% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
4.1% |
|
|
|
3.8% |
|
|
|
5.7% |
|
|
|
3.2% |
|
|
|
4.2% |
|
|
Income tax expense
|
|
|
0.5% |
(1) |
|
|
1.6% |
|
|
|
2.2% |
|
|
|
1.3% |
|
|
|
1.6% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
3.6% |
|
|
|
2.2% |
|
|
|
3.5% |
|
|
|
1.9% |
|
|
|
2.6% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Income tax expense was not recorded by the Predecessor because
its tax structure included entities that had elected subchapter
S status under the Internal Revenue Code, the income of which
was taxed at the stockholder level, as well as entities that
were subject to tax, but did not generate tax liabilities or
benefits due to operating losses. |
The Predecessor financial statements do not reflect any
provision for doubtful receivables. The necessity for the
provision for doubtful receivables became evident during the
second half of 2002, based upon managements experience
following the acquisition of the WellCare group of companies.
Factors considered included the age and amounts of receivables,
the effort and timeframe necessary to collect those receivables
and the strategic nature of the applicable relationships.
Managements evaluation of the history of the relationships
indicated doubt that certain of the receivables would ultimately
be fully collected. Therefore, a provision for the doubtful
receivables was deemed to be appropriate and necessary for the
three month period ended March 31, 2005 and the years ended
2004 and 2003.
One of our primary tools for measuring profitability is our
medical benefits ratio, the ratio of our medical benefits
expense to the premiums we receive. Changes in the medical
benefits ratio from period to period result from, among other
things, changes in Medicaid and Medicare funding, changes in the
mix of Medicaid and Medicare membership, our ability to manage
medical costs and changes in accounting estimates related to
incurred but not reported claims. We use medical benefits ratios
both to monitor our management of medical benefits expense and
to make various business decisions, including what healthcare
plans to offer, what geographic areas to enter or exit and the
selection of healthcare providers. Although medical benefits
ratios play an important role in our business strategy, we may
be willing to enter into provider arrangements that might
produce a less favorable medical benefits ratio if those
arrangements, such as capitation or risk-sharing, would likely
lower our exposure to variability in medical costs.
39
Comparison of Three Month Period Ended March 31, 2005
Compared to the Three Month Period Ended March 31, 2004
Premium revenue. Premium revenues for the three months
ended March 31, 2005 increased $114.6 million, or 38%,
to $415.9 million from $301.3 million for the same
period last year. The increase is due to the addition of 84,000
Medicaid members resulting from the acquisition of Harmony in
June 2004, organic growth in membership of 17%, and rate
increases on our products. Total membership grew by 184,000
members, or 32%, from 581,000 at March 31, 2004 to
approximately 765,000 at March 31, 2005.
Our Medicaid segment includes Medicaid programs and other
state-sponsored healthcare programs. The Medicaid segment
premium revenue for the three months ended March 31, 2005
increased $93.1 million, or 43%, to $309.2 million
from $216.1 million for the same period last year. The
increase was primarily due to the members acquired through the
acquisition of Harmony in June 2004, organic growth of 17%, and
the increase in rates in the State of Florida effective
July 1, 2004 of approximately 9%. Aggregate membership in
the Medicaid segment grew by 173,000 members, or 32%, from
538,000 members at March 31, 2004 to approximately 711,000
at March 31, 2005.
Medicare segment premium revenue for the three months ended
March 31, 2005 increased $22.1 million, or 26%, to
$106.7 million from $84.6 million for the same period
last year. Growth in premium revenue within the Medicare segment
was due to membership growth and the result of increased rates
received for Medicare members, averaging approximately 10% based
on the health status and demographic mix of our membership.
Membership within the Medicare segment grew by 11,000 members,
or 26%, from 43,000 members at March 31, 2004 to 54,000
members at March 31, 2005.
Investment income. Investment income for the three months
ended March 31, 2005 increased $2.4 million, or 415%,
to $3.0 million from $0.5 million for the same period
last year. For the three months ended March 31, 2005, the
increase was due primarily to the investment of the net proceeds
we received from our initial and follow-on public offerings of
approximately $157.2 million and higher interest rate
environment.
Medical benefits expense. Medical benefits expense for
the three months ended March 31, 2005 increased
$93.5 million, or 37%, to $344.9 million from
$251.4 million for the same period last year. The increase
in medical benefits expense was due to organic growth in
membership as well as through the acquisition of Harmony in June
2004. The medical benefits ratio, as a percentage of premium
revenue, for the three months ended March 31, 2005 was
82.9% compared to 83.5% for the same period last year. The
medical benefits ratio decreased in 2005 primarily as a result
of lower overall utilization of services and increased premium
rates received for Medicaid members.
The Medicaid segment medical benefits expense for the three
months ended March 31, 2005 increased $74.9 million,
or 41%, to $258.0 million from $183.1 million for the
same period last year. The increase in medical benefits expense
was primarily due to growth in membership and the acquisition of
Harmony. The membership increase and the inclusion of Harmony
accounted for $61.0 million of the increase when comparing
the three-month periods. Increased healthcare costs and changes
in membership mix accounted for $13.9 million of the
quarterly increase. The Medicaid medical benefits ratio, as a
percentage of premium revenue, for the three months ended
March 31, 2005 was 83.4% compared to 84.7% for the same
period last year. The Medicaid benefits ratio decreased in 2005
primarily as a result of lower overall utilization of services
and increased premium rates received for Medicaid members.
Medicare segment medical benefits expense for the three months
ended March 31, 2005 increased $19.0 million, or 28%,
to $86.9 million from $68.0 million for the same
period last year. The increase was primarily due to the growth
in membership, which accounted for $14.1 million of the
increase in the quarter. Increased healthcare costs accounted
for $4.9 million of the quarterly increase. The Medicare
medical benefits ratio, as a percentage of premium revenue, for
the three months ended March 31, 2005 was 81.5% compared to
80.4% for the same period last year. The medical benefits ratio
increased due to changes in benefits design and higher
utilization of services by our members.
Selling, general and administrative expense. Selling,
general and administrative (SG&A) expense for
the three months ended March 31, 2005 increased
$14.5 million, or 39%, to $51.2 million from
$36.8 million
40
for the same period last year. Our SG&A expense to revenue
ratio was 12.2% for the three months ended March 31, 2005
and 2004. The increase in SG&A expense was primarily due to
investments in information technology, investments in sales and
marketing strategies and increased spending necessary to support
and sustain our membership growth.
Interest expense. Interest expense was $3.2 million
and $2.3 million for the three months ended March 31,
2005 and 2004, respectively. The increase primarily relates to
the additional amount of debt outstanding during the quarter
ended March 31, 2005.
Income tax expense. Income tax expense for the three
months ended March 31, 2005 was $6.8 million with an
effective tax rate of 39.1% as compared to $3.9 million for
the same period last year with an effective tax rate of 39.9%.
Net income. Net income for the three months ended
March 31, 2005 was $10.6 million compared to
$5.8 million for the same period last year, representing an
increase of 82.8%.
Comparison of Year Ended December 31, 2004 to Year Ended
December 31, 2003
Premium revenue. For the year ended December 31,
2004, premium revenue increased $348.0 million, or 33%, to
$1,390.9 million from $1,042.9 million for the same
period last year. The increase was due in part to the addition
of 84,000 Medicaid members resulting from the acquisition of
Harmony in June 2004, organic growth in our total membership of
19% and rate increases on our products. Total membership grew by
192,000 members, or 35%, from 555,000 at December 31,
2003 to 747,000 at December 31, 2004.
Our Medicaid segment includes Medicaid programs and other
state-sponsored healthcare programs. For the year ended
December 31, 2004, Medicaid segment premium revenue
increased $314.9 million, or 43%, to $1,055.0 million
from $740.1 million for the same period last year. The
increase was primarily due to organic growth in Medicaid
membership of 21%, the increase in rates in the State of Florida
effective July 1, 2004 of approximately 9%, and the members
acquired through the acquisition of Harmony in June 2004.
Aggregate membership in the Medicaid segment grew by 189,000
members, or 37%, from 512,000 members at December 31, 2003
to 701,000 at December 31, 2004.
For the year ended December 31, 2004, Medicare segment
premium revenue increased $46.4 million, or 16%, to
$334.8 million from $288.3 million for the same period
last year. Growth in premium revenue within the Medicare segment
was primarily the result of increased rates received for
Medicare members, averaging approximately 10% based on the
demographic mix of our membership, and increased membership.
Membership within the Medicare segment grew by 4,000 members, or
10%, from 42,000 members at December 31, 2003 to 46,000
members at December 31, 2004.
Investment income. For the year ended December 31,
2004, investment income increased $1.2 million, or 38%, to
$4.3 million from $3.1 million for the same period
last year. The increase was due to greater available cash and
investment balances and higher returns in the current interest
rate environment.
Medical benefits expense. For the year ended
December 31, 2004, medical benefits expense increased
$264.5 million, or 31%, to $1,125.6 million from
$861.1 million for the same period last year. The increase
in medical benefits expense was primarily due to organic growth
in membership as well as through the acquisition of Harmony in
June 2004. The methodology used in estimating medical benefits
payable was consistent with prior periods. The medical benefits
ratio was 80.9% compared to 82.6% for the same period last year.
The medical benefits ratio decreased in 2004 primarily as a
result of the increased premium rate received for Medicare
members and lower overall utilization of services by our
members. Additionally, pharmacy and professional costs were
reduced by approximately $1.3 million due to the
inaccessibility of services as a result of the four hurricanes
that affected the State of Florida during the third quarter of
2004.
For the year ended December 31, 2004, Medicaid medical
benefits expense increased $241.9 million, or 40%, to
$851.2 million from $609.2 million for the same period
last year. The increase in medical benefits expense was
primarily due to the acquisition of Harmony and organic growth
in membership. The membership increase and the inclusion of
Harmony accounted for $222.6 million of the increase.
Increases in
41
healthcare costs accounted for $15.2 million of the
increase, while changes in membership mix resulted in cost
increases of $4.1 million. For the year ended
December 31, 2004, the Medicaid medical benefits ratio was
80.7% compared to 82.3% for the same period last year.
For the year ended December 31, 2004, Medicare medical
benefits expense increased $36.4 million, or 15%, to
$275.3 million from $238.9 million for the same period
last year. The increase was partially due to the growth in
membership, which accounted for $13.2 million of the
increase. Increased healthcare costs accounted for
$22.1 million of the increase with changes in membership
mix resulting in cost increases of $1.2 million. For the
year ended December 31, 2004, the Medicare medical benefits
ratio was 82.3% compared to 82.9% for the same period last year.
The medical benefits ratio decreased as a result of the premium
rate increases and lower overall utilization.
Selling, general and administrative expense. For the year
ended December 31, 2004, selling, general and
administrative expense increased $45.2 million, or 36%, to
$171.3 million from $126.1 million for the same period
last year. Our selling, general and administrative expense to
revenue ratio was 12.3% and 12.1% for the years ended
December 31, 2004 and 2003, respectively. The increase in
selling, general and administrative expense was primarily due to
investments in information technology, investments in sales and
marketing strategies and increased spending necessary to support
and sustain our membership growth.
Interest expense. Interest expense was $10.2 million
for the years ended December 31, 2004 and 2003. Interest
expense for the year ended December 31, 2004 is reduced by
an approximately $0.7 million net gain on early repayment
of long term indebtedness.
Income tax expense. Income tax expense for the year ended
December 31, 2004 was $31.3 million with an effective
tax rate of 38.8% as compared to $17.0 million with an
effective tax rate of 41.9% for the same period last year. This
decrease was due to increased investment in tax-exempt
securities, more effective state tax planning in the current
year and additional taxes incurred in the third quarter of last
year as a result of the purchase price adjustments arising from
the acquisition of the WellCare group of companies in August
2002.
Net income. For the year ended December 31, 2004,
net income was $49.3 million compared to $23.5 million
for the same period last year, representing an increase of 109%.
Comparison of Consolidated Year Ended December 31, 2003
to Combined Year Ended December 31, 2002
Premium revenue. Premium revenue for the year ended
December 31, 2003 increased $127.0 million, or 14%, to
$1.04 billion from $915.9 million for the combined
year ended December 31, 2002. The increase was principally
due to internal growth in overall membership within the Medicaid
segment and to a lesser extent increased premium rates per
member. Premium rate increases were partially offset by a lower
average premium per member primarily as a result of changes in
the demographics of Medicaid members by product. During 2003,
membership increased by 85,000 members, or 18%, from 470,000
members at December 31, 2002 to 555,000 members at
December 31, 2003.
Medicaid segment premium revenue for the year ended
December 31, 2003 increased $143.0 million, or 24%, to
$740.1 million from $597.1 million for the combined
year ended December 31, 2002. The increase was primarily
due to an increase in membership of approximately
$166.7 million and a change in membership demographics and
premium rates, which offset the increase by $23.7 million.
During 2003, membership within the Medicaid segment increased
92,000 members, or 22%, from 420,000 members at
December 31, 2002 to 512,000 members at December 31,
2003. Membership increased by approximately 44,000 as a result
of assignment of SCHIP members in Florida under a competitive
bidding process, and the remaining growth in Medicaid membership
resulted from a combination of mandatory assignment and
successful marketing efforts.
Medicare segment premium revenue for the year ended
December 31, 2003 decreased $2.6 million, or 1.0%, to
$288.3 million from $290.9 million for the combined
year ended December 31, 2002. The decrease was primarily
due to a decrease in the aggregate time our members were covered
by our plans, partially offset by an increase in premium rates
and change in membership demographics of approximately
$7.2 million. We continually review the medical loss ratio
of our business and make strategic decisions based on those
analyses.
42
During 2003, our medical benefits expense in certain areas of
Florida was higher than expected. We addressed this concern by
withdrawing from areas where financial performance was
unfavorable. Overall membership levels remained flat at
approximately 42,000.
Investment income. Investment income for the year ended
December 31, 2003 decreased $2.9 million, or 53%, to
$2.6 million from $5.5 million for the combined year
ended December 31, 2002. The decrease in investment income
was primarily due to the continued decline in market interest
rates and maintaining investments with shorter maturities, which
was partially offset by an increase in overall cash levels. Cash
levels increased primarily due to increased profitability and
differences in the timing of our receipt of premiums as compared
to the timing of our payment of the related medical benefits
expense.
Medical benefits expense. Medical benefits expenses for
the year ended December 31, 2003 increased
$84.4 million, or 11%, to $861.1 million from
$776.7 million for the combined year ended
December 31, 2002. The increase was primarily due to the
increase in membership. The medical benefits ratio, as a
percentage of premium revenue, for the year ended
December 31, 2003 was 82.6% compared to 84.8% in 2002. The
medical benefits ratio decreased in 2003 primarily as a result
of our initiatives to enter into contracts with providers that
offer more economical benefits, to focus on preventative and
disease management programs, and to increase the effectiveness
of medical management to ensure that medical benefits are
utilized efficiently.
The Medicaid segment medical benefits expense for the year ended
December 31, 2003 increased $112.5 million, or 23%, to
$609.2 million from $496.7 million for the combined
year ended December 31, 2002. The increase was principally
due to internal growth in overall membership within the Medicaid
segment, which accounted for an increase of $138.7 million,
and to a lesser extent increased healthcare costs, which
accounted for an increase of $3.8 million. This was offset
by $30.0 million resulting from a change in membership
demographics. The Medicaid medical benefits ratio, as a
percentage of premium revenue, for the year ended
December 31, 2003 was 82.3% compared to 83.2% in 2002.
Medicare segment medical benefits expense for the year ended
December 31, 2003 decreased $14.3 million, or 6%, to
$238.9 million from $253.2 million for the combined
year ended December 31, 2002. The decrease was principally
a result of our withdrawal from certain areas of Florida where
financial performance was unfavorable and, to a lesser extent,
as a result of revised contracts with providers containing
improved contract terms. The decrease in membership accounted
for $8.5 million of the reduction in expense, and the
changes in contract terms accounted for the remainder. The
Medicare medical benefits ratio, as a percentage of premium
revenue, for the year ended December 31, 2003 was 82.9%
compared to 87.0% in 2002.
Selling, general and administrative expense. Selling,
general and administrative expense for the year ended
December 31, 2003 increased $26.2 million, or 26%, to
$126.1 million from $99.9 million for the combined
year ended December 31, 2002. Our selling, general and
administrative expense to premium revenue ratio was 12.1% and
10.8% for the years ended December 31, 2003 and 2002,
respectively. The increase in the ratio was the result of
increased marketing efforts, servicing our increased membership,
amortization of purchased intangible assets and costs incurred
to strengthen our infrastructure. These costs include additional
management staff, information technology system enhancements,
and consulting services. Additionally, certain expenses to
expand the business or make the operations more efficient were
not incurred in 2002 as the predecessor management was preparing
the company for sale.
Interest expense. Interest expense for the year ended
December 31, 2003 increased $7.3 million, or 252%, to
$10.2 million from $2.9 million for the combined year
ended December 31, 2002. The increase was due to increased
debt as a result of the purchase of the business from the
predecessor owners.
Income tax expense. Income tax expense for the year ended
December 31, 2003 increased $12.2 million, or 254%, to
$17.0 million from $4.8 million for the combined year
ended December 31, 2002. The increase resulted from being
taxed as a C corporation for 12 months in 2003
compared to being taxed as a C corporation for only five
months in 2002. Prior to August 1, 2002, our Predecessor
was an S corporation and was a disregarded entity for
federal and state income taxes. Our effective tax rate for the
year ended December 31, 2003 was 41.9% and for the
five-month period ended December 31, 2002 was 50.8%.
43
Net income. Net income for the year ended
December 31, 2003 was $23.5 million compared to
$32.6 million for the combined year ended December 31,
2002.
Liquidity and Capital Resources
We have financed our operations principally through internally
generated funds. We generate cash mainly from premium revenue.
Our primary use of cash is the payment of expenses related to
medical benefits and administrative expenses. We generally
receive premium revenue in advance of payment of claims for
related healthcare services. We expect that our future funding
for working capital needs, capital expenditures, long-term debt
repayments, dividends and other financing activities will
continue to be provided from these resources.
In July 2004, we received $112.3 million of net proceeds
from our initial public offering. Additionally, in December
2004, we received $44.9 million of net proceeds from a
secondary offering. From time to time, we may need to raise
additional capital or draw on our credit facility to fund
planned geographic and product expansion or acquire healthcare
businesses.
Each of our existing and projected sources of cash are impacted
by operational and financial risks that influence the overall
amount of cash generated and the capital available to us. For a
further discussion of risks that can impact our liquidity, see
Risk Factors beginning on page 8.
Because we generally receive premiums in advance of payments of
claims for healthcare services, we maintain estimated balances
of cash and cash equivalents pending payment of claims. At
March 31, 2005, December 31, 2004 and
December 31, 2003, cash and cash equivalents were
$340.7 million, $397.6 million and
$237.3 million, respectively. We also had short-term
investments with maturities of three to 12 months of
$173.7 million, $75.5 million and $33.8 million
at March 31, 2005, December 31, 2004 and
December 31, 2003, respectively.
Our investment policies are designed primarily to provide
liquidity and preserve capital. The states in which we operate
prescribe the types of instruments in which our subsidiaries may
invest their funds. As of March 31, 2005, December 31,
2004 and December 31, 2003, a substantial portion of our
cash was invested in certificates of deposit and a portfolio of
highly liquid money market securities with a weighted average
maturity of 54 days, 30 days and 138 days,
respectively. The average portfolio yield for the three months
ended March 31, 2005 and the years ended December 31,
2004 and 2003 was approximately 2.0%, 1.5% and 1.2%,
respectively.
Overview of Cash Flow Activities
For the three month periods ended March 31, 2005 and 2004
our cash flows are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
Net cash provided by (used in) operations
|
|
$ |
43,304 |
|
|
$ |
(24,157 |
) |
Net cash used in investing activities
|
|
|
(100,358 |
) |
|
|
(10,774 |
) |
Net cash provided by (used in) financing activities
|
|
|
172 |
|
|
|
(3,591 |
) |
Cash Provided by (Used in) Operations: The increase in
cash provided by operations was primarily due to increased
membership, improved profitability and changes in outstanding
receivables and liabilities based on the timing of cash receipts
and payments. Because we generally receive premium revenue in
advance of payment for the related medical care costs, our cash
has historically increased during periods of enrollment growth.
Cash Used in Investing Activities: The increase in cash
used in investing activities is due to additional investments
made during the three months ended March 31, 2005.
44
Cash Provided by (Used in) Financing Activities: The
change in cash from financing activities is primarily due to
option activity and debt payments.
For the years ended December 31, 2004 and 2003 our cash
flows from operations are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
2004 | |
|
2003 | |
|
|
| |
|
| |
Net cash provided by operations
|
|
$ |
48,762 |
|
|
$ |
122,798 |
|
Net cash used in investing activities
|
|
|
(96,466 |
) |
|
|
(18,313 |
) |
Net cash provided by (used in) financing activities
|
|
|
208,010 |
|
|
|
(13,948 |
) |
Cash Provided by Operations. The decrease in cash from
operations was primarily due to changes in premiums receivable,
unearned premiums and liabilities and on the timing of cash
receipts and payments. These changes were partially offset by
increases in net income resulting from increased membership and
improved profitability.
Cash Used in Investing Activities. The increase in cash
used in investing activities is due to our acquisition of
Harmony in June 2004 which required a net cash outlay of
$36.5 million. We invested excess cash obtained from our
public offerings and operations totaling approximately
$41.7 million. To fulfill certain State requirements,
$9.5 million was invested into restricted investment
accounts. A total of $8.7 million was invested in property
and equipment, principally at our new corporate office location.
Cash Provided by (Used in) Financing Activities. The
change in cash from financing activities is primarily due to the
public offerings which generated net proceeds of
$157.5 million. Additionally, we obtained
$159.2 million from the proceeds of a new debt issuance.
These proceeds were partially offset by payments made on
existing debt facilities totaling approximately
$108.8 million.
For the years ended December 31, 2003 and 2002 our cash
flows from operations are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
2003 | |
|
2002 | |
|
|
| |
|
| |
Net cash provided by operations
|
|
$ |
122,798 |
|
|
$ |
66,923 |
|
Net cash (used in) provided by investing activities
|
|
|
(18,313 |
) |
|
|
25,704 |
|
Net cash (used in) provided by financing activities
|
|
|
(13,948 |
) |
|
|
59,703 |
|
Cash Provided by Operations. The growth in cash from
operations was primarily due to increased membership, improved
profitability and changes in outstanding receivables and
payables based on the timing of cash receipts and payments.
Because we generally receive premium revenue in advance of
payment for the related medical care costs, our cash has
historically increased during periods of enrollment growth.
Cash (Used in) Provided by Investing Activities. The
increase in cash used in investing activities is mainly due to
the purchases of property and equipment and additional
investments made during the year ended December 31, 2003.
Cash (Used in) Provided by Financing Activities. The
increase in cash used in financing activities is due to debt
repayments made during the year ended December 31, 2003.
During the year ended December 31, 2002, capital
contributions of approximately $70.1 million were received,
which related to the acquisition of the WellCare group of
companies.
Regulatory Capital and Restrictions on Dividends. Our
operations are conducted through our HMO subsidiaries. These
subsidiaries are subject to state regulations that, among other
things, may require the maintenance of minimum levels of
statutory capital, as defined by each state. These regulations
may restrict the amount, payment, and timing of the distribution
of dividends that may be paid to our parent company. The states
can, in their sole discretion, require individual subsidiaries
to maintain statutory capital levels higher than state mandated
minimums. Management believes that we were in compliance with
all minimum statutory capital requirements at March 31,
2005, and will continue to be so for the foreseeable future.
45
The National Association of Insurance Commissioners has adopted
rules which, to the extent they are implemented by the states in
which we operate, set minimum capitalization requirements for
subsidiaries and other risk bearing entities. The requirements
take the form of risk-based capital rules. Florida and New York
have not yet adopted the risk-based capital standard as a net
worth requirement. Our operations in Illinois, Indiana,
Connecticut and Louisiana are subject to the National
Association of Insurance Commissioners guidance. Our
subsidiaries are required to maintain minimum capital amounts as
prescribed by the various states in which we operate. Our
restricted assets consist of cash and cash equivalents that are
deposited or pledged to state agencies in accordance with state
rules and regulations. At March 31, 2005, December 31,
2004 and 2003, all of our restricted assets consisted of cash
and cash equivalents. At March 31, 2005, December 31,
2004 and 2003, all of our subsidiaries were in compliance with
the minimum capital requirements. Barring any change in
regulatory requirements, we believe that we will continue to be
in compliance with these requirements at least through 2005. New
York regulators have proposed a 150% increase in reserve
requirements to be implemented over an eight-year period, which
would materially increase the capital requirements of our New
York managed care plan.
If our regulators were to deny or significantly further restrict
our subsidiaries ability to pay dividends to us or to pay
management fees to our affiliates, the funds available to us as
a whole would be limited, which could harm our ability to
implement our business strategy. For example, we could be
hindered in our ability to make debt service payments on amounts
drawn from our credit facility.
Debt and Credit Facilities. As part of the consideration
for the acquisition of the WellCare group of companies, we
issued a senior subordinated non-negotiable promissory note in
the original principal amount of $53.0 million to the
stockholder representative on behalf of the stockholders of the
Florida business, including Rupesh Shah, our Senior Vice
President, Market Expansion, and his spouse. In February 2004,
we entered into a settlement agreement with the selling
stockholders that fixed the remaining amount of the seller note
at $119.7 million. In May 2004, we entered into a further
agreement with the selling stockholders, pursuant to which we
prepaid $85.0 million of the principal balance of the note,
using proceeds from the senior secured term loan facility
described below, and $3.0 million of the principal balance
was forgiven in consideration of that prepayment. In August
2004, we prepaid an additional $3.2 million of the
principal balance of the note. The remaining balance of the
note, $25.0 million, is due on September 15, 2006, and
would be due immediately upon a sale of our business. Interest
on the principal amount of the note accrues at the rate of
5.25% per year.
In May 2004, we entered into a credit agreement pursuant to
which we obtained two senior secured credit facilities,
consisting of a term loan facility in an amount of
$160.0 million and a revolving credit facility in the
amount of $50.0 million, of which $10.0 million is
available for short-term borrowings on a swingline basis. These
facilities are provided by a group of banks and other financial
institutions led by Credit Suisse First Boston and Morgan
Stanley Senior Funding, Inc. We used the proceeds from the term
loan to prepay $85.0 million of the principal balance of
the seller note discussed above, to prepay in full, for
$18.3 million, certain senior discount notes previously
issued by one of our subsidiaries, to pay the $50.3 million
purchase price for the Harmony acquisition, and to pay
approximately $4.3 million in transaction fees and
expenses. No amounts have been drawn on the $50.0 million
revolving credit facility since its inception.
Interest on the facilities is payable quarterly at a rate per
annum based on the optional rates available to us. We have the
option to select either (a) LIBOR plus a 4 percent
margin or (b) the greater of (i) prime or
(ii) the federal funds rate plus 0.50%, plus a margin of
3 percent. In May 2004, we chose the six month LIBOR rate
option of 5.5625%. In December 2004, we also selected the six
month LIBOR rate option of 6.49%. The term loan facility will
mature in May 2009, and the revolving credit facility will
mature in May 2008.
Our credit facilities include financial and operational
covenants that limit our ability to incur additional
indebtedness and pay dividends as well as purchase or dispose of
significant assets. Covenants in the credit facilities include
maintenance of a fixed charge coverage ratio above a set
minimum, maintenance of a leverage ratio below a set maximum,
and limitations on capital expenditures and acquisitions. We
believe that we were in compliance with all of these covenants
at March 31, 2005.
46
As of May 2005, our debt was rated below investment grade by the
major credit rating agencies as follows:
|
|
|
|
|
|
|
|
|
Agency |
|
Outlook | |
|
Credit Rating | |
|
|
| |
|
| |
Moodys
|
|
|
Stable |
|
|
|
B2 |
|
Standard & Poors
|
|
|
Stable |
|
|
|
B+ |
|
Consequently, if we seek to raise funds in capital markets
transactions, our ability to do so will be limited to issuing
additional non-investment grade debt or issuing equity and/or
equity-linked instruments.
We expect to fund our working capital requirements and capital
expenditures during the next several years from our cash flow
from operations, from public offerings or other possible future
capital markets transactions. We have taken a number of steps to
increase our internally generated cash flow, including reducing
our health care expenses by, among other things, exiting from
unprofitable markets and undertaking cost savings initiatives.
If our cash flow is less than we expect due to one or more of
the risks described in Risk Factors, or our cash
flow requirements increase for reasons we do not currently
foresee, then we may need to draw upon available funds under our
revolving line of credit, which matures in May 2008, or issue
additional debt or equity securities. Because we currently
intend to make select acquisitions as part of our growth
strategy, we likely will draw upon such funds and credit
facilities and/or issue additional debt or equity securities.
Based on the above, we believe that we will be able to
adequately fund our current and long-term capital needs.
A failure to comply with any covenant in our credit facilities
could make funds under our credit facilities unavailable. We
also may be required to take additional actions to reduce our
cash flow requirements, including the deferral of planned
investments aimed at reducing our selling, general and
administrative expenses. The deferral or cancellation of any
investments could have a material adverse impact on our ability
to meet our short-term business objectives. We regularly
evaluate cash requirements for current operations and
commitments, and for capital acquisitions and other strategic
transactions. We may elect to raise additional funds for these
purposes either through additional debt or equity, the sale of
investment securities or otherwise as appropriate.
Off-Balance Sheet Arrangements
At March 31, 2005, we did not have any off-balance sheet
arrangements that are required to be disclosed under
Item 303(a)(4)(ii) of SEC Regulation S-K.
Commitments and Contingencies
The following table sets forth information regarding our
contractual obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments due to period | |
|
|
| |
Contractual Obligations at |
|
|
|
Less than | |
|
1-3 | |
|
3-5 | |
|
More than | |
March 31, 2005 |
|
Total | |
|
1 Year | |
|
Years | |
|
Years | |
|
5 Years | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(in thousands) | |
Long-term
debt(1)
|
|
$ |
183,800 |
|
|
$ |
1,600 |
|
|
$ |
28,200 |
|
|
$ |
154,000 |
|
|
$ |
|
|
Operating leases
|
|
|
27,240 |
|
|
|
4,744 |
|
|
|
8,634 |
|
|
|
8,298 |
|
|
|
5,564 |
|
Other liabilities
|
|
|
1,606 |
|
|
|
1,606 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
212,646 |
|
|
$ |
7,950 |
|
|
$ |
36,834 |
|
|
$ |
162,298 |
|
|
$ |
5,564 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Long-term debt (including current maturities) at March 31,
2005 includes total short and long-term debt of $183,141 plus
the unamortized portion of the discount on the term loan
of $659. |
We are not an obligor under or guarantor of any indebtedness of
any other party; however, we may have to pay referral claims of
healthcare providers under contract with us who are not able to
pay costs of medical services provided by other providers. We
have no off-balance sheet financing arrangements except for the
operating leases described above.
47
Recent Accounting Pronouncements
In January 2003, the FASB issued Interpretation No. 46,
Consolidation of Variable Interest Entities. This
interpretation of Accounting Research Bulletin No. 51,
Consolidated Financial Statements, addresses
consolidation by business enterprises of variable interest
entities that either: (1) do not have sufficient equity
investment at risk to permit the entity to finance its
activities without additional subordinated financial support, or
(2) have equity investors that lack an essential
characteristic of a controlling financial interest. As of
December 31, 2003, we did not have any entities that
require disclosure or new consolidation as a result of the
adoption of FASB Interpretation No. 46.
In December 2004, SFAS No. 123(R), Share-Based
Payment, which addresses the accounting for employee stock
options, was issued. SFAS 123(R) revises the disclosure
provisions of SFAS 123, Accounting for Stock Based
Compensation and supercedes APB Opinion No. 25,
Accounting for Stock Issued to Employees.
SFAS 123(R) requires that the cost of all employee stock
options, as well as other equity-based compensation
arrangements, be reflected in the financial statements based on
the estimated fair value of the awards. This statement will be
effective beginning on January 1, 2006. We have elected not
to early adopt the provisions of SFAS 123(R) for the year
ended December 31, 2004.
Qualitative and Quantitative Disclosures about Market Risk
At March 31, 2005, December 31, 2004 and
December 31, 2003, we had cash and cash equivalents of
$340.7 million, $397.6 million and
$237.3 million, respectively, investments classified as
current assets of $173.7 million, $75.5 million and
$33.8 million, respectively, and restricted investments on
deposit for licensure of $31.5 million, $31.5 million
and $21.4 million, respectively. The short-term investments
classified as current assets consist of highly liquid securities
with maturities between three and twelve months and longer term
bonds with floating interest rates that are considered available
for sale. Long-term restricted assets consist of cash and cash
equivalents deposited or pledged to state agencies in accordance
with state rules and regulations. These restricted assets are
classified as long-term regardless of the contractual maturity
date due to the long-term nature of the states
requirements. The investments classified as long-term are
subject to interest rate risk and will decrease in value if
market rates increase. Because of their short-term pricing
nature, however, we would not expect the value of these
investments to decline significantly as a result of a sudden
change in market interest rates. Assuming a hypothetical and
immediate 1% increase in market interest rates at March 31,
2005, the fair value of our fixed income investments would
decrease by less than $1.8 million. Similarly, a 1%
decrease in market interest rates at March 31, 2005 would
result in an increase of the fair value of our investments of
less than $1.8 million.
48
OUR BUSINESS
Overview
We provide managed care services targeted exclusively to
government-sponsored healthcare programs, focusing on Medicaid
and Medicare. We have centralized core functions, such as claims
processing and medical management, combined with localized
marketing and strong provider relationships. We believe that
this approach will allow us to effectively grow our business,
both through organic growth and through acquisitions. We
currently operate health plans in Florida, New York, Illinois,
Indiana, Connecticut, Louisiana and Georgia. As of
March 31, 2005, we had approximately 765,000 members. We
recently became licensed to offer Medicaid and Medicare services
to beneficiaries in Georgia. As of March 31, 2005, we did
not have any members in Georgia.
We serve individuals eligible for both Medicaid and Medicare
benefits, including recipients of the TANF and the SSI Medicaid
programs and the State Childrens Health Insurance Program,
generally known as SCHIP and, in Florida, as Healthy Kids. We
believe that our experience in managing healthcare for this
broad range of beneficiaries better positions us to capitalize
on growth opportunities across all of these programs. In
addition, unlike many other managed care organizations that
attempt to serve the general population through commercial
health plans, we focus exclusively on serving individuals in
government programs. We believe that this focus allows us to
better serve our members and providers and to more efficiently
manage our operations.
We were formed in May 2002 to acquire the WellCare group of
companies. In July 2002, we completed the acquisition of our
current businesses through two concurrent transactions. In the
first, we acquired our Florida operations, including our
WellCare of Florida and HealthEase subsidiaries, in a stock
purchase from several individuals. In the second transaction, we
acquired The WellCare Management Group, Inc., a publicly-traded
holding company and the parent company of our New York and
Connecticut operations, through a merger of that company into a
wholly-owned subsidiary of ours. See Managements
Discussion and Analysis of Financial Condition and
Operations Corporate History and Acquisitions.
From inception to July 2004, we operated through a holding
company that was a limited liability company. In July 2004,
immediately prior to the closing of our initial public offering,
that company was merged into a Delaware corporation and we
changed our name to WellCare Health Plans, Inc.
Our Markets and Opportunities
|
|
|
The Market for Government-Sponsored Healthcare
Programs |
The market for government-sponsored healthcare programs is large
and growing. Overall healthcare spending in the United States
has increased dramatically over the past four decades, from
$41 billion in 1965 to $1.6 trillion in 2002,
according to CMS. CMS estimates that healthcare expenditures
will continue to increase over the next decade at an average
annual rate of 7.3%, growing to a projected $3.4 trillion
by 2013. According to CMS, approximately 32.8% of total
healthcare spending in 2003, or $550 billion, was financed
by Medicare and Medicaid. According to CMS, as of June 30,
2003, approximately 42.7 million people received Medicaid
benefits, and total Medicaid expenditures were approximately
$255 billion, of which approximately $109 billion was
the responsibility of state governments and the balance provided
by the federal government. As of June 30, 2003,
approximately 41.1 million people were enrolled in
Medicare, and the federal government spent approximately
$283 billion for Medicare, according to CMS. In particular,
enrollment in Medicaid managed care programs has grown rapidly
in recent years, from 13.3 million, or 40% of enrollees, in
1996 to 25.3 million, or 59.1% of enrollees, in 2003,
according to CMS.
We currently operate managed care health plans in Florida, New
York, Illinois, Indiana, Connecticut, Louisiana and Georgia.
Florida and New York have two of the largest Medicaid and
Medicare populations in the United States.
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Florida. As of June 30, 2003, Florida has the fourth
largest population of Medicaid enrollees, 2.2 million, and
the second largest population of Medicare enrollees,
2.9 million, according to CMS. In 2002, total Medicaid
spending in Florida was approximately $9.9 billion, of
which the state |
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governments portion totaled approximately
$5.6 billion, according to CMS. During 2001, according to
CMS, total Medicare spending in Florida totaled approximately
$21.6 billion. According to data from CMS, in 2003,
approximately 61% of Medicaid-eligible beneficiaries in Florida
participated in managed care plans. |
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New York. New York has the second largest population of
Medicaid enrollees, approximately 3.6 million as of
June 30, 2003, and the third largest population of Medicare
enrollees, approximately 2.8 million, according to CMS. In
fiscal year 2002, total Medicaid spending in New York was
approximately $36.3 billion, of which the state and local
governments portion totaled approximately
$18.1 billion, according to CMS, and current budgets call
for total Medicaid spending in the range of $44.0 billion
to 45.0 billion. According to CMS, Medicare spending in New
York for 2001 was approximately $20.4 billion. According to
data from CMS, as of June 20, 2003, approximately 53% of
Medicaid-eligible beneficiaries in New York participated in
managed care plans. |
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Illinois. Illinois has approximately 1.6 million
Medicaid enrollees and approximately 1.7 million Medicare
enrollees, according to CMS. In 2002, total Medicaid spending in
Illinois was approximately $8.8 billion, of which the state
governments portion totaled approximately
$4.4 billion, according to CMS. According to CMS, Medicare
spending in Illinois was approximately $8.0 billion in
2001. According to data from CMS, in 2003 approximately 9% of
Medicaid-eligible beneficiaries participated in managed care
plans. |
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Indiana. Indiana has approximately 707,000 Medicaid
enrollees and approximately 878,000 Medicare enrollees,
according to CMS. In 2002, total Medicaid spending in Indiana
was approximately $4.4 billion, of which the state
governments portion totaled approximately
$2.8 billion, according to CMS. According to CMS, Medicare
spending in Indiana was approximately $5.0 billion in 2001.
According to data from CMS, in 2003 approximately 71% of
Medicaid-eligible beneficiaries participated in managed care
plans. |
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Connecticut. Connecticut has approximately 405,000
Medicaid enrollees and approximately 533,000 Medicare enrollees,
according to CMS. In 2002, total Medicaid spending in
Connecticut was $3.5 billion, of which the state
governments portion totaled $1.7 billion, according
to CMS. According to CMS, Medicare spending in Connecticut was
$3.1 billion in 2001. According to data from CMS, in 2003
approximately 73% of Medicaid-eligible beneficiaries
participated in managed care plans. |
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Louisiana. Louisiana has approximately 860,000 Medicaid
enrollees and approximately 620,000 Medicare enrollees,
according to CMS. In 2002, total Medicaid spending in Louisiana
was $4.9 billion, of which the state governments
portion totaled $3.4 billion, according to CMS. According
to CMS, Medicare spending in Louisiana was $4.9 billion in
2001. According to data from CMS, in 2003 approximately 59% of
Medicaid-eligible beneficiaries participated in managed care
plans. |
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Georgia. Georgia has approximately 1.4 million
Medicaid enrollees and approximately 975,000 Medicare enrollees,
according to CMS. In 2002, total Medicaid spending in Georgia
was $6.2 billion, of which the state governments
portion totaled $3.7 billion, according to CMS. According
to CMS, Medicare spending in Georgia was $4.4 billion in
2001. According to data from CMS, in 2003 approximately 84% of
Medicaid-eligible beneficiaries participated in managed care
plans. |
Market For Prescription Drug Benefits Under Medicare
Part D
The MMA included a significant expansion of the Medicare program
to include a new federal prescription drug benefit beginning in
2006. The Henry J. Kaiser Family Foundation estimates that
in 2006 there will be approximately 29 million Medicare
eligible beneficiaries, or approximately 67% of the estimated
43 million total Medicare eligible population, who are
likely to seek prescription drug coverage pursuant to Medicare
Part D. In addition, the United States Department of Health
and Human Services estimates that in 2006, approximately
11 million Medicare beneficiaries will receive low-income
subsidies, including dual-eligible subsidies.
50
Government-Sponsored Healthcare Programs
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Emergence of Managed Care and Government Programs |
HMOs. Health maintenance organizations, or HMOs, and
other types of managed care plans were created as a response to
dramatic increases in healthcare-related costs. Managed care
plans generally reduce the cost of health insurance by providing
members with access to a quality, efficient and cost-effective
network of providers. The plans also reduce costs by attempting
to increase member access to timely and preventative healthcare
delivered in the most appropriate healthcare delivery setting.
Since the 1970s, enrollment in managed care has increased
dramatically, especially over the past decade. As part of its
efforts to control rising costs within government-sponsored
healthcare programs, the federal government and many states have
encouraged the creation of managed care plans for government
programs.
Administration of Government Programs. The Centers for
Medicare & Medicaid Services, currently known as CMS,
is the government agency which administers the federal Medicare
program and works in partnership with the states to administer
Medicaid and the state SCHIP programs.
Medicaid Managed Care. Medicaid is a joint federal and
state health insurance program for certain low-income
individuals. The amount of total federal outlays for Medicaid
has no set limit; rather, the federal government must match
whatever the particular state provides for its eligible
recipients, subject to limits determined annually by CMS. The
percentage matched by the federal government varies by state.
Medicaid is structured to allow each state to establish, within
broad federal guidelines, its own eligibility standards,
benefits package, payment rates and program administration. In
most states, the threshold requirements for Medicaid eligibility
are determined by the state. In some cases, eligibility criteria
are determined by reference to other federal financial
assistance programs, including TANF and SSI. The TANF program
provides assistance to low-income families with children. SSI
provides assistance to low-income aged, blind or disabled
individuals. States may also broaden eligibility beyond the
requirements for these programs. Families who exceed the income
thresholds for Medicaid may be able to qualify for the state
SCHIP program.
Historically, Medicaid operated on a fee-for-service model,
under which the Medicaid programs made payments directly to
providers after delivery of care. We believe that the
fee-for-service model has resulted in beneficiaries often
receiving care on an episodic basis and in inappropriate,
high-cost settings, such as emergency rooms and hospitals, as
opposed to receiving care in a comprehensive organized manner.
To address these concerns, 42 states have now implemented
mandatory Medicaid managed care programs and six have
implemented voluntary managed care programs. In states with
mandatory Medicaid managed care programs, a percentage of
Medicaid recipients are automatically enrolled by the state into
a managed care program. States generally may only mandate
managed care in areas where more than one managed care plan
operates. The percentage of recipients who are subject to such
mandatory enrollment varies by state and is set by law or
regulation within each state from time to time. If Medicaid
managed care is not mandatory, individuals entitled to Medicaid
may choose either the traditional Medicaid fee-for-service
program or a managed care plan, if available.
There are two types of Medicaid managed care programs: capitated
managed care plans and primary care case management plans. Under
capitated managed care programs, which we operate, the state
pays the managed care plan a fixed fee per enrollee and the plan
assumes either full or partial risk for the financing and
delivery of state-specified healthcare services. Under primary
care case management plans, a provider is paid a per patient
monthly case management fee for acting as a gatekeeper to
approve all medical services and does not assume financial risk
for the recipient.
SCHIP is the single largest expansion of health insurance
coverage for children since the enactment of Medicaid, and some
states are expanding the program to include adults. SCHIP is a
federal and state matching program designed to help states
expand health insurance to children whose families earn too much
to qualify for traditional Medicaid yet not enough to afford
private health insurance. States have the option of
administering SCHIP through their existing Medicaid programs,
creating separate programs or combining both approaches.
Currently, all 50 states, the District of Columbia and all
U.S. territories have approved
51
SCHIP plans, and many states continue to submit plan amendments
to further expand coverage under SCHIP.
Overview. Medicare is a federal program that provides
eligible persons age 65 and over and some disabled persons
a variety of hospital and medical insurance benefits. Medicare
beneficiaries have the option to enroll in a Medicare Advantage
plan (previously known as Medicare+Choice), Medicares
managed care option, in geographic areas where such a plan is
offered. Under this program, managed care organizations can
contract with CMS to provide Medicare benefit plans to Medicare
enrollees eligible for Part A and enrolled in Part B
in exchange for a fixed monthly payment per member that varies
based on the county in which the member resides. Individuals who
elect to participate in the Medicare Advantage program select a
Medicare Advantage plan available in their county of residence
and usually receive greater benefits than they would have under
traditional Medicare. Medicare Advantage plan benefit
enhancements include lower deductible and coinsurance amounts,
Part B premium refunds, additional benefits (for example,
coverage of additional skilled nursing facility days), and, in
some Medicare Advantage plans, supplemental benefits, such as
prescription drug coverage. Except for Medicare enrollees in
Medicare Advantage PPOs, Medicare Advantage plan enrollees are
generally required to use the services and provider network
offered by the managed care organization exclusively and may be
required to pay a monthly premium to the managed care
organization.
2003 Medicare Reform Legislation. The 2003 Medicare
reform legislation, known as the Medicare Modernization Act, or
MMA, is perhaps the most significant change to the Medicare
program since its inception. The MMA expands Medicare
beneficiary healthcare options by, among other things, adding
the Part D prescription drug benefit beginning in 2006, as
discussed below, creating regional health plan options and
modifying the methods by which Medicare will pay Medicare
managed care plans. The MMA also created a transitional Medicare
discount drug card program, running from June 1, 2004
through December 31, 2005. The program is available on a
voluntary basis to all Medicare recipients. Medicare managed
care organizations applied to CMS to participate in the
transitional program and many managed care plans are currently
offering discount drug cards to their Medicare enrollees. The
program includes up to $600 annually in transitional assistance
funds for eligible enrollees at or below 135% of the federal
poverty level. This fund may be used to purchase prescription
drugs or to pay any applicable coinsurance or deductibles.
Finally, the MMA adjusted the current process by which the
Medicare MCOs are paid and created the opportunity for regional
Medicare plans, primarily preferred provider organizations, or
PPOs, to be offered in 2006. Retroactive to January 1,
2004, the MMA increased Medicare Advantage rates by reconnecting
the managed care plan rate calculation to at least 100% of each
regions Medicare fee-for-service costs. This rate
calculation adjustment had the effect of raising the fixed
monthly payments made to managed care plans by CMS for providing
services to Medicare beneficiaries in some counties. Under the
MMA, the Medicare Advantage plans were required to use these
increased payments in 2004 to improve the healthcare benefits
that were offered, to reduce premiums or to strengthen their
provider networks and as part of the MMA, plans are subject to
routine audits.
Beginning in 2006, a revised rate calculation system will be
instituted for the Medicare Advantage local managed care plans.
The statutory payment rate for each county will be relabeled as
the benchmark amount, and plans will submit bids
that reflect the costs they expect to incur in providing the
base Medicare Part A and Part B benefits. If the bid
is less than the benchmark, Medicare will pay the plan its bid
plus 75% of the amount by which the benchmark exceeds the bid.
Plans will be required to use the 75% excess amount to provide
beneficiaries with extra benefits, reduced cost sharing, or
reduced premiums. The remaining 25% of the excess amount will be
returned to the U.S. Treasury. If the bid is greater than
the benchmark, the plans will be required to charge a premium to
enrollees equal to the difference between the bid and the
benchmark.
Also beginning in 2006, Medicare Advantage plans may be offered
on a regional basis, primarily in the form of PPOs. There
will be 26 Medicare Advantage PPO regions and the payments
for the regional PPO plans will also be based on a bidding
process very similar to the bidding process for the Medicare
Advantage
52
local HMO plans, described above. These Medicare Advantage
regional PPO plans will be required to offer the same benefits
across the entire region.
Enrollment in Medicare managed care programs has declined in
recent years primarily as the result of managed care plans that
had contracted with CMS reducing benefits or withdrawing from
markets because Medicare healthcare costs in many areas exceeded
payments received from CMS for their participation in Medicare.
However, as a result of the MMA and the increased reimbursement
rates to Medicare managed care plans which generally allows
Medicare managed care plans to offer more attractive benefits,
the additional Part D drug benefit offering and the
introduction of regional PPOs into the Medicare program, we
expect enrollment in Medicares managed care programs to
increase in the coming years.
Prescription Drug Program. As part of the MMA, beginning
in 2006, every Medicare recipient will be able to select a
prescription drug plan through Medicare Part D, largely
funded by the federal government. The Medicare Part D
benefit will be available to Medicare managed care enrollees as
well as Medicare fee-for-service enrollees. Managed care plans
will be required to offer a Part D drug benefit plan
(called an MA-PD plan) in every region in which they operate. In
addition, fee-for-service beneficiaries will be able to purchase
a stand alone PDP from a list of Medicare-approved PDPs
available in their region. CMS has created 26 MA-PD regions
and 34 PDP regions nationwide.
As required by the MMA, managed care companies, HMOs, pharmacy
benefit managers and other entities that wish to offer a PDP
filed applications with CMS in March 2005. Medicare Advantage
plans also submitted applications in March 2005 to provide
MA-PDs. In June 2005, qualified applicants submitted bids to CMS
for each MA-PD and PDP they propose to offer in 2006. CMS will
establish monthly premiums to approved plans based upon the
outcome of the MA-PD and PDP bidding process. From the bidding
process, it is anticipated that CMS will calculate a national
weighted average of the total premium per person and CMS
generally would pay each plan a certain percentage of such
average premium. The remaining amount would be paid as a premium
by the member. We currently anticipate that CMS will announce
the results of the bidding process and the applications in
September 2005, with marketing and enrollment in Part D
plans to commence in October and November 2005, respectively, to
be effective beginning January 1, 2006.
Dual-Eligible and SSI Beneficiaries. Individuals who are
eligible to receive both Medicare and Medicaid benefits are
sometimes termed dual-eligibles. Health plans such
as ours that serve dual-eligibles receive a higher premium on
account of those members. We believe that dual-eligibles are an
increasingly important sector of the market. In addition, we are
increasingly focused on the healthcare needs of the SSI
population through the provision of services to individuals that
as a result of their health needs require significant Medicaid
expenditures while representing only a small segment of the
total Medicaid population. For example, according to The Kaiser
Commission on Medicaid and the Uninsured, the SSI population in
2002, on a nationwide basis, while comprising only approximately
25% of the total number of eligible Medicaid participants,
accounted for approximately 70% of the total amount spent on
Medicaid benefits. We also believe the SSI population represents
an attractive growth opportunity for us due to the relatively
low concentration of managed care plans that currently provide
benefits to the SSI population in the markets where we provide
Medicaid services and our history of successfully serving these
populations.
Our Competitive Advantages
We operate health plans focused on government-sponsored
healthcare programs. We believe the following are our key
competitive advantages:
Leading Market Presence. We are the leading Medicaid
provider in Florida, with an approximately 53% market share of
Medicaid managed care enrollees. As a result of our acquisition
of Harmony in 2004, we are also the leading provider of Medicaid
managed care services in Illinois. Nationally, we had over
711,000 Medicaid members as of March 31, 2005. We believe
our strong market position provides us with numerous strategic
advantages, including:
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enhanced economies of scale; |
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extensive provider networks in our core markets; |
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strong relationships with state and local government
agencies; and |
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the ability to provide a broad range of government-sponsored
healthcare programs. |
Diversified Government Healthcare Programs. We offer
managed care services for a diversified range of government
programs, including Medicaid programs such as the SCHIP, SSI and
TANF Medicaid programs and Medicare programs. This approach
helps reduce the impact on us resulting from rate reductions or
other adverse changes that impact any one program. We believe
that our experience in serving a broad range of enrollees in
Medicaid, Medicare and related programs positions us to
capitalize on growth opportunities within the market of
government-sponsored healthcare programs.
Exclusive Focus on Government Healthcare Programs. We are
focused on designing and operating our business to serve our
government programs constituents, including members, providers
and regulators. We believe this allows us to build our provider
networks with a focus on our target populations, and allows us,
in large part, to contract with our providers using the Medicaid
and Medicare fee schedules as a benchmark, which are generally
lower than commercial rates. Our approach to contracting has
allowed us to build strong provider networks that have been
designed to provide the necessary care to our members, based on
specific benefit designs, in the appropriate healthcare setting.
We also target our sales and marketing efforts directly to
individuals and communities, rather than employers and other
groups targeted by commercial plans. We have developed internal
regulatory affairs expertise which we believe allows us to work
more effectively with CMS, the states and other regulators that
govern our programs and services.
Centralized and Scalable Operations. We have centralized
various functions across all of our health plans, including
claims processing, member services, information technology,
regulatory compliance and medical management and pharmacy
benefits management programs. Centralizing these functions and
operating on a single platform permit us to better assess and
control medical costs. Our administrative and information
services have been designed to be scaleable to accommodate
growth, while allowing targeted marketing and provider services
tailored to local markets.
Localized, Disciplined Sales and Marketing Efforts. Our
sales force is designed to target the diverse ethnic, cultural
and linguistic composition of the communities we serve with over
six different languages spoken. Through the strong relationships
our sales people have with community leaders and healthcare
providers, we are able to access Medicaid-eligible populations
and encourage them to join our plans, resulting in greater
market share than plans that must rely solely on mandatory
assignments. We believe that our sales efforts are enhanced by
targeted marketing designed to strengthen our local brands. We
believe these marketing programs enhance our leading brands,
such as HealthEase and Staywell in Florida, and will allow us to
further penetrate the Medicare market. Our sales and marketing
team also provides us with increased flexibility as we assess
potential new markets. We believe that we have developed the
requisite infrastructure and expertise to succeed in both
mandatory and non-mandatory Medicaid managed care states.
Strong Relationships with Government Agencies. We work
closely with the government agencies that regulate us and help
develop the products and services that we offer. We believe that
our relationships with these government agencies enable us to
deliver high-quality, affordable healthcare services to our
members and create cost saving opportunities for the states in
which we operate, many of which are facing budgetary pressures.
As a result of our ability to provide quality, cost-effective
services, we believe government agencies will remain committed
to growth of managed care as a means to control rising
healthcare expenditures.
Partnerships with Providers. We seek to have mutually
beneficial arrangements with our providers which help them to
develop their practices. We strive to provide quality service
and to be a low hassle partner in developing and maintaining
strong relationships with our providers. As a result of this
approach, we have established broad provider networks that
included over 27,000 physicians and specialists and
approximately 392 hospitals as of March 31, 2005.
Integrated Medical Management. We employ a coordinated,
integrated approach to medical management in order to arrange
for the provision of appropriate care to our members, contain
costs and ensure efficient delivery within the network. Our
focus is to ensure that members receive the appropriate care in
a timely manner and in the appropriate healthcare delivery
setting. Key elements of our medical management
54
strategy include a focus on preventative care, provider network
structure, careful management of outpatient, inpatient and other
services and case and disease management. We believe that this
multi-tiered approach allows us to improve medical outcomes for
our members, which results in cost savings.
Our Growth Strategy
Our objective is to be the leading provider of government
programs-focused managed care services. To achieve this
objective, we intend to grow our business by:
Expanding our Medicaid Business within Existing Markets.
We believe that there are significant growth opportunities in
most of the states in which we operate. Each of the states in
which we operate, other than Illinois, has mandatory assignment
of a certain percentage of Medicaid-eligible individuals to
Medicaid managed care plans. We intend to continue to grow our
business in the markets that we currently serve by, among other
things:
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maintaining and expanding our provider networks; |
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deepening relationships with our providers; |
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arranging for the provision of high-quality, affordable
healthcare; |
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tailoring our localized marketing efforts to reach individuals
who are eligible for government healthcare programs; |
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encouraging our government partners to increase mandatory
assignment; |
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focusing on the healthcare needs of the aged, blind and disabled
populations; and |
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selectively pursuing acquisitions of Medicaid membership within
our existing markets. |
Leveraging our Established Medicaid Businesses to Develop
Medicare Plans. We intend to use the core competencies,
systems and infrastructure that we have developed through our
established Medicaid businesses to continue to develop Medicare
plans. We believe that there are compelling synergies between
Medicaid and Medicare health plans that make leveraging our
Medicaid businesses attractive, including:
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a similar sales process; |
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member demographics; |
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a focus on strong provider relationships; |
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significant provider network overlap; |
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a focus on cost-effective networks and operations; |
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the importance of disciplined medical management; |
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an ability to leverage our existing licenses and investments in
required statutory capital; and |
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a proven track record with regulatory agencies. |
We also believe that our Medicaid experience and competencies
will allow us to expand our Medicare business organically in the
other states where we currently operate, as well as in
additional markets, without incurring significant expenses. We
currently have applications pending with CMS for fourteen new
Medicare counties representing approximately 605,000 Medicare
beneficiaries. We also intend to monitor the effects of the MMA
and may consider acquisitions of select Medicare managed care
businesses.
Entering New Markets Through Internal Growth, Geographic
Expansions and Acquisitions. We intend to enter new markets,
whether or not they have mandatory assignment for Medicaid
recipients into managed care plans, through a combination of
internal growth, geographic expansions and acquisitions. We
recently became licensed to offer Medicaid services to
beneficiaries in Georgia and have submitted applications to
provide Medicaid services in the state. We also recently became
licensed to offer Medicare services to beneficiaries in Georgia
and received approval to provide Medicare services in certain
counties in the state. We believe that entering Medicaid and/or
Medicare markets will provide us with the opportunity to grow
and diversify our revenues, enhance economies of scale from our
centralized administrative infrastructure and strengthen our
55
relationships with providers and government agencies. We expect
to grow organically by expanding our service area and provider
network, increasing awareness of our local brand names and
maintaining positive provider relationships. We also intend to
enter new markets by acquiring existing Medicaid and/or Medicare
managed care businesses. We expect to focus our expansion on
markets with significant Medicaid and/ or Medicare populations,
large provider populations, a fragmented competitive landscape
and favorable regulatory conditions. We believe that the managed
care industry, particularly Medicaid-focused plans, is likely to
experience continued consolidation in the future and that this
will provide us an opportunity to acquire existing plans in
attractive markets.
Providing Prescription Drug Plan Coverage. We have
received conditional approval from CMS to provide a stand-alone
PDP under Medicare Part D beginning in January 2006. In
addition, in June 2005, we filed bids with CMS that include our
benefit plan designs and proposed rates for PDPs in all 34
regions established by CMS. If our bids are approved by CMS, we
intend to provide stand-alone PDPs starting January 1,
2006. We believe that many of these beneficiaries, which include
dual eligibles, will enroll in Medicare Part D coverage as
a cost effective way of obtaining drug coverage. We intend to
capitalize on this potential opportunity by applying our
expertise in benefit design, developing and managing
prescription drug formularies and marketing as well as our
understanding of the health conditions of Medicare
beneficiaries, especially low-income beneficiaries, and member
demographics. We also believe that our exclusive focus on
government-sponsored healthcare programs, such as Medicaid and
Medicare, will enable us to successfully attract members to our
PDP plans.
Our Health Plans
We provide managed care services targeted exclusively to
government-sponsored healthcare programs, focusing on Medicaid
and Medicare. Our business currently operates health plans in
Florida, New York, Illinois, Indiana, Connecticut, Louisiana and
Georgia, serving approximately 765,000 members as of
March 31, 2005. The following tables summarize our
membership by state and by program as of the dates indicated.
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December 31, | |
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March 31, | |
State |
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2004 | |
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2005 | |
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Florida
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532,000 |
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530,000 |
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New York
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69,000 |
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75,000 |
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Illinois
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67,000 |
|
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68,000 |
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Indiana
|
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45,000 |
|
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58,000 |
|
Connecticut
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34,000 |
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33,000 |
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Louisiana
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600 |
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747,000 |
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764,600 |
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Program |
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Medicaid
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701,000 |
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711,000 |
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Medicare
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46,000 |
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53,600 |
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747,000 |
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764,600 |
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We recently became licensed to offer Medicaid services to
beneficiaries in Georgia and have submitted applications to
provide Medicaid services in the state. We also recently became
licensed to offer Medicare services to beneficiaries in Georgia
and received approval from CMS to provide Medicare services in
certain counties in the state. As of March 31, 2005, we did
not have any members in Georgia.
We enter into contracts generally on an annual basis with
government agencies that administer health benefits programs. We
receive premiums from state and federal agencies for the members
that are assigned to or have selected us to provide healthcare
services under each benefit program. The amount of premiums we
receive for each member is fixed, although it varies according
to the government program at issue and demographics, including
the members geographic location, age and sex.
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We are the largest operator of Medicaid managed care plans in
Florida. We began providing Medicaid services in Florida in
1994, and now operate the two largest Medicaid managed care
plans in the state, Staywell Health Plans, or Staywell, and
HealthEase. Our two distinct Medicaid health plans have separate
brand identities, sales forces, provider networks and geographic
coverage, but both utilize our centralized back office and
claims processing systems. This allows us to benefit from
economies of scale while increasing our coverage and penetration
throughout the state.
Our Medicaid managed care plans have broad geographic coverage
throughout Florida. Staywell operates in 15 counties, with
a particularly strong presence in South Florida. HealthEase
operates in 30 counties and has a significant presence in
Central and South Florida, as well as in counties in Northern
Florida, many of which tend to be rural counties. We also
participate in Floridas SCHIP program.
We began providing Medicare services in Florida in 2000 and now
operate a rapidly growing Medicare plan under the name WellCare.
Our Medicare plan operates in 16 counties in Florida, and
has particularly large membership in South Florida, which has a
large population of Medicare-eligible individuals and favorable
reimbursement rates.
From January 1, 2004 to March 31, 2005, our overall
membership in Florida grew from approximately 475,000 members to
approximately 530,000 members. During the three months ended
March 31, 2005, we experienced a decline of 2,000 members
in our overall membership in Florida primarily due to enrollment
delays reducing participation in Floridas Healthy Kids
program.
Our Medicaid contracts with the State of Florida for our
Staywell and HealthEase plans expire on June 30, 2006. Our
Medicare contract for our WellCare plan expires on
December 31, 2005. We also have a SCHIP contract with the
Florida Health Kids Corporation that expires on
September 30, 2005. We have been able to successfully renew
our contracts since we began operating in Florida.
Our Medicaid managed care programs in New York, which we provide
under the WellCare name, have grown rapidly under our
management. We currently operate plans in four of the boroughs
of New York City, the Hudson Valley region and Ulster County in
the Catskill Mountains region. We also offer Child Health Plus
and Family Health Plus plans in New York.
We also have a Medicare plan in New York which we also provide
under the WellCare name. We are currently focused on
restructuring our Medicare provider network in New York, with a
focus on building strong relationships with providers and
hospitals, and have made significant investments in quality
improvement.
Our Medicaid contracts in New York expire on September 30,
2005. Our Medicare contract with CMS expires on
December 31, 2005. We also have Child Health Plus and
Family Health Plus contracts with the State of New York that
expire on June 30, 2005 and September 30, 2005,
respectively. We have been able to successfully renew our
contracts since we began operating in New York.
From January 1, 2004 to March 31, 2005, our overall
New York membership grew from approximately 56,000 members to
approximately 75,000 members.
Our Illinois subsidiary operates the largest provider of
Medicaid managed care services in that state under the name
Harmony Health Plan of Illinois, which we acquired in June 2004.
Harmony began operations in Illinois in September 1996,
initially serving the Cook County market, and has increased its
membership throughout its operating history. From June 2004, the
date we acquired Harmony, to March 31, 2005, Harmonys
membership in Illinois grew from approximately 54,000 members to
approximately 68,000 members. In April 2005, we received
approval from CMS to offer Medicare Advantage plans in Cook and
57
Will counties effective May 1, 2005. According to CMS,
these counties had an aggregate of approximately 744,000
eligible enrollees as of December 2004.
Our Medicaid contract with the State of Illinois expires on
July 31, 2005. The Illinois state legislature recently
adopted budget legislation directing the state Medicaid agency
to renegotiate its contracts with health plans, such as ours, to
reduce premiums significantly. The state Medicaid agency
recently notified us of its proposed premium reductions and we
are continuing to negotiate with the agency to determine the
final premium applicable to our Illinois Medicaid health plans.
See Risk Factors Reductions in funding for
government healthcare programs could substantially reduce our
profitability. Although Harmony has successfully renewed
its Medicaid contract since it began operating in Illinois, we
can provide no assurance that our current negotiations will be
successful.
Harmony also operates a Medicaid managed care plan in Indiana
under the name Harmony Health Plan of Indiana. Harmony began
operations in Indiana in February 2001, after successfully
participating in the State of Indianas competitive bidding
process. From June 2004, the date we acquired Harmony, to
March 31, 2005, Harmonys membership in Indiana grew
from approximately 30,000 members to approximately
58,000 members.
Our Medicaid contract with the State of Indiana expires on
December 31, 2006. Harmony has been able to successfully
renew its Medicaid contract since it began operating in Indiana.
In Connecticut, we operate a Medicaid managed care plan under
the name PreferredOne. We began operating in Connecticut in 1995
when we purchased Yale New Haven Health Plan. We currently offer
services in each of Connecticuts eight counties. From
January 1, 2004 to March 31, 2005, our PreferredOne
membership grew from approximately 24,000 members to
approximately 33,000 members. We also significantly
expanded our provider network in the state during this period.
During the three months ended March 31, 2005, we
experienced a decline of 1,000 members in our overall membership
in Connecticut primarily due to our efforts to reallocate
resources in preparation for the launch of our Medicare products
and due to the impact of the states suspension of our
marketing activities during the latter portion of 2004. In April
2005, we received approval from CMS to offer Medicare Advantage
plans in Fairfield and New Haven counties effective May 1,
2005. According to CMS, these counties had an aggregate of
approximately 263,000 eligible enrollees as of December
2004.
Our Medicaid contracts with the State of Connecticut expire on
December 31, 2005. We have been able to successfully renew
our Medicaid contracts since we began operating in Connecticut.
We began operations as a Medicare managed care plan in Louisiana
in September 2004. The Louisiana subsidiary operates under the
WellCare name in three Louisiana parishes in the Baton Rouge
metro area. As of March 31, 2005, membership in Louisiana
was approximately 600 members. Our Medicare contract with CMS
expires on December 31, 2005.
We recently became licensed to offer Medicaid services to
beneficiaries in Georgia and responded to a request for proposal
from the Georgia Department of Community Health, or
DCH, pursuant to which DCH would transition to several
managed care plans approximately 1.1 million Medicaid and
SCHIP beneficiaries. We also recently became licensed to offer
Medicare services to beneficiaries in Georgia and received
approval from CMS to provide Medicare services to beneficiaries
in Fulton and Dekalb counties, which together represents 140,000
eligible enrollees. As of March 31, 2005, we did not have
any members in Georgia.
Medical Programs and Services
Medicaid. The Medicaid programs and services we offer to
our members vary by state and county and are designed to address
the unique needs of our members within the various communities
we serve. Although
58
our Medicaid contracts determine to a large extent the type and
scope of healthcare services that we arrange for our members, we
also customize our benefits in ways which we believe make our
products more attractive. Our Medicaid plans provide our members
with access to a broad spectrum of medical benefits from all
facets of primary care and preventative programs to full
hospitalization and tertiary care.
In addition, our approach to contracting has allowed us to build
strong provider networks, which provide our members with access
to physicians to whom they may not otherwise have access.
Members are required to use our network, except in cases of
emergencies, transition of care or when specialty providers are
unavailable or inadequate to meet a members medical needs,
and generally must receive a referral from their primary care
physician in order to receive healthcare from a specialist, such
as an orthopedic surgeon or neurologist. Members do not pay any
premiums, deductibles or co-payments.
Medicare. Through our Medicare plans, we also cover a
wide spectrum of medical services. We provide an enhanced level
of services relative to standard fee-for-service Medicare
coverage, ranging from reduced out-of-pocket expenses to
prescription drug coverage. Through these enhanced benefits, the
out-of-pocket expenses incurred by our members are reduced,
which allows them to better predict their healthcare costs.
Most of our Medicare plans require members to pay a co-payment
for services provided, and the amount of the co-payment varies
by benefit. None of our plans require a deductible for services.
Members are required to use our network of providers, except in
limited cases such as emergencies, transition of care or when
specialty providers are unavailable or inadequate to meet a
members medical needs, and generally must receive a
referral from their primary care physician in order to receive
healthcare from a specialist. Also, compared to our Medicaid
plans, we have more flexibility in designing benefits packages,
and we can charge members a premium for benefits that the
Medicare fee-for-service plan does not offer.
Beginning in 2006, under Medicare Part D, we will also be
required to offer prescription drug benefits to our Medicare
Advantage members who desire such benefits.
Provider Networks
We have longstanding, established relationships with our network
of providers in each of the markets we currently serve. We
arrange for the provision of healthcare services to our members
through mutually non-exclusive contracts with independent
primary care physicians, specialists, ancillary medical agencies
and professionals and hospitals.
Our network of primary care physicians plays an integral role in
managing the healthcare of our members. The relationship between
the primary care physician, or PCP, and a member is critical for
the member to make the most effective use of managed care. Our
PCPs are encouraged to discuss care options with new members
during their first visit, and answer questions they may have
about managed care, as well as to assist them in understanding
the role of the PCP. PCPs include family and general
practitioners, pediatricians, internal medicine physicians and
OB/GYNs. Specialty care physicians provide medical care to
members generally upon referral by the primary care physicians.
The following table shows the total approximate number of PCPs,
specialists and hospitals participating in our network as of
December 31, 2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Florida | |
|
New York | |
|
Illinois | |
|
Indiana | |
|
Connecticut | |
|
Louisiana | |
|
Total | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Primary care physicians
|
|
|
2,985 |
|
|
|
1,958 |
|
|
|
350 |
|
|
|
107 |
|
|
|
851 |
|
|
|
42 |
|
|
|
6,293 |
|
Specialists
|
|
|
6,300 |
|
|
|
3,960 |
|
|
|
3,155 |
|
|
|
629 |
|
|
|
2,038 |
|
|
|
91 |
|
|
|
16,173 |
|
Hospitals
|
|
|
207 |
|
|
|
72 |
|
|
|
59 |
|
|
|
14 |
|
|
|
22 |
|
|
|
2 |
|
|
|
376 |
|
We have also contracted with other ancillary medical providers
and professionals for physical therapy, mental health and
chemical dependency care, home healthcare, vision care,
diagnostic laboratory tests, x-ray examinations, ambulance
services and durable medical equipment. Additionally, we have
contracted with a national pharmacy benefit manager that
provides a local pharmacy network in our markets where pharmacy
is a covered benefit. We also offer, using in-house resources,
comprehensive management of mental health and substance abuse
services.
59
We value our relationships with our providers. Our provider
relations strategy is focused on being a low hassle partner.
Examples of the steps we have taken to implement this strategy
include:
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|
|
|
paying claims promptly; |
|
|
|
providing web-based access to eligibility information; |
|
|
|
delivering useful information to our providers, including
monthly reports to help providers evaluate their performance and
increase their efficiency; |
|
|
|
reducing restrictions on network physicians in ordering of
medical tests and procedures; and |
|
|
|
sponsoring marketing events designed to increase awareness of
our plans and the advantages of managed care, sometimes with the
participation of our providers. |
We also consult with members of our provider network to obtain
their assistance in designing benefit packages, and we enter
into relationships using a range of contract types, including
capitated and fee-for-service arrangements. See Provider
Payment Methods. We believe that our focus on strong
provider relationships has helped us to make our health plans
more attractive and increase our membership.
In order to help ensure the quality of our providers, we
credential and re-credential our providers using standards that
are required in the states in which we operate. We also
continuously upgrade and review our networks to help ensure
adequacy of coverage and compliance of individual providers with
our network and operational standards, and we replace and add
providers as appropriate.
Our contracts with hospitals, independent primary care
physicians and specialists are usually for one to two year
periods and automatically renew for successive one-year terms.
The contracts can generally be cancelled by either party upon a
specified prior written notice period, which is typically 60 or
90 days, subject to various conditions. With respect to our
hospital contracts, the hospital is paid for all medically
necessary inpatient and outpatient services, including emergency
services, diagnostic services and therapeutic care provided to
members. With the exception of admissions from the emergency
room, all inpatient hospital services require precertification
from our utilization review staff. All contracted hospitals are
required to participate in our utilization review and quality
improvement programs.
Provider Payment Methods
We utilize three primary methods of payment with our network
providers: capitation, fee-for-service and risk sharing
arrangements, the latter of which we utilize just in our
Medicare business. In addition, in order to encourage our PCPs
to be proactive in the treatment of our members, we pay a
fee-for-service rate in excess of the capitation rate to our
PCPs who provide specified preventative health services, such as
childhood immunizations, lead screening and well-child
check-ups. In New York, PCPs to whom we pay a capitation also
receive an additional payment, or bill-above, for supplying us
with timely encounter data regarding the nature of members
Medicaid visits. We use these data to improve the level of
preventative healthcare available under our plans, such as
vaccinations, immunizations and health screenings for newborn
children. These data also help us to monitor the amount and
level of medical treatment and improve our compliance with
regulatory reporting requirements to ensure our contracted
providers are providing high-quality medical care. We
periodically review our payment methods as necessary. Factors we
generally consider in adjusting payment methods include changes
to state Medicaid fee schedules, the competitive environment,
current market conditions, anticipated utilization patterns and
projected medical benefits expense.
Medicaid
Capitation. We pay most of our PCPs a fixed fee per
member, which is referred to as capitation. Under this
arrangement, the PCP is at risk for all costs related to the
services rendered by such physician, with the exception of those
preventative health services that are paid in addition to the
capitation and subject, in some cases, to stop-loss
arrangements. In some instances, certain specialty physicians
are also paid on a capitated basis. For the three months ended
March 31, 2005 and for the year ended December 31,
2004, 17% and 16%, respectively, of our Medicaid payments to
physicians were on a capitated basis.
Fee-for-Service. We pay our other providers, including
most specialists, based upon the service performed, which is
referred to as fee-for-service. For the three months ended
March 31, 2005 and the year
60
ended December 31, 2004, 83% and 84%, respectively, of our
Medicaid payments to providers were on a fee-for-service basis.
The primary fee-for-service arrangements are percentage of
Medicaid payment and per diem and case rates. These arrangements
may also be combined. The following is a description of the
principal fee-for-service arrangements we utilize:
|
|
|
|
|
Percentage of Medicaid fee schedule. We pay providers a
specified percentage of the amount Medicaid would pay under the
fee-for-service program. |
|
|
|
Per diem and case rates. Hospital facility costs are
generally reimbursed at negotiated per diem or case rates, which
vary depending upon the level of care. Lower intensity services
are generally paid at a lower rate than high intensity services.
For example, services provided on behalf of a newborn baby who
in order to gain weight stays in the hospital a few days longer
than the mother would typically be paid at a lower rate; whereas
a neo-natal intensive care unit stay for a baby born with severe
developmental disabilities would be paid at a higher rate. |
A significant percentage of our fee-for-service contracts with
providers allow for automatic adjustments in payments based upon
changes in government reimbursement rates.
Risk-sharing Arrangements. Within our capitation and
fee-for-service arrangements, which accounted for 30% and 70%,
respectively, of our Medicare payments to providers for the year
ended December 31, 2004 and 23% and 77%, respectively, for
the three months ended March 31, 2005, a small number of
Medicare providers operate under specialized capitated risk
arrangements in order to more efficiently align our interests.
Under these arrangements, we establish a risk fund for each
provider based on a percentage of premium paid, which is
evaluated on an individual or group basis, subject to monitoring
and analysis by our actuaries. Based on this analysis, we
estimate the amount, if any, due to the provider and establish a
liability and pay the applicable provider on a periodic basis,
to the extent that the balance exceeds claim payments.
When our members receive services for which we are responsible
from a provider with whom we have not contracted, such as in the
case of emergency room services from non-contracted hospitals,
we generally attempt to negotiate a rate with that provider. In
some cases, we may be obligated to pay the full rate billed by
the provider. In the case of a Medicare patient who is admitted
to a non-contracting hospital, we are only obligated to pay the
amount that that hospital would have received from CMS under
traditional Medicare.
Sales and Marketing Programs
Our sales force consists of approximately 536 associates. Our
sales force operates throughout all of our regions with the
exception of Indiana, where we do not maintain a sales force
because Indiana members choose their providers, each of which is
associated with a particular Medicaid plan, as opposed to
choosing an HMO directly. Our sales associates focus their
efforts on individuals and communities, rather than on employer
groups. We believe that our targeted sales and marketing efforts
are primarily responsible for our rapid membership growth in
several of our markets.
Our sales and marketing programs have been developed on a
localized basis with a focus on the communities in which our
members reside. We often conduct our sales programs in churches,
community centers and in coordination with government agencies.
We regularly participate in local events and festivals and
organize community health fairs to promote our products and the
benefits of preventative care. We also utilize traditional
marketing methods such as direct mail, telemarketing, mass media
and cooperative advertising with participating medical groups to
generate leads. Consistent with our community-focused approach,
we employ a culturally diverse sales staff, with more than six
languages represented, including Spanish, Russian and Chinese.
This allows us to target specific demographic markets, including
markets requiring specific language skills and knowledge.
In addition, we have fee-for-service relationships with
third-party brokers and agents to help us promote our Medicare
plans in some markets.
61
Our marketing and sales activities are heavily regulated by CMS
and the states. For example, our sales and marketing materials
must be approved in advance by the applicable regulatory
authority and our sales activities are limited to such
activities as conveying information regarding the benefits of
preventative care, describing the operations of managed care
plans and providing information about eligibility requirements.
The activities of third-party brokers and agents are also
heavily regulated by CMS and the states. See
Regulation for a further description of restrictions
on marketing and sales activities.
Quality Improvement
We continually strive to improve the quality of care provided to
our members. We believe that improvement in the delivery of
quality care and measurement of the results of quality
improvement efforts will be driving factors in the continued
growth of managed care.
Our Quality Improvement Program provides the basis for our
quality and utilization management functions and outlines
specific, ongoing processes designed to improve the delivery of
quality healthcare services to our members, as well as to ensure
compliance with regulatory and accreditation standards. Our
Quality Improvement Committee is chaired by our President and
Chief Executive Officer and includes all senior executive
management and other key company associates as members. The
Quality Improvement Committee also has a number of subcommittees
that are charged with monitoring certain aspects of care and
service, such as healthcare utilization, pharmacy services and
provider credentialing/recredentialing. Several of our
subcommittees include physicians as members.
Elements of our Quality Improvement Program include the
following:
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|
|
evaluation of the effects of particular preventative measures; |
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|
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member satisfaction surveys; |
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|
|
grievance and appeals processes for members and providers; |
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|
|
orientation visits to, and site audits of, select providers; |
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|
|
provider credentialing and recredentialing; |
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|
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ongoing member education programs; |
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|
|
ongoing provider education programs; |
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|
|
regulatory compliance; |
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|
|
health plan accreditation; and |
|
|
|
medical record audits. |
As part of our Quality Improvement Program, we have implemented
changes to our reimbursement methods to reward those providers
who encourage preventative care, such as well-child check-ups
and prenatal care. In addition, we have specialized systems to
support our quality improvement activities. Information is drawn
from our systems to identify opportunities to improve care and
to track the outcomes of the services provided to achieve those
improvements. Some examples of our intervention programs include:
|
|
|
|
|
a prenatal case management program to help women with high-risk
pregnancies deliver full-term, healthy infants; |
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|
|
a program to reduce the number of inappropriate emergency room
visits; |
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|
|
a disease management program to decrease the need for emergency
room visits and hospitalizations for asthma, congestive heart
failure and diabetes patients; and |
|
|
|
a wound management program to redirect specialized care to the
home setting, resulting in improved patient outcomes and reduced
cost of care. |
We believe that these efforts have resulted in improvements in
the quality of care our members receive, while reducing our
medical costs. As a result of our Quality Improvement Program,
we have received
62
accreditation from the Accreditation Association for Ambulatory
Health Care, or AAAHC, in the State of Florida which was
recently renewed for a three-year term.
Corporate Compliance
Due to the increasingly complex ethical and legal questions
facing all participants in the healthcare industry, we have
unified our corporate ethics and compliance policies by
implementing a comprehensive corporate ethics and compliance
program, called the Trust Program. The Trust Program
covers all aspects of our company and is designed to assist us
with conducting our business in accordance with applicable
federal and state laws and high standards of business ethics.
The Trust Program applies to members of our board of
directors, our associates including our Chief Executive Officer,
Chief Financial Officer and our Principal Accounting Officer or
Controller, and in some cases, our business partners and our
independent contractors. The Trust Program contains the
following elements:
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|
written standards of conduct; |
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|
|
designation of a corporate compliance officer and compliance
committee; |
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|
|
training and education; |
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|
|
lines for reporting and communication; |
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|
|
enforcement of standards through disciplinary guidelines and
actions; |
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|
|
internal monitoring and auditing; and |
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|
|
prompt response to detected offenses and development of
corrective action plans. |
We maintain and update training and monitoring programs to
educate our directors, associates and independent contractors on
the legal and regulatory requirements of their respective duties
and positions and to detect possible violations. To help ensure
compliance with the Trust Program, we also conduct regular,
periodic compliance audits by internal and external auditors and
compliance staff who have expertise in federal and state
healthcare laws and regulations.
Competition
In the Medicaid managed care market, our principal competitors
for state contracts, members and providers include the following
types of organizations:
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|
|
Primary Care Case Management Programs. Programs
established by the states through contracts with primary care
providers to provide the Medicaid recipient with primary care
services, on a non-capitated, non-risk basis, as well as to
provide limited oversight over other services. |
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|
|
Commercial HMOs. National and regional commercial managed
care organizations that have Medicaid members in addition to
members in private commercial plans. |
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|
|
Medicaid HMOs. Managed care organizations that focus
solely on providing healthcare services to Medicaid recipients,
typically on a capitated, full-risk basis. Many of these
competitors operate in a single or small number of geographic
locations. There are a few multi-state Medicaid-only
organizations that tend to be larger in size and therefore able
to leverage their infrastructure over a larger membership base. |
In the Medicare managed care market, our primary competitors for
contracts, members and providers are national and regional
commercial managed care organizations that serve Medicare
recipients and provider-sponsored organizations. MMA may cause a
number of commercial managed care organizations already in our
service areas to decide to enter the Medicare market. MMA also
creates a new competitive bidding process beginning in 2006 for
setting the payment and the beneficiary premium and benefits,
without limiting the number of bidders that may provide the
benefits.
63
We will continue to face varying levels of competition as we
expand in our existing service areas or enter new markets.
However, the licensing requirements and bidding and contracting
procedures in some states present barriers to entry into the
Medicaid and Medicare managed care markets.
We recently received conditional approval from CMS to provide
PDP coverage to Medicare beneficiaries. In addition, in June
2005, we submitted bids that include our benefit plan designs
and proposed rates for PDPs in all 34 regions established
by CMS. If our bids are approved, we expect to begin providing
PDP benefits beginning in 2006. In providing these services, we
expect to face competition from several national and regional
commercial managed care organizations.
Many of our competitors are large companies that have greater
financial, technological and marketing resources than we do. The
competition we face in each of our markets is as follows:
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|
|
Florida: Our Medicaid plans collectively have
approximately 53% market share in Florida, based on membership.
Our plans face competition from approximately 16 competitors
statewide, including Amerigroup Corporation, with approximately
21% of the market, and Humana, Inc., with approximately 7% of
the market. Our Medicare plan in Florida has an approximately 9%
market share, the fourth largest in the state. We compete with
15 other Medicare managed care plans in Florida. These
competitors include Humana, Inc., UnitedHealthcare of Florida,
Inc. and CarePlus Health Plans, Inc., which collectively have an
approximately 63% market share. |
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|
New York: Our Medicaid plans have approximately 2% market
share in New York. Our plans face competition from over
30 competitors in New York, including Health Insurance Plan
of Greater New York, Inc. and HealthFirst PHSP, Inc., with a
combined market share of approximately 20%, and others such as
Centercare, CarePlus Health Plan and United Healthcare Group
Incorporated, each with less than 5% of the market. |
|
|
|
Connecticut: Our Medicaid plans have approximately 10%
market share in Connecticut, and face competition from three
main competitors: Anthem Blue Cross and Blue Shield, with
approximately 41% of the market, HealthNet, Incorporated, with
approximately 30% of the market, and Community Health Network of
Connecticut, with approximately 29% of the market. |
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|
Illinois: Our Medicaid plans have approximately 39%
market share in Illinois. Our plans face competition from three
main competitors: Amerigroup, with approximately 22% of the
market, UnitedHealth Group Incorporated, with approximately 16%
of the market, and Humana, Inc., with approximately 10% of the
market. |
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|
Indiana: Our Medicaid plans have approximately 17% market
share in Indiana, and face competition from two main
competitors: Centene Corporation, with approximately 43% of the
market, and MDwise, Inc., with approximately 34% of the market. |
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|
|
Louisiana: We began operations as a Medicare managed care
plan in three Baton Rouge metro area parishes in September 2004
and face competition principally from Humana, Inc. and Tenet
Healthcare Corporation, each with approximately 47% of the
market. |
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|
Georgia: We recently became licensed to offer Medicaid
services to beneficiaries in Georgia and have submitted
applications to provide Medicaid services in the state. We also
recently became licensed to offer Medicare services to
beneficiaries in Georgia and received approval from CMS to
provide Medicare services in certain counties in the state. In
Georgia, we expect to face competition from several Medicare
competitors, including Kaiser, with approximately 70% of the
market, and Humana, Inc., with approximately 21% of the market.
In addition, if we are approved to provide Medicaid services in
Georgia, we expect that the Medicaid market will be highly
competitive. |
We compete with other managed care organizations for
public-sector healthcare program contracts, members and
providers. States and the federal government generally use
either a competitive bidding process or award individual
contracts to any applicant that can demonstrate that it meets
the governments requirements. To select a winning bid or
award a contract, state governments and the federal government
64
consider many factors, including the plans provider
network, quality and utilization management processes,
responsiveness to member complaints and grievances, timeliness
of claims payment and financial resources.
People who wish to enroll in a managed care plan or change plans
typically choose a plan based on a specific provider being part
of the network, the quality of care and service offered, ease of
access to services and the availability of supplemental
benefits. In addition, beginning in 2006, a new regional
Medicare Preferred Provider Organization, or Medicare PPO,
program will be implemented pursuant to MMA. Medicare PPOs would
allow their members more flexibility to select physicians than
the current Medicare Advantage plans, such as HMOs, which often
require members to coordinate with a primary care physician.
Regional Medicare PPO plans will compete with local Medicare
Advantage HMO plans, including the plans we offer. We are
currently evaluating the effects of MMA and the implications for
our business.
Regulation
Our healthcare operations are regulated by both state and
federal government agencies. Regulation of managed care products
and healthcare services is an evolving area of law that varies
from jurisdiction to jurisdiction. Regulatory agencies generally
have discretion to issue regulations and interpret and enforce
laws and rules. Changes in applicable laws and rules occur
frequently.
In order to operate a health plan, we must apply for and obtain
a certificate of authority or license from each state in which
we intend to operate. However, starting in 2006, CMS has
proposed that regional Medicare Advantage plans that operate in
more than one state may apply for a waiver so that the plan will
initially only need a license from one state within a region,
provided, however, that each such plan has demonstrated to the
satisfaction of the Secretary of Health and Human Services that
it has filed the necessary applications to meet the requirements
of such other states in the region. Our health plans are
licensed to operate as health maintenance organizations in
Florida, New York, Illinois, Indiana, Connecticut, Louisiana and
we hold a limited HMO license in Georgia. As health maintenance
organizations in those jurisdictions, we are regulated by both
the state insurance departments and another state agency with
responsibility for oversight of health maintenance
organizations. The licensing requirements are the same for us as
they are for commercial managed healthcare organizations. We
generally must demonstrate to the state, among other things,
that:
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we have an adequate provider network; |
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our quality and utilization management processes comply with
state requirements; |
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we have procedures in place for responding to member and
provider complaints and grievances; |
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our systems are capable of processing providers claims in
a timely fashion and for collecting and analyzing the
information needed to manage our business; and |
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we have the financial resources necessary to pay our anticipated
medical care expenses and the infrastructure needed to account
for our costs. |
Each of our health plans is required to report quarterly, if not
monthly, on its performance to the appropriate regulatory agency
in the state in which the health plan is licensed. Each plan
also undergoes periodic examinations and reviews by the
applicable state. The plans generally must obtain approval from
the state before declaring dividends in excess of certain
thresholds and prior to entering into certain transactions
between the plan and a related party. Each plan must maintain a
net worth in an amount determined by statute or regulation and
we may only invest in types of investments approved by the
state. In addition, any acquisition of a health plan must also
be approved by the state in which the plan is domiciled.
In addition, our Medicaid and SCHIP activities are regulated by
each states department of health services or equivalent
agency, and our Medicare activities are regulated by CMS. These
agencies typically require demonstration of the same
capabilities mentioned above and perform periodic audits of
performance, usually annually.
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Medicaid was established under the U.S. Social Security Act
of 1965 to provide medical assistance to low income and disabled
citizens. It is state-operated and implemented, although it is
funded by both the state and federal governments. Our contracts
with the state Medicaid programs place additional requirements
on us. Within broad guidelines established by the federal
government, each state:
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establishes its own eligibility standards; |
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determines the type, amount, duration and scope of services; |
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sets the rate of payment for services; and |
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administers its own program. |
Some states, such as those in which we operate, award contracts
to applicants that can demonstrate that they meet the
states requirements. Other states engage in a competitive
bidding process for all or certain programs. We must demonstrate
to the satisfaction of the state Medicaid program that we are
able to meet the states operational and financial
requirements. These requirements are in addition to those
required for a license and are targeted to the specific needs of
the Medicaid population. For example:
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we must measure provider access and availability in terms of the
time needed to reach the doctors office using public
transportation; |
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our quality improvement programs must emphasize member education
and outreach and include measures designed to promote
utilization of preventative services; |
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we must have linkages with schools, city or county health
departments, and other community-based providers of healthcare,
in order to demonstrate our ability to coordinate all of the
sources from which our members may receive care; |
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we must have the capability to meet the needs of the disabled
and others with special needs; |
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our providers and member service representatives must be able to
communicate with members who do not speak English or who are
deaf; and |
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our member handbook, newsletters and other communications must
be written at the prescribed reading level and must be available
in languages other than English. |
In addition, we must demonstrate that we have the systems
required to process enrollment information, to report on care
and services provided and to process claims for payment in a
timely fashion. We must also have adequate financial resources
needed to protect the state, our providers and our members
against the risk of our insolvency.
Once awarded, our government contracts generally have terms of
one to two years, with renewal options at the discretion of the
states. In addition to the operating requirements listed above,
the contracts with the states and regulatory provisions
applicable to us generally set forth in great detail provisions
relating to subcontractors, marketing, safeguarding of member
information, fraud and abuse reporting and grievance procedures.
Our health plans are subject to periodic financial and
informational reporting and comprehensive quality assurance
evaluations. We submit periodic utilization reports and other
information to the state or county Medicaid program of our
operations.
Medicare is a federal program that provides eligible persons
age 65 and over and some disabled persons a variety of
hospital and medical insurance benefits. Medicare beneficiaries
have the option to enroll in a Medicare Advantage plan as an HMO
benefit in areas where such a plan is offered. Under Medicare
Advantage, managed care plans contract with CMS to provide
comparable Medicare benefits as a traditional
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fee-for-service Medicare in exchange for a fixed monthly payment
per member that varies based on the county in which a member
resides.
On December 8, 2003, President Bush signed the MMA, which
made numerous changes to the Medicare program, including
expanding the Medicare program to include a prescription drug
benefit beginning in 2006, a transitional drug discount card
that as of June 2004 enables Medicare beneficiaries to obtain
discounts on drugs prior to receiving drug coverage in 2006, and
expanding the Medicare+Choice program and renaming it
Medicare Advantage. Medicare Advantage plans are
eligible to sponsor the drug discount card and transitional
assistance program as well as the new prescription drug plan.
CMS, however, may limit the number of prescription drug plan
sponsors and endorsed drug card sponsors that are selected in a
particular area. We offer an approved drug discount card in
certain markets.
Under the MMA, commencing in 2006, a new voluntary prescription
drug benefit will be available under Medicare. Medicare
beneficiaries who elect to participate will pay a monthly
premium for this Medicare Part D outpatient drug benefit,
which will be offered through private prescription drug plans.
This drug benefit is subject to certain beneficiary cost
sharing. Under the standard drug coverage, for 2006, the cost
sharing is a $250 deductible, 25% coinsurance for annual drug
costs reimbursed by Medicare for the next $2,000 in drug
expenses, and no reimbursement for drug costs above $2,250,
until the beneficiary has paid $3,600 out-of-pocket. After that,
MMA provides catastrophic stop loss coverage for annual incurred
drug costs in excess of $3,600 for that year, subject to nominal
cost-sharing. Plans are not required to mirror these limits;
instead, drug plans are required to provide coverage that is at
least actuarially equivalent to the standard drug coverage
delineated in the MMA. These numbers will be adjusted on an
annual basis. The MMA provides subsidies and the reduction or
elimination of cost sharing for certain low-income
beneficiaries, including dual-eligible individuals who receive
benefits under both Medicare and Medicaid. The Medicare
Part D drug benefit will be offered by new regional
prescription drug plans and by Medicare Advantage plans.
Medicare Advantage organizations must offer at least one plan
with the new drug benefit in every region in which they operate.
In addition, Medicare Advantage organizations may bid to offer a
stand-alone prescription drug plan that beneficiaries who have
fee for service Medicare may elect.
The MMA also revises payment methodologies for Medicare
Advantage organizations beginning in 2004, and in 2006 the MMA
expands the Medicare Advantage program to include, in addition
to the traditional HMO and fee-for-service plans established by
county, new regional PPO plans which will provide out-of-network
benefits in addition to in-network benefits. The Secretary of
Health and Human Services, or HHS, created 26 regions. The MMA
creates a new competitive bidding process beginning in 2006 for
both the local HMO plan and the new regional plan for setting
the payment to the Medicare Advantage plan and the beneficiary
premium and benefits. The bidding process does not limit the
number of plans that may participate in the Medicare Advantage
program.
In addition, the MMA created the drug discount card and
transitional assistance program as an interim program until the
new Medicare Part D prescription drug benefit goes into
effect January 1, 2006. The voluntary drug discount card
program enables Medicare beneficiaries to pay a fixed fee to
access discounts on drugs. Certain low income beneficiaries may
enroll in the transitional assistance program and receive a
subsidy of up to $600 per year for certain covered drugs
that are purchased using the drug discount card. A Medicare
Advantage plan may apply to be an endorsed sponsor of the drug
card as a stand alone product or may apply to offer the drug
discount card exclusively to its enrollees. The drug discount
card program went into effect in June 2004 and sponsors may
continue to enroll eligible individuals through
December 31, 2005. In 2006, endorsed card sponsors must
honor the drug card until the end of a transition period which
runs until the date of the individuals enrollment in a new
drug benefit or the end of the drug benefit enrollment period.
The MMA shifts coverage responsibility for the drug benefit for
dual-eligible individuals. Starting January 1, 2006,
dual-eligibles will receive their drug coverage from the
Medicare program and not the Medicaid program.
67
The State Childrens Health Insurance Program, or SCHIP, is
a federal and state matching program designed to help states
expand health insurance to children whose families earn too much
to qualify for traditional Medicaid, yet not enough to afford
private health insurance. States have the option of
administering SCHIP through their existing Medicaid programs,
creating separate programs or combining both strategies. The
SCHIP programs in Florida, New York, Illinois, Indiana and
Connecticut are administered by the same agency that administers
the states Medicaid program. Currently, all
50 states, the District of Columbia and all
U.S. territories have approved SCHIP plans, and many states
continue to submit plan amendments to further expand coverage
under SCHIP.
In 1996, Congress enacted the Health Insurance Portability and
Accountability Act of 1996, and thereafter, the Secretary of
Health and Human Services issued regulations implementing HIPAA.
HIPAA is intended to improve the portability and continuity of
health insurance coverage and simplify the administration of
health insurance claims and related transactions. All health
plans, including ours, are subject to HIPAA. HIPAA generally
requires health plans to:
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protect the privacy and security of patient health information
through the implementation of appropriate administrative,
technical and physical safeguards; and |
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establish the capability to receive and transmit electronically
certain administrative healthcare transactions, such as claims
payments, in a standardized format. |
We believe we have met the HIPAA deadlines for the adoption and
implementation of appropriate policies and procedures for
privacy and transactions and code sets, and we are implementing
security policies and procedures to achieve compliance with the
security standards. However, given HIPAAs complexity, the
recent effectiveness of several final regulations, and the
possibility that the regulations may change and may be subject
to changing and perhaps conflicting interpretation, our ongoing
ability to comply with the HIPAA requirements is uncertain.
Federal and state governments have made a priority of
investigating and prosecuting healthcare fraud and abuse. Fraud
and abuse prohibitions encompass a wide range of operating
activities, including kickbacks or other inducements for
referral of members or for the coverage of products (such as
prescription drugs) by a health plan, billing for unnecessary
medical services, improper marketing and violation of patient
privacy rights. Companies involved in public healthcare programs
such as Medicaid and Medicare are often the subject of fraud and
abuse investigations. The regulations and contractual
requirements applicable to participants in these public-sector
programs are complex and subject to change. Although we believe
that we have structured our compliance program with care in an
effort to meet all statutory and regulatory requirements,
ongoing vigorous law enforcement and the highly technical
regulatory scheme mean that our compliance efforts in this area
will continue to require significant resources.
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Required Statutory Capital |
By law, regulation and government policy, our HMO subsidiaries,
which we refer to as our regulated subsidiaries, are required to
maintain minimum levels of statutory net worth. The minimum
statutory net worth requirements differ by state and are
generally based on a percentage of annualized premium revenue, a
percentage of annualized healthcare costs or risk-based capital,
or RBC, requirements. The RBC requirements are based on
guidelines established by the National Association of Insurance
Commissioners, or NAIC, and are administered by the states.
Currently, our Illinois, Indiana, Connecticut, Louisiana and
Georgia operations are subject to RBC requirements. If adopted,
the RBC requirements may be modified as each state legislature
deems appropriate for that state. The RBC formula, based on
asset risk, underwriting risk, credit risk, business risk and
other factors, generates the authorized control level, or ACL,
which represents the
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amount of net worth believed to be required to support the
regulated entitys business. For states in which the RBC
requirements have been adopted, the regulated entity typically
must maintain a minimum of the greater of the required ACL or
the minimum statutory net worth requirement calculated pursuant
to pre-RBC guidelines. In addition to the foregoing
requirements, our regulated subsidiaries are subject to
restrictions on their ability to make dividend payments, loans
and other transfers of cash.
The statutory framework for our regulated subsidiaries
statutory net worth requirements may change over time. For
instance, RBC requirements may be adopted by the states in which
we operate. These subsidiaries are also subject to their state
regulators overall oversight powers. For example, New York
regulators have proposed a 150% increase in reserve requirements
over an eight-year period, to which our New York business would
be subject. Those regulators could require our subsidiaries to
maintain minimum levels of statutory net worth in excess of the
amount required under the applicable state laws if the
regulators determine that maintaining such additional statutory
net worth is in the best interest of our members. In addition,
as we expand our plan offerings in new states or pursue new
business opportunities, such as Medicare Part D program, we
may be required to make additional statutory capital
contributions.
The marketing activities of Medicare managed care plans are
strictly regulated by CMS. CMS must approve all marketing
materials before they can be used unless a plan uses standard
marketing materials that have already been approved by CMS.
Federal law precludes states from imposing additional marketing
restrictions on Medicare managed care plans. However, states
remain free to regulate, and typically do regulate, the
marketing activities of plans that enroll Medicaid and
commercial beneficiaries.
Likewise, our Medicaid marketing efforts are highly regulated by
the states in which we operate, each of which imposes different
requirements and restrictions on Medicaid marketing. In general,
the states in which we operate can impose a variety of sanctions
for marketing violations, or for alleged violations, including
fines, a suspension of marketing and/or a suspension of new
enrollment. For example, the State of Connecticut recently
imposed a prohibition of marketing on our Connecticut plan as
the result of allegedly having engaged in a repeated practice of
marketing violations. The state has since lifted the marketing
prohibition after imposing a monetary fine and reviewing our
corrective action plan. We are currently revising the corrective
action plan to accommodate certain comments received by the
state, and we have been asked to suspend the use of certain
practices while the revised corrective action plan is being
reviewed.
Technology
A foundation of our approach to managed care is the accurate and
timely capture, processing and analysis of critical data.
Focusing on data is essential to our being able to operate our
business in a cost effective manner. Data processing and
data-driven decision making are key components of both
administrative efficiency and medical cost management. We have
successfully developed a system that enables our management team
to better assess and control medical costs. Our system gathers
information from our centralized computer-based information
system, Perot Systems Diamond 950 software, an
enterprise software solution designed to be scalable to
accommodate growth. This system supports our core transaction
processing functions and is designed to be scalable to
accommodate internal growth and growth from acquisitions. Its
integrated database architecture helps to assure that consistent
sources of claim and member information are provided across all
of our health plans. We use our information system for premium
billing, claims processing, utilization management, reporting,
medical cost trending, planning and analysis. The system also
supports member and provider service functions, including
enrollment, member eligibility verification, primary care and
specialist physician roster access, claims status inquiries, and
referrals and authorizations. We migrated Harmony, which we
acquired in June 2004, from its prior claims processing software
to the Diamond 950 system in January 2005.
We are in the process of implementing a comprehensive disaster
recovery and business continuity plan. We have contracted with
SunGard Recovery Services LP to provide disaster recovery
services, and recently
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implemented the disaster recovery and emergency mode operations
systems. We expect that our business continuity plan will be
completed in 2005.
Customers
We currently provide Medicaid plans under 18 separate contracts
including 11 contracts in New York, three contracts in Florida,
two contracts in Connecticut, and one contract with each of the
other states in which we offer Medicaid plans. Our 2004 premium
revenues from our New York Medicaid contracts, on an aggregate
basis, and our Florida Medicaid contracts, taken together,
represented approximately 9% and 55%, respectively, of our total
premium revenues. However, other than Florida, we did not
receive in excess of 10% of our total 2004 premium revenues
under any of our New York or other state contracts when taken
individually. Similarly, we offer Medicare plans under separate
contracts with CMS for each of the states in which we offer such
plans. Our 2004 premium revenues from all of our CMS contracts,
on an aggregate basis, represented 24% of our total 2004 premium
revenues. Other than Florida, we did not receive in excess of
10% of our total 2004 premium revenues under any state CMS
contracts when taken individually.
Employees
As of March 31, 2005, we had approximately
1,871 full-time associates. Our associates are not
represented by any collective bargaining agreement, and we have
never experienced a work stoppage. We believe we have good
relations with our associates.
Facilities
Our principal administrative, sales and marketing facilities are
located at our headquarters in Tampa, Florida. We currently
occupy approximately 179,000 square feet of office space in
the Tampa facility for a term that is scheduled to expire in
2011. We also lease office space for our health plans in a
number of locations in Florida, New York, Illinois, Indiana,
Connecticut and Louisiana. We believe these facilities are
suitable and provide the appropriate level of capacity for our
current operations.
Legal Proceedings
We are involved in legal actions in the normal course of
business, some of which seek monetary damages, including claims
for punitive damages, which are not covered by insurance. These
actions, when finally concluded and determined, will not, in our
opinion, have a material adverse effect on our financial
position, results of operations or cash flows.
We believe that we have obtained adequate insurance or rights to
indemnification or, where appropriate, have established adequate
reserves in connection with these legal proceedings.
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MANAGEMENT
Our directors, executive officers and other management
associates and their respective ages and positions as of
May 31, 2005 are as follows:
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Position |
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Executive Officers and Directors:
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Todd S. Farha
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37 |
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President and Chief Executive Officer, Director |
Paul L. Behrens
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43 |
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Senior Vice President and Chief Financial Officer |
Thaddeus Bereday
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40 |
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Senior Vice President and General Counsel |
David W. Erickson
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50 |
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Senior Vice President and Chief Information Officer |
Ace M. Hodgin, M.D.
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49 |
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Senior Vice President and Chief Medical Officer |
Heath G. Schiesser
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37 |
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Senior Vice President, Marketing & Sales |
Imtiaz (MT) H. Sattaur
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42 |
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President, Florida |
Regina E. Herzlinger
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61 |
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Director |
Kevin F. Hickey
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53 |
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Director |
Alif A. Hourani
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52 |
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Director |
Glen R. Johnson, M.D.
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62 |
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Director |
Ruben Jose King-Shaw, Jr.
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43 |
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Director |
Christian P. Michalik
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36 |
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Director |
Neal Moszkowski
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39 |
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Chairman of the Board of Directors |
Jane M. Swift
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40 |
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Director |
Executive Officers
Todd S. Farha has served as our President and Chief
Executive Officer and as a member of our board of directors
since May 2002. From January 2000 to June 2001, Mr. Farha
served as Chief Executive Officer of Best Doctors, Inc., a
provider of information and referral services for patients
suffering from critical illnesses. In addition, from 1999 to
2004, Mr. Farha served as President and Chief Executive
Officer of a company he founded, Medical Technology Management
LLC, a provider of shared medical equipment and services for
physicians and hospitals. From August 1995 to November 1998,
Mr. Farha served as Chief Executive Officer of Oxford
Specialty Management, a subsidiary of Oxford Health Plans, Inc.,
a health care company, focusing on the management of acute
clinical conditions in six specialty areas. In 1995,
Mr. Farha served in the Office of the Chief Executive
Officer of Oxford Health Plans. Prior to that, from 1990 to
1993, he held various positions with Physician Corporation of
America, a Florida-based health plan focused on Medicaid
recipients. Mr. Farha received his undergraduate degree
from Trinity University and a masters of business administration
from Harvard Business School. Mr. Farha is a cousin of
Mr. Hourani.
Paul L. Behrens has served as our Senior Vice President
and Chief Financial Officer since September 2003. Prior to that,
Mr. Behrens was a partner in the insurance practice of
Ernst & Young LLP, which he joined in 1983.
Mr. Behrens received his undergraduate degree from Dana
College. Mr. Behrens is a certified public accountant.
Thaddeus Bereday has served as our Senior Vice President
and General Counsel since November 2002. Mr. Bereday was a
partner at Brobeck, Phleger & Harrison, LLP, and from
2000 to 2001, he was a partner at Morgan, Lewis &
Bockius, LLP. From 1998 to 1999, Mr. Bereday served as Vice
President and General Counsel of SmarTalk TeleServices, Inc., a
publicly-traded telecommunications company, and as its President
and Acting General Counsel from 1999 to 2000, after the company
filed for Chapter 11 bankruptcy protection.
Mr. Bereday received his undergraduate degree from Brown
University and a juris doctor, magna cum laude, from Case
Western Reserve University School of Law.
David W. Erickson has served as our Senior Vice President
and Chief Information Officer since February 2005. Prior
thereto, Mr. Erickson served as Vice President, Information
Services and Chief Information Officer for Molina Healthcare,
Inc., a health care company, since June 1999, where he had
responsibility for
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corporate Information Technology, Claims and Administrative
services. From April 1997 until June 1999,
Mr. Erickson served as the Vice President and Chief
Information Officer, Western Region for UnitedHealthcare.
Prior to that, Mr. Erickson worked for the IBM Corporation
for twenty years where his last position was executive-in-charge
of the IBM Global Services outsourcing contract serving
Boeings west coast divisions. Mr. Erickson received
his Bachelors of Science degree in Social Science from the State
University of New York.
Ace M. Hodgin, M.D. has served as our Senior Vice
President and Chief Medical Officer since July 2004. From June
2003 to July 2004, Dr. Hodgin served as the Medical
Director for HealthCare Partners, a New York based managed care
provider. From October 1994 to January 2002, Dr. Hodgin
served in several different capacities with PacifiCare Health
Systems, Inc., including President and Chief Executive Officer
of PacifiCare of Arizona, Regional Vice President, Desert Region
and Senior Vice President, PPO Product. From 1991 to 1994,
Dr. Hodgin served as the Director of Medical Examination
and Associate Dean for Clinical Education at the Summa Health
System, Northeastern Ohio Universities College of Medicine.
Prior to that, he served as the Medical Services Administrator
for the Maricopa Medical Center from 1985 to 1991 and as a Staff
Physician for CIGNA Healthplan of Arizona from 1984 to 1985.
Dr. Hodgin was appointed to serve on the Arizona
Governors Advisory Council on Quality from 1997 to 2001
and served on the Arizona Select Task Force on Managed Care
Reform in 1999. Dr. Hodgin received his undergraduate
degree and his doctorate from the University of Arizona. He has
also received a Masters in Health Administration from the
University of Colorado.
Heath G. Schiesser has served as our Senior Vice
President, Marketing & Sales since July 2002. Prior to
that, from May 2002 to July 2002, Mr. Schiesser was a
consultant to us. For part of 2001, Mr. Schiesser served as
Vice President of the Emerging Business Group at Enron
Corporation. In 2000 and 2001, Mr. Schiesser served as a
Managing Director at Idealab, an investment firm that developed
and funded seed-stage businesses. During 2000, he led the
turnaround and sale of an Idealab portfolio company, iExchange,
as President and Chief Executive Officer. From 1998 to 1999, he
co-founded and served as the Vice-President of Business
Development for YourPharmacy.com, which was sold in October
1999. From 1993 to 1998, Mr. Schiesser worked at
McKinsey & Company, an international management
consulting firm. Mr. Schiesser received his undergraduate
degree from Trinity University and a masters of business
administration from Harvard Business School.
Imtiaz (MT) H. Sattaur has served as the
President of our Florida business since April 2004 and as Senior
Vice President, National Medicare Programs from January 2004 to
April 2004. From October 2002 to December 2003, Mr. Sattaur
served as President and Chief Executive Officer of Amerigroup
Florida, Inc., a Medicaid health care company. From April 1999
to September 2002, Mr. Sattaur served as Vice President and
Chief Operating Officer of Affinity Health Plan in New York.
Mr. Sattaur has over 20 years experience in the health
and managed care industry. Mr. Sattaur received his
undergraduate degree from Florida International University.
Non-Employee Directors
Regina E. Herzlinger has been a member of our board of
directors since August 2003. Dr. Herzlinger is the
Nancy R. McPherson Professor of Business Administration at
the Harvard Business School and has been teaching at Harvard
since 1971. She is a member of the board of directors of Zimmer
Holdings, Inc. Dr. Herzlinger received her undergraduate
degree from Massachusetts Institute of Technology and her
doctorate from Harvard Business School.
Kevin F. Hickey has been a member of our board of
directors since November 2002. From October 1998 until January
2005, Mr. Hickey served as the Chairman and Chief Executive
Officer of IntelliClaim, Inc., a privately-held application
service provider that provides insurance payors with
capabilities for enhancing claim processing efficiency and
productivity. From September 1997 until August 1998,
Mr. Hickey was Executive Vice President of Operations and
Technology for Oxford Health Plans, Inc. Mr. Hickey has
also served as a director of the American Association of
Preferred Provider Organizations from 1999 until 2002; a
director of First Health/ HealtheSolutions, a privately-held
company, since 1982; a director of Benefit Management
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Group, a privately-held company, since 1997; a director of
Healthaxis Inc., a technology and business process services firm
for the health benefits industry, since 2001; and a director of
HealthMarket, Inc., a consumer directed health plan, from 2002
until 2004. Mr. Hickey received his undergraduate degree
from Harvard University, a masters in health services
administration from the University of Michigan and a juris
doctor from Loyola College of Law.
Alif A. Hourani has been a member of our board of
directors since August 2003. Since 1997, Mr. Hourani has
served as Chairman and Chief Executive Officer of Pulse Systems,
Inc., a practice management and clinical records software
company. From 1987 to 1997, Mr. Hourani held various
positions, including Chief Executive Officer of Physician
Corporation of America/ Data Systems, Senior Vice President of
Management Information Systems of Physician Corporation of
America, and Manager of Computer Engineering at the Wolf Creek
Nuclear Operating Corporation. Mr. Hourani received his
undergraduate degree from the University of Lyon and his masters
of science degree and doctorate degrees from the University of
Strasbourg. Mr. Hourani is a cousin of Mr. Farha.
Glen R. Johnson, M.D. has been a member of our board
of directors since February 2004. Since May 1998,
Dr. Johnson has served as President and Chief Executive
Officer of Community Health Choice, Inc., a managed health care
organization that provides healthcare services to Medicaid
members in the Houston, Texas area. Since March 2003,
Dr. Johnson has also served as an expert consultant to the
Texas State Board of Medical Examiners, and since 1999 he has
been a clinical associate professor in the Department of Family
Medicine at Baylor College of Medicine in Houston. From 1990 to
October 1997, Dr. Johnson served as Senior Vice President
for Medical Affairs and as Corporate Chief Medical Officer of
Physician Corporation of America. Dr. Johnson is a delegate
of the American Academy of Family Physicians to the American
Medical Association and is the former Vice President of The
American Academy of Family Physicians. Dr. Johnson received
his undergraduate degree and his doctorate from Howard
University, and is a certified physician executive.
Ruben Jose King-Shaw, Jr. has been a member of our
board of directors since August 2003. Since September 2004,
Mr. King-Shaw has been a partner in Pine Creek Healthcare
Capital, LLC, a provider of science- and evidence-based services
and information to the pharmaceutical and life sciences
industries. Mr. King-Shaw served as Senior Advisor to the
Secretary of the Department of the Treasury from January 2003 to
June 2003. From July 2001 to April 2003, Mr. King-Shaw
served as Chief Operating Officer and Deputy Administrator of
the federal governments Centers for Medicare &
Medicaid Services. Prior to that, from January 1999 to July
2001, he served as Secretary of the Agency for Health Care
Administration of the State of Florida. Mr. King-Shaw
received his undergraduate degree from Cornell University and a
masters of business administration from Florida International
University.
Christian P. Michalik has been a member of our board of
directors since May 2002. Since July 2004, Mr. Michalik has
served as Managing Director of Kinderhook Industries, a private
equity investment firm, and prior to that was a partner in Soros
Private Equity Partners LLC, the private equity investment
business of Soros Fund Management LLC, from January 1999
through December 2003. From 1997 to 1998, Mr. Michalik was
an investment manager with Capital Resource Partners, a private
equity investment firm. From 1995 to 1996, Mr. Michalik was
an associate at Colony Capital, a real estate investment firm.
Mr. Michalik currently serves as a director of Notification
Technologies, Inc., a provider of school-to-parent
communications for emergency, attendance and community outreach,
and NACT Telecommunications, a provider of fully integrated
advanced telecommunications applications, switching gateways and
billing systems. Mr. Michalik received his undergraduate
degree from Yale University and his masters of business
administration from Harvard Business School.
Neal Moszkowski has been the Chairman of our board of
directors since May 2002. Since April 2005, Mr. Moszkowski
has been a Co-Chief Executive Officer of TowerBrook Capital
Partners, LP, a private equity investment company. Prior to
joining TowerBrook, Mr. Moszkowski was Managing Director
and Co-Head of Soros Private Equity, the private equity
investment business of Soros Fund Management LLC, where he
served since August 1998. From August 1993 to August 1998,
Mr. Moszkowski worked for Goldman, Sachs & Co. and
affiliates, where he served as a Vice President and an Executive
Director in the Principal Investment
73
Area. Mr. Moszkowski currently serves as a director of
Bluefly, Inc., an online discount apparel retailer, Day
International Group, Inc., a producer and distributor of
precision-engineered products and JetBlue Airways Corporation, a
passenger airline. Mr. Moszkowski received his
undergraduate degree from Amherst College and his masters of
business administration from the Graduate School of Business of
Stanford University.
Jane M. Swift has been a member of our board of directors
since November 2004. Since May 2003, Ms. Swift has been a
General Partner of Arcadia Partners, a venture capital firm
focused exclusively on the for-profit education and training
industry. From April 2001 until January 2003, Ms. Swift
served as the Governor of Massachusetts. Prior thereto, she
served as the Lieutenant Governor of Massachusetts from January
1999 until April 2001. Ms. Swift is a member of the Board
of Directors of both Teachscape and the Brigham and Womens
Hospital.
Terms of Office
At present, all directors are elected and serve until a
successor is duly elected and qualified or until his or her
earlier death, resignation or removal. Our executive officers
are elected by, and serve until dismissed by, the board of
directors.
Our board is divided into three classes, which are required to
be as nearly equal in number as possible, with each director
serving a three-year term and one class being elected at each
years annual meeting of stockholders.
Messrs. King-Shaw and Michalik and Dr. Johnson are in
the class of directors whose term expires at the 2006 annual
meeting of our stockholders. Messrs. Hourani and Moszkowski
and Ms. Swift are in the class of directors whose term
expires at the 2007 annual meeting of our stockholders.
Messrs. Farha and Hickey and Dr. Herzlinger are in the
class of directors whose term expires at the 2008 annual meeting
of our stockholders. At each annual meeting of our stockholders,
successors to the class of directors whose term expires at such
meeting will be elected to serve for three-year terms or until
their respective successors are elected and qualified.
Board Committees
The audit committee of the board of directors makes
recommendations concerning the engagement of independent public
accountants. The audit committee charter mandates that the audit
committee approve all audit, audit-related, tax and other
services conducted by our independent accountants. In addition,
the committee reviews the plans, results and fees of the audit
engagement with our independent public accountants, and any
independence issues with our independent public accountants. The
audit committee also reviews the adequacy of our internal
accounting controls. The current members of the audit committee
are Mr. Michalik, Dr. Herzlinger and Ms. Swift.
The compensation committee of the board of directors determines
compensation for our executive officers and administers our
equity plans. The compensation committee currently consists of
Messrs. Hickey, Hourani and Moszkowski.
The nominating and corporate governance committee of the board
of directors nominates candidates for election to the board of
directors and oversees corporate governance processes. The
nominating and corporate governance committee currently consists
of Messrs. Hourani, Michalik and Moszkowski.
Compensation Committee Interlocks and Insider
Participation
No member of the compensation committee serves as a member of
the board of directors or compensation committee of any other
entity that has one or more executive officers serving as a
member of our board of directors or compensation committee.
Director Compensation
Meeting Fees and Annual Retainers. With the exception of
Mr. Moszkowski, we pay each non-employee member of our
board an annual directors fee of $25,000 for attending
meetings of the board of directors and committee meetings.
Mr. Moszkowski does not receive an annual retainer nor is
he paid for his
74
attendance at board or committee meetings. Mr. Farha does
not receive any additional compensation for his service as a
member of the board of directors.
Stock Options. Upon the closing of the initial public
offering in July 2004, we granted to each non-employee member of
our board, other than Mr. Moszkowski, an option to
purchase 5,000 shares (or, in the case of
Dr. Herzlinger, 10,000 shares) of our common stock,
vesting over a four-year period, at a per share exercise price
of $17.00. Upon Ms. Swifts appointment to the board
in November 2004, we granted Ms. Swift an option to
purchase 25,000 shares of our common stock, vesting
over a four-year period, at a per share exercise price of
$23.50. Upon Dr. Johnsons appointment to the board in
February 2004, Dr. Johnson purchased 8,989 shares of
restricted stock and was awarded options to acquire
40,657 shares of our common stock, vesting over a four year
period at a per share exercise price of $8.33. All of these
option grants to directors have ten-year terms. We may, in our
discretion, grant additional stock options and other equity
awards to our directors from time to time. Our directors do not
receive regular awards of stock options under a plan or
otherwise.
Perquisites and Other Benefits. We also pay all
reasonable expenses incurred by directors for attending
meetings, pay for certain director continuing education programs
and related expenses and maintain directors and officers
liability insurance. We do not provide a retirement plan or
other perquisites for our directors.
Consulting Agreement with Mr. King-Shaw. In November
2003, we entered into a consulting agreement with
Mr. King-Shaw, one of our directors, pursuant to which
Mr. King-Shaw oversees governmental and regulatory issues
for us, including current and proposed federal and state
legislation and federal and state government affairs activities.
The term of this agreement is one year, but shall automatically
renew for successive one-year periods unless either party
notifies the other of its intent not to renew. The agreement can
be terminated by the company at any time for any reason. Under
this agreement, we pay Mr. King-Shaw a per diem rate
or, in some cases, an hourly rate, plus travel and related
expenses. At the discretion of our chief executive officer,
Mr. King-Shaw is eligible for one or more discretionary
performance bonuses during the term of the agreement. In 2004,
we paid $35,000 to Mr. King-Shaw under this agreement. In
addition, in May 2004, in consideration of services rendered
under this consulting agreement, we awarded Mr. King-Shaw
options to acquire 8,131 shares of our common stock at an
exercise price of $6.47. These options expire on May 12,
2014, and originally vested as to 20.833% of the shares subject
thereto upon the date of grant, and as to 4.167% of the shares
subject thereto upon the end of each full calendar month
following the grant date. In November 2004, our board of
directors determined to accelerate the vesting of these options
in full.
75
Executive Compensation
The following summary compensation table sets forth the 2004 and
2003 cash compensation and certain other components of the
compensation of Todd S. Farha, our president and chief
executive officer, and the four most highly compensated
executive officers who were serving as such at the end of 2004.
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Annual Compensation | |
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Long-Term Compensation | |
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| |
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| |
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Securities | |
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Other Annual | |
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Underlying | |
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All Other | |
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Compensation | |
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Restricted Stock | |
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Options/ | |
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Compensation | |
Name and Principal Position |
|
Year | |
|
Salary($)(1) | |
|
Bonus($)(2) | |
|
($)(3) | |
|
Awards($) | |
|
SARs(#) | |
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($)(4) | |
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| |
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| |
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| |
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| |
Todd S. Farha
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2004 |
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|
$ |
311,538 |
|
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$ |
718,920 |
|
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$ |
102,802 |
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$ |
475,680 |
(5) |
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81,315 |
|
|
$ |
9,680 |
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President and Chief |
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2003 |
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300,000 |
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600,000 |
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65,427 |
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(6) |
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554 |
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Executive Officer |
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Paul L. Behrens
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2004 |
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285,577 |
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182,838 |
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1,719 |
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71,352 |
(5) |
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8,131 |
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12,593 |
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Senior Vice President |
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2003 |
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68,750 |
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260,000 |
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19,286 |
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1,116,612 |
(8) |
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and Chief Financial
Officer(7) |
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Imtiaz (MT) Sattaur
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2004 |
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259,615 |
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329,053 |
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173,623 |
(5) |
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137,578 |
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7,928 |
|
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President,
Florida(9) |
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2003 |
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Heath Schiesser
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2004 |
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259,615 |
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182,838 |
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71,352 |
(5) |
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8,131 |
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9,232 |
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Senior Vice President, |
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2003 |
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250,000 |
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210,000 |
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60,808 |
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5,639 |
(10) |
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2,400 |
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Marketing & Sales |
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Rupesh Shah
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2004 |
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285,577 |
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182,838 |
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12,462 |
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|
71,352 |
(5) |
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66,263 |
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|
9,078 |
|
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Senior Vice President, |
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2003 |
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275,000 |
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135,000 |
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3,969 |
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130,104 |
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Market
Expansion(11) |
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(1) |
Represents total salary earned by the executive officer during
2004 and includes amounts of compensation deferred by the named
officers under our 401(k) savings plan. The amounts set forth in
the table for 2004 are higher than annual base salaries as a
result of an extra bi-weekly pay period in 2004. |
|
(2) |
The bonus payments include annual cash bonuses, signing bonuses
and bonuses in the form of vested restricted stock. The annual
cash bonuses and the grants of restricted stock in March 2005
represent payments earned for service in the year prior to the
year of payment. The bonuses paid to each of the executive
officers named in the Summary Compensation Table are as follows: |
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Value of Vested | |
Name |
|
Year | |
|
Annual Cash Bonus($) | |
|
Signing Bonus($) | |
|
Restricted Stock($) | |
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| |
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| |
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| |
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| |
Todd S. Farha
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2004 |
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|
$ |
600,000 |
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$ |
118,920 |
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2003 |
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600,000 |
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Paul L. Behrens
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2004 |
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165,000 |
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17,838 |
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2003 |
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185,000 |
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$ |
75,000 |
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Imtiaz (MT) Sattaur
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2004 |
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185,647 |
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100,000 |
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43,406 |
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2003 |
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Heath Schiesser
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2004 |
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165,000 |
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17,838 |
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2003 |
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210,000 |
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Rupesh Shah
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2004 |
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165,000 |
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17,838 |
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2003 |
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135,000 |
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The value of the vested restricted stock is based on the fair
market value of our common stock on the date of grant. The
portion of the restricted stock awards that was unvested as of
the date of grant is reflected in the Restricted Stock Awards
column of this Summary Compensation Table. |
(footnotes continued on following page)
76
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(3) |
The total perquisites paid to the above listed executive
officers who received perquisites during 2004 and 2003 are as
follows: |
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Name |
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Year | |
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Auto Allowance($) | |
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Relocation($) | |
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Housing Allowance($) | |
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Tax Gross-ups($) | |
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| |
Todd S. Farha
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2004 |
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|
|
$ |
44,068 |
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$ |
58,734 |
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2003 |
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$ |
9,921 |
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35,980 |
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19,526 |
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Paul L. Behrens
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2004 |
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1,719 |
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|
2003 |
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|
$ |
12,088 |
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|
7,198 |
|
Heath Schiesser
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2004 |
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2003 |
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42,138 |
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18,670 |
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Rupesh Shah
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2004 |
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12,462 |
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2003 |
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3,969 |
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(4) |
The 2003 All Other Compensation amounts represent company
matching contributions to the 401(k) savings plan. The 2004 All
Other Compensation amounts include company matching
contributions to the 401(k) savings plan of $2,600 to each of
Messrs. Farha, Sattaur, Schiesser and Shah, and premiums
paid for certain life, disability and medical insurance policies
as set forth below: |
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Name |
|
Life($) | |
|
Disability($) | |
|
Medical($) | |
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| |
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| |
Todd S. Farha
|
|
$ |
468 |
|
|
$ |
3,901 |
|
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$ |
2,711 |
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Paul L. Behrens
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|
351 |
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6,487 |
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5,755 |
|
Imtiaz (MT) Sattaur
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325 |
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406 |
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4,597 |
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Heath Schiesser
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|
390 |
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|
487 |
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5,755 |
|
Rupesh Shah
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|
429 |
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|
487 |
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|
5,562 |
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(5) |
On March 15, 2005: (a) Mr. Farha received an
award of 20,000 restricted shares of common stock as a component
of his 2004 annual bonus, of which 16,000 were unvested as of
the date of grant; (b) Messrs. Behrens, Schiesser and
Shah each received an award of 3,000 restricted shares of our
common stock as a component of their respective 2004 annual
bonuses, of which 2,400 were unvested as of the date of grant;
and (c) Mr. Sattaur received an award of 7,300
restricted shares of our common stock as a component of his 2004
annual bonus, of which 5,840 were unvested as of the date of
grant. The value of the aggregate unvested portion of these
awards as reflected in the Summary Compensation Table is based
on the fair market value of our common stock on the date of
grant. These awards vest 20% on the date of grant and 20% on
each of the next four anniversaries of the date of grant. The
grants would immediately vest in full upon the termination of
the recipients employment by the company without cause, or
by the recipient for good reason, within twelve months of a
change of control of the company. Dividends, if any are
declared, will be paid on the restricted shares. The portion of
these awards that vested on the date of grant is reflected in
the Bonus column of this Summary Compensation Table. |
|
(6) |
On September 6, 2002, Mr. Farha received an award of
1,634,582 restricted shares of common stock, of which
306,486 shares were unvested as of December 31, 2004.
The value of the aggregate unvested restricted shares held by
Mr. Farha as of December 31, 2004 was $9,960,795,
based on the closing price of our common stock on
December 31, 2004. The restricted stock award was 25%
vested on the date of grant, and the remainder vests over a
three-year period, at a rate of 2.0833% upon the end of each
full calendar month after the grant date. The grant would
immediately vest in full upon a change of control of the
company. Dividends, if any are declared, will be paid on the
restricted shares. |
|
(7) |
Mr. Behrens commenced employment with us in September 2003. |
|
(8) |
On September 30, 2003, Mr. Behrens received an award
of 458,572 restricted shares of common stock, of which
315,269 shares were unvested as of December 31, 2004.
The value of this award as reflected in the Summary Compensation
Table is based on the fair market value of our common stock on
the date of grant. The value of the aggregate unvested
restricted shares held by Mr. Behrens as of
December 31, 2004 was $10,246,243, based on the closing
price of our common stock on December 31, 2004. The
restricted stock award vests over a four-year period, at a rate
of 25% on September 15, 2004 and 2.0833% upon the end of
each full calendar month thereafter. The grant would immediately
vest in full upon the termination of Mr. Behrens
employment by WellCare without cause, or by Mr. Behrens for
good reason, following a change of control of the company.
Dividends, if any are declared, will be paid on the restricted
shares. |
|
(9) |
Mr. Sattaur commenced employment with us in January 2004. |
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|
(10) |
On May 30, 2003, Mr. Schiesser received a grant of
458,572 restricted shares of common stock, of which
191,072 shares were unvested as of December 31, 2004.
The value of this award as reflected in the Summary Compensation
Table is based on the fair market value of our common stock on
the date of grant. The value of the aggregate unvested
restricted shares held by Mr. Schiesser as of
December 31, 2004 was $6,209,840, based on the closing
price of our common stock on December 31, 2004. The
restricted stock award vests over a four-year period, at a rate
of 2.0833% upon the end of each full calendar month following
the date of grant. The grant would immediately vest in full upon
the termination of Mr. Schiessers employment by the
company without cause, or by Mr. Schiesser for good reason,
within six months of a change of control of the company.
Dividends, if any are declared, will be paid on the restricted
shares. |
|
|
(11) |
In April 2005, after considering Mr. Shahs current
role and responsibilities in the company, our board of directors
determined that Mr. Shah was no longer an executive
officer of the company. |
77
Options Granted in 2004
The following table sets forth certain information regarding
stock options granted in 2004 to the five individuals named in
the Summary Compensation Table. In addition, in accordance with
the Securities and Exchange Commissions rules, the table
also shows the grant date present value, as of the date of
grant, of the options under the option pricing model discussed
below. It should be noted that this model is only one method of
valuing options, and our use of the model should not be
interpreted as an endorsement of its accuracy. The actual value
of the options may be significantly different, and the value
actually realized, if any, will depend upon the excess of the
market value of the common stock over the exercise price at the
time of exercise.
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Percent of Total | |
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|
Number of Securities | |
|
Options/SARs Granted | |
|
Exercise or | |
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|
Underlying Options/SARs | |
|
to Employees in Fiscal | |
|
Base Price | |
|
Expiration | |
|
Grant Date Present | |
Name |
|
Granted (#)(1) | |
|
Year | |
|
($/Sh)(2) | |
|
Date | |
|
Value ($)(3) | |
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| |
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| |
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| |
|
| |
Todd S. Farha
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|
|
81,315 |
|
|
|
4.76 |
% |
|
$ |
8.33 |
|
|
|
02/06/14 |
|
|
$ |
483,824 |
|
Paul L. Behrens
|
|
|
8,131 |
|
|
|
0.48 |
% |
|
|
8.33 |
|
|
|
02/06/14 |
|
|
|
48,379 |
|
Imtiaz (MT) Sattaur
|
|
|
97,578 |
|
|
|
5.71 |
% |
|
|
8.33 |
|
|
|
02/06/14 |
|
|
|
580,589 |
|
|
|
|
20,000 |
|
|
|
1.17 |
% |
|
|
17.00 |
|
|
|
06/30/14 |
|
|
|
191,600 |
|
|
|
|
20,000 |
|
|
|
1.17 |
% |
|
|
23.50 |
|
|
|
11/03/14 |
|
|
|
261,000 |
|
Heath Schiesser
|
|
|
8,131 |
|
|
|
0.48 |
% |
|
|
8.33 |
|
|
|
02/06/14 |
|
|
|
48,379 |
|
Rupesh Shah
|
|
|
16,263 |
|
|
|
0.95 |
% |
|
|
8.33 |
|
|
|
05/12/14 |
|
|
|
163,606 |
|
|
|
|
50,000 |
|
|
|
2.93 |
% |
|
|
17.00 |
|
|
|
07/07/14 |
|
|
|
606,000 |
|
|
|
(1) |
All options granted and reported in this table were made
pursuant to the 2002 Employee Plan with the exception of the
November 2004 grant of 20,000 options to Mr. Sattaur and
the July 2004 grant of 50,000 options to Mr. Shah which
were made pursuant to our 2004 Equity Plan. All of the options
reported in this table have the following material terms:
(a) options are nonqualified stock options, except for a
portion of the July 2004 award to Mr. Shah which are
incentive stock options under Section 422 if
the Internal Revenue Code of 1986; (b) all options expire
upon the earlier to occur of ten years from the date of grant or
60 days, under the 2002 Employee Plan, or 90 days,
under the 2004 Equity Plan, following termination of employment;
and (c) the options vest 25% on the first anniversary of
the date of grant and pro rata monthly over the following
thirty-six months, with the exception of the July 2004 grant of
50,000 options to Mr. Shah which vest pro rata monthly over
four years commencing on the date of grant. In addition, with
respect to the February 2004 award of 97,578 options to
Mr. Sattaur and options granted under the 2004 Equity Plan,
if an optionee is terminated without cause or for good reason
within twelve months following a change in control of the
company, all of such individuals options shall become
vested and immediately exercisable. |
(2) |
Exercise price is the fair market value of the common stock on
the date of grant. The exercise price per share for grants made
prior to our initial public offering was equal to the fair
market value of our common stock as of the date of grant as
determined by our board of directors. |
(3) |
The amounts shown are based on the Black-Scholes option pricing
model which uses certain assumptions to estimate the value of
employee stock options. The material assumptions used for the
grants in the table above include the following: expected term
of 6.75 years from the date of grant; 0% dividend yield;
expected volatility of 50.2%; and risk-free interest rates of
4.12% for the February 6, 2004 grants, 4.62% for the
June 30, 2004 grants, 4.09% for the November 3, 2004
grant, 4.79% for the May 12, 2004 grant and 4.50% for the
July 7, 2004 grant. |
Equity Awards in 2005 to Todd S. Farha
On June 6, 2005, the compensation committee of our board of
directors approved a grant to Mr. Farha of the following awards
to acquire shares of our common stock pursuant to our 2004
Equity Incentive Plan.
|
|
|
Non-Qualified Stock Options |
Mr. Farha was granted an option to acquire, at an exercise
price of $34.95 per share, 220,000 shares of our common stock.
Under the terms of his grant, the options vest 50% on the second
anniversary of the grant date and 25% on each of the third and
fourth anniversaries of the grant date.
Mr. Farha was granted an award of 220,000 shares of
restricted stock with no payment required by Mr. Farha.
Under the terms of his grant, the restricted stock vests 25%
annually from the second through fifth anniversary of the grant
date.
78
Mr. Farha was granted an award of 130,000 shares of
common stock, with no payment required by Mr. Farha. Under
the terms of his performance award, shares vest on the
three-year and five-year anniversaries of the grant date based
upon our achievement of compounded annual percentage increases
in diluted net income per share, or EPS, over three-year and
five-year periods. The three-year period is measured from
January 1, 2005 through December 31, 2007. The
five-year period is measured from January 1, 2005 through
December 31, 2009.
Achievement of goals under Mr. Farhas performance
award will be measured against cumulative EPS over the
three-year and five-year periods, respectively, with
target, threshold and
maximum awards to be based on annual EPS growth. The
target number of performance shares to be issued in the
aggregate is 130,000 and the actual number of performance shares
to be issued shall be between zero and 240,279 based upon our
achievement of the performance goals.
50% of the shares pursuant to the performance award will be
available for issuance on the first vesting date based on our
achievement of the cumulative EPS goals for the first three-year
period. Any portion of the 50% not issued on the first vesting
date will be available for issuance on the second vesting date
(together with the remaining 50%) based on achievement of the
cumulative EPS goals for the full five-year period.
Aggregated Option Exercises in 2004 and Option Values at
December 31, 2004
The following table indicates, for each of the five individuals
named in the Executive Compensation Table herein the number of
shares covered by both exercisable and nonexercisable stock
options as of December 31, 2004, and the values for
in-the-money options which represent the excess of
the closing market price of our common stock at
December 31, 2004, over the exercise price of any such
existing stock options. None of these five individuals exercised
stock options during 2004.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Securities | |
|
|
|
|
|
|
|
|
Underlying Unexercised | |
|
Value(1) of Unexercised In- | |
|
|
|
|
|
|
Options/SARs at | |
|
The-Money Options/SARs | |
|
|
|
|
|
|
December 31, 2004(#) | |
|
at December 31, 2004($) | |
|
|
Shares Acquired | |
|
Value | |
|
| |
|
| |
Name |
|
on Exercise(#) | |
|
Realized($) | |
|
Exercisable | |
|
Unexercisable | |
|
Exercisable | |
|
Unexercisable | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Todd S. Farha
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
81,315 |
|
|
|
|
|
|
$ |
1,965,384 |
|
Paul L. Behrens
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,131 |
|
|
|
|
|
|
|
196,526 |
|
Imtiaz (MT) Sattaur
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
137,578 |
|
|
|
|
|
|
|
2,848,460 |
|
Heath Schiesser
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,131 |
|
|
|
|
|
|
|
196,526 |
|
Rupesh Shah
|
|
|
|
|
|
|
|
|
|
|
86,183 |
|
|
|
110,184 |
|
|
$ |
2,402,612 |
|
|
|
2,513,761 |
|
|
|
(1) |
These values are based on $32.50, the closing price of the
shares underlying the options on December 31, 2004, less
the exercise price, multiplied by the number of options. |
Employee Benefit Plans
|
|
|
2004 Equity Incentive Plan |
A description of the provisions of our 2004 Equity Incentive
Plan is set forth below. This summary is qualified in its
entirety by the detailed provisions of the Equity Incentive
Plan. In July 2004, our board of directors adopted and our
stockholders approved our Equity Incentive Plan. The Equity
Incentive Plan is designed to enable us to attract, retain and
motivate our directors, officers, employees and consultants, and
to further align their interests with those of our stockholders,
by providing for or increasing their ownership interests in our
company.
Administration. The Equity Incentive Plan is administered
by the compensation committee of our board of directors. Our
board may, however, at any time resolve to administer the Equity
Incentive Plan. Subject to the specific provisions of the
incentive Plan, the compensation committee is authorized to
select persons to participate in the incentive Plan, determine
the form and substance of grants made under the Equity Incentive
Plan to each participant, and otherwise make all determinations
for the administration of the Equity Incentive Plan.
79
Participation. Individuals who will be eligible to
participate in the Equity Incentive Plan are directors
(including non-employee directors), officers (including
non-employee officers) and employees of, and other individuals
performing services for, or to whom an offer of employment has
been extended by, us or our subsidiaries.
Type of Awards. The Equity Incentive Plan provides for
the issuance of stock options, stock appreciation rights, or
SARs, restricted stock, deferred stock, dividend equivalents,
other stock-based awards and performance awards. Performance
awards may be based on the achievement of certain business or
personal criteria or goals, as determined by the compensation
committee.
Available Shares. An aggregate of 4,688,532 shares
of our common stock was initially reserved for issuance under
the Equity Incentive Plan, subject to certain adjustments
reflecting changes in our capitalization. The number of shares
reserved for issuance will be subject to an annual increase to
be added on January 1 of each year, commencing on
January 1, 2005 and ending on January 1, 2013. The
annual increase will be equal to the lesser of 3% of the number
of shares outstanding on each such date, 1,200,000 shares,
or such lesser amount determined by our board. If any grant
under the Equity Incentive Plan expires or terminates
unexercised, becomes unexercisable or is forfeited as to any
shares, or is tendered or withheld as to any shares in payment
of the exercise price of the grant or the taxes payable with
respect to the exercise, then such unpurchased, forfeited,
tendered or withheld shares will thereafter be available for
further grants under the Equity Incentive Plan unless, in the
case of options granted under the Equity Incentive Plan, related
SARs are exercised. The Equity Incentive Plan provides that the
compensation committee shall not grant, in any one calendar
year, to any one participant awards to purchase or acquire a
number of shares of common stock in excess of 15% of the total
number of shares authorized for issuance under the Equity
Incentive Plan.
Option Grants. Options granted under the Equity Incentive
Plan may be either incentive stock options within the meaning of
Section 422 of the Internal Revenue Code or non-qualified
stock options, as the compensation committee may determine. The
exercise price per share for each option will be established by
the compensation committee, except that in the case of the grant
of any incentive stock option, the exercise price may not be
less than 100% of the fair market value of a share of common
stock as of the date of grant of the option. In the case of the
grant of any incentive stock option to an employee who, at the
time of the grant, owns more than 10% of the total combined
voting power of all of our classes of stock, the exercise price
may not be less than 110% of the fair market value of a share of
common stock as of the date of grant of the option.
Terms of Options. The term during which each option may
be exercised will be determined by the compensation committee,
but if required by the Internal Revenue Code and except as
otherwise provided in the Equity Incentive Plan, no option will
be exercisable in whole or in part more than ten years from the
date it is granted, and no incentive stock option granted to an
employee who at the time of the grant owns more than 10% of the
total combined voting power of all of our classes of stock will
be exercisable more than five years from the date it is granted.
All rights to purchase shares pursuant to an option will, unless
sooner terminated, expire at the date designated by the
compensation committee. The compensation committee will
determine the date on which each option will become exercisable
and may provide that an option will become exercisable in
installments. The shares constituting each installment may be
purchased in whole or in part at any time after such installment
becomes exercisable, subject to such minimum exercise
requirements as may be designated by the compensation committee.
Prior to the exercise of an option and delivery of the shares
represented thereby, the optionee will have no rights as a
stockholder, including any dividend or voting rights, with
respect to any shares covered by such outstanding option. If
required by the Internal Revenue Code, the aggregate fair market
value, determined as of the grant date, of shares for which an
incentive stock option is exercisable for the first time during
any calendar year under all of our and our subsidiaries equity
incentive plans may not exceed $100,000. The compensation
committee may provide, in its discretion, for the grant of
reload options and for the grant of options which are
exercisable for shares of restricted stock.
Payment of Options. Options may be exercised, in whole or
in part, upon payment of the exercise price of the shares to be
acquired. Unless otherwise determined by the compensation
committee, payment shall be made (i) in cash (including
check, bank draft, money order or wire transfer of immediately
available funds), (ii) by delivery of outstanding shares of
common stock with a fair market value on the date of exercise
equal to the aggregate exercise price payable with respect to
the options exercise, (iii) by simultaneous sale
through
80
a broker reasonably acceptable to the compensation committee of
shares acquired on exercise, as permitted under
Regulation T of the Federal Reserve Board, (iv) by
authorizing the company to withhold from issuance a number of
shares issuable upon exercise of the options which, when
multiplied by the fair market value of a share of common stock
on the date of exercise, is equal to the aggregate exercise
price payable with respect to the options so exercised or
(v) by any combination of the foregoing.
Stock Appreciation Rights. SARs entitle a participant to
receive the amount by which the fair market value of a share of
our common stock on the date of exercise exceeds the grant price
of the SAR. The compensation committee shall have the authority
to grant SARs under this Equity Incentive Plan, either alone or
in tandem with options (either at the time of grant of the
related option or thereafter by amendment to an outstanding
option). The grant price and the term of a SAR will be
determined by the compensation committee. SARs granted in tandem
with options shall be exercisable only when, to the extent and
on the conditions that any related option is exercisable. The
exercise of an option shall result in an immediate forfeiture of
any related SAR to the extent the option is exercised, and the
exercise of a SAR shall cause an immediate forfeiture of any
related option to the extent the SAR is exercised.
Termination of Options and SARs. Unless otherwise
determined by the compensation committee, and subject to certain
exemptions and conditions, if a participant ceases to be a
director, officer or employee of, or to otherwise perform
services for us or a subsidiary of ours for any reason other
than death, disability, retirement or termination for cause, all
of the participants options and SARs that were exercisable
on the date of such cessation will remain exercisable for, and
will otherwise terminate at the end of, a period of 90 days
after the date of such cessation. In the case of death or
disability, all of the participants options and SARs that
were exercisable on the date of such death or disability will
remain so for a period of 180 days from the date of such
death or disability. In the case of a retirement, all of the
participants options and SARs that were exercisable on the
date of such retirement will remain exercisable for, and will
otherwise terminate at the end of, a period of 90 days
after the date of such retirement; provided, however, that such
options and SARs may become fully vested and exercisable in the
discretion of the Committee. In the case of a termination for
cause, or if a participant does not become a director, officer
or employee of, or does not begin performing other services for
us or a subsidiary of ours for any reason, all of the
participants options and SARs will expire and be forfeited
immediately upon such cessation or non-commencement, whether or
not then exercisable.
Restricted Stock and Deferred Shares. Restricted stock is
a grant of shares of our common stock that may not be sold or
disposed of, and that may be forfeited in the event of certain
terminations of employment, prior to the end of a restricted
period set by the compensation committee. A participant granted
restricted stock generally has all of the rights of a
stockholder, unless the compensation committee determines
otherwise. An award of deferred shares confers upon a
participant the right to receive shares of our common stock at
the end of a deferral period set by the compensation committee,
subject to possible forfeiture of the award in the event of
certain terminations of employment prior to the end of deferral
period. Prior to settlement, an award of deferred shares carries
no voting or dividend rights or other rights associated with
share ownership, although dividend equivalents may be granted in
connection with restricted stock or deferred shares.
Dividend Equivalents. Dividend equivalents confer the
right to receive, currently or on a deferred basis, cash, shares
of our common stock, other awards or other property equal in
value to dividends paid on a specific number of shares of our
common stock. Dividend equivalents may be granted alone or in
connection with another award, and may be paid currently or on a
deferred basis. If deferred, dividend equivalents may be deemed
to have been reinvested in additional shares of our common stock.
Other Stock-Based Awards. The compensation committee is
authorized to grant other awards that are denominated or payable
in, valued by reference to, or otherwise based on or related to
shares of our common stock, under the Equity Incentive Plan.
These awards may include convertible or exchangeable debt
securities, other rights convertible or exchangeable into shares
of common stock, purchase rights for shares of common stock,
awards with value and payment contingent upon our performance as
a company or any other factors designated by the compensation
committee, and awards valued by reference to the book value of
shares or the value of securities of or the performance of
specified subsidiaries. The compensation committee will
determine the terms and conditions of these awards.
81
Performance Awards. The compensation committee may
subject a participants right to exercise or receive a
grant or settlement of an award, and the timing of the grant or
settlement, to performance conditions specified by the
compensation committee. Performance awards may be granted under
the Equity Incentive Plan in a manner that results in their
qualifying as performance-based compensation exempt from the
limitation on tax deductibility under Section 162(m) of the
Internal Revenue Code for compensation in excess of $1,000,000
paid to our chief executive officer and our four highest
compensated officers. The compensation committee will determine
performance award terms, including the required levels of
performance with respect to particular business criteria, the
corresponding amounts payable upon achievement of those levels
of performance, termination and forfeiture provisions and the
form of settlement. In granting performance awards, the
compensation committee may establish unfunded award
pools, the amounts of which will be based upon the
achievement of a performance goal or goals based on one or more
business criteria. Business criteria might include, for example,
total stockholder return, net income, pretax earnings, EBITDA,
earnings per share, or return on investment.
Effect of Change in control and Adjustments for Stock
Dividends and Similar Events. Certain change in control (as
defined in the Equity Incentive Plan) transactions may cause
awards granted under the Equity Incentive Plan to vest and
become exercisable in full. The compensation committee will make
appropriate adjustments in outstanding awards, in the number of
shares available for issuance under the Equity Incentive Plan,
and in the exercise price of outstanding options and SARs, to
reflect common stock dividends, stock splits and other similar
events.
Transferability. Stock options, SARs, performance awards
or restricted stock granted under the Equity Incentive Plan may
not be sold, transferred, pledged, or assigned other than by
will, under applicable laws of descent and distribution, or by
gift or qualified domestic relations order to a
participants family member (as defined under the Equity
Incentive Plan).
Amendment of Outstanding Awards and Amendment/ Termination of
Plan. The board of directors or the compensation committee
generally has the power and authority to amend or terminate the
Equity Incentive Plan at any time without approval from our
stockholders. The compensation committee generally have the
authority to amend the terms of any outstanding award under the
plan, including, without limitation, the ability to reduce the
exercise price of any options or SARs or to accelerate the dates
on which they become exercisable or vest, at any time without
approval from our stockholders. The compensation committee may,
in its discretion, permit holders of awards under the Equity
Incentive Plan to surrender outstanding awards in order to
exercise or realize rights under other awards, or in exchange
for the grant of new awards, or require holders of awards to
surrender outstanding awards as a condition precedent to the
grant of new awards under the Equity Incentive Plan. No
amendment will become effective without the prior approval of
our stockholders if stockholder approval would be required by
applicable law or regulations, including if required for
continued compliance with the performance-based compensation
exception of Section 162(m) of the Internal Revenue Code,
under provisions of Section 422 of the Internal Revenue
Code or by any listing requirement of the principal stock
exchange on which our common stock is then listed. Unless
previously terminated by the board or the committee, the Equity
Incentive Plan will terminate on the tenth anniversary of its
adoption. No termination of the Equity Incentive Plan will
materially and adversely affect any of the rights or obligations
of any person, without his or her written consent, under any
grant of options or other incentives theretofore granted under
the Equity Incentive Plan.
The following is a summary description of our 2002 Senior
Executive Equity Plan and our 2002 Employee Option Plan, both of
which were adopted by the board of directors and became
effective on September 6, 2002 (collectively the
plans). This summary is qualified in its entirety by
the detailed provisions of the plans. A maximum of
3,604,443 shares of common stock in the aggregate were
reserved for issuances under the plans. Both plans are
administered by our board of directors and the compensation
committee.
Under the Senior Executive Equity Plan, each participant was
given the opportunity to purchase a specified number of what
were, prior to our reorganization as a corporation, Class A
Common Units. As a
82
result of that purchase, each participant was granted, for no
consideration, a specified number of what were Class C
Common Units. Under the Employee Option Plan, each participant
was granted an option to purchase a specified number of what
were Class A Common Units. The securities that were granted
under both plans are subject to the terms, including vesting,
set forth in each subscription agreement or option agreement, as
applicable. All securities granted pursuant to the plans are
subject to repurchase by us at fair market value if the
participant ceases to be employed by us.
Upon the closing of our reorganization as a corporation, the
Class C Common Units granted under the Senior Executive
Equity Plan were converted automatically into shares of our
common stock, and the options granted under the Employee Option
Plan were converted automatically into equivalent options to
purchase our common stock. Each granted share and option will be
subject to the same vesting terms as in each holders
original subscription or option agreement, as applicable. The
number of shares subject to each option and their exercise price
will be adjusted to reflect any stock split effected in
connection with the restructuring. As of June 6, 2005,
18 of our employees hold a total of 2,017,820 shares
under our Senior Executive Equity Plan, of which
1,172,607 shares are vested, 149 of our employees hold
options under our 2002 Employee Option Plan exercisable for
approximately 1,216,937 shares of our common stock, at a
weighted average exercise price of $8.98, of which
314,468 are vested, and 111 of our employees and
directors hold options under our 2004 Equity Incentive Plan
exercisable for approximately 1,292,566 shares of our
common stock at a weighted average price of $26.11, of which
10,416 are vested. We do not intend to issue any additional
securities under our 2002 Senior Executive Equity Plan or our
2002 Employee Option Plan.
|
|
|
Employee Stock Purchase Plan |
The following is a summary description of our 2005 Employee
Stock Purchase Plan. This summary is qualified in its entirety
by the detailed provisions of the 2005 Employee Stock Purchase
Plan. In November 2004, our board of directors adopted our 2005
Employee Stock Purchase Plan, and on June 15, 2005, our
stockholders approved our 2005 Employee Stock Purchase Plan at
our 2005 annual meeting of stockholders. The purpose of the plan
is to provide an incentive for our employees (and employees of
our subsidiaries designated by our board of directors) to
purchase our common stock and acquire a proprietary interest in
us.
Administration. A committee designated by our board
administers the plan. The plan vests the committee with the
authority to interpret the plan, to prescribe, amend, and
rescind rules and regulations relating to the plan, and to make
all other determinations necessary or advisable for the
administration of the plan, although our board of directors may
exercise any such authority in lieu of the committee. In all
cases, the plan will be required to be administered in such a
manner as to comply with applicable requirements of
Rule 16b-3 under the Securities Exchange Act of 1934, as
amended, and Section 423 of the Internal Revenue Code of
1986, as amended.
Eligibility and Participation. Each person who was
employed either by us or by one of our designated subsidiaries
and has completed one month of service is eligible to
participate in the plan. None of our senior executives or highly
compensated senior officers are eligible to participate in the
plan.
Options to Purchase/ Purchase of Shares. Each participant
will be granted an option to purchase shares of our common stock
at the beginning of each offering period under the
plan, which generally will be three months, with purchases of
common stock occurring automatically on each exercise
date during the offering period. Exercise dates generally
will occur on each March 31, June 30,
September 30 and December 31. Participants will
purchase the shares of our common stock through after-tax
payroll deductions, not to exceed 10% of the participants
total base salary. No participant may purchase more than $3,000
of common stock in any one calendar year, or more than
500 shares on any exercise date. The purchase price for
each share will generally be 95% (subject to increases or
decreases by the committee, but not less than 85%) of the fair
market value on the exercise date. A participant will have no
interest or voting right in shares covered by his option until
such option has been exercised. If a participants
employment with us or one of our designated subsidiaries
terminates, any outstanding option of that participant also will
terminate.
Share Reserve. The maximum number of shares of our common
stock reserved for issuance over the term of the plan is
387,714. Shares of common stock subject to the plan may be newly
issued shares or shares reacquired in private transactions or
open market purchases. If any option to purchase reserved shares
is not
83
exercised by a participant for any reason, or if the option
terminates, the shares that were not purchased shall again
become available under the plan. The number of shares available
under the plan will be subject to periodic adjustment for
changes in the outstanding common stock occasioned by stock
splits, stock dividends, recapitalizations or other similar
changes affecting our outstanding common stock.
Adjustments Upon Changes in Capitalization; Corporate
Transactions. If the outstanding shares of common stock are
increased or decreased, or are changed into or are exchanged for
a different number or kind of shares, as a result of one or more
reorganizations, restructurings, recapitalizations,
reclassifications, stock splits, reverse stock splits, stock
dividends or the like, upon authorization of the committee,
appropriate adjustments shall be made in the number and/or kind
of shares, and the per-share option price thereof, which may be
issued in the aggregate and to any participant upon exercise of
options granted under the plan. In the event of the proposed
dissolution or liquidation of the company, the offering period
will terminate immediately prior to the consummation of such
proposed action, unless otherwise provided by the committee. In
the event of a proposed sale of all or substantially all of the
Companys assets, or the merger of the Company with or into
another corporation (each, a sale transaction), each
option under the plan shall be assumed or an equivalent option
shall be substituted by such successor corporation or a parent
or subsidiary of such successor corporation, unless the
committee determines, in the exercise of its sole discretion and
in lieu of such assumption or substitution, to shorten the
offering period then in progress by setting a new exercise date.
Amendment, Suspension and Termination. Our board or the
committee generally has the power and authority to amend the
plan from time to time in any respect without the approval of
our stockholders. However, no amendment will become effective
without the prior approval of our stockholders if stockholder
approval would be required by applicable law or regulation,
including Rule 16b-3 under the Securities Exchange Act of
1934, Section 423 of the Internal Revenue Code, or any
listing requirement of the principal stock exchange on which our
common stock is then listed. Additionally, except as otherwise
specified in the plan, no amendment may make any change to an
option already granted that adversely affects the rights of any
participant. The board or the committee may, as of the close of
any exercise date, suspend the plan; provided, that the board or
committee provides notice to the participants at least five
(5) business days prior to the suspension. The board or
committee may resume the normal operation of the plan as of any
exercise date; provided further, that the notice is provided to
the participants at least twenty (20) business days prior
to the date of termination of the suspension period. The plan
will terminate at the earliest of the tenth anniversary of its
implementation, the time when there are no remaining reserved
shares available for purchase under the plan, or an earlier time
that our board may determine.
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401(k) Profit Sharing Plan |
We have adopted a tax-qualified employee savings and retirement
plan, the 401(k) Profit Sharing Plan, for eligible associates.
Eligible associates may elect to defer a portion of their
eligible compensation, subject to the statutorily prescribed
annual limit. We may make matching contributions on behalf of
all participants who have elected to make deferrals to the
401(k) Profit Sharing Plan in an amount determined annually by
us. Any contributions to the plan by us or the participants are
paid to a trustee. The contributions made by us, if any, are
subject to a vesting schedule; all other contributions are fully
vested at all times. The 401(k) Profit Sharing Plan, and the
accompanying trust, is intended to qualify under
Sections 401(k) and 501 of the Internal Revenue Code, so
that contributions by us or by associates and income earned (if
any) on plan contributions are not taxable to associates until
withdrawn and contributions by us, if any, will be deductible by
the company when made. At the direction of each participant, the
trustee invests the contributions made to the 401(k) Profit
Sharing Plan in any number of investment options.
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Employment Contracts, Termination of Employment and
Change-in-Control Arrangements |
Todd S. Farha serves as our Chief Executive Officer, President
and a member of our board of directors pursuant to an amended
and restated employment agreement dated June 6, 2005. The
agreement has an initial term of five years, commencing on
June 6, 2005, and will automatically renew at the end of
the initial term and each additional term for an additional
one-year period unless either party notifies the other that the
term will not be extended. Under the agreement, Mr. Farha
is entitled to an annual salary of $400,000, subject to annual
review and potential increase by our board of directors. In
addition, Mr. Farha is eligible to receive an
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annual cash bonus, based upon the satisfaction of performance
criteria to be established annually by our compensation
committee. If Mr. Farhas employment is terminated by
us without cause, or by Mr. Farha for good reason, then
Mr. Farha will be entitled to continue to receive his base
salary for 12 months, or 24 months if the termination
occurs after a change in control. He will also be entitled to
receive an amount equal to his target bonus for the year in
which the termination occurs, payable one year after the date of
termination, as well as continuation of benefits for
12 months following termination. We would also be obligated
to make additional payments to Mr. Farha if he were to
incur any excise taxes pursuant to Section 4999 of the
Internal Revenue Code on account of the benefits and payments
provided under the agreement or otherwise. The additional
payments would be in an amount such that, after taking into
account all applicable federal, state and local taxes applicable
to such additional payments, Mr. Farha would be able to
retain from such additional payments an amount equal to the
excise taxes that are imposed. Mr. Farha has agreed not to
compete with us during the term of his employment and for one
year thereafter, except that if Mr. Farhas employment
terminates because we notify him that the term of his agreement
will not be renewed, the non-competition covenant will not apply
following the term unless we elect to continue to pay him his
base salary during that period.
Paul Behrens serves as our Senior Vice President and Chief
Financial Officer and Heath Schiesser serves as our Senior Vice
President, Marketing & Sales, pursuant to employment
agreements with us. Each agreement has an initial term of three
years, and will automatically renew for successive additional
one-year periods thereafter unless either party notifies the
other that the term will not be extended. Under the agreements,
Mr. Behrens is entitled to an annual salary of $275,000 and
Mr. Schiesser is entitled to an annual salary of $250,000,
in each case subject to annual review and potential increase by
our board of directors. In addition, each is eligible to receive
an annual potential bonus, payable in the form of cash or
equity, based upon the satisfaction of performance criteria to
be established annually by our compensation committee. If the
employment of either of these executives is terminated by us
without cause, or by the executive for good reason, the
executive will be entitled to continue to receive his base
salary and benefits for 12 months following the date of
termination. In addition, in the case of Mr. Schiesser, if
the termination occurs within six months after a change of
control has occurred or a definitive agreement providing for a
change of control has been signed, or if a definitive agreement
providing for a change of control is signed within six months
after the date of termination, he would also be entitled to
receive an amount equal to his expected potential bonus payable
for the 12-month period following the termination. Each of the
executives has agreed not to compete with us during the term of
his employment and for one year thereafter.
Pursuant to an offer letter to Mr. Sattaur dated
December 5, 2003, Mr. Sattaur agreed to serve as our
Senior Vice President, National Medicare Programs with an
initial annual base salary of $250,000 and a bonus award
potential of up to 50% of his base salary. Pursuant to the offer
letter, Mr. Sattaur was awarded stock options and a sign-on
bonus of $100,000. Mr. Sattaur also entered into our
standard confidentiality, restrictive covenant and repayment of
sign-on bonus agreements. In April 2004, Mr. Sattaur was
promoted to President, Florida and in March 2005,
Mr. Sattaurs annual base salary was increased to
$275,000.
Pursuant to an offer letter to Mr. Shah dated July 15,
2004, Mr. Shah agreed to serve as our Senior Vice
President, Market Expansion with an initial base salary of
$275,000 and a bonus award potential consistent with our other
senior executives. Pursuant to the offer letter, Mr. Shah
was also awarded stock options and offered a success bonus in
the amount of $62,500 upon achievement of certain milestones.
Mr. Shah also entered into a restrictive covenant and
non-solicitation agreement.
The shares of restricted stock awarded to Messrs. Farha,
Behrens and Schiesser prior to our initial public offering are
subject to accelerated vesting in certain circumstances in
connection with a change in control, as described more fully in
the footnotes to the Summary Compensation Table herein.
Limitations on Liability of Directors and Officers and
Indemnification
Our certificate of incorporation provides that our officers and
directors will not be personally liable to us or our
stockholders for monetary damages resulting from a breach of
fiduciary duty, to the maximum extent
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permitted by Delaware law. Under Delaware law, directors of a
corporation will not be personally liable for monetary damages
for breach of their fiduciary duties as directors, except for:
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any breach of the duty of loyalty to the corporation or its
stockholders; |
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acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law; |
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unlawful payments of dividends or unlawful stock repurchases or
redemptions; or |
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any transaction from which the director derived an improper
personal benefit. |
This limitation of liability does not apply to non-monetary
remedies that may be available, such as injunctive relief or
rescission, nor does it relieve our officers and directors from
complying with federal or state securities laws.
Indemnification
Our certificate of incorporation and bylaws provide that we
shall indemnify our directors and executive officers, and may
indemnify our other corporate agents, to the fullest extent
permitted by law. An officer or director shall not be entitled
to indemnification if:
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the officer or director did not act in good faith and in a
manner reasonably believed to be in, or not opposed to our best
interests; or |
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the officer or director is subject to criminal action or
proceedings and had reasonable cause to believe the conduct was
unlawful. |
We have entered into agreements to indemnify our directors and
certain executive officers in addition to the indemnification
provided for in our certificate of incorporation and our bylaws.
These agreements, among other things, provide for
indemnification of our directors and officers for expenses
specified in the agreements, including attorneys fees,
judgments, fines and settlement amounts incurred by any of these
persons in any action or proceeding arising out of these
persons services as a director or officer for us, any of
our subsidiaries or any other entity to which the person
provides services at our request. We believe that these
provisions and agreements are necessary to attract and retain
qualified persons as directors and officers.
CERTAIN TRANSACTIONS
The summaries of the agreements described below are not complete
and you should read the agreements in their entirety. These
agreements have been filed as exhibits to the registration
statement of which this prospectus is a part.
Other than the transactions described below, for the last three
full fiscal years there has not been, nor is there currently
proposed, any transaction or series of similar transactions to
which we are or will be a party in which the amount involved
exceeded or will exceed $60,000, and in which any director,
executive officer, holder of more than 5% of our common stock on
an as-converted basis or any member of their immediate family
has or will have a direct or indirect material interest.
Although we do not have a separate conflicts policy, we comply
with Delaware law with respect to transactions involving
potential conflicts. Delaware law requires that all transactions
between us and any director or executive officer are subject to
full disclosure and approval of the majority of the
disinterested members of our board of directors, approval of the
majority of our stockholders or the determination that the
contract or transaction is intrinsically fair to us.
Acquisition Agreements
We were formed in May 2002 for the purpose of acquiring the
WellCare group of companies. That acquisition was completed in
July 2002, through two transactions. In the first, we acquired
our Florida operations, including our WellCare of Florida and
HealthEase subsidiaries, in a stock purchase from Rupesh Shah,
our Senior Vice President, Market Expansion, his spouse, and the
other former owners of our Florida business, pursuant to a
purchase agreement. The purchase price for this transaction
consisted of:
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the issuance of a senior subordinated non-negotiable promissory
note in the original principal amount of $53.0 million,
subject to adjustments for earnouts and other purchase price
adjustments; and |
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warrants to purchase 1,859,704 shares of our common
stock. |
The purchase price was subject to adjustment, based upon a
number of earn-outs and other calculations. In February 2004,
the remaining principal amount of the note was fixed at
$119.7 million pursuant to the terms of a settlement
agreement with the sellers. See Amendment and
Settlement Agreement.
In the second transaction, we acquired The WellCare Management
Group, Inc., a publicly-traded holding company and the parent
company of our New York and Connecticut operations, by means of
a merger of that company into a wholly-owned subsidiary of ours,
pursuant to an agreement and plan of merger. The purchase price
for this transaction consisted of approximately
$7.72 million in cash. Mr. Shah was also a stockholder
of The WellCare Management Group prior to the acquisition.
Other Agreements
In connection with our acquisition of our Florida business
pursuant to the purchase agreement, we entered into the
following agreements with Mr. Shah and the other sellers:
Seller Note. As part of the consideration for the
acquisition, we issued a senior subordinated non-negotiable
promissory note in the original principal amount of
$53.0 million, subject to adjustments for earnouts and
other purchase price adjustments, to the shareholder
representative on behalf of the former shareholders of the
Florida business, including Mr. Shah and his spouse. In
February 2004, the remaining principal amount of the note was
fixed at $119.7 million pursuant to the terms of an
amendment and settlement agreement with the former shareholders,
and the seller note was amended and restated in its entirety.
See Amendment and Settlement Agreement.
Based on the Shahs aggregate percentage ownership interest
in the Florida business prior to the acquisition, we estimate
their interest in the current principal amount of the note to be
approximately $4.8 million.
Warrants. As further consideration for the acquisition,
we entered into an equity and warrant agreement with
Mr. Shah and two other former stockholders of our Florida
business. Under the equity and warrant agreement, the
stockholders were issued warrants to purchase Class B
Common Units, which were converted into an aggregate of
1,859,704 shares of our common stock in our reorganization
into a corporation. The warrants were fully exercised in
December 2003.
Investor Rights Agreement. We entered into an investor
rights agreement with Mr. Shah and the two other former
stockholders who received warrants under the equity and warrant
agreement. Under the investor rights agreement, the stockholders
have piggyback registration rights to include their
shares in any registration statement we file on our own behalf
(other than for employee benefit plans and other exceptions) or
on behalf of other stockholders, subject to other
stockholders priority rights of registration. The
stockholders also have the right to require us to register their
shares on Form S-3, if available for such an offering and
if the aggregate price of the shares to be sold would be at
least $1.0 million, not more than once during any 12-month
period. The stockholders would be responsible for the expenses
of any such registration on Form S-3. The stockholders also
received information rights and a right to participate in some
types of sales by us of our equity securities. Those rights
terminated upon the closing of our initial public offering.
Pledge and Escrow Agreements. As security for our
obligations under the seller note, we entered into a pledge
agreement with the stockholder representative on behalf of the
former stockholders of the Florida business, including
Mr. Shah and his spouse, pursuant to which we pledged a
portion of the shares of capital stock of WCG Health Management,
Inc. held by us. Currently, 51% of the shares remain subject to
the pledge. Upon the payment in full of the note, all of the
shares will be released.
Amendment and Settlement Agreement. In February 2004, we
entered into an amendment and settlement agreement with
Mr. Shah, his spouse and the other sellers that fixed the
remaining amount of the seller note at $119.7 million.
Under the terms of the agreement, the aggregate indemnification
obligations of the sellers under the purchase agreement were
reduced, subject to certain exceptions.
Prepayment Agreement. In May 2004, we entered into a
prepayment and amendment agreement with Mr. Shah, his
spouse and the other former shareholders of our Florida
business. Under the terms of the
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prepayment agreement, we prepaid $85.0 million of the
outstanding principal amount of the seller note, and an
additional $3.0 million of the outstanding principal amount
was forgiven in consideration for the prepayment. A portion of
the $85.0 million prepayment was deposited into an escrow
account to secure certain indemnification obligations of the
shareholders arising under the purchase agreement.
Prepayment and Settlement Allocation Agreement. In August
2004, we entered into a prepayment and settlement allocation
agreement with the shareholder representative on behalf of the
former shareholders of the Florida business, including
Mr. Shah and his spouse, to, among other things, settle
certain indemnification obligations of the former shareholders
arising under the acquisition agreement. As part of this
agreement, we prepaid an additional $3.2 million of the
principal amount of the seller note, resulting in a remaining
outstanding principal balance of $25.0 million due on
September 15, 2006. In addition, the amounts deposited into
escrow pursuant to the prepayment agreement were released.
Agreements with TowerBrook
Initial Capitalization and Contribution Agreement. We
were formed in May 2002 by our equity sponsor, TowerBrook
Investors L.P. (f/k/a Soros Private Equity Investors LP) At
that time, our equity sponsor contributed $1,000 in cash to us
in exchange for one Class A Common Unit. In July 2002, in
connection with the consummation of the acquisition of the
WellCare businesses, our equity sponsor contributed an
additional $70.0 million in cash to us, in exchange for
additional Class A Common Units, pursuant to a contribution
agreement.
Registration Rights Agreement. We are party to a
registration rights agreement with TowerBrook, Todd Farha and
some of our other stockholders, pursuant to which we granted
registration rights to those stockholders. Under the agreement,
holders of a majority of shares held by TowerBrook or any of its
affiliates may require us to effect the registration of their
shares from time to time. In addition, the stockholders party to
the agreement have piggyback registration rights to
include their shares in any registration statement we file on
our own behalf (other than for employee benefit plans and other
exceptions) or on behalf of other stockholders. We are required
to pay all registration expenses in connection with any demand
or piggyback registrations. Notwithstanding the other provisions
of the agreement, we are not obligated to effect any demand
registration within 180 days after the effective date of
either:
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any registration we effect on Form S-1, or any similar
long-form registration (including this
offering); or |
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any other offering in which stockholders party to the agreement
were given piggyback rights pursuant to the
agreement, if the offering includes at least 80% of the number
of shares requested by the stockholders to be included. |
Reorganization
In February 2004, upon our incorporation, we issued
100 shares of common stock to WellCare Holdings, LLC in
exchange for $1,000.
In February 2004, the Board of Directors of WellCare Holdings,
LLC authorized a plan to reorganize WellCare Holdings, LLC as a
corporation, by means of a merger of WellCare Holdings, LLC with
and into WellCare Group, Inc. Upon the consummation of the
reorganization, which took place in July 2004:
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based on the initial public offering price of $17.00 per
share, we issued an aggregate of 29,735,757 shares of
common stock in exchange for 23,530,225 Class A Common
Units, 2,287,037 Class B Common Units and 4,807,508
Class C Common Units of WellCare Holdings, LLC; |
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all outstanding options issued by WellCare Holdings, LLC were
automatically converted into options to acquire shares of our
common stock; and |
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our name was changed to WellCare Health Plans, Inc. |
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Equity Sales and Grants
The executive officers and directors listed below purchased what
were, prior to our reorganization as a corporation, our
Class A Common Units. As a result of those purchases, those
officers and directors were granted, for no additional
consideration, a specified number of what were Class C
Common Units, subject to vesting restrictions. Upon the
completion of our reorganization, all of these units converted
into shares of our common stock, and the vesting restrictions
remained in place.
On September 6, 2002, Todd Farha purchased
13,552 shares, for an aggregate purchase price of $50,000,
and was granted 1,634,581 restricted shares.
On May 30, 2003, Kevin Hickey purchased 13,552 shares,
for an aggregate purchase price of $50,000, and was granted
40,657 restricted shares.
On May 30, 2003, Heath Schiesser purchased
2,711 shares, for an aggregate purchase price of $10,000,
and was granted 458,572 restricted shares, pursuant to our
2002 Senior Executive Equity Plan.
On May 31, 2003, Thaddeus Bereday purchased
2,710 shares, for an aggregate purchase price of $10,000,
and was granted 327,551 restricted shares, pursuant to our
2002 Senior Executive Equity Plan.
On September 30, 2003, Paul L. Behrens purchased
13,552 shares, for an aggregate purchase price of $50,000,
and was granted 458,572 restricted shares, pursuant to our
2002 Senior Executive Equity Plan.
On September 30, 2003, Regina Herzlinger purchased
13,552 shares, for an aggregate purchase price of $50,000,
and was granted 40,657 restricted shares.
On September 30, 2003, Ruben King-Shaw purchased
13,552 shares, for an aggregate purchase price of $50,000,
and was granted 40,657 restricted shares.
On September 30, 2003, Alif Hourani purchased
13,552 shares, for an aggregate purchase price of $50,000,
and was granted 40,657 restricted shares.
Restricted Stock Grants
The executive officers and directors below were granted shares
of restricted stock, generally vesting over a four-year period
(other than Mr. Farhas June 6, 2005 grant, which
vests over a five-year period).
On March 15, 2005, Paul L. Behrens was granted 3,000
shares of restricted stock, pursuant to our 2004 Equity
Incentive Plan.
On March 15, 2005, Thaddeus Bereday was granted 3,000
shares of restricted stock, pursuant to our 2004 Equity
Incentive Plan.
On March 15, 2005, Todd Farha was granted 20,000 shares of
restricted stock, pursuant to our 2004 Equity Incentive Plan.
On March 15, 2005, Ace Hodgin was granted 3,000 shares of
restricted stock, pursuant to our 2004 Equity Incentive Plan.
On March 15, 2005, MT Sattaur was granted 7,300 shares of
restricted stock, pursuant to our 2004 Equity Incentive Plan.
On March 15, 2005, Heath Schiesser was granted 3,000 shares
of restricted stock, pursuant to our 2004 Equity Incentive Plan.
On March 15, 2005, Rupesh Shah was granted 3,000 shares of
restricted stock, pursuant to our 2004 Equity Incentive Plan.
On April 28, 2005, David Erickson was granted 10,000 shares
of restricted stock, pursuant to our 2004 Equity Incentive Plan.
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On June 6, 2005, Todd Farha was granted 220,000 shares of
restricted stock, pursuant to our 2004 Equity Incentive Plan.
Option Grants
The executive officers and directors listed below were granted
options to purchase shares of our common stock, generally
subject to vesting over a four-year period.
On September 30, 2003, Rupesh Shah was granted options to
purchase 130,104 shares, at a per share exercise price
of $3.69, pursuant to our 2002 Employee Option Plan.
On December 31, 2003, Christian Michalik was granted
options to purchase 40,657 shares, at a per share
exercise price of $6.47.
On February 6, 2004, Todd Farha was granted options to
purchase 81,315 shares, at a per share exercise price
of $8.33, pursuant to our 2002 Employee Option Plan.
On February 6, 2004, Paul Behrens was granted options to
purchase 8,131 shares, at a per share exercise price
of $8.33, pursuant to our 2002 Employee Option Plan.
On February 6, 2004, Thaddeus Bereday was granted options
to purchase 16,263 shares, at a per share exercise
price of $8.33, pursuant to our 2002 Employee Option Plan.
On February 6, 2004, Heath Schiesser was granted options to
purchase 8,131 shares, at a per share exercise price
of $8.33, pursuant to our 2002 Employee Option Plan.
On February 6, 2004, MT Sattaur was granted options to
purchase 97,578 shares, at a per share exercise price
of $8.33, pursuant to our 2002 Employee Option Plan.
On February 6, 2004, Glen Johnson was granted options to
purchase 40,657 shares, at a per share exercise price
of $8.33.
On May 12, 2004, Rupesh Shah was granted options to
purchase 16,263 shares, at a per share exercise price
of $8.33, pursuant to our 2002 Employee Option Plan.
On May 12, 2004, Ruben King-Shaw was granted options to
purchase 8,131 shares, at a per share exercise price
of $6.47. In November 2004, the board determined to accelerate
the vesting of these options in full.
On June 30, 2004, MT Sattaur was granted options to
purchase 20,000 shares, at a per share exercise price
of $17.00, pursuant to our 2002 Employee Option Plan.
On June 30, 2004, Thaddeus Bereday was granted options to
purchase 10,000 shares, at a per share exercise price
of $17.00, pursuant to our 2002 Employee Option Plan.
On July 7, 2004, Kevin Hickey was granted options to
purchase 5,000 shares, at a per share exercise price
of $17.00, pursuant to our 2004 Equity Incentive Plan.
On July 7, 2004, Alif Hourani was granted options to
purchase 5,000 shares, at a per share exercise price
of $17.00, pursuant to our 2004 Equity Incentive Plan.
On July 7, 2004, Glen Johnson was granted options to
purchase 5,000 shares, at a per share exercise price of
$17.00, pursuant to our 2004 Equity Incentive Plan.
On July 7, 2004, Ruben King-Shaw was granted options to
purchase 5,000 shares, at a per share exercise price of
$17.00, pursuant to our 2004 Equity Incentive Plan.
On July 7, 2004, Christian Michalik was granted options to
purchase 5,000 shares, at a per share exercise price of
$17.00, pursuant to our 2004 Equity Incentive Plan.
On July 7, 2004, Regina Herzlinger was granted options to
purchase 10,000 shares, at a per share exercise price of
$17.00, pursuant to our 2004 Equity Incentive Plan.
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On July 7, 2004, Rupesh Shah was granted options to
purchase 50,000 shares, at a per share exercise price of
$17.00, pursuant to our 2004 Equity Incentive Plan.
On August 5, 2004, Ace Hodgin was granted options to
purchase 80,000 shares, at a per share exercise price of
$17.00, pursuant to our 2004 Equity Incentive Plan.
On November 3, 2004, Jane Swift was granted options to
purchase 25,000 shares, at a per share exercise price of
$23.50, pursuant to our 2004 Equity Incentive Plan.
On November 3, 2004, MT Sattaur was granted options to
purchase 20,000 shares, at a per share exercise price of
$23.50, pursuant to our 2004 Equity Incentive Plan.
On February 22, 2005, David Erickson was granted options to
purchase 15,000 shares, at a per share exercise price of
$30.32 pursuant to our 2004 Equity Incentive Plan.
On June 6, 2005, Todd Farha was granted options to purchase
220,000 shares, at a per share exercise price of $34.95
pursuant to our 2004 Equity Incentive Plan.
Other Agreements
IntelliClaim. In March 2003, we entered into an agreement
with IntelliClaim, Inc., pursuant to which we license software,
and obtain maintenance, support and related services, from
IntelliClaim. Kevin Hickey, a member of our board of directors,
was the Chairman and Chief Executive Officer of IntelliClaim
until January 2005. In 2003 and 2004, we paid $225,000 and
$218,675 in the aggregate, respectively, to IntelliClaim under
this agreement. As of January 2005, Mr. Hickey no longer
served as an officer or director of IntelliClaim.
Ruben King-Shaw, Jr. In November 2003, we entered
into a consulting agreement with Ruben King-Shaw, Jr., one
of our directors, as more fully described under Director
Compensation above.
Employment Agreements. We have entered into employment
agreements with some of our executive officers, as described in
Management Employment Contracts, Termination
of Employment and Change-in-Control Arrangements.
Indemnification Agreements. We have entered into
indemnification agreements with our directors and some of our
executive officers, as described in Management
Limitations on Liability of Directors and Officers and
Indemnification.
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PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth information regarding the
beneficial ownership of our common stock as of June 6,
2005, and as adjusted to reflect the sale of the shares of
common stock offered by this prospectus by:
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the selling stockholders in this offering listed below; |
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each person or entity who is known by us to own beneficially
more than 5% of our outstanding common stock; |
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each of our executive officers named in the Summary Compensation
Table; |
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each of our directors; and |
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all directors and executive officers as a group. |
Beneficial ownership is determined in accordance with the rules
of the Securities and Exchange Commission. In computing the
number of shares beneficially owned by a person and the
percentage ownership of that person, shares of common stock
subject to options held by that person that are currently
exercisable or will become exercisable within 60 days after
June 6, 2005, are deemed outstanding, while the shares are
not deemed outstanding for purposes of computing percentage
ownership of any other person. Unless otherwise indicated in the
footnotes below, the persons and entities named in the table
have sole voting or investment power with respect to all shares
beneficially owned, subject to community property laws where
applicable.
The number and percentage of shares beneficially owned are based
on the aggregate of 39,120,131 shares of common stock
outstanding as of June 6, 2005.
Unless otherwise indicated, the principal address of each of the
stockholders below is c/o WellCare Health Plans, Inc.,
8725 Henderson Road, Renaissance One, Tampa, Florida 33634.
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of | |
|
|
Beneficially | |
|
Outstanding | |
|
Number of Shares | |
|
Beneficially | |
|
Outstanding | |
|
|
Owned | |
|
Shares | |
|
Offered Hereby | |
|
Owned | |
|
Shares | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
Executive Officers and Directors
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Todd S.
Farha(1)
|
|
|
1,734,827 |
|
|
|
4.43 |
|
|
|
219,000 |
|
|
|
1,515,827 |
|
|
|
3.87 |
|
Regina
Herzlinger(2)
|
|
|
49,831 |
|
|
|
* |
|
|
|
5,000 |
|
|
|
44,831 |
|
|
|
* |
|
Kevin
Hickey(3)
|
|
|
48,647 |
|
|
|
* |
|
|
|
5,000 |
|
|
|
43,647 |
|
|
|
* |
|
Alif
Hourani(4)
|
|
|
48,581 |
|
|
|
* |
|
|
|
5,000 |
|
|
|
43,581 |
|
|
|
* |
|
Glen R.
Johnson, M.D.(5)
|
|
|
20,638 |
|
|
|
* |
|
|
|
0 |
|
|
|
20,638 |
|
|
|
* |
|
Ruben Jose
King-Shaw, Jr.(6)
|
|
|
56,712 |
|
|
|
* |
|
|
|
5,000 |
|
|
|
51,712 |
|
|
|
* |
|
Christian P.
Michalik(7)
|
|
|
33,235 |
|
|
|
* |
|
|
|
0 |
|
|
|
33,235 |
|
|
|
* |
|
Jane Swift
|
|
|
0 |
|
|
|
* |
|
|
|
0 |
|
|
|
0 |
|
|
|
* |
|
Neal
Moszkowski(8)
|
|
|
16,733,784 |
|
|
|
42.78 |
|
|
|
6,000,000 |
|
|
|
10,733,784 |
|
|
|
27.44 |
|
Paul
Behrens(9)
|
|
|
455,967 |
|
|
|
1.17 |
|
|
|
64,000 |
|
|
|
391,967 |
|
|
|
1.00 |
|
Thaddeus
Bereday(10)
|
|
|
322,211 |
|
|
|
* |
|
|
|
48,000 |
|
|
|
274,211 |
|
|
|
* |
|
David
Erickson(11)
|
|
|
10,000 |
|
|
|
* |
|
|
|
0 |
|
|
|
10,000 |
|
|
|
* |
|
Ace
Hodgin(12)
|
|
|
22,841 |
|
|
|
* |
|
|
|
0 |
|
|
|
22,841 |
|
|
|
* |
|
Imtiaz
(MT) Sattaur(13)
|
|
|
48,921 |
|
|
|
* |
|
|
|
0 |
|
|
|
48,921 |
|
|
|
* |
|
Heath
Schiesser(14)
|
|
|
442,644 |
|
|
|
1.13 |
|
|
|
65,000 |
|
|
|
377,644 |
|
|
|
* |
|
Rupesh
Shah(15)
|
|
|
276,096 |
|
|
|
* |
|
|
|
45,000 |
|
|
|
231,096 |
|
|
|
* |
|
All directors and officers as a group
(16 persons)(16)
|
|
|
20,304,935 |
|
|
|
51.55 |
|
|
|
6,461,000 |
|
|
|
13,843,935 |
|
|
|
35.14 |
|
5% Stockholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TowerBrook Investors
L.P.(17)
|
|
|
16,733,784 |
|
|
|
42.78 |
|
|
|
6,000,000 |
|
|
|
10,733,784 |
|
|
|
27.44 |
|
Waddell & Reed, Inc., et
al(18)
|
|
|
2,707,850 |
|
|
|
6.92 |
|
|
|
0 |
|
|
|
2,707,850 |
|
|
|
6.92 |
|
Other Selling Stockholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jeffrey A.
Potter(19)
|
|
|
96,623 |
|
|
|
* |
|
|
|
17,000 |
|
|
|
79,623 |
|
|
|
* |
|
Jack N.
Shoemaker(20)
|
|
|
37,156 |
|
|
|
* |
|
|
|
7,000 |
|
|
|
30,156 |
|
|
|
* |
|
Randall D.
Zomermaand(21)
|
|
|
84,092 |
|
|
|
* |
|
|
|
15,000 |
|
|
|
69,092 |
|
|
|
* |
|
92
|
|
|
|
(1) |
Includes 372,216 unvested shares and 28,799 shares issuable
upon exercise of options that are exercisable within
60 days of June 6, 2005. |
|
(2) |
Includes 22,870 unvested shares and 2,500 shares issuable
upon exercise of options that are exercisable within
60 days of June 6, 2005. |
|
(3) |
Includes 15,247 unvested shares and 1,250 shares issuable
upon exercise of options that are exercisable within
60 days of June 6, 2005. |
|
(4) |
Includes 22,870 unvested shares and 1,250 shares issuable
upon exercise of options that are exercisable within
60 days of June 6, 2005. |
|
(5) |
Includes 15,649 shares issuable upon exercise of options
that are exercisable within 60 days of June 6, 2005. |
|
(6) |
Includes 22,870 unvested shares and 9,381 shares issuable
upon exercise of options that are exercisable within
60 days of June 6, 2005. |
|
(7) |
Includes 22,425 shares issuable upon exercise of options that
are exercisable within 60 days of June 6, 2005. |
|
(8) |
Represents shares held by TowerBrook, as described in
note (17). If the over-allotment option is exercised in
full, the ownership percentage will decrease to 25.0%. |
|
(9) |
Includes 269,901 unvested shares and 2,880 shares issuable
upon exercise of options that are exercisable within
60 days of June 6, 2005. |
|
|
(10) |
Includes 125,235 unvested shares and 8,467 shares issuable upon
exercise of options that are exercisable within 60 days of
June 6, 2005. |
(11) |
Includes 10,000 unvested shares. |
(12) |
Includes 2,400 unvested shares and 20,000 shares issuable upon
exercise of options that are exercisable within 60 days of
June 6, 2005. |
(13) |
Includes 5,840 unvested shares and 42,007 shares issuable
upon exercise of options that are exercisable within
60 days of June 6, 2005. |
(14) |
Includes 145,709 unvested shares and 2,879 shares
issuable upon exercise of options that are exercisable within
60 days of June 6, 2005. |
(15) |
Includes 2,400 unvested shares and 114,820 shares issuable upon
exercise of options that are exercisable within 60 days of
June 6, 2005. In April 2005, after considering
Mr. Shahs current role and responsibilities in the
company, our board of directors determined that Mr. Shah
was no longer an executive officer of the company. |
(16) |
Includes 1,017,558 unvested shares and 272,307 shares issuable
upon exercise of options that are exercisable within
60 days of June 6, 2005. |
(17) |
This information is furnished in reliance on the
Schedule 13D filed by TowerBrook Investors L.P. (f/k/a
Soros Private Equity Investors L.P.) (TowerBrook)
with the Securities and Exchange Commission on April 25,
2005. TowerBrook is a Delaware limited partnership. Its general
partner is TCP General Partner L.P. (f/k/a SPEP General Partner
LP), a Delaware limited partnership (TCP GP). An
investment committee of TCP GP exercises exclusive
decision-making authority with regard to the acquisition and
disposition of, and voting power with respect to, investments by
TowerBrook. TCP GPs general partner is TowerBrook Capital
Partners LLC, a Delaware limited liability company, whose
controlling members are Neal Moszkowski and Ramez Sousou, who in
such capacity may be deemed to have shared voting and
dispositive power over securities held for the account of
TowerBrook. Each of Mr. Moszkowski and Mr. Sousou
disclaim beneficial ownership of such securities except to the
extent of any pecuniary interest therein. If the over-allotment
option is exercised in full, TowerBrooks ownership
percentage will decrease to 25.0%. The principal business
address of TowerBrook is 888 Seventh Avenue, New York,
NY 10106. |
(18) |
This information is furnished in reliance on the
Schedule 13G filed by Waddell & Reed, Inc.
(WRI) and other affiliated entities on
February 8, 2005. WRI and the other affiliated entities
reported that the securities are beneficially owned by one or
more open-end investment companies or other managed accounts
which are advised or sub-advised by Waddell & Reed Ivy
Investment Company (WRIICO), an investment advisory
subsidiary of Waddell & Reed Financial, Inc.
(WDR) or Waddell & Reed Investment
Management Company (WRIMCO), an investment advisory
subsidiary of WRI. WRI is a broker-dealer and underwriting
subsidiary of Waddell & Reed Financial Services, Inc.,
a parent holding company (WRFSI). In turn, WRFSI is
a subsidiary of WDR, a publicly traded company. The investment
advisory contracts grant WRIICO and WRIMCO all investment and/or
voting power over securities owned by such advisory clients. The
investment sub-advisory contracts grant WRIICO and WRIMCO
investment power over securities owned by such sub-advisory
clients and, in most cases, voting power. Any investment
restriction of a sub-advisory contract does not restrict
investment discretion or power in a material manner. The
principal business address of WRI is 6300 Lamar Avenue,
Overland Park, KS 66202. |
(19) |
Includes 28,167 unvested shares and 8,721 shares issuable upon
exercise of options that are exercisable within 60 days of
June 6, 2005. |
(20) |
Includes 11,765 unvested shares and 1,354 shares issuable upon
exercise of options that are exercisable within 60 days of
June 6, 2005. |
(21) |
Includes 43,058 unvested shares and 5,760 shares issuable upon
exercise of options that are exercisable within 60 days of
June 6, 2005. |
93
DESCRIPTION OF CAPITAL STOCK
The following description of our common stock and preferred
stock and the relevant provisions of our certificate of
incorporation and bylaws currently in effect are summaries and
are qualified by reference to these documents. Forms have been
filed with the Securities and Exchange Commission as exhibits to
our registration statement, of which this prospectus forms a
part.
Our authorized capital stock consists of 100,000,000 shares
of common stock, par value $.01 per share and
20,000,000 shares of preferred stock, par value
$.01 per share.
Common Stock
As of June 6, 2005, there were 39,120,131 shares of
common stock outstanding.
Holders of common stock are entitled to one vote per share on
all matters submitted to a vote of stockholders. Holders of
common stock do not have cumulative voting rights. Holders of
common stock are entitled to receive dividends as may be
declared from time to time by the board of directors out of
funds legally available for the payment of dividends, subject to
the preferences that apply to any outstanding preferred stock.
See Dividend Policy. Upon our liquidation,
dissolution or winding up, the holders of common stock are
entitled to share ratably in all assets remaining after payment
of liabilities and after giving effect to the liquidation
preference of any outstanding preferred stock. The common stock
has no preemptive or conversion rights and no additional
subscription rights. There are no redemption or sinking fund
provisions applicable to the common stock. All outstanding
shares of common stock are fully paid and nonassessable. The
shares issued in this offering will be fully paid and
nonassessable.
Preferred Stock
Our certificate of incorporation authorizes the board of
directors, without stockholder action, to designate and issue
from time to time shares of preferred stock in one or more
series. The board of directors may designate the price, rights,
preferences and privileges of the shares of each series of
preferred stock, which may be greater than the rights of the
common stock. It is not possible to state the actual effect of
the issuance of any shares of preferred stock upon the rights of
holders of common stock until the board of directors determines
the specific rights of the preferred stock. However, possible
effects of issuing preferred stock with voting and conversion
rights include:
|
|
|
|
|
restricting dividends on common stock; |
|
|
|
diluting the voting power of common stock; |
|
|
|
impairing the liquidation rights of the common stock; |
|
|
|
delaying or preventing a change of control of us without
stockholder action; and |
|
|
|
harming the market price of common stock. |
Upon the closing of this offering, no shares of our preferred
stock will be outstanding. We have no present plans to issue any
shares of preferred stock.
Registration Rights
After the completion of this offering, the holders of
12,240,668 shares of common stock, including TowerBrook,
are entitled to demand registration rights requiring us to
register the sale of their shares under the Securities Act of
1933, under the terms of an agreement between us and the holders
of these shares. The holders of a majority of the shares held by
TowerBrook or its affiliates are entitled to demand that we
register their shares under the Securities Act, subject to
various limitations. In addition, these holders are entitled to
piggyback registration rights with respect to the registration
of their shares under the Securities Act, subject to various
limitations.
94
In addition, after the completion of this offering, the holders
of an additional 14,005,375 shares of common stock will be
entitled to piggyback registration rights, subject to various
limitations. Further, at any time after we become eligible to
file a registration statement on Form S-3, these holders
may require us to file registration statements on Form S-3
under the Securities Act with respect to their shares of common
stock. These registration rights are subject to certain
conditions and limitations, among them the right of the
underwriters of an offering to limit the number of shares of
common stock held by these holders with registration rights to
be included in a registration. We are generally required to bear
all of the expenses of all of these registrations, except
underwriting discounts and selling commissions. Registration of
any of the shares of common stock held by these holders with
registration rights would result in shares becoming freely
tradable without restriction under the Securities Act
immediately upon effectiveness of such registration.
Delaware Anti-Takeover Law and Provisions in Our Charter and
Bylaws
Delaware Anti-Takeover Statute. We are subject to
Section 203 of the Delaware General Corporation Law. In
general, these provisions prohibit a Delaware corporation from
engaging in any business combination with any interested
stockholder for a period of three years following the date that
the stockholder became an interested stockholder, unless the
transaction in which the person became an interested stockholder
is approved in a manner presented in Section 203 of the
Delaware General Corporation Law. Generally, a business
combination is defined to include mergers, asset sales and
other transactions resulting in financial benefit to a
stockholder. In general, an interested stockholder
is a person who, together with affiliates and associates, owns,
or within three years, did own, 15% or more of a
corporations voting stock.
Certificate of Incorporation. Our certificate of
incorporation provides that:
|
|
|
|
|
our board of directors may issue, without further action by the
stockholders, up to 20,000,000 shares of undesignated
preferred stock; |
|
|
|
any action to be taken by our stockholders must be effected at a
duly called annual or special meeting and not by a consent in
writing; |
|
|
|
our board of directors shall be divided into three classes, with
each class serving for a term of three years; |
|
|
|
vacancies on the board, including newly created directorships,
can be filled for the remainder of the relevant term by a
majority of the directors then in office; |
|
|
|
our directors may be removed only for cause. |
Bylaws. Our bylaws provide that stockholders seeking to
bring business before an annual meeting of stockholders or to
nominate candidates for election as directors at an annual
meeting of stockholders, must provide timely notice to use in
writing. To be timely, a stockholders notice must be
received at our principal executive offices not less than
90 days nor more than 120 days prior to the
anniversary date of the immediately preceding annual meeting of
stockholders. In the event that the annual meeting is called for
a date that is not within 30 days before or 60 days
after the anniversary date, in order to be timely notice from
the stockholder must be received:
|
|
|
|
|
not earlier than 120 days prior to the annual meeting of
stockholders; and |
|
|
|
not later than 90 days prior to the annual meeting of
stockholders or the tenth day following the date on which notice
of the annual meeting was made public. |
In the case of a special meeting of stockholders called for the
purpose of electing directors, notice by the stockholder, in
order to be timely, must be received:
|
|
|
|
|
not earlier than 120 days prior to the special
meeting; and |
|
|
|
not later than 90 days prior to the special meeting or the
close of business on the tenth day following the day on which
public disclosure of the date of the special meeting was made. |
95
Our bylaws also specify requirements as to the form and content
of a stockholders notice. These provisions may preclude
stockholders from bringing matters before an annual or special
meeting of stockholders or from making nominations for directors
at an annual or special meeting of stockholders or from making
nominations for directors at an annual or special meeting of
stockholders. In addition, our amended and restated certificate
of incorporation permits our board of directors to amend or
repeal our amended and restated bylaws by majority vote, but
requires a two-thirds supermajority vote of stockholders to
amend or repeal our amended and restated bylaws.
The provisions in our certificate of incorporation and our
bylaws are intended to enhance the likelihood of continuity and
stability in the composition of the board of directors and in
the policies formulated by the board of directors and to
discourage certain types of transactions that may involve an
actual or threatened change of control of WellCare. These
provisions also are designed to reduce our vulnerability to an
unsolicited proposal for a takeover of WellCare that does not
contemplate the acquisition of all of its outstanding shares or
an unsolicited proposal for the restructuring or sale of all or
part of WellCare. These provisions, however, could discourage
potential acquisition proposals and could delay or prevent a
change in control of WellCare. They may also have the effect of
preventing changes in our management.
Transfer Agent
The transfer agent and registrar for our common stock is
EquiServe Trust Company, N.A.
Listing
Our common stock is listed on the New York Stock Exchange under
the symbol WCG.
96
SHARES ELIGIBLE FOR FUTURE SALE
We cannot predict the effect, if any, that the sale of our
common stock or the availability of shares of common stock for
sale will have on the market price prevailing from time to time.
Nevertheless, sales of substantial amounts of common stock in
the public market following the offering could adversely affect
the market price of the common stock and adversely affect our
ability to raise capital at a time and on terms favorable
to us.
Sale of Restricted Shares
We have 39,120,131 shares of common stock outstanding. Of
these shares of common stock, the 6,500,000 shares of
common stock being sold in this offering, plus any shares sold
upon exercise of the underwriters over-allotment option,
will be freely tradeable without restriction under the
Securities Act, except for any such shares which may be held or
acquired by an affiliate of ours, as that term is
defined in Rule 144 under the Securities Act, which shares
will be subject to the volume limitations and other restrictions
of Rule 144 described below. Approximately 15,778,947
shares of common stock held by our existing stockholders upon
completion of the offering will be restricted
securities, as that phrase is defined in Rule 144,
and may not be resold in the absence of registration under the
Securities Act or pursuant to an exemption from such
registration, including among others, the exemptions provided by
Rule 144 or 144(k) under the Securities Act, which rules
are summarized below. Taking into account the lock-up agreements
described below and the provisions of Rule 144, additional
shares will be available for sale in the public market as
follows:
|
|
|
|
|
1,306,079 shares not subject to lock-up agreements will be
available for sale on July 7, 2005 pursuant to
Rule 144; and |
|
|
|
13,689,079 shares will be available for sale 90 days
after the date of this prospectus, the expiration date for the
lock-up agreements entered into in connection with this
offering, pursuant to Rule 144. |
In general, under Rule 144 as currently in effect, a person
who has beneficially owned shares for at least one year,
including an affiliate, as that term is defined in
the Securities Act, is entitled to sell, within any three-month
period, a number of shares that does not exceed the greater of:
|
|
|
|
|
one percent of the then outstanding shares of our common stock
(approximately 391,201 shares); or |
|
|
|
the average weekly trading volume during the four calendar weeks
preceding filing of notice of such sale. |
Sales under Rule 144 are also subject to certain manner of
sale provisions, notice requirements and the availability of
current public information about us. A stockholder who is deemed
not to have been an affiliate of ours at any time
during the 90 days preceding a sale, and who has
beneficially owned restricted shares for at least two years,
would be entitled to sell such shares under Rule 144(k)
without regard to the volume, limitations, manner of sale
provisions or public information requirements.
We have granted options to purchase shares of our common stock
under our equity plans. As of June 6, 2005, options to
purchase an aggregate of 2,659,120 shares of our common
stock were outstanding, of which 416,734 were vested and
exercisable at a weighted average exercise price of
$5.95 per share.
We have filed an S-8 registration statement under the
Securities Act to register shares of common stock reserved for
issuance under our 2002 Employee Option Plan, our 2004 Equity
Incentive Plan, our 2005 Employee Stock Purchase Plan, certain
option agreements granted outside of our equity plans prior to
our initial public offering and our 2005 ESPP. Such registration
statement was automatically effective immediately upon filing.
Any shares issued upon the exercise of such stock options or
following purchase under the 2005 ESPP will be eligible for
immediate public sale, subject to the lock-up agreements noted
below. See Management Employee Benefit
Plans.
97
Lock-up Arrangements
Our executive officers, directors and certain other stockholders
have agreed not to sell or otherwise dispose of any shares of
common stock that they beneficially own for a period of
90 days after the date of this offering (except that, in
the case of one non-management stockholder, such stockholder
will be permitted to sell up to 200,000 shares during such
lock-up period) without the prior written consent of Morgan
Stanley & Co. Incorporated, on behalf of the
underwriters. Upon the expiration of these lock-up agreements,
additional shares will be available for sale in the public
market.
Registration Rights
After completion of this offering, the holders of approximately
12,240,668 shares of our common stock will be entitled to
certain rights with respect to the registration of such shares
under the Securities Act. See Description of Capital
Stock Registration Rights. Under the terms of
our agreement with TowerBrook and certain other stockholders,
including Todd Farha, our president and chief executive officer,
we are not obligated to file a Form S-1 Registration
Statement until 180 days following the date of this
prospectus. Additionally, all holders with demand registration
rights have agreed not to exercise their rights until
90 days following the date of this prospectus without the
prior written consent of Morgan Stanley & Co.
Incorporated, on behalf of the underwriters.
98
CERTAIN UNITED STATES TAX CONSEQUENCES
TO NON-UNITED STATES HOLDERS
The following is a general discussion of the material
U.S. federal income and estate tax consequences of the
ownership and disposition of our common stock by a
non-U.S. holder. As used in this discussion, the term
non-U.S. holder means a beneficial owner of our
common stock that is not, for U.S. federal income tax
purposes:
|
|
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|
|
an individual who is a citizen or resident of the United States; |
|
|
|
a corporation created or organized in or under the laws of the
United States or any political subdivision of the United States; |
|
|
|
an estate whose income is includible in gross income for
U.S. federal income tax purposes regardless of its
source; or |
|
|
|
a trust, in general, if (i) a U.S. court is able to
exercise primary supervision over the administration of the
trust, and one or more United States persons have the authority
to control all substantial decisions of the trust, or
(ii) the trust has a valid election in effect under
Treasury regulations to be treated as a United States person. |
If an entity classified as a partnership for U.S. federal
income tax purposes holds our common stock, the tax treatment of
a partner generally will depend on the status of the partner and
the activities of the partnership. If you are a partnership
holding our common stock, or a partner in such a partnership,
you should consult your tax advisers.
An individual may be treated as a resident of the United States
in any calendar year for U.S. federal income tax purposes,
instead of a nonresident, by, among other ways, being present in
the United States on at least 31 days in that calendar year
and for an aggregate of at least 183 days during the
current calendar year and the two immediately preceding calendar
years. For purposes of this calculation, you would count all of
the days present in the current year, one-third of the days
present in the immediately preceding year and one-sixth of the
days present in the second preceding year. Residents are taxed
for U.S. federal income purposes as if they were
U.S. citizens.
This discussion does not consider:
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|
|
U.S. state and local or non-U.S. tax consequences; |
|
|
|
specific facts and circumstances that may be relevant to a
particular non-U.S. holders tax position, including,
if the non-U.S. holder is a partnership, that the
U.S. tax consequences of holding and disposing of our
common stock may be affected by certain determinations made at
the partner level; |
|
|
|
the tax consequences to the stockholders or beneficiaries of a
non-U.S. holder; |
|
|
|
special tax rules that may apply to particular
non-U.S. holders, including financial institutions,
insurance companies, tax-exempt organizations,
U.S. expatriates, broker-dealers and traders in
securities; or |
|
|
|
special tax rules that may apply to a non-U.S. holder that
holds our common stock as part of a straddle,
hedge, conversion transaction,
synthetic security or other integrated investment. |
The following discussion is based on provisions of the
U.S. Internal Revenue Code of 1986, as amended, applicable
U.S. Treasury regulations and administrative and judicial
interpretations, all as in effect on the date of this
prospectus, and all of which are subject to change,
retroactively or prospectively. The following discussion also
assumes that a non-U.S. holder holds our common stock as a
capital asset. EACH NON-U.S. HOLDER SHOULD CONSULT ITS
TAX ADVISER REGARDING THE U.S. FEDERAL, STATE, LOCAL, AND
NON-U.S. INCOME AND OTHER TAX CONSEQUENCES OF ACQUIRING,
HOLDING AND DISPOSING OF SHARES OF OUR COMMON STOCK.
99
Dividends
The gross amount of dividends paid to a non-U.S. holder of
our common stock ordinarily will be subject to withholding of
U.S. federal income tax at a 30% rate, or at a lower rate
if an applicable income tax treaty so provides and we have
received proper certification of the application of that treaty.
Dividends that are effectively connected with a
non-U.S. holders conduct of trade or business in the
United States and, if provided in an applicable income tax
treaty, attributable to a permanent establishment or fixed base
in the United States, are not subject to the U.S. federal
withholding tax but instead are taxed in the manner applicable
to United States persons. In that case, we will not have to
withhold U.S. federal withholding tax provided the
non-U.S. holder complies with applicable certification and
disclosure requirements. In addition, dividends received by a
foreign corporation that are effectively connected with the
conduct of trade or business in the United States may be subject
to a branch profits tax at a 30% rate, or at a lower rate if
provided by an applicable income tax treaty.
Non-U.S. holders should consult their tax advisers
regarding their entitlement to benefits under an applicable
income tax treaty and the manner of claiming the benefits of the
treaty. A non-U.S. holder that is eligible for a reduced
rate of U.S. federal withholding tax under an income tax
treaty may obtain a refund or credit of any excess amounts
withheld by timely filing an appropriate claim for a refund with
the IRS.
Gain on Disposition of Common Stock
A non-U.S. holder generally will not be taxed on gain
recognized on a disposition of our common stock unless:
|
|
|
|
|
the non-U.S. holder is an individual who holds our common
stock as a capital asset, is present in the United States for
183 days or more during the taxable year of the disposition
and meets certain other conditions; |
|
|
|
the gain is effectively connected with the
non-U.S. holders conduct of trade or business in the
United States and, in some instances if an income tax treaty
applies, is attributable to a permanent establishment or fixed
base maintained by the non-U.S. holder in the United
States; or |
|
|
|
we are or have been a United States real property holding
corporation for U.S. federal income tax purposes at
any time during the shorter of the five-year period ending on
the date of disposition and the period that the
non-U.S. holder held our common stock. |
We have determined that we are not, and we believe we will not
become, a United States real property holding corporation.
An individual non-U.S. holder described in the first bullet
point immediately above is taxed on his gains (including gain
from the sale of our common stock, net of applicable
U.S. losses incurred on sales or exchanges of other capital
assets during the year) at a flat rate of 30%. Other
non-U.S. holders who may be subject to U.S. federal
income tax on the disposition of our common stock will be taxed
on the disposition in the same manner in which citizens or
residents of the United States would be taxed.
Federal Estate Tax
Common stock owned or treated as owned by an individual who is
not a U.S. citizen will be included in the
individuals gross estate for U.S. federal estate tax
purposes and may be subject to U.S. federal estate tax
unless an applicable estate tax treaty provides otherwise.
U.S. federal legislation enacted in the spring of 2001
provides for reductions in the U.S. federal estate tax
through 2009 and the elimination of the tax entirely in 2010.
Under the legislation, the U.S. federal estate tax would be
fully reinstated, as in effect prior to the reductions, in 2011.
100
Information Reporting and Backup Withholding
Non-U.S. holders may be subject to U.S. information
reporting requirements and backup withholding with respect to
dividends paid on our common stock unless such
non-U.S. holder provides a Form W-8BEN (or satisfies
certain documentary evidence requirements for establishing that
they are not United States persons) or otherwise establish an
exemption.
Information reporting and backup withholding also generally will
not apply to a payment of the proceeds of a sale of common stock
effected outside the United States by a foreign office of a
foreign broker. However, information reporting requirements (but
not backup withholding) will apply to a payment of the proceeds
of a sale of common stock effected outside the United States by
a foreign office of a broker if the broker (i) is a United
States person, (ii) derives 50% or more of its gross income
for certain periods from the conduct of trade or business in the
United States, (iii) is a controlled foreign
corporation as to the United States or (iv) is a
foreign partnership that, at any time during its taxable year,
is more than 50% (by income or capital interest) owned by United
States persons or is engaged in the conduct of a U.S. trade
or business, unless in any such case the broker has documentary
evidence in its records that the holder is a
non-U.S. holder and certain conditions are met, or the
holder otherwise establishes an exemption. Payment by a
U.S. office of a broker of the proceeds of a sale of common
stock will be subject to both backup withholding and information
reporting unless the holder certifies under penalties of perjury
that it is not a United States person or otherwise establishes
an exemption.
NON-U.S. HOLDERS SHOULD CONSULT THEIR OWN TAX ADVISERS
REGARDING THE APPLICATION OF THE INFORMATION REPORTING AND
BACKUP WITHHOLDING RULES TO THEM.
101
UNDERWRITERS
Under the terms and subject to the conditions contained in the
underwriting agreement dated June 29, 2005, the
underwriters named below, for whom Morgan Stanley & Co.
Incorporated, Lehman Brothers Inc., SG Cowen &
Co., LLC, UBS Securities LLC and Wachovia Capital
Markets, LLC are acting as representatives, have severally
agreed to purchase, and the selling stockholders have agreed to
sell to them, severally, the number of shares of common stock
indicated below:
|
|
|
|
|
|
Name |
|
Number of Shares | |
|
|
| |
Morgan Stanley & Co. Incorporated
|
|
|
2,925,000 |
|
Lehman Brothers Inc.
|
|
|
975,000 |
|
SG Cowen & Co., LLC
|
|
|
975,000 |
|
UBS Securities LLC
|
|
|
975,000 |
|
Wachovia Capital Markets, LLC
|
|
|
650,000 |
|
|
|
|
|
|
Total
|
|
|
6,500,000 |
|
|
|
|
|
The underwriters and the representatives are collectively
referred to as the underwriters and the
representatives, respectively. The underwriters are
offering the shares of common stock subject to their acceptance
of the shares from the selling stockholders and subject to prior
sale. The underwriting agreement provides that the obligations
of the several underwriters to pay for and accept delivery of
the shares of our common stock offered by this prospectus are
subject to the approval of legal matters by their counsel and to
certain other conditions. The underwriters are obligated to take
and pay for all of the shares of common stock offered by this
prospectus if any such shares are taken. However, the
underwriters are not required to take or pay for the shares
covered by the underwriters over-allotment option
described below.
The underwriters initially propose to offer part of the shares
of common stock directly to the public at the offering price
listed on the cover page of this prospectus and part to certain
dealers at a price that represents a concession not in excess of
$1.096 a share under the offering price. After the initial
offering of the shares of common stock, the offering price and
other selling terms may from time to time be varied by the
representatives.
TowerBrook has granted to the underwriters an option,
exercisable for 30 days from the date of this prospectus,
to purchase up to an aggregate of 975,000 shares of our
common stock at the public offering price listed on the cover
page of this prospectus, less underwriting discounts and
commissions. The underwriters may exercise this option solely
for the purpose of covering over-allotments, if any, made in
connection with the offering of the shares offered by this
prospectus. To the extent the option is exercised, each
underwriter will become obligated, subject to limited
conditions, to purchase approximately the same percentage of the
additional shares as the number listed next to the
underwriters name in the preceding table bears to the
total number of shares listed next to the names of all
underwriters in the preceding table.
The following table summarizes the compensation and estimated
expenses we will pay in connection with this offering:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per Share | |
|
Total | |
|
|
| |
|
| |
|
|
Without | |
|
With | |
|
Without | |
|
With | |
|
|
Over-allotment | |
|
Over-allotment | |
|
Over-allotment | |
|
Over-allotment | |
|
|
| |
|
| |
|
| |
|
| |
Underwriting discounts and commissions paid by the selling
stockholders
|
|
$ |
1.6863 |
|
|
$ |
1.6863 |
|
|
$ |
10,960,950 |
|
|
$ |
12,605,093 |
|
Expenses payable by us
|
|
$ |
0.14 |
|
|
$ |
0.12 |
|
|
$ |
900,000 |
|
|
$ |
900,000 |
|
We estimate that the total expenses of this offering, excluding
underwriting discounts and commissions, will be approximately
$900,000.
Our common stock is listed on the NYSE under the symbol
WCG.
102
Each of us, our directors, executive officers and certain other
stockholders has agreed that, with the exception of the common
stock being offered pursuant to this prospectus and without the
prior written consent of Morgan Stanley & Co.
Incorporated on behalf of the underwriters, each of us will not,
during the period ending 90 days after the date of this
prospectus:
|
|
|
|
|
offer, pledge, sell, contract to sell, sell any option or
contract to purchase, purchase any option or contract to sell,
grant any option, right or warrant to purchase, lend or
otherwise transfer or dispose of directly or indirectly, any
shares of our common stock or any securities convertible into or
exercisable or exchangeable for our common stock; or |
|
|
|
enter into any swap or other arrangement that transfers to
another, in whole or in part, any of the economic consequences
of ownership of the common stock, |
whether any transaction described above is to be settled by
delivery of common stock or such other securities, in cash or
otherwise.
The restrictions described in the preceding paragraph do not
apply to:
|
|
|
|
|
the sale of shares to the underwriters; |
|
|
|
the issuance by us of shares of common stock upon the exercise
of an option or a warrant or the conversion of a security
outstanding on the date of this prospectus of which the
underwriters have been advised in writing or which is described
in this prospectus; |
|
|
|
the grant of options or the issuance of shares of common stock
by us to employees, officers, directors, advisors or consultants
pursuant to any employee benefit plan described in this
prospectus; |
|
|
|
the filing of any registration statement on Form S-8 in
respect of any employee benefit plan described in this
prospectus; |
|
|
|
transaction by any person other than us relating to shares of
common stock or other securities acquired in open market
transactions after the completion of the offering of the shares; |
|
|
|
certain distributions or transfers to limited partners,
stockholders or affiliates and certain gratuitous transfers by
any person other than us to family member, trusts and/or
controlled entities of such person in connection with estate
planning or charitable contributions, provided that each
transferee also agrees to the restrictions described
above; or |
|
|
|
the establishment of a trading plan pursuant to Rule 10b5-1
under the Securities Exchange Act of 1934, provided that no
transfers occur under such plan during the 90 day lock-up
period. |
In order to facilitate the offering of our common stock, the
underwriters may engage in transactions that stabilize, maintain
or otherwise affect the price of our common stock. Specifically,
the underwriters may sell more shares than they are obligated to
purchase under the underwriting agreement, creating a short
position in our common stock for their own account. A short sale
is covered if the short position is no greater than the number
of shares available for purchase by the underwriters under the
over-allotment option. The underwriters can close out a covered
short sale by exercising the over-allotment option or purchasing
shares in the open market. In determining the source of shares
to close out a covered short sale, the underwriters will
consider, among other things, the open market price of shares
compared to the price available under the over-allotment option.
The underwriters may also sell shares in excess of the
over-allotment option, creating a naked short position. The
underwriters must close out any naked short position by
purchasing shares in the open market. A naked short position is
more likely to be created if the underwriters are concerned that
there may be downward pressure on the price of our common stock
in the open market after pricing that could adversely affect
investors who purchase in the offering. In addition, in order to
cover any over-allotments or to stabilize the price of our
common stock, the underwriters may bid for, and purchase, shares
of our common stock in the open market. Finally, the
underwriting syndicate may also reclaim selling concessions
allowed to an underwriter or a dealer for distributing our
common stock in the offering, if the syndicate repurchases
previously distributed shares of our common stock to cover
syndicate short positions or to stabilize the price of the
common stock. Any of these activities may stabilize or maintain
the market price of our common stock
103
above independent market levels. The underwriters are not
required to engage in these activities, and may end any of these
activities at any time.
We, the selling stockholders, and the underwriters have each
agreed to indemnify each other against specified liabilities,
including liabilities under the Securities Act.
Morgan Stanley Senior Funding, Inc., an affiliate of Morgan
Stanley & Co. Incorporated, is one of the financial
institutions that provided our term loan and revolving credit
facilities. Wachovia Bank, National Association, an affiliate of
Wachovia Capital Markets, LLC, is one of the financial
institutions that provided our revolving credit facility. UBS
Loan Finance LLC, an affiliate of UBS Securities LLC, and
Société Generale, an affiliate of SG Cowen &
Co., LLC, are among the financial institutions that provided our
term loan.
LEGAL MATTERS
Certain legal matters in connection with the offering will be
passed upon for us and certain of the selling stockholders by
Hogan & Hartson L.L.P., for TowerBrook Investors L.P.,
one of the selling stockholders, by Kirkland & Ellis
LLP, New York, New York, and for the underwriters by
Ropes & Gray LLP, Boston, Massachusetts.
EXPERTS
The financial statements as of December 31, 2004 and 2003,
and for each of the two years in the period ended
December 31, 2004, and for the five-month period ended
December 31, 2002, and the Predecessors combining
financial statements for the seven-month period ended
July 31, 2002 included in this prospectus and the related
financial statement schedules included elsewhere in the
registration statement have been audited by Deloitte &
Touche LLP, an independent registered public accounting firm, as
stated in their reports appearing herein and elsewhere in the
registration statement, and have been so included in reliance
upon the reports of such firm given upon their authority as
experts in accounting and auditing.
ADDITIONAL INFORMATION
We maintain a website at www.wellcare.com. Information contained
on our website is not incorporated by reference into this
prospectus, and you should not consider information contained on
our website to be part of this prospectus.
We have filed with the SEC a registration statement on
Form S-1 (including the exhibits, schedules, and amendments
to the registration statement) under the Securities Act with
respect to the shares of common stock offered by this
prospectus. This prospectus does not contain all the information
set forth in the registration statement. For further information
with respect to us and the shares of common stock to be sold in
this offering, we refer you to the registration statement.
Statements contained in this prospectus as to the contents of
any contract, agreement or other document to which we make
reference are not necessarily complete. In each instance, we
refer you to the copy of such contract, agreement or other
document filed as an exhibit to the registration statement, each
such statement being qualified in all respects by the more
complete description of the matter involved.
We file periodic and current reports, proxy statements, and
other information with the SEC. You may read and copy this
information at the Public Reference Room of the SEC located at
450 Fifth Street, N.W., Washington, D.C. 20549. Please
call the SEC at 1-800-SEC-0330 for further information on the
operation of the Public Reference Room. Copies of all or any
part of the registration statement may be obtained from the
SECs offices upon payment of fees prescribed by the SEC.
The SEC maintains an Internet site that contains periodic and
current reports, proxy and information statements, and other
information regarding issuers that file electronically with the
SEC. The address of the SECs website is www.sec.gov.
104
INDEX TO FINANCIAL STATEMENTS
WELLCARE HEALTH PLANS, INC.
|
|
|
|
|
F-11 |
|
|
F-12 |
|
|
F-13 |
|
|
F-14 |
|
|
F-15 |
|
|
F-16 |
F-1
WELLCARE HEALTH PLANS, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(Unaudited, in thousands, except share data)
|
|
|
|
|
|
|
|
|
March 31, | |
|
|
2005 | |
|
|
| |
Assets
|
|
|
|
|
Current Assets:
|
|
|
|
|
|
Cash and cash equivalents
|
|
$ |
340,745 |
|
|
Investments
|
|
|
173,746 |
|
|
Premiums and other receivables, net
|
|
|
44,534 |
|
|
Prepaid expenses and other current assets
|
|
|
5,512 |
|
|
Income taxes receivable
|
|
|
|
|
|
Deferred income taxes
|
|
|
18,123 |
|
|
|
|
|
|
|
Total current assets
|
|
|
582,660 |
|
Property and equipment, net
|
|
|
13,943 |
|
Goodwill
|
|
|
180,848 |
|
Other intangibles, net
|
|
|
24,140 |
|
Restricted investment assets
|
|
|
31,502 |
|
Other assets
|
|
|
256 |
|
|
|
|
|
Total Assets
|
|
$ |
833,349 |
|
|
|
|
|
Liabilities and Stockholders Equity
|
|
|
|
|
Current Liabilities:
|
|
|
|
|
|
Medical benefits payable
|
|
$ |
206,931 |
|
|
Unearned premiums
|
|
|
64,453 |
|
|
Accounts payable and accrued expenses
|
|
|
34,474 |
|
|
Income taxes payable
|
|
|
5,631 |
|
|
Current portion of long-term debt
|
|
|
1,600 |
|
|
|
|
|
|
|
Total current liabilities
|
|
|
313,089 |
|
Notes payable to related party
|
|
|
25,000 |
|
Long-term debt
|
|
|
156,541 |
|
Deferred income taxes
|
|
|
15,588 |
|
Other liabilities
|
|
|
2,743 |
|
|
|
|
|
|
|
Total Liabilities
|
|
|
512,961 |
|
|
|
|
|
Commitments and Contingencies (see Note 4)
|
|
|
|
|
Stockholders Equity:
|
|
|
|
|
Preferred Stock, $0.01 par value (20,000,000 authorized, no
shares issued or outstanding)
|
|
|
|
|
Common Stock, $0.01 par value (100,000,000 authorized and
38,768,293 shares issued and outstanding)
|
|
|
388 |
|
Paid-in capital
|
|
|
231,912 |
|
Retained earnings
|
|
|
88,084 |
|
Accumulated other comprehensive income
|
|
|
4 |
|
|
|
|
|
|
|
Total Stockholders Equity
|
|
|
320,388 |
|
|
|
|
|
Total Liabilities and Stockholders Equity
|
|
$ |
833,349 |
|
|
|
|
|
See notes to condensed consolidated financial statements.
F-2
WELLCARE HEALTH PLANS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited, in thousands, except per share and unit data)
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months | |
|
|
Ended | |
|
|
March 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
Revenues:
|
|
|
|
|
|
|
|
|
|
Premium
|
|
$ |
415,866 |
|
|
$ |
301,250 |
|
|
Investment and other income
|
|
|
3,015 |
|
|
|
586 |
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
418,881 |
|
|
|
301,836 |
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
Medical benefits
|
|
|
344,926 |
|
|
|
251,435 |
|
|
Selling, general and administrative
|
|
|
51,248 |
|
|
|
36,791 |
|
|
Depreciation and amortization
|
|
|
2,042 |
|
|
|
1,659 |
|
|
Interest
|
|
|
3,205 |
|
|
|
2,265 |
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
401,421 |
|
|
|
292,150 |
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
17,460 |
|
|
|
9,686 |
|
Income tax expense
|
|
|
6,820 |
|
|
|
3,864 |
|
|
|
|
|
|
|
|
Net income
|
|
$ |
10,640 |
|
|
|
5,822 |
|
|
|
|
|
|
|
|
Class A common unit yield
|
|
|
|
|
|
|
(1,571 |
) |
|
|
|
|
|
|
|
Net income attributable to common units
|
|
|
|
|
|
$ |
4,251 |
|
|
|
|
|
|
|
|
Net income per share (see Note 1):
|
|
|
|
|
|
|
|
|
Net income per share basic
|
|
$ |
0.29 |
|
|
|
|
|
Net income per share diluted
|
|
$ |
0.27 |
|
|
|
|
|
Net income attributable per common unit (see Note 1):
|
|
|
|
|
|
|
|
|
Net income attributable per common unit basic
|
|
|
|
|
|
$ |
0.15 |
|
Net income attributable per common unit diluted
|
|
|
|
|
|
$ |
0.13 |
|
Pro forma net income per common share (see Note 1)
(unaudited):
|
|
|
|
|
|
|
|
|
Pro forma net income per common share basic
(unaudited)
|
|
|
|
|
|
$ |
0.19 |
|
Pro forma net income per common share diluted
(unaudited)
|
|
|
|
|
|
$ |
0.16 |
|
See notes to condensed consolidated financial statements.
F-3
WELLCARE HEALTH PLANS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended | |
|
|
March 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
Cash from operating activities:
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
10,640 |
|
|
$ |
5,822 |
|
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization expense
|
|
|
2,042 |
|
|
|
1,659 |
|
|
|
Realized gains on investments
|
|
|
7 |
|
|
|
|
|
|
|
Equity-based compensation expense
|
|
|
719 |
|
|
|
260 |
|
|
|
Accreted interest
|
|
|
40 |
|
|
|
277 |
|
|
|
Deferred taxes, net
|
|
|
(1,991 |
) |
|
|
(909 |
) |
|
|
Provision for doubtful receivables
|
|
|
|
|
|
|
1,416 |
|
|
|
Changes in operating accounts, net of effect of acquisition:
|
|
|
|
|
|
|
|
|
|
|
|
Premiums and other receivables
|
|
|
7,636 |
|
|
|
(5,347 |
) |
|
|
|
Prepaid expenses and other current assets
|
|
|
590 |
|
|
|
(769 |
) |
|
|
|
Medical benefits payable
|
|
|
16,336 |
|
|
|
106 |
|
|
|
|
Unearned premiums
|
|
|
1,004 |
|
|
|
(24,215 |
) |
|
|
|
Accounts payable and accrued expenses
|
|
|
(1,169 |
) |
|
|
(4,675 |
) |
|
|
|
Accrued interest
|
|
|
257 |
|
|
|
(1,514 |
) |
|
|
|
Taxes payable
|
|
|
7,246 |
|
|
|
3,732 |
|
|
|
|
Other liabilities
|
|
|
(53 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operations
|
|
|
43,304 |
|
|
|
(24,157 |
) |
|
|
|
|
|
|
|
Cash from investing activities:
|
|
|
|
|
|
|
|
|
|
Proceeds from sale and maturities of investments, net
|
|
|
25,174 |
|
|
|
48 |
|
|
Purchases of investments
|
|
|
(123,405 |
) |
|
|
(5,201 |
) |
|
Purchases and dispositions of restricted investments
|
|
|
(29 |
) |
|
|
(4,847 |
) |
|
Additions to property and equipment, net
|
|
|
(2,098 |
) |
|
|
(774 |
) |
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(100,358 |
) |
|
|
(10,774 |
) |
|
|
|
|
|
|
|
Cash from financing activities:
|
|
|
|
|
|
|
|
|
|
Proceeds from options
|
|
|
572 |
|
|
|
|
|
|
Payments on debt
|
|
|
(400 |
) |
|
|
(3,591 |
) |
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
172 |
|
|
|
(3,591 |
) |
|
|
|
|
|
|
|
Cash and cash equivalents:
|
|
|
|
|
|
|
|
|
|
Decrease during period
|
|
|
(56,882 |
) |
|
|
(38,522 |
) |
Balance at beginning of period
|
|
|
397,627 |
|
|
|
237,321 |
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$ |
340,745 |
|
|
$ |
198,799 |
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
|
|
|
|
|
|
|
|
|
|
Cash paid for taxes
|
|
$ |
1,571 |
|
|
$ |
1,040 |
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$ |
2,643 |
|
|
$ |
2,002 |
|
|
|
|
|
|
|
|
See notes to condensed consolidated financial statements.
F-4
WELLCARE HEALTH PLANS, INC.
(SUCCESSOR TO WELLCARE HOLDINGS, LLC)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except member, share and unit data)
|
|
1. |
ORGANIZATION, BASIS OF PRESENTATION AND SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES |
WellCare Health Plans, Inc., a Delaware corporation (the
Company), provides managed care services targeted
exclusively to government-sponsored healthcare programs,
focusing on Medicaid and Medicare. Through its health plans, the
Company offers a diverse array of products, primarily Medicaid
and related state programs, such as the State Childrens
Health Insurance Program (S-CHIP), and Medicare
programs, serving approximately 765,000 members as of
March 31, 2005. Through its health maintenance organization
(HMO) subsidiaries, the Company operates in the
states of Florida, Illinois, Indiana, New York, Connecticut,
Louisiana and Georgia.
WellCare Holdings, LLC (Holdings), a Delaware
limited liability corporation, was formed in May 2002 for the
purpose of acquiring various subsidiaries that operate health
plans focused on government programs in various states. Holdings
began operating in August 2002 in conjunction with the
acquisition of its indirect operating subsidiaries and did not
have any activity from May 2002 through July 2002. The Company,
formerly known as WellCare Group, Inc., became the successor to
Holdings following a reorganization (the
Reorganization) that took place immediately prior to
the closing of the Companys initial public offering in
July 2004. The Reorganization was effected through a merger of
Holdings with and into the Company, a wholly-owned subsidiary of
Holdings. The Company issued an aggregate of
29,735,757 shares of the Companys common stock in
exchange for all of the outstanding membership interests in
Holdings, plus accrued yields, pursuant to the merger. Upon
consummation of the merger, the Company changed its name to
WellCare Health Plans, Inc.
In July 2004, the Company completed its initial public offering,
at a price of $17 per share. The offering resulted in net
proceeds to the Company of approximately $112.3 million.
In December 2004, the Company completed a follow-on public
offering of common stock whereby 6,000,000 shares were sold
by selling stockholders and 1,500,000 shares were sold by
the Company. The Company received net proceeds of
$44.9 million from this offering.
The accompanying unaudited condensed consolidated interim
financial statements should be read in conjunction with the
consolidated and combined financial statements and notes thereto
for the fiscal year ended December 31, 2004 included in the
Companys Annual Report on Form 10-K filed with the
Securities and Exchange Commission (the SEC) on
February 15, 2005 (the 2004 Form 10-K). In
the opinion of the Companys management, the interim
financial statements reflect all normal recurring adjustments
which the Company considers necessary for the fair presentation
of the financial position and results of operations and cash
flows for the interim periods presented. The interim financial
statements included herein have been prepared in accordance with
accounting principles generally accepted in the United States of
America and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, certain
information and footnote disclosures normally included in
financial statements prepared in accordance with accounting
principles generally accepted in the United States of America
have been condensed or omitted. Results for the interim periods
presented are not necessarily indicative of results that may be
expected for the entire year or any other interim period.
F-5
WELLCARE HEALTH PLANS, INC.
(SUCCESSOR TO WELLCARE HOLDINGS, LLC)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Certain 2004 amounts in the consolidated financial statements
have been reclassified to conform to the 2005 presentation.
These reclassifications have no effect on net income, total
assets, liabilities or stockholders equity as previously
reported.
|
|
|
Earnings Per Common Share |
Basic net income per common share is computed by dividing the
net income for the period by the weighted average number of
shares of common stock outstanding during the period. Diluted
net income per common share is computed by dividing the net
income for the period by the weighted average number of shares
of common stock outstanding during the period, plus other
potentially dilutive securities.
Earnings Attributable Per
Common Unit
Basic net income attributable per unit is computed by dividing
the net income less the Class A common unit yield for the
period by the weighted average number of units outstanding
during the period, less units outstanding. Diluted net income
attributable per unit is computed by dividing the net income for
the period less the Class A common unit yield by the
weighted average number of units outstanding during the period,
plus, other potentially dilutive securities, including the
unvested units.
Holdings historic capital structure is not indicative of
the Companys current structure due to the automatic
conversion of all units of Holdings into common stock of the
Company immediately prior to the closing of the Companys
initial public offering. Accordingly, historic basic and diluted
net income attributable per common unit should not be used as an
indicator of the future earnings per common share. The pro forma
information in the condensed consolidated statements of income
assumes conversion of all outstanding units of Holdings into
shares of the Companys common stock resulting from the
completion of the initial public offering as if it had occurred
at the beginning of all periods presented. Pro forma net income
per share is computed using the weighted average number of
common shares outstanding, including the pro forma effects of
automatic conversion of all outstanding common units into shares
of the Companys common stock effective immediately prior
to the closing of the Companys initial public offering on
July 7, 2004.
The components of total shares outstanding at March 31,
2005 and December 31, 2004, are as follows:
|
|
|
|
|
|
|
|
|
|
|
March 31, | |
|
December 31, | |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
Common Shares Outstanding
|
|
|
34,789,662 |
|
|
|
34,681,436 |
|
Vested restricted shares
|
|
|
2,665,598 |
|
|
|
2,432,280 |
|
Unvested restricted shares
|
|
|
1,313,033 |
|
|
|
1,476,939 |
|
Options outstanding
|
|
|
2,363,882 |
|
|
|
2,415,075 |
|
|
|
|
|
|
|
|
Total Shares outstanding including options
|
|
|
41,132,175 |
|
|
|
41,005,730 |
|
|
|
|
|
|
|
|
F-6
WELLCARE HEALTH PLANS, INC.
(SUCCESSOR TO WELLCARE HOLDINGS, LLC)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table illustrates the effect on net income and net
income attributable per common unit as if the fair value based
method had been applied to all awards:
|
|
|
|
|
|
|
|
|
|
|
|
Three Months | |
|
|
Ended | |
|
|
March 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
|
(unaudited) | |
Net income, as reported
|
|
$ |
10,640 |
|
|
$ |
5,822 |
|
Reconciling items (net of tax effects):
|
|
|
|
|
|
|
|
|
Add: equity-based employee compensation expense determined under
the intrinsic-value based method for all awards
|
|
|
438 |
|
|
|
154 |
|
Deduct: equity-based employee compensation expense determined
under the fair-value based method for all awards
|
|
|
(2,093 |
) |
|
|
(487 |
) |
|
|
|
|
|
|
|
Net adjustment
|
|
|
(1,655 |
) |
|
|
(333 |
) |
|
|
|
|
|
|
|
Net income, as adjusted
|
|
$ |
8,985 |
|
|
$ |
5,489 |
|
|
|
|
|
|
|
|
Class A common unit yield
|
|
|
|
|
|
|
(1,571 |
) |
|
|
|
|
|
|
|
Adjusted net income attributable to common units
|
|
|
|
|
|
$ |
3,918 |
|
|
|
|
|
|
|
|
Net income per common share:
|
|
|
|
|
|
|
|
|
|
Basic as reported
|
|
$ |
0.29 |
|
|
|
|
|
|
Basic as adjusted
|
|
$ |
0.24 |
|
|
|
|
|
|
Diluted as reported
|
|
$ |
0.27 |
|
|
|
|
|
|
Diluted as adjusted
|
|
$ |
0.23 |
|
|
|
|
|
Net income attributable per common unit:
|
|
|
|
|
|
|
|
|
|
Basic as reported
|
|
|
|
|
|
$ |
0.15 |
|
|
Basic as adjusted
|
|
|
|
|
|
$ |
0.14 |
|
|
Diluted as reported
|
|
|
|
|
|
$ |
0.13 |
|
|
Diluted as adjusted
|
|
|
|
|
|
$ |
0.12 |
|
The Company has equity-based compensation plans for the benefit
of its eligible associates, consultants and directors. The
Company accounts for equity-based compensation under Accounting
Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees. The Company has adopted the
disclosure-only provisions of Statement of Financial Accounting
Standards (SFAS) No. 123, Accounting for
Stock-Based Compensation, and SFAS No. 148,
Accounting for Stock-Based Compensation
Transition and Disclosure.
F-7
WELLCARE HEALTH PLANS, INC.
(SUCCESSOR TO WELLCARE HOLDINGS, LLC)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table presents the calculation of net income per
common share basic and diluted and net income
attributable per common unit basic and diluted:
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended | |
|
|
March 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
|
(unaudited) | |
Numerator:
|
|
|
|
|
|
|
|
|
Net income basic and diluted
|
|
$ |
10,640 |
|
|
$ |
5,822 |
|
|
|
|
|
|
|
|
Class A common unit yield
|
|
|
|
|
|
|
(1,571 |
) |
|
|
|
|
|
|
|
Net income attributable to common unit
|
|
|
|
|
|
$ |
4,251 |
|
|
|
|
|
|
|
|
Denominator
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding basic
|
|
|
37,250,621 |
|
|
|
|
|
Adjustment for unvested restricted common shares
|
|
|
1,394,423 |
|
|
|
|
|
Dilutive effect of stock options (as determined by the treasury
stock method)
|
|
|
832,044 |
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding diluted
|
|
|
39,477,088 |
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average units outstanding basic
|
|
|
|
|
|
|
27,613,922 |
|
Adjustment for unvested outstanding Class C common units
and equity options issued
|
|
|
|
|
|
|
4,606,674 |
|
|
|
|
|
|
|
|
Weighted average units outstanding diluted
|
|
|
|
|
|
|
32,220,596 |
|
|
|
|
|
|
|
|
Pro forma weighted average shares outstanding basic
|
|
|
|
|
|
|
22,454,244 |
|
|
|
|
|
|
|
|
Pro forma weighted average shares outstanding diluted
|
|
|
|
|
|
|
26,200,158 |
|
|
|
|
|
|
|
|
Net income per common share:
|
|
|
|
|
|
|
|
|
|
Net income per common share basic
|
|
$ |
0.29 |
|
|
|
|
|
|
Net income per common share diluted
|
|
$ |
0.27 |
|
|
|
|
|
Net income attributable per common unit:
|
|
|
|
|
|
|
|
|
|
Net income attributable per common unit basic
|
|
|
|
|
|
$ |
0.15 |
|
|
Net income attributable per common unit diluted
|
|
|
|
|
|
$ |
0.13 |
|
Pro forma net income per common share:
|
|
|
|
|
|
|
|
|
|
Pro forma net income per common share basic
|
|
|
|
|
|
$ |
0.19 |
|
|
Pro forma net income per common share diluted
|
|
|
|
|
|
$ |
0.16 |
|
In June 2004, the Company acquired Harmony Health Systems, Inc.
and its subsidiaries, (collectively, Harmony)
pursuant to the terms of a merger agreement entered into in
March 2004, for $50,296, including acquisition costs of $1,609.
The results of Harmonys operations have been included in
the condensed consolidated financial statements since the
acquisition date.
F-8
WELLCARE HEALTH PLANS, INC.
(SUCCESSOR TO WELLCARE HOLDINGS, LLC)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following unaudited pro forma summary information presents
the consolidated income statement information for the
three-month period ended March 31, 2004 as if the
acquisition had been consummated on January 1, 2004, and
does not purport to be indicative of what would have occurred
had the acquisition been completed at that date or the results
that may occur in the future.
|
|
|
|
|
|
|
Three Months | |
|
|
Ended | |
|
|
March 31, | |
|
|
2004 | |
|
|
| |
Premium Revenue
|
|
$ |
332,935 |
|
|
|
|
|
Net Income
|
|
$ |
6,161 |
|
|
|
|
|
Net income attributable per common unit basic
|
|
$ |
0.17 |
|
|
|
|
|
Net income attributable per common unit diluted
|
|
$ |
0.16 |
|
|
|
|
|
3. SEGMENT REPORTING
The Company has two reportable segments: Medicaid and Medicare.
The segments were determined based upon the type of governmental
administration, regulation and funding of the health plans.
Segment performance is evaluated based upon earnings from
operations without corporate allocations. Accounting policies of
the segments are consistent with those applied at the
December 31, 2004 year end.
The Medicaid segment includes operations to provide healthcare
services to recipients that are eligible for state supported
programs including Medicaid and family and childrens
health programs. The Medicare segment includes operations to
provide healthcare services to recipients who are eligible for
the federally supported Medicare program. The Company no longer
operates a commercial line of business.
Asset, liability and equity amounts by segment have not been
disclosed, as they are not reported by segment internally by the
Company.
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended | |
|
|
March 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
Premium revenue:
|
|
|
|
|
|
|
|
|
Medicaid
|
|
$ |
309,210 |
|
|
$ |
216,120 |
|
Medicare
|
|
|
106,656 |
|
|
|
84,560 |
|
Corporate and other
|
|
|
|
|
|
|
570 |
|
|
|
|
|
|
|
|
|
Total
|
|
|
415,866 |
|
|
|
301,250 |
|
|
|
|
|
|
|
|
Medical benefits expense:
|
|
|
|
|
|
|
|
|
Medicaid
|
|
|
257,996 |
|
|
|
183,062 |
|
Medicare
|
|
|
86,930 |
|
|
|
67,969 |
|
Corporate and other
|
|
|
|
|
|
|
404 |
|
|
|
|
|
|
|
|
|
Total
|
|
|
344,926 |
|
|
|
251,435 |
|
|
|
|
|
|
|
|
Gross profit:
|
|
|
|
|
|
|
|
|
Medicaid
|
|
|
51,214 |
|
|
|
33,058 |
|
Medicare
|
|
|
19,726 |
|
|
|
16,591 |
|
Corporate and other
|
|
|
|
|
|
|
166 |
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
70,940 |
|
|
$ |
49,815 |
|
|
|
|
|
|
|
|
F-9
WELLCARE HEALTH PLANS, INC.
(SUCCESSOR TO WELLCARE HOLDINGS, LLC)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
4. COMMITMENTS AND
CONTINGENCIES
The Company is a party to legal proceedings in the ordinary
course of business. The Company does not believe these
proceedings, individually or in the aggregate, will have a
material adverse effect on its financial position, results of
operations or cash flows. The Company believes that it has
obtained adequate insurance or rights to indemnification or,
where appropriate, has established adequate reserves in
connection with these legal proceedings.
5. INCOME TAXES
The Company uses the asset and liability method of accounting
for income taxes. At March 31, 2005, net deferred tax
assets were approximately $2,535. In assessing the realizability
of deferred tax assets, management considers the scheduled
reversal of deferred tax liabilities, projected future taxable
income, and tax planning strategies. The Company expects the
deferred tax assets to be realized through the generation of
future taxable income and the reversal of existing taxable
temporary differences.
6. CREDIT AGREEMENT
In May 2004, the Company and certain subsidiaries entered into a
credit agreement (the Credit Agreement) and obtained
two new credit facilities, consisting of a senior secured term
loan facility in the amount of $160,000 and a revolving credit
facility in the amount of $50,000, of which $10,000 is available
for short-term borrowings on a swingline basis. Interest is
payable quarterly, currently at the six month LIBOR rate option
of 6.49%. The term loan matures in May 2009, and the revolving
credit facility will mature in May 2008. The revolving credit
facility has not been utilized.
The Credit Agreement contains various restrictive covenants
which limit, among other things, the Companys ability to
incur indebtedness and liens and to enter into business
combination transactions. In addition, the Company must maintain
certain fixed charge and leverage ratios. The Company believes
that it is in compliance with all the financial and
non-financial covenants at March 31, 2005.
F-10
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
WellCare Health Plans, Inc.
Tampa, Florida
We have audited the accompanying consolidated balance sheets of
WellCare Health Plans, Inc. (the Company) as of
December 31, 2004 and 2003, and the related consolidated
statements of income, of changes in stockholders and
members equity, and of cash flows for the years ended
December 31, 2004 and 2003 and the five-month period ended
December 31, 2002, and the combined statements of income,
of changes in stockholders equity, and of cash flows for
the seven-month period ended July 31, 2002 of The WellCare
Management Group, Inc. and subsidiaries, Well Care HMO, Inc.,
HealthEase of Florida, Inc., Comprehensive Health Management,
Inc. and Comprehensive Health Management of Florida, L.C.; these
companies are under common ownership and common management (the
Predecessor). Our audits also included the financial statement
schedules listed in the Index at Item 15. These financial
statements and financial statement schedules are the
responsibility of the Companys management. Our
responsibility is to express an opinion on the financial
statements and financial statement schedules based on our audits.
We conducted our audits in accordance with standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes consideration
of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion
on the effectiveness of the Companys internal control over
financial reporting. Accordingly, we express no such opinion. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, such consolidated and combined financial
statements present fairly, in all material respects, the
consolidated financial position of WellCare Health Plans, Inc.
as of December 31, 2004 and 2003, and the results of their
operations and their cash flows for the years ended
December 31, 2004 and 2003 and the five-month period ended
December 31, 2002, and the Predecessor combined results of
operations and cash flows for the seven-month period ended
July 31, 2002, in conformity with accounting principles
generally accepted in the United States of America. Also, in our
opinion, such financial statement schedules, when considered in
relation to the basic consolidated and combined financial
statements taken as a whole, present fairly in all material
respects the information set forth therein.
/S/ DELOITTE & TOUCHE LLP
Certified Public Accountants
Tampa, Florida
February 10, 2005
F-11
WELLCARE HEALTH PLANS, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share and unit data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
December 31, | |
|
|
2004 | |
|
2003 | |
|
|
| |
|
| |
Assets
|
|
|
|
|
|
|
|
|
Current Assets:
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$ |
397,627 |
|
|
$ |
237,321 |
|
|
Investments
|
|
|
75,515 |
|
|
|
33,778 |
|
|
Premiums and other receivables, net
|
|
|
52,170 |
|
|
|
12,792 |
|
|
Prepaid expenses and other current assets
|
|
|
6,119 |
|
|
|
3,663 |
|
|
Income taxes receivable
|
|
|
1,615 |
|
|
|
|
|
|
Deferred income taxes
|
|
|
15,362 |
|
|
|
12,036 |
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
548,408 |
|
|
|
299,590 |
|
Property and equipment, net
|
|
|
12,587 |
|
|
|
4,717 |
|
Goodwill
|
|
|
180,848 |
|
|
|
158,725 |
|
Other intangibles, net
|
|
|
25,441 |
|
|
|
12,403 |
|
Restricted investment assets
|
|
|
31,473 |
|
|
|
21,392 |
|
Other assets
|
|
|
279 |
|
|
|
280 |
|
|
|
|
|
|
|
|
Total Assets
|
|
$ |
799,036 |
|
|
$ |
497,107 |
|
|
|
|
|
|
|
|
Liabilities and Stockholders and Members
Equity
|
|
|
|
|
|
|
|
|
Current Liabilities:
|
|
|
|
|
|
|
|
|
|
Medical benefits payable
|
|
$ |
190,595 |
|
|
$ |
148,297 |
|
|
Unearned premiums
|
|
|
63,449 |
|
|
|
76,248 |
|
|
Accounts payable and accrued expenses
|
|
|
35,520 |
|
|
|
29,830 |
|
|
Income taxes payable
|
|
|
|
|
|
|
143 |
|
|
Deferred income taxes
|
|
|
|
|
|
|
1,252 |
|
|
Current portion of notes payable to related party
|
|
|
|
|
|
|
48,170 |
|
|
Current portion of long-term debt
|
|
|
1,600 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
291,164 |
|
|
|
303,940 |
|
Notes payable to related party
|
|
|
25,000 |
|
|
|
71,568 |
|
Long-term debt
|
|
|
156,901 |
|
|
|
16,017 |
|
Accrued interest
|
|
|
1,349 |
|
|
|
1,782 |
|
Deferred income taxes
|
|
|
14,818 |
|
|
|
3,971 |
|
Other liabilities
|
|
|
1,173 |
|
|
|
252 |
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
490,405 |
|
|
|
397,530 |
|
|
|
|
|
|
|
|
Commitments and Contingencies (Note 9)
|
|
|
|
|
|
|
|
|
Stockholders and Members Equity:
|
|
|
|
|
|
|
|
|
Preferred units, no par value (no units issued or outstanding)
|
|
|
|
|
|
|
|
|
Class A Common Units no par value (0 and
23,507,839 units issued and outstanding)
|
|
|
|
|
|
|
|
|
Class B Common Units no par value (no units issued and
outstanding)
|
|
|
|
|
|
|
|
|
Class C Common Units no par value (0 and
4,842,508 units issued and outstanding)
|
|
|
|
|
|
|
|
|
Preferred Stock no par value (20,000,000 authorized, no shares
issued or outstanding)
|
|
|
|
|
|
|
|
|
Common Stock, $0.01 par value (100,000,000 authorized, and
38,590,655 and 0 shares issued and outstanding at
December 31, 2004 and 2003, respectively)
|
|
|
386 |
|
|
|
|
|
Paid-in capital
|
|
|
230,804 |
|
|
|
71,382 |
|
Retained earnings
|
|
|
77,444 |
|
|
|
28,194 |
|
Accumulated other comprehensive income/(expense)
|
|
|
(3 |
) |
|
|
1 |
|
|
|
|
|
|
|
|
|
|
Total stockholders and members equity
|
|
|
308,631 |
|
|
|
99,577 |
|
|
|
|
|
|
|
|
Total Liabilities and Stockholders and Members Equity
|
|
$ |
799,036 |
|
|
$ |
497,107 |
|
|
|
|
|
|
|
|
See notes to consolidated and combined financial
statements.
F-12
WELLCARE HEALTH PLANS, INC.
CONSOLIDATED AND COMBINED STATEMENTS OF INCOME
(Dollars in thousands, except per share and per unit data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor | |
|
|
Predecessor | |
|
|
| |
|
|
| |
|
|
|
|
Five-Month | |
|
|
Seven-Month | |
|
|
Year Ended | |
|
Year Ended | |
|
Period Ended | |
|
|
Period Ended | |
|
|
December 31, | |
|
December 31, | |
|
December 31, | |
|
|
July 31, | |
|
|
2004 | |
|
2003 | |
|
2002 | |
|
|
2002 | |
|
|
| |
|
| |
|
| |
|
|
| |
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premium
|
|
$ |
1,390,896 |
|
|
$ |
1,042,852 |
|
|
$ |
398,653 |
|
|
|
$ |
517,213 |
|
|
Investment and other income
|
|
|
4,307 |
|
|
|
3,130 |
|
|
|
3,152 |
|
|
|
|
2,819 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
1,395,203 |
|
|
|
1,045,982 |
|
|
|
401,805 |
|
|
|
|
520,032 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medical benefits
|
|
|
1,125,560 |
|
|
|
861,053 |
|
|
|
341,763 |
|
|
|
|
434,924 |
|
|
Selling, general and administrative
|
|
|
171,257 |
|
|
|
126,106 |
|
|
|
45,384 |
|
|
|
|
54,492 |
|
|
Depreciation and amortization
|
|
|
7,715 |
|
|
|
8,159 |
|
|
|
3,734 |
|
|
|
|
1,239 |
|
|
Interest
|
|
|
10,165 |
|
|
|
10,172 |
|
|
|
1,462 |
|
|
|
|
1,446 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
1,314,697 |
|
|
|
1,005,490 |
|
|
|
392,343 |
|
|
|
|
492,101 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
80,506 |
|
|
|
40,492 |
|
|
|
9,462 |
|
|
|
|
27,931 |
|
Income tax expense
|
|
|
31,256 |
|
|
|
16,955 |
|
|
|
4,805 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
49,250 |
|
|
|
23,537 |
|
|
|
4,657 |
|
|
|
$ |
27,931 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A common unit yield
|
|
|
|
|
|
|
(5,997 |
) |
|
|
(2,356 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to common units
|
|
|
|
|
|
$ |
17,540 |
|
|
$ |
2,301 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share (Note 1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share basic
|
|
$ |
1.70 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share diluted
|
|
$ |
1.56 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable per common unit (Note 1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable per common unit basic
|
|
|
|
|
|
$ |
0.66 |
|
|
$ |
0.09 |
|
|
|
|
|
|
Net income attributable per common unit diluted
|
|
|
|
|
|
$ |
0.60 |
|
|
$ |
0.08 |
|
|
|
|
|
|
Pro forma net income per common share (unaudited)
(see Note 1)
|
|
|
|
|
|
$ |
0.82 |
|
|
|
|
|
|
|
|
|
|
Pro forma net income per common share diluted
(unaudited) (see Note 1)
|
|
|
|
|
|
$ |
0.73 |
|
|
|
|
|
|
|
|
|
|
Pro forma weighted average common shares outstanding
basic (unaudited) (see Note 1)
|
|
|
|
|
|
|
21,466,300 |
|
|
|
|
|
|
|
|
|
|
Pro forma weighted average common shares outstanding
diluted (unaudited) (see Note 1)
|
|
|
|
|
|
|
23,937,664 |
|
|
|
|
|
|
|
|
|
|
See notes to consolidated and combined financial
statements.
F-13
WELLCARE HEALTH PLANS, INC.
CONSOLIDATED AND COMBINED STATEMENTS OF CHANGES IN
STOCKHOLDERS AND MEMBERS
EQUITY AND COMPREHENSIVE INCOME
(Dollars in thousands, except share and unit data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated | |
|
|
|
|
|
|
|
|
|
|
Other | |
|
Total | |
|
|
Common | |
|
Paid-in | |
|
Retained | |
|
Comprehensive | |
|
Stockholders | |
|
|
Stock | |
|
Capital | |
|
Earnings | |
|
Income | |
|
Equity | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
Predecessor:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at January 1, 2002
|
|
$ |
255 |
|
|
$ |
81,314 |
|
|
$ |
(59,283 |
) |
|
$ |
(241 |
) |
|
$ |
22,045 |
|
Issuance of common stock
|
|
|
96 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
96 |
|
Shareholder withdrawals
|
|
|
|
|
|
|
(9,209 |
) |
|
|
|
|
|
|
|
|
|
|
(9,209 |
) |
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
27,931 |
|
|
|
|
|
|
|
27,931 |
|
|
Change in unrealized gain/loss on investments, net of deferred
taxes of $243
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
693 |
|
|
|
693 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28,624 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at July 31, 2002
|
|
$ |
351 |
|
|
$ |
72,105 |
|
|
$ |
(31,352 |
) |
|
$ |
452 |
|
|
$ |
41,556 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Units | |
|
|
|
|
|
Accumulated | |
|
|
|
|
Outstanding | |
|
|
|
|
|
Other | |
|
Total | |
|
|
| |
|
Paid-in | |
|
Retained | |
|
Comprehensive | |
|
Members | |
|
|
Class A | |
|
Class B | |
|
Class C | |
|
Capital | |
|
Earnings | |
|
Income | |
|
Equity | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Balance at May 8, 2002
(date of inception) |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Issuance of common units
|
|
|
23,351,667 |
|
|
|
|
|
|
|
2,093,518 |
|
|
|
70,227 |
|
|
|
|
|
|
|
|
|
|
|
70,227 |
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,657 |
|
|
|
|
|
|
|
4,657 |
|
|
Change in unrealized gain/loss on investments, net of deferred
taxes of $20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33 |
|
|
|
33 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,690 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2002
|
|
|
23,351,667 |
|
|
|
|
|
|
|
2,093,518 |
|
|
$ |
70,227 |
|
|
$ |
4,657 |
|
|
$ |
33 |
|
|
$ |
74,917 |
|
Issuance of common units
|
|
|
174,505 |
|
|
|
2,287,037 |
|
|
|
2,910,117 |
|
|
|
8,152 |
|
|
|
|
|
|
|
|
|
|
|
8,152 |
|
Receivables from related parties
|
|
|
(15,000 |
) |
|
|
(2,287,037 |
) |
|
|
|
|
|
|
(6,906 |
) |
|
|
|
|
|
|
|
|
|
|
(6,906 |
) |
Purchase of treasury units
|
|
|
(3,333 |
) |
|
|
|
|
|
|
(161,127 |
) |
|
|
(91 |
) |
|
|
|
|
|
|
|
|
|
|
(91 |
) |
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23,537 |
|
|
|
|
|
|
|
23,537 |
|
|
Change in unrealized gain/loss on investments, net of deferred
taxes of $20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(32 |
) |
|
|
(32 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23,505 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2003
|
|
|
23,507,839 |
|
|
|
|
|
|
|
4,842,508 |
|
|
$ |
71,382 |
|
|
$ |
28,194 |
|
|
$ |
1 |
|
|
$ |
99,577 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Units | |
|
|
|
|
|
Accumulated | |
|
Total | |
|
|
Common Stock | |
|
Outstanding | |
|
|
|
|
|
Other | |
|
Stockholders/ | |
|
|
| |
|
| |
|
Paid in | |
|
Retained | |
|
Comprehensive | |
|
Members | |
|
|
Shares | |
|
Amount | |
|
Class A | |
|
Class B | |
|
Class C | |
|
Capital | |
|
Earnings | |
|
Income | |
|
Equity | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Balance at December 31, 2003
|
|
|
|
|
|
$ |
|
|
|
|
23,507,839 |
|
|
|
|
|
|
|
4,842,508 |
|
|
$ |
71,382 |
|
|
$ |
28,194 |
|
|
$ |
1 |
|
|
$ |
99,577 |
|
Issuance of common units
|
|
|
|
|
|
|
|
|
|
|
22,386 |
|
|
|
2,287,037 |
|
|
|
|
|
|
|
95 |
|
|
|
|
|
|
|
|
|
|
|
95 |
|
Forfeiture of restricted units
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(35,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock
|
|
|
8,833,333 |
|
|
|
89 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
157,079 |
|
|
|
|
|
|
|
|
|
|
|
157,168 |
|
Common stock issued for stock options
|
|
|
21,565 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
83 |
|
|
|
|
|
|
|
|
|
|
|
83 |
|
Conversion of common units to Common stock
|
|
|
24,902,513 |
|
|
|
297 |
|
|
|
(23,530,225 |
) |
|
|
(2,287,037 |
) |
|
|
(4,807,508 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
297 |
|
Conversion of Class A Common Yield to Common stock
|
|
|
4,833,244 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,165 |
|
|
|
|
|
|
|
|
|
|
|
2,165 |
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
49,250 |
|
|
|
|
|
|
|
49,250 |
|
|
Change in unrealized gain/loss on investments, net of deferred
taxes of $1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4 |
) |
|
|
(4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
49,246 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2004
|
|
|
38,590,655 |
|
|
$ |
386 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
230,804 |
|
|
$ |
77,444 |
|
|
$ |
(3 |
) |
|
$ |
308,631 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated and combined financial
statements.
F-14
WELLCARE HEALTH PLANS, INC.
CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor | |
|
|
Predecessor | |
|
|
| |
|
|
| |
|
|
|
|
Five-Month | |
|
|
|
|
|
Year Ended | |
|
Year Ended | |
|
Period Ended | |
|
|
Seven-Month | |
|
|
December 31, | |
|
December 31, | |
|
December 31, | |
|
|
Period Ended | |
|
|
2004 | |
|
2003 | |
|
2002 | |
|
|
July 31, 2002 | |
|
|
| |
|
| |
|
| |
|
|
| |
Cash from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
49,250 |
|
|
$ |
23,537 |
|
|
$ |
4,657 |
|
|
|
$ |
27,931 |
|
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization expense
|
|
|
7,715 |
|
|
|
8,159 |
|
|
|
3,734 |
|
|
|
|
1,239 |
|
|
|
Write-off of fixed assets
|
|
|
|
|
|
|
|
|
|
|
790 |
|
|
|
|
|
|
|
|
Equity-based compensation expense
|
|
|
2,044 |
|
|
|
746 |
|
|
|
172 |
|
|
|
|
|
|
|
|
Accreted interest
|
|
|
378 |
|
|
|
903 |
|
|
|
|
|
|
|
|
|
|
|
|
Provision for doubtful receivables
|
|
|
1,195 |
|
|
|
4,247 |
|
|
|
580 |
|
|
|
|
|
|
|
|
Net gain on loan prepayment
|
|
|
(2,697 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in operating accounts, net of effect of acquisitions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums and other receivables
|
|
|
(23,408 |
) |
|
|
6,048 |
|
|
|
(2,961 |
) |
|
|
|
3,525 |
|
|
|
|
Prepaid expenses and other current assets
|
|
|
(6,680 |
) |
|
|
(1,194 |
) |
|
|
(1,286 |
) |
|
|
|
(121 |
) |
|
|
|
Deferred income tax asset
|
|
|
(2,221 |
) |
|
|
(3,139 |
) |
|
|
(8,377 |
) |
|
|
|
|
|
|
|
|
Medical benefits payable
|
|
|
24,138 |
|
|
|
34,627 |
|
|
|
2,958 |
|
|
|
|
11,363 |
|
|
|
|
Unearned premiums
|
|
|
(12,901 |
) |
|
|
52,584 |
|
|
|
22,060 |
|
|
|
|
(22,451 |
) |
|
|
|
Accounts payables and other accrued expenses
|
|
|
2,889 |
|
|
|
149 |
|
|
|
18,680 |
|
|
|
|
(6,371 |
) |
|
|
|
Accrued interest
|
|
|
(433 |
) |
|
|
530 |
|
|
|
1,252 |
|
|
|
|
568 |
|
|
|
|
Taxes payable and deferred liability
|
|
|
9,913 |
|
|
|
(4,409 |
) |
|
|
9,255 |
|
|
|
|
|
|
|
|
|
Other, net
|
|
|
(420 |
) |
|
|
10 |
|
|
|
755 |
|
|
|
|
(1,029 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operations
|
|
|
48,762 |
|
|
|
122,798 |
|
|
|
52,269 |
|
|
|
|
14,654 |
|
Cash from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of business
|
|
|
(36,542 |
) |
|
|
|
|
|
|
9,387 |
|
|
|
|
|
|
|
Proceeds from sale of investments
|
|
|
103,434 |
|
|
|
10,450 |
|
|
|
24,474 |
|
|
|
|
27,183 |
|
|
Purchases of investments
|
|
|
(145,174 |
) |
|
|
(25,012 |
) |
|
|
(4,399 |
) |
|
|
|
(20,761 |
) |
|
Purchases and dispositions of restricted investments, net
|
|
|
(9,505 |
) |
|
|
(709 |
) |
|
|
(4,395 |
) |
|
|
|
(4,237 |
) |
|
Additions to property and equipment, net
|
|
|
(8,679 |
) |
|
|
(3,042 |
) |
|
|
(53 |
) |
|
|
|
(1,495 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by investing activities
|
|
|
(96,466 |
) |
|
|
(18,313 |
) |
|
|
25,014 |
|
|
|
|
690 |
|
Cash from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholder withdrawals
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9,209 |
) |
|
Contribution of capital
|
|
|
95 |
|
|
|
400 |
|
|
|
70,055 |
|
|
|
|
|
|
|
Proceeds from debt issuance, net
|
|
|
159,200 |
|
|
|
14,568 |
|
|
|
1,069 |
|
|
|
|
|
|
|
Payments on debt
|
|
|
(108,833 |
) |
|
|
(28,916 |
) |
|
|
(1,623 |
) |
|
|
|
(589 |
) |
|
Proceeds from options exercised
|
|
|
82 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from initial and secondary public offerings, net
|
|
|
157,466 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
208,010 |
|
|
|
(13,948 |
) |
|
|
69,501 |
|
|
|
|
(9,798 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase during period
|
|
|
160,306 |
|
|
|
90,537 |
|
|
|
146,784 |
|
|
|
|
5,546 |
|
Balance at beginning of period
|
|
|
237,321 |
|
|
|
146,784 |
|
|
|
|
|
|
|
|
75,414 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$ |
397,627 |
|
|
$ |
237,321 |
|
|
$ |
146,784 |
|
|
|
$ |
80,960 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for taxes
|
|
$ |
27,151 |
|
|
$ |
16,101 |
|
|
$ |
1,270 |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$ |
11,343 |
|
|
$ |
7,416 |
|
|
$ |
|
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated and combined financial
statements.
F-15
WELLCARE HEALTH PLANS, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
Year ended December 31, 2004 and 2003, five-month period
ended December 31,
2002, predecessor seven-month period ended July 31,
2002
(Dollars in thousands, except member, share and unit data)
|
|
1. |
ORGANIZATION, BASIS OF PRESENTATION AND SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES |
WellCare Health Plans, Inc., a Delaware corporation (the
Company), provides managed care services targeted
exclusively to government-sponsored healthcare programs,
focusing on Medicaid and Medicare. Through its health plans, the
Company offers a diverse array of products, primarily Medicaid
and related state programs, such as the State Childrens
Health Insurance Program (SCHIP), and Medicare
programs, serving approximately 747,000 members as of
December 31, 2004. Through its HMO subsidiaries, the
Company operates in the states of Florida, Illinois, Indiana,
New York, Connecticut and Louisiana.
WellCare Holdings, LLC (Holdings), a Delaware
limited liability corporation, was formed in May 2002 for the
purpose of acquiring various subsidiaries that operate health
plans focused on government programs in various states. Holdings
began operating in August 2002 in conjunction with the
acquisition of its indirect operating subsidiaries and did not
have any activity from May 2002 through July 2002. The Company,
formerly known as WellCare Group, Inc., became the successor to
Holdings following a reorganization (the
Reorganization) that took place immediately prior to
the closing of the Companys initial public offering in
July 2004. The Reorganization was effected through a merger of
Holdings with and into the Company, a wholly-owned subsidiary of
Holdings. The Company issued an aggregate of
29,735,757 shares of the Companys common stock in
exchange for all of the outstanding membership interests in
Holdings, plus accrued yields, pursuant to the merger. Upon
consummation of the merger, the Company changed its name to
WellCare Health Plans, Inc. The Companys direct and
indirect subsidiaries are WCG Health Management, Inc., a
Delaware-domiciled holding company, Well Care of Florida, Inc.
(WC) and HealthEase of Florida, Inc.
(HE), both Florida-licensed health maintenance
organizations (HMOs); WellCare of New York, Inc.
(WCNY), a New York-licensed HMO; FirstChoice
HealthPlans of Connecticut, Inc. (FC), a
Connecticut-licensed HMO; The WellCare Management Group, Inc.
(WCMG), a New York-domiciled holding company;
Comprehensive Health Management, Inc. (CHMI), a
Florida-domiciled third-party administrator (TPA);
Comprehensive Health Management of Florida, L.C.
(LLC), a Florida-domiciled limited liability
company; WellCare of Louisiana, Inc. (LA); a
Louisiana-licensed HMO; Harmony Behavioral Health, Inc.
(BH); a Delaware-domiciled behavioral health
services company; Comprehensive Reinsurance, Ltd., a Cayman
Island Reinsurance Company (Comp Re), Harmony
Health Systems, Inc. (HHS), a New Jersey-domiciled
holding company; Harmony Health Plan of Illinois, Inc.
(HHP), an Illinois-licensed HMO; and Harmony Health
Management, Inc. (HHM), a New Jersey-domiciled TPA
(collectively, the Subsidiaries). WC, HE, WCNY, FC,
WCMG, CHMI and LLC are referred to collectively as the
Acquired Subsidiaries.
On June 30, 2004, the Company completed its initial public
offering, at a price of $17 per share. The aggregate sale
price for all the shares sold by the Company was approximately
$124.7 million, resulting in net proceeds to the Company of
approximately $112.3 million after payment of underwriting
discounts and commissions of approximately $8.7 million and
legal, accounting and other fees incurred in connection with the
offering of approximately $3.7 million.
On December 22, 2004, the Company closed a follow-on public
offering of common stock whereby 6,000,000 shares were sold
by selling stockholders and 1,500,000 shares were sold by
the Company. The Company received net proceeds of
$44.9 million from this offering after deducting
underwriting discounts and commissions of approximately
$2.4 million and other offering costs of approximately $716.
F-16
WELLCARE HEALTH PLANS, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL
STATEMENTS (Continued)
The Acquired Subsidiaries, as they existed under common control
prior to their July 2002 acquisition by the Company, are
referred to collectively as Predecessor. The
Company, as it existed on and after July 2002, is referred to as
the Company or Successor.
The consolidated balance sheets, statements of income, changes
in stockholders and members equity and comprehensive
income and cash flows include the accounts of the Successor and
all of its subsidiaries. Significant intercompany accounts and
transactions have been eliminated.
The combined statements of income, changes in stockholders
and members equity and comprehensive income and cash flows
include all of the accounts of the Predecessor prior to the July
2002 acquisition of the Acquired Subsidiaries. Significant
intercompany accounts and transactions have been eliminated.
The accompanying Predecessors historical combined
financial statements for the period ended July 2002 represent
the financial position and corporate structure as of the date
indicated. The Predecessors historical combined financial
statements do not reflect the effects of the Companys new
capital structure (debt and equity), C Corporation tax
structure (previously an S Corporation), purchase
accounting as a result of the acquisition of the Acquired
Subsidiaries, and accounting for the acquired intangible assets
and goodwill.
The following table describes the periods presented in these
consolidated and combined financial statements and related notes
thereto:
|
|
|
Period |
|
Referred to as: |
|
|
|
Consolidated results for the Successor from January 1, 2004
through December 31, 2004
|
|
Year ended December 31, 2004
|
Consolidated results for the Successor from January 1, 2003
through December 31, 2003
|
|
Year ended December 31, 2003
|
Consolidated results for the Successor from August 1, 2002
through December 31, 2002
|
|
Five-month period ended December 31, 2002
|
Combined results for the Predecessor from January 1, 2002
through July 31, 2002
|
|
Predecessor seven-month period ended
July 31, 2002
|
Combined results for the Predecessor from January 1, 2002
through July 31, 2002 and results for the Successor from
August 1, 2002 through December 31, 2002
|
|
Combined year ended December 31, 2002
|
The consolidated and combined financial statements have been
prepared in accordance with accounting principles generally
accepted in the United States (GAAP). The
preparation of financial statements in conformity with GAAP
requires management to make estimates and assumptions that
affect the amounts reported in the consolidated and combined
financial statements and accompanying notes. These estimates are
based on knowledge of current events and anticipated future
events and accordingly, actual results may differ from those
estimates. The most significant estimate made by management is
the medical benefits payable.
|
|
|
Cash and Cash Equivalents |
Cash and cash equivalents include cash and short-term
investments with original maturities of three months or less.
These amounts are recorded at cost, which approximates fair
value.
F-17
WELLCARE HEALTH PLANS, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL
STATEMENTS (Continued)
The Companys fixed maturity securities are classified as
available-for-sale and are reported at their estimated fair
value. Unrealized investment gains and losses on securities are
recorded as a separate component of other comprehensive income
or loss, net of deferred income taxes. The cost of fixed
maturity securities is adjusted for impairments in value deemed
to be other-than-temporary. These adjustments are recorded as
investment losses. Investment gains and losses on sales of
securities are determined on a specific identification basis.
Short-term investments are stated at amortized cost, which
approximates fair value.
The Companys fixed maturity investments are exposed to
three primary sources of investment risk: credit, interest rate
and market valuation. The financial statement risks are those
associated with the recognition of impairments and income, as
well as the determination of fair values. The assessment of
whether impairments have occurred is based on managements
case-by-case evaluation of the underlying reasons for the
decline in fair value. Management considers a wide range of
factors about the security issuer and uses its best judgment in
evaluating the cause of the decline in the estimated fair value
of the security and in assessing the prospects for near-term
recovery. Inherent in managements evaluation of the
security are assumptions and estimates about the operations of
the issuer and its future earnings potential. Considerations
used by the Company in the impairment evaluation process
include, but are not limited to: (i) the length of time and
the extent to which the market value has been below cost;
(ii) the potential for impairments of securities when the
issuer is experiencing significant financial difficulties;
(iii) the potential for impairments in an entire industry
sector or sub-sector; (iv) the potential for impairments in
certain economically depressed geographic locations;
(v) the potential for impairments of securities where the
issuer, series of issuers or industry has suffered a
catastrophic type of loss or has exhausted natural resources;
(vi) unfavorable changes in forecasted cash flows on
asset-backed securities; and (vii) other subjective
factors, including concentrations and information obtained from
regulators and rating agencies. In addition, the earnings on
certain investments are dependent upon market conditions, which
could result in prepayments and changes in amounts to be earned
due to changing interest rates or equity markets. The
determination of fair values in the absence of quoted market
values is based on: (i) valuation methodologies;
(ii) securities the Company deems to be comparable; and
(iii) assumptions deemed appropriate given the
circumstances.
|
|
|
Restricted Investment Assets |
Restricted investment assets consist of cash, cash equivalents,
and other short-term investments required by various state
statutes to be deposited or pledged to state agencies. At
December 31, 2004 and 2003, all restricted investment
assets consisted of cash and cash equivalents. Restricted
investment assets are classified as long-term, regardless of the
contractual maturity date due to the nature of the states
requirements.
|
|
|
Premiums and Other Receivables, Net |
Premiums and other receivables consist of premiums due from
federal and state agencies, and amounts advanced to hospitals
that are under contract with the Company to provide medical
services to members. Such advances provided funding to these
providers for medical benefits payable. The Company performs an
analysis of collectibility on its outstanding advances and
records a provision for these accounts which are judged to be at
collection risk based upon a review of financial condition and
solvency of the provider. The Companys allowance for
uncollectible premiums and other receivables was approximately
$6,022 and $4,827 at December 31, 2004 and 2003,
respectively.
|
|
|
Property and Equipment, Net |
Property and equipment is stated at cost, less accumulated
depreciation. Depreciation for financial reporting purposes is
computed using the straight-line method over the estimated
useful lives of the related assets, which is five years for
computer equipment and software and five years for furniture and
other
F-18
WELLCARE HEALTH PLANS, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL
STATEMENTS (Continued)
equipment. Maintenance and repairs are charged to operating
expense when incurred. Major improvements that extend the lives
of the assets are capitalized. On an ongoing basis, the Company
reviews events or changes in circumstances that may indicate
that the carrying value of an asset may not be recoverable. If
the carrying value of an asset exceeds the sum of estimated
undiscounted future cash flows, then an impairment loss is
recognized in the current period for the difference between
estimated fair value and carrying value. If assets are
determined to be recoverable, or the useful lives are shorter
than originally estimated, the net book value of the asset is
depreciated over the newly determined remaining useful lives.
|
|
|
Goodwill and Other Intangible Assets |
Goodwill represents the excess of the cost over the fair market
value of net assets acquired. The Companys other
intangible assets were obtained as a result of its acquisitions
of the Acquired Subsidiaries and Harmony and include provider
networks, membership contracts, trademark, noncompete
agreements, state contracts, licenses and permits. The
Companys other intangible assets are amortized over their
estimated useful lives ranging from one to 26 years.
The Company reviews goodwill and other intangible assets for
impairment at least annually or sooner if events or changes in
circumstances occur that may affect the estimated useful life or
the recoverability of the remaining balance of goodwill. The
Companys management has selected the third quarter for its
annual impairment test, which generally coincides with the
finalization of state and federal negotiations and its initial
budgeting process. During the third quarter ended
September 30, 2004, management assessed the earnings
forecast for its reporting unit and concluded that the fair
value of the reporting unit, based upon the expected present
value of future cash flows and other qualitative factors, was in
excess of net assets. As of December 31, 2004, management
believes that there are no indicators of impairment to the value
of goodwill or other intangible assets.
The cost of medical benefits is recognized in the period in
which services are provided and includes an estimate of the cost
of medical benefits that have been incurred but not yet
reported. The Company contracts with various healthcare
providers for the provision of certain medical care services to
its members and generally compensates those providers on a
fee-for-service basis or pursuant to certain risk-sharing
arrangements. Medical benefits expense consists of capitation
expenses and health benefit claims. Capitation represents fixed
payments on a per member per month basis to participating
physicians and other medical specialists, as compensation for
providing comprehensive health services. Participating physician
capitation payments for the years ended December 31, 2004,
December 31, 2003, five-month period ended
December 31, 2002, and seven-month period ended
July 31, 2002, were 14%, 11%, 10%, and 10%, respectively,
of total medical benefits expense.
Medical benefits payable consists primarily of liabilities
established for reported and unreported claims and accrued
capitation fees and adjustments, which are unpaid as of the
balance sheet date, and contractual liabilities under risk
sharing arrangements established through an estimation process
utilizing company-specific, industry-wide, and general economic
information and data. The liability includes both direct medical
expenses and medically-related administrative costs. The
estimation process also involves continuous monitoring and
evaluation of the submission, adjudication, and payment cycles
of claims. The Companys year-end medical benefits payable
is substantially satisfied through claims payment in the
subsequent year. The Company estimates ultimate claims based
upon historical experience and other available information as
well as assumptions about emerging trends, which vary by
business segment. Significant assumptions used in the estimation
process include trends in benefit costs, seasonality, changes in
member demographics, utilization, provider contract terms and
reimbursement strategies, frequency and severity of claims
incurred, known and adjudicated claims and changes in the timing
of the reporting of claims. Additionally, as part of the review,
the
F-19
WELLCARE HEALTH PLANS, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL
STATEMENTS (Continued)
Company estimates and accrues for the costs necessary to process
unpaid claims. The Company includes estimates for provider
settlements within its medical benefits payable liability. Such
settlements are typically due to clarification of contract
terms, out-of-network reimbursement and claims payment
differences, as well as amounts due to contracted providers
under risk-sharing arrangements. Estimates are made by
management using historical claims history and such losses are
not expected to be significant.
The Company records reserves for estimated referral claims
related to healthcare providers under contract with the Company
who are financially troubled or insolvent and who may not be
able to honor their obligations for the costs of medical
services provided by other providers. In these instances, the
Company may be required to honor these obligations for legal or
business reasons. Based on the Companys current assessment
of providers under contract with the Company, such losses have
not been and are not expected to be significant.
Due to the numerous factors influencing this liability, the
Company develops a series of estimates based upon generally
accepted actuarial projection methodologies using various
scenarios with respect to claim submission and payment patterns
and cost trends. The Companys policy is to record
managements best estimate of medical and other benefits
payable that adequately provides for future payments of claims
incurred but not paid under moderately adverse conditions.
Deviations, whether positive or negative, between actual
experience and estimates used to establish the liability are
recorded in the period of claim payment on a consistent basis.
The Company continually monitors the reasonableness of the
assumptions and judgments used in prior estimates by comparison
with actual claim patterns and considers this information in
future estimates.
Medical and other benefits paid can also be significantly
impacted by outcomes from court decisions, interpretations by
regulatory authorities, and legislative changes involving
healthcare matters. As a result, amounts ultimately paid may
differ from initial estimates that did not consider such
outcomes, interpretations and changes.
|
|
|
Premium Deficiency Reserves |
Premium deficiency reserves are recognized when it is probable
that the future costs associated with a group of existing
contracts will exceed the anticipated future premiums,
investment income and stop-loss reinsurance recoveries on those
contracts. For purposes of determining whether a premium
deficiency exists, contracts are grouped in a manner consistent
with the Companys method of acquiring, servicing and
measuring profitability of such contracts. At December 31,
2004 and 2003, the Company recorded premium deficiency reserves
of $0 and $500, respectively, in the accompanying Consolidated
Balance Sheets.
Deferred tax assets and liabilities are recognized for the
estimated future tax consequences attributable to differences
between the financial statement carrying amounts of existing
assets and liabilities and their respective tax bases. Deferred
tax assets and liabilities are measured using tax rates expected
to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. A valuation
allowance is recognized when, based on available evidence, it is
more likely than not that the deferred tax assets may not be
realized.
The Company generally receives premiums in advance of providing
services, and recognizes premium revenue during the period in
which the Company is obligated to provide services to its
members. Premiums are billed monthly for coverage in the
following month and are recognized as revenue in the month for
which insurance coverage is provided. Premiums collected in
advance are deferred and reported as unearned
F-20
WELLCARE HEALTH PLANS, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL
STATEMENTS (Continued)
premiums in the accompanying Consolidated Balance Sheets, any
amounts that have not been received by the end of the period
remain on the balance sheet classified as premium receivables.
The Company records adjustments to revenues based on member
retroactivity. These adjustments reflect changes in the number
of and eligibility status of enrollees subsequent to when
revenue was billed. Management estimates the amount of
outstanding retroactivity each period and adjust premium revenue
accordingly. The estimates of retroactivity adjustments are
based on historical trends, premiums billed, the volume of
member and contract renewal activity and other information.
Certain premiums and medical benefits are ceded to other
insurance companies under various reinsurance agreements. The
ceded reinsurance agreements provide the Company with increased
capacity to write larger risks and maintain its exposure to loss
within its capital resources. The Company is contingently liable
in the event that the reinsurers do not meet their contractual
obligations.
Reinsurance premiums and medical benefits are accounted for
consistently with the accounting for the original policies
issued and other terms of the reinsurance contracts. The Company
had payments of $610, $2,724, $1,071, and $1,616, respectively,
for the years ended December 31, 2004, December 31,
2003, the five-month period ended December 31, 2002, and
the seven-month period ended July 31, 2002. The Company had
recoveries of $591, $715, $985, and $1,751, respectively, for
the years ended December 31, 2004, December 31, 2003,
the five-month period ended December 31, 2002, and the
seven-month period ended July 31, 2002.
Member acquisition costs consist of both internal and external
agent commissions, policy issuance and other administrative
costs that the Company incurs to acquire new members. The
Company does not defer member acquisition costs. Member
acquisition costs are expensed in the period in which they are
incurred.
The Company expenses the production costs of advertising as
incurred. Costs of communicating an advertising campaign are
expensed over the period the advertising takes place.
Advertising expense was $6,723, $1,974, and $1,982,
respectively, for the years ended December 31, 2004,
December 31, 2003, and December 31, 2002.
|
|
|
Equity-Based Employee Compensation |
The Company has four equity-based employee compensation plans,
which are described more fully in Note 10. The Company
accounts for these plans under the recognition and measurement
principles (the intrinsic-value method) prescribed in Accounting
Principles Board (APB) Opinion No. 25,
Accounting for Stock Issued to Employees, and
related interpretations. Compensation cost for unit options is
reflected in net income and is measured as the excess of the
market price of the Companys unit at the date of grant
over the amount an employee must pay to acquire the unit.
In December 2002, Statement of Financial Accounting Standards
(SFAS) No. 148, Accounting for Stock-Based
Compensation Transition and Disclosure was
issued. SFAS No. 148 provides alternative methods of
transition to the fair value method of accounting for
equity-based employee compensation. It also amends and expands
the disclosure provisions of SFAS No. 123 and APB
Opinion No. 28, Interim Financial Reporting, to
require disclosure in the summary of significant accounting
policies of the effects of an entitys accounting policy
with respect to equity-based employee compensation on reported
net income and earnings per share in annual and interim
financial statements. While SFAS No. 148 does not
require companies to
F-21
WELLCARE HEALTH PLANS, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL
STATEMENTS (Continued)
account for employee equity options using the fair-value method,
the disclosure provisions of SFAS No. 148 are
applicable to all companies with equity-based employee
compensation, regardless of whether they account for that
compensation using the fair-value method of
SFAS No. 123 or the intrinsic-value method of APB
Opinion No. 25. The Company has adopted the disclosure
requirements of SFAS No. 148.
In December 2004, SFAS No. 123(R), Share-Based
Payment, which addresses the accounting for employee stock
options, was issued. SFAS 123(R) revises the disclosure
provisions of SFAS 123, Accounting for Stock Based
Compensation and supercedes APB Opinion No. 25,
Accounting for Stock Issued to Employees.
SFAS 123(R) requires that the cost of all employee stock
options, as well as other equity-based compensation
arrangements, be reflected in the financial statements based on
the estimated fair value of the awards. This statement is
effective for all public entities who file as of the beginning
of the first interim or annual reporting period that begins
after June 15, 2005. The Company has not elected to early
implement SFAS 123(R) for the year ended December 31,
2004.
The following table illustrates the effect on net income and net
income attributable to common units if the fair value based
method had been applied to all awards.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor | |
|
|
| |
|
|
|
|
Five-Month | |
|
|
Year Ended | |
|
Year Ended | |
|
Period Ended | |
|
|
December 31, | |
|
December 31, | |
|
December 31, | |
|
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
Net income, as reported
|
|
$ |
49,250 |
|
|
$ |
23,537 |
|
|
$ |
4,657 |
|
Reconciling items (net of tax effects):
|
|
|
|
|
|
|
|
|
|
|
|
|
Add: equity-based employee compensation expense determined under
the intrinsic-value based method for all awards
|
|
|
1,256 |
|
|
|
434 |
|
|
|
4 |
|
Deduct: equity-based employee compensation expense determined
under the fair-value based method for all awards
|
|
|
(3,392 |
) |
|
|
(819 |
) |
|
|
(4 |
) |
|
|
|
|
|
|
|
|
|
|
Net adjustment
|
|
|
(2,136 |
) |
|
|
(385 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income, as adjusted
|
|
$ |
47,114 |
|
|
|
23,152 |
|
|
|
4,657 |
|
|
|
|
|
|
|
|
|
|
|
Class A common unit yield
|
|
|
|
|
|
|
(5,997 |
) |
|
|
(2,356 |
) |
|
|
|
|
|
|
|
|
|
|
Net income attributable to common unit, as adjusted
|
|
|
|
|
|
$ |
17,155 |
|
|
$ |
2,301 |
|
|
|
|
|
|
|
|
|
|
|
Net income per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic as reported
|
|
$ |
1.70 |
|
|
|
|
|
|
|
|
|
|
Basic as adjusted
|
|
$ |
1.62 |
|
|
|
|
|
|
|
|
|
|
Diluted as reported
|
|
$ |
1.56 |
|
|
|
|
|
|
|
|
|
|
Diluted as adjusted
|
|
$ |
1.51 |
|
|
|
|
|
|
|
|
|
Net income attributable per common unit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic as reported
|
|
|
|
|
|
$ |
0.66 |
|
|
$ |
0.09 |
|
|
Basic as adjusted
|
|
|
|
|
|
$ |
0.65 |
|
|
$ |
0.09 |
|
|
Diluted as reported
|
|
|
|
|
|
$ |
0.60 |
|
|
$ |
0.08 |
|
|
Diluted as adjusted
|
|
|
|
|
|
$ |
0.58 |
|
|
$ |
0.08 |
|
F-22
WELLCARE HEALTH PLANS, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL
STATEMENTS (Continued)
The Predecessor seven-month period ended July 31, 2002 did
not have any equity-based employee compensation and as a result,
this period is not displayed in the table above.
|
|
|
Earnings Per Common Share |
Basic net income per common share is computed by dividing the
net income for the period by the weighted average number of
shares of common stock outstanding during the period. Diluted
net income per common share is computed by dividing the net
income for the period by the weighted average number of shares
of common stock outstanding during the period, plus other
potentially dilutive securities.
|
|
|
Earnings Attributable Per Common Unit |
Basic net income attributable per unit is computed by dividing
the net income less the Class A common unit yield for the
period by the weighted average number of units outstanding
during the period, less units outstanding that are unvested and
subject to provisions that allow the Company to repurchase units
at its sole discretion.
Diluted net income attributable per unit is computed by dividing
the net income for the period less the Class A common unit
yield by the weighted average number of units outstanding during
the period, including the unvested units that are subject to
provisions that allow the Company to repurchase units at its
sole discretion.
Holdings historic capital structure is not indicative of
the Companys current structure due to the automatic
conversion of all units of Holdings into common stock of the
Company immediately prior to the closing of the Companys
initial public offering. Accordingly, historic basic and diluted
net income attributable per common unit should not be used as an
indicator of future earnings per common share. The pro forma
information in the Consolidated and Combined Statements of
Income assumes conversion of all outstanding units of Holdings
into shares of the Companys common stock resulting from
the completion of the initial public offering as if it had
occurred at the beginning of all periods presented. Pro forma
net income per share is computed using the weighted average
number of common shares outstanding, including the pro forma
effects of automatic conversion of all outstanding units into
shares of the Companys common stock effective immediately
prior to the closing of the Companys initial public
offering on July 7, 2004.
The components of total shares and units outstanding at
December 31, 2004 and December 31, 2003, are as
follows:
|
|
|
|
|
|
|
|
|
|
|
Successor | |
|
|
| |
|
|
December 31, | |
|
December 31, | |
|
|
2004 | |
|
2003 | |
|
|
| |
|
| |
Common shares outstanding
|
|
|
34,681,436 |
|
|
|
|
|
Units outstanding
|
|
|
|
|
|
|
23,507,839 |
|
Vested restricted shares
|
|
|
2,432,280 |
|
|
|
|
|
Vested restricted units
|
|
|
|
|
|
|
1,702,978 |
|
Unvested restricted shares
|
|
|
1,476,939 |
|
|
|
|
|
Unvested restricted units
|
|
|
|
|
|
|
3,139,530 |
|
Options outstanding
|
|
|
2,415,075 |
|
|
|
1,099,500 |
|
|
|
|
|
|
|
|
Total shares/units outstanding, including options
|
|
|
41,005,730 |
|
|
|
29,449,847 |
|
|
|
|
|
|
|
|
F-23
WELLCARE HEALTH PLANS, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL
STATEMENTS (Continued)
The following table presents the calculation of net income
attributable per common share basic and diluted and
net income attributable per common unit basic and
diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor | |
|
|
| |
|
|
|
|
Five-Month | |
|
|
|
|
Period | |
|
|
Year Ended | |
|
Year Ended | |
|
Ended | |
|
|
December 31, | |
|
December 31, | |
|
December 31, | |
|
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income basic and diluted
|
|
$ |
49,250 |
|
|
$ |
23,537 |
|
|
$ |
4,657 |
|
Class A Common unit yield
|
|
|
|
|
|
|
(5,997 |
) |
|
|
(2,356 |
) |
|
|
|
|
|
|
|
|
|
|
Net income attributable to common share/unit
|
|
$ |
49,250 |
|
|
$ |
17,540 |
|
|
$ |
2,301 |
|
|
|
|
|
|
|
|
|
|
|
Denominator
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding basic
|
|
|
29,011,115 |
|
|
|
|
|
|
|
|
|
Adjustment for unvested restricted common shares
|
|
|
2,077,990 |
|
|
|
|
|
|
|
|
|
Dilutive effect of stock options (as determined by the treasury
stock method)
|
|
|
506,075 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding diluted
|
|
|
31,595,180 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average units outstanding basic
|
|
|
|
|
|
|
26,398,962 |
|
|
|
25,752,459 |
|
Adjustments for unvested outstanding Class C Common units
and equity options issued
|
|
|
|
|
|
|
3,039,250 |
|
|
|
1,486,778 |
|
|
|
|
|
|
|
|
|
|
|
Weighted average units outstanding diluted
|
|
|
|
|
|
|
29,438,212 |
|
|
|
27,239,237 |
|
|
|
|
|
|
|
|
|
|
|
Net income per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share basic
|
|
$ |
1.70 |
|
|
|
|
|
|
|
|
|
|
Net income per common share diluted
|
|
$ |
1.56 |
|
|
|
|
|
|
|
|
|
Net income attributable per common unit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable per unit basic
|
|
|
|
|
|
$ |
0.66 |
|
|
$ |
0.09 |
|
|
Net income attributable per unit diluted
|
|
|
|
|
|
$ |
0.60 |
|
|
$ |
0.08 |
|
Pro forma net income per common share basic
|
|
|
|
|
|
$ |
0.82 |
|
|
$ |
0.11 |
|
Pro forma net income per common share diluted
|
|
|
|
|
|
$ |
0.73 |
|
|
$ |
0.10 |
|
|
|
|
Accumulated Other Comprehensive Income |
Accumulated other comprehensive income consists of unrealized
gains and losses on investments that are not recorded in the
statements of income but instead are recorded directly to
stockholders and members equity. The Companys
components of accumulated other comprehensive income include net
unrealized gain/(losses) on available-for-sale securities, net
of taxes.
F-24
WELLCARE HEALTH PLANS, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL
STATEMENTS (Continued)
The operations of the Companys subsidiaries in Florida
represent a significant concentration of the Companys
revenues. The following table illustrates the Companys
Florida subsidiaries revenue as a percentage of the total
revenue.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor | |
|
Predecessor | |
|
|
| |
|
| |
|
|
|
|
Five-Month | |
|
Seven-Month | |
|
|
Year Ended | |
|
Year Ended | |
|
Period Ended | |
|
Period Ended | |
|
|
December 31, | |
|
December 31, | |
|
December 31, | |
|
July 31, | |
|
|
2004 | |
|
2003 | |
|
2002 | |
|
2002 | |
|
|
| |
|
| |
|
| |
|
| |
Medicare
|
|
|
24% |
|
|
|
27% |
|
|
|
29% |
|
|
|
31% |
|
Medicaid
|
|
|
55% |
|
|
|
59% |
|
|
|
57% |
|
|
|
54% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
79% |
|
|
|
86% |
|
|
|
86% |
|
|
|
85% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company expects that the Florida subsidiaries Medicare
and Medicaid contracts, which expire on various dates between
March 2005 and June 2006, will be renewed. The Companys
operating results could be significantly constrained in the
event that the compensation provided under its Florida
subsidiaries Medicare and Medicaid contracts is inadequate
to fund medical benefits expense or in the event that these
contracts are not renewed.
The Companys Consolidated Balance Sheets include the
following financial instruments: cash and cash equivalents,
receivables, investments, accounts payable, medical benefits
payable, and notes payable. The carrying amounts of current
assets and liabilities approximate their fair value because of
the relatively short period of time between the origination of
these instruments and their expected realization. The carrying
value of the notes payable to a related party is estimated by
management to approximate fair value based upon the term, nature
of the obligation and the arms-length negotiations conducted
during the purchase transaction. The carrying value of other
long-term debt obligations approximates their fair value based
on borrowing rates currently available to the Company for
instruments with similar terms and remaining maturities.
|
|
|
Recent Accounting Pronouncements |
In January 2003, the FASB issued Interpretation No. 46,
Consolidation of Variable Interest Entities. This
interpretation of Accounting Research Bulletin No. 51,
Consolidated Financial Statements, addresses
consolidation by business enterprises of variable interest
entities (VIEs) when the VIEs either: (1) do
not have sufficient equity investment at risk to permit the
entity to finance its activities without additional subordinated
financial support, or (2) the equity investors lack an
essential characteristic of a controlling financial interest. As
of December 31, 2004, the Company does not have any
entities that require disclosure or new consolidation as a
result of adopting the provisions of FASB Interpretation
No. 46.
Certain 2003 and 2002 amounts have been reclassified to conform
to their 2004 financial statement presentation.
F-25
WELLCARE HEALTH PLANS, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL
STATEMENTS (Continued)
In July 2002, Holdings acquired (directly or indirectly)
100 percent of the outstanding stock or other ownership
interests of the Acquired Subsidiaries. The results of the
Acquired Subsidiaries operations have been included in the
consolidated financial statements since that date.
The aggregate purchase price was $170,060, plus a warrant to
purchase 2,287,037 Class B Common Units at an adjusted
purchase price of $3.00 per unit with an estimated value of
$250. The valuation of the warrants was made utilizing
Black-Scholes valuation model. Significant assumptions utilized
were: dividend yield of 0%; expected term of one year; risk-free
interest rate of 1.8%; and an expected volatility of 50.2%. The
Company entered into a settlement agreement in February 2004,
which finalized all outstanding purchase price adjustments with
the sellers. Goodwill and other intangibles totaling $117,064
and $19,970, respectively were recorded. Identifiable
intangibles with definite useful lives are being amortized based
on their estimated useful lives.
|
|
|
b) Harmony Health Systems, Inc. |
In June 2004, the Company acquired HHS and its subsidiaries, HHP
and HHM (collectively, Harmony) pursuant to the
terms of a merger agreement entered into in March 2004, for
$50,296, including acquisition costs of $1,609. The purchase
price will be increased or reduced, as applicable, by the amount
of any excess or shortfall in the amount of Harmonys
reserves for medical claims as of December 31, 2003
compared to medical claims actually incurred as of that date, as
measured on or about December 31, 2004. The results of the
Harmonys operations have been included in the consolidated
financial statements since the acquisition date.
Harmony is a provider of Medicaid managed care plans in Illinois
and Indiana. Harmony, through HHP, operates the largest Medicaid
managed care plan in Illinois.
The following table summarizes the estimated fair values of the
assets acquired and liabilities assumed at May 31, 2004. No
material transactions occurred between May 31, 2004 and the
transaction date. Goodwill and other intangibles totaled $40,186.
|
|
|
|
|
|
|
May 31, | |
|
|
2004 | |
|
|
| |
|
|
(unaudited) | |
Cash and cash equivalents
|
|
$ |
13,754 |
|
Premiums and other receivables
|
|
|
16,223 |
|
Other assets
|
|
|
3,706 |
|
|
|
|
|
Total assets acquired
|
|
|
33,683 |
|
|
|
|
|
Claims payable
|
|
|
(18,160 |
) |
Short-term debt and other liabilities
|
|
|
(1,813 |
) |
Deferred tax liability
|
|
|
(3,600 |
) |
|
|
|
|
Total liabilities assumed
|
|
|
(23,573 |
) |
|
|
|
|
Net assets acquired
|
|
$ |
10,110 |
|
|
|
|
|
F-26
WELLCARE HEALTH PLANS, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL
STATEMENTS (Continued)
The following pro forma summary financial information presents
the consolidated and combined income statement information for
the years ended December 31, 2004 and 2003 as if the
Harmony transaction had been consummated on January 1, of
each year respectively, and adjusted for the proforma effects of
converted shares outstanding subsequent to the IPO as if those
share counts were outstanding for the full year. Additionally,
the proforma does not purport to be indicative of what would
have occurred had the acquisition been completed at that date or
the results that may occur in the future.
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended | |
|
Year Ended | |
|
|
December 31, | |
|
December 31, | |
|
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
|
(unaudited) | |
|
(unaudited) | |
Premium Revenue
|
|
$ |
1,443,872 |
|
|
$ |
1,155,950 |
|
|
|
|
|
|
|
|
Net Income
|
|
$ |
50,299 |
|
|
$ |
25,664 |
|
|
|
|
|
|
|
|
Net income per common share:
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
1.73 |
|
|
|
|
|
|
Diluted
|
|
$ |
1.59 |
|
|
|
|
|
Net income attributable per common unit:
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
$ |
0.69 |
|
|
Diluted
|
|
|
|
|
|
$ |
0.66 |
|
Weighted average common shares outstanding
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
29,011,115 |
|
|
|
|
|
|
Diluted
|
|
|
31,595,180 |
|
|
|
|
|
Weighted average units outstanding
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
37,069,090 |
|
|
Diluted
|
|
|
|
|
|
|
38,871,400 |
|
|
|
3. |
GOODWILL AND INTANGIBLE ASSETS |
Goodwill balances and the changes therein are as follows:
|
|
|
|
|
|
Balance as of December 31, 2002
|
|
$ |
117,095 |
|
|
Goodwill acquired during the year
|
|
|
|
|
|
Adjustments to goodwill for purchase price allocated
|
|
|
41,630 |
|
|
|
|
|
Balance as of December 31, 2003
|
|
|
158,725 |
|
|
Goodwill acquired during the year
|
|
|
22,123 |
|
|
|
|
|
Balance as of December 31, 2004
|
|
$ |
180,848 |
|
|
|
|
|
The aggregate amount of goodwill related to the Acquired
Subsidiaries in 2002 was $117,064 and was increased in 2003 by
$41,630 to account for the purchase price adjustments. The
purchase price adjustment during 2003 was assigned to each unit
based upon the corresponding impact of the purchase price
adjustments. Goodwill was assigned to its two reporting units,
which are also its reporting segments. At December 31, 2004
and 2003 goodwill of $78,339 and $78,339, respectively, was
assigned to the Medicare reporting unit, and $102,509 and
$80,386, respectively, was assigned to the Medicaid reporting
unit. The aggregate amount of goodwill relating to the purchase
of Harmony effective June 2004 was $22,123 and was all assigned
to the
F-27
WELLCARE HEALTH PLANS, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL
STATEMENTS (Continued)
Medicaid reporting unit. The Company had no impairment losses or
any write-offs of goodwill during 2004 and 2003.
The following is a summary of the acquired intangible assets
resulting from business acquisitions as of December 31,
2004 and 2003:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
|
Gross Carrying | |
|
Accumulated | |
|
Gross Carrying | |
|
Accumulated | |
|
|
Amount | |
|
Amortization | |
|
Amount | |
|
Amortization | |
|
|
| |
|
| |
|
| |
|
| |
Provider network
|
|
$ |
5,517 |
|
|
$ |
(2,467 |
) |
|
$ |
3,800 |
|
|
$ |
(1,274 |
) |
Membership contracts
|
|
|
10,960 |
|
|
|
(6,867 |
) |
|
|
6,000 |
|
|
|
(4,870 |
) |
Trademark
|
|
|
10,443 |
|
|
|
(1,243 |
) |
|
|
6,500 |
|
|
|
(661 |
) |
Noncompete agreements
|
|
|
4,433 |
|
|
|
(1,393 |
) |
|
|
2,500 |
|
|
|
(652 |
) |
Licenses and permits
|
|
|
985 |
|
|
|
(159 |
) |
|
|
985 |
|
|
|
(93 |
) |
State contracts
|
|
|
5,467 |
|
|
|
(235 |
) |
|
|
185 |
|
|
|
(17 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
37,805 |
|
|
$ |
(12,364 |
) |
|
$ |
19,970 |
|
|
$ |
(7,567 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization expense for the years ended December 31, 2004
and 2003 and the five-month period ended December 31, 2002
was $4,797, $4,537, and $3,030, respectively. Amortization
expense expected to be recognized during fiscal years subsequent
to December 31, 2004 is as follows:
|
|
|
|
|
2005
|
|
$ |
4,636 |
|
2006
|
|
|
4,180 |
|
2007
|
|
|
2,146 |
|
2008
|
|
|
1,845 |
|
2009
|
|
|
1,620 |
|
2010 and thereafter
|
|
|
11,014 |
|
|
|
|
|
|
|
$ |
25,441 |
|
|
|
|
|
The weighted-average amortization periods of the acquired
intangible assets resulting from the business acquisitions are
as follows:
|
|
|
|
|
|
|
Weighted-Average | |
|
|
Amortization Period | |
|
|
(In Years) | |
|
|
| |
Provider network
|
|
|
8.94 |
|
Membership contracts
|
|
|
3.42 |
|
Trademark
|
|
|
15.00 |
|
Noncompete agreements
|
|
|
5.00 |
|
Licenses and permits
|
|
|
15.00 |
|
State contracts
|
|
|
15.00 |
|
Total intangibles
|
|
|
10.74 |
|
F-28
WELLCARE HEALTH PLANS, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL
STATEMENTS (Continued)
The amortized cost, gross unrealized gains, gross unrealized
losses and fair value of available for sale short-term
investments are as follows at December 31, 2004 and 2003.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross | |
|
Gross |
|
|
|
|
Amortized | |
|
Unrealized | |
|
Unrealized |
|
Estimated | |
|
|
Cost | |
|
Gains | |
|
Losses |
|
Fair Value | |
December 31, 2004 |
|
| |
|
| |
|
|
|
| |
Available for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipal variable rate bonds
|
|
$ |
10,630 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
10,630 |
|
|
Certificates of deposit
|
|
|
39,711 |
|
|
|
|
|
|
|
|
|
|
|
39,711 |
|
|
Treasury Bills
|
|
|
25,174 |
|
|
|
|
|
|
|
|
|
|
|
25,174 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
75,515 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
75,515 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2003 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificate of deposit
|
|
$ |
33,777 |
|
|
$ |
1 |
|
|
$ |
|
|
|
$ |
33,778 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contractual maturity available for sale short-term investments
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Within | |
|
1 Through | |
|
5 Through | |
|
|
|
|
Total | |
|
1 Year | |
|
5 Years | |
|
10 Years | |
|
Thereafter | |
December 31, 2004 |
|
| |
|
| |
|
| |
|
| |
|
| |
Available for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipal variable rate bonds
|
|
$ |
10,630 |
|
|
$ |
|
|
|
$ |
770 |
|
|
$ |
2,550 |
|
|
$ |
7,310 |
|
|
Certificates of deposit
|
|
|
39,711 |
|
|
|
14,127 |
|
|
|
25,584 |
|
|
|
|
|
|
|
|
|
|
Treasury Bills
|
|
|
25,174 |
|
|
|
25,174 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
75,515 |
|
|
$ |
39,301 |
|
|
$ |
26,354 |
|
|
$ |
2,550 |
|
|
$ |
7,310 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2003 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificates of deposit
|
|
$ |
33,778 |
|
|
$ |
33,675 |
|
|
$ |
103 |
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual maturities may differ from contractual maturities due to
the exercise of prepayment options.
Available for sale investments are accounted for using a
specific identification basis. During the year ended
December 31, 2004, bond investments totaling $94,706 were
sold. No realized gains/(losses) were recorded for the years
ended December 31, 2004 and 2003, the five-month period
ended December 31, 2002 and the seven-month period ended
July 31, 2002.
Excluding investments in U.S. Treasury securities, the
Company is not exposed to any significant concentration of
credit risk in its fixed maturities portfolio.
|
|
5. |
RESTRICTED INVESTMENT ASSETS |
As a condition for licensure, the Company is required to
maintain certain funds on deposit or pledged to various state
agencies. Due to the nature of the states requirements,
these assets are classified as long-term
F-29
WELLCARE HEALTH PLANS, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL
STATEMENTS (Continued)
regardless of their contractual maturity dates. Accordingly, at
December 31, 2004 and 2003, the amortized cost, gross
unrealized gains, gross unrealized losses, and fair value of
these securities are summarized below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
Gross | |
|
Estimated | |
|
|
Amortized | |
|
Unrealized |
|
Unrealized | |
|
Fair | |
|
|
Cost | |
|
Gains |
|
Losses | |
|
Value | |
December 31, 2004 |
|
| |
|
|
|
| |
|
| |
Certificates of deposit
|
|
$ |
5,522 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
5,522 |
|
Money market funds
|
|
|
25,951 |
|
|
|
|
|
|
|
(3 |
) |
|
|
25,948 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
31,473 |
|
|
$ |
|
|
|
$ |
(3 |
) |
|
$ |
31,470 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2003 |
|
|
|
|
|
|
|
|
Certificates of deposit
|
|
$ |
4,001 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
4,001 |
|
Money market funds
|
|
|
17,391 |
|
|
|
2 |
|
|
|
|
|
|
|
17,393 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
21,392 |
|
|
$ |
2 |
|
|
$ |
|
|
|
$ |
21,394 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The contractual maturity of all assets categorized as restricted
investment assets are within one year.
At December 31, 2004 an unrealized loss of $3 was recorded
on certain money market funds. Unrealized losses on money market
funds are primarily attributable to changes in interest rates.
Management does not believe any unrealized losses represent an
other-than-temporary impairment based on its evaluation of
available evidence as of December 31, 2004.
No realized gains/(losses) were recorded for the years ended
December 31, 2004 and 2003, the five-month period ended
December 31, 2002 and the seven-month period ended
July 31, 2002.
|
|
6. |
PROPERTY AND EQUIPMENT |
Property and equipment is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
|
| |
|
| |
Land
|
|
$ |
42 |
|
|
$ |
42 |
|
Leasehold improvements
|
|
|
3,393 |
|
|
|
2,991 |
|
Computer equipment and software
|
|
|
6,908 |
|
|
|
3,570 |
|
Furniture and other equipment
|
|
|
4,664 |
|
|
|
3,389 |
|
|
|
|
|
|
|
|
|
|
|
15,007 |
|
|
|
9,992 |
|
Less accumulated depreciation
|
|
|
(2,420 |
) |
|
|
(5,275 |
) |
|
|
|
|
|
|
|
|
|
$ |
12,587 |
|
|
$ |
4,717 |
|
|
|
|
|
|
|
|
The Company recognized depreciation expense on property and
equipment of $2,896, $2,547, $703, and $1,239 for the years
ended December 31, 2004 and 2003, the five-month period
ended December 31, 2002, and the seven-month period ended
July 31, 2002, respectively.
F-30
WELLCARE HEALTH PLANS, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL
STATEMENTS (Continued)
|
|
7. |
MEDICAL BENEFITS PAYABLE |
The following table provides a reconciliation of the beginning
and ending balance of medical benefits payable for the following
periods:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor | |
|
|
Predecessor | |
|
|
| |
|
|
| |
|
|
|
|
Five-Month | |
|
|
Seven-Month | |
|
|
Year Ended | |
|
Year Ended | |
|
Period Ended | |
|
|
Period Ended | |
|
|
December 31, | |
|
December 31, | |
|
December 31, | |
|
|
July 31, | |
|
|
2004 | |
|
2003 | |
|
2002 | |
|
|
2002 | |
|
|
| |
|
| |
|
| |
|
|
| |
Balances as of beginning of period
|
|
$ |
148,297 |
|
|
$ |
113,670 |
|
|
$ |
109,054 |
|
|
|
$ |
98,314 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Opening medical benefits payable related to Harmony acquisition
|
|
|
18,160 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medical benefits incurred related to:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current period
|
|
|
1,151,948 |
|
|
|
884,703 |
|
|
|
348,079 |
|
|
|
|
436,444 |
|
Prior periods
|
|
|
(26,388 |
) |
|
|
(23,650 |
) |
|
|
(6,316 |
) |
|
|
|
(1,520 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
1,125,560 |
|
|
|
861,053 |
|
|
|
341,763 |
|
|
|
|
434,924 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medical benefits paid related to:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current period
|
|
|
(985,844 |
) |
|
|
(751,826 |
) |
|
|
(249,076 |
) |
|
|
|
(335,938 |
) |
Prior periods
|
|
|
(115,578 |
) |
|
|
(74,600 |
) |
|
|
(88,071 |
) |
|
|
|
(88,246 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
(1,101,422 |
) |
|
|
(826,426 |
) |
|
|
(337,147 |
) |
|
|
|
(424,184 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances as of end of period
|
|
$ |
190,595 |
|
|
$ |
148,297 |
|
|
$ |
113,670 |
|
|
|
$ |
109,054 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medical benefits payable recorded at December 31, 2003
developed favorably by $26,388. The favorable development was
primarily due to realized medical benefits expense trends that
were less than initially assumed trends. The Company initially
assumed a medical benefits expense trend increase of 6.9% and
3.4% for the Medicaid and Medicare segments, respectively, at
December 31, 2003. Based on payments made subsequent to
December 31, 2003, for the dates of service prior to
December 31, 2003, the realized trends were an increase of
3.4% for the Medicaid segment and a decrease of 3.2% for the
Medicare segment.
Medical benefits payable recorded at December 31, 2002
developed favorably by $23,650. This favorable development was
primarily due to realized medical benefits expense trends that
were less than initially assumed trends. The Company initially
assumed a medical benefits expense trend increase of 7.8% and a
decrease of 4.1% for the Medicaid and Medicare segments,
respectively, at December 31, 2002. Based upon payments
made subsequent to December 31, 2002, for dates of service
prior to December 31, 2002, the realized trends were an
increase of 4.5% for the Medicaid segment and a decrease of 5.4%
for the Medicare segment. Medical benefits payable at
July 31, 2002 developed favorably by $6,316 due primarily
to lower utilization of medical services than anticipated.
F-31
WELLCARE HEALTH PLANS, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL
STATEMENTS (Continued)
The Companys outstanding debt at December 31, 2004
and 2003 consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt | |
|
Other | |
|
|
| |
|
| |
|
|
December 31, | |
|
December 31, | |
|
December 31, |
|
December 31, | |
|
|
2004 | |
|
2003 | |
|
2004 |
|
2003 | |
|
|
| |
|
| |
|
|
|
| |
Line of credit
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Note payable
|
|
|
25,000 |
|
|
|
119,738 |
|
|
|
|
|
|
|
15,903 |
|
Term loan facility
|
|
|
158,501 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
114 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
183,501 |
|
|
|
119,738 |
|
|
|
|
|
|
|
16,017 |
|
Less: current portion of long term debt
|
|
|
(1,600 |
) |
|
|
(48,170 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
181,901 |
|
|
$ |
71,568 |
|
|
$ |
|
|
|
$ |
16,017 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In May 2004, the Company and certain subsidiaries entered into a
credit agreement (the Credit Agreement) and obtained
two new credit facilities, consisting of a senior secured term
loan facility in the amount of $160,000 and a revolving credit
facility in the amount of $50,000, of which $10,000 is available
for short-term borrowings on a swingline basis. Interest is
payable quarterly at a rate per annum based on the optional
rates available to the Company. The Company has the option to
select either (a) LIBOR plus a 4 percent margin or
(b) the greater of (i) prime or (ii) the federal
funds rate plus 0.50%, plus a margin of 3 percent. In May
2004, the Company chose the six month LIBOR rate option of
5.5625%. On December 2004, the Company also selected the six
month LIBOR rate option of 6.49%. The term loan facility will
mature in May 2009, and the revolving credit facility will
mature in May 2008. The Company is a party to this agreement for
the purpose of guaranteeing the indebtedness of its subsidiaries
that are parties to the agreement.
Proceeds from the term loan were used to make the $85,000
principal payment on the note payable to related party described
below. Additionally, the Company used $18,263 of the term loan
proceeds to prepay the $16,271 senior discount note issued in
March 2003 by a subsidiary of the Company, and terminated the
previously available $15,000 line of credit obtained in March
2003 by a subsidiary of the Company. The Company also used
$3,508 of the proceeds to pay transaction fees and expenses. No
amounts have been drawn on the $50,000 revolving credit facility
since its inception.
The Credit Agreement contains various restrictive covenants
which limit, among other things, the Companys ability to
incur indebtedness and liens and to enter into business
combination transactions. In addition, the Company must maintain
certain fixed charge and leverage ratios. The Company believes
that it is in compliance with the financial ratios at
December 31, 2004.
|
|
|
Note Payable to Related Party |
In conjunction with the Companys acquisition of the
Acquired Subsidiaries described in Note 2, the Company
issued a note (the Seller Note) payable to the
former stockholders of WC, HE, CHMI and LLC (the Florida
Companies). The Seller Note is secured by a portion of WCG
(the Seller Note) common stock, had an initial
principal amount of $53,000, bears interest at the rate of
5.25% per annum and is payable from September 15, 2003
through September 15, 2006. The principal amount of the
Seller Note was subject to adjustment in 2003 and 2004 based
upon a number of earnouts and other contingencies set forth in
the purchase agreement, including the capital adequacy of
certain of the Florida Companies as of the closing date and the
earnings of the Florida Medicare business during fiscal 2002, as
described in Note 2. The Company
F-32
WELLCARE HEALTH PLANS, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL
STATEMENTS (Continued)
entered into a settlement agreement in February 2004 that fixed
the amount of the purchase price and the Seller Note.
Concurrently upon entering into the Credit Agreement, the
Company entered into an agreement with the former stockholders
to repay $85,000 of the principal balance on the Seller Note. In
addition, $3,000 of the principal balance of the Seller Note was
forgiven in consideration for that prepayment which was netted
off against interest expense. In August 2004, the Company
entered into an agreement with the former stockholders to prepay
an additional $3,241 of the principal balance of the Seller
Note. The remaining principal balance of the Seller Note,
$25,000, is due on September 15, 2006 and would be due
immediately upon a sale of the Company.
Scheduled maturities of the Companys debt, including the
accreted amount of the senior discount notes, during fiscal
years subsequent to December 31, 2004 are as follows:
|
|
|
|
|
2005
|
|
$ |
1,600 |
|
2006
|
|
|
26,600 |
|
2007
|
|
|
1,600 |
|
2008
|
|
|
1,600 |
|
2009 and thereafter
|
|
|
152,101 |
|
|
|
|
|
|
|
$ |
183,501 |
|
|
|
|
|
|
|
9. |
COMMITMENTS AND CONTINGENCIES |
The Company is involved in legal actions in the normal course of
business, some of which seek monetary damages, including claims
for punitive damages, which are not covered by insurance. These
actions, when finally concluded and determined, will not, in the
opinion of management, have a material adverse effect on the
Companys financial position, results of operations or cash
flows.
The Company believes that it has obtained adequate insurance or
rights to indemnification or, where appropriate, has established
adequate reserves in connection with these legal proceedings.
The Company has operating leases for office space, electronic
data processing equipment, automobiles, software and terminal
lines. Rental expense totaled $4,139, $2,273, $773 and $993 for
the years ended December 31, 2004 and 2003, the five-month
period ended December 31, 2002, and the seven-month period
ended July 31, 2002, respectively. Future minimum lease
payments under noncancelable operating leases with initial or
remaining lease terms in excess of one year at December 31,
2004 were:
|
|
|
|
|
2005
|
|
$ |
5,129 |
|
2006
|
|
|
4,760 |
|
2007
|
|
|
4,805 |
|
2008
|
|
|
4,860 |
|
2009
|
|
|
4,687 |
|
2010 and thereafter
|
|
|
7,756 |
|
|
|
|
|
|
|
$ |
31,997 |
|
|
|
|
|
F-33
WELLCARE HEALTH PLANS, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL
STATEMENTS (Continued)
Under Holdings Second Amended and Restated Limited
Liability Company Agreement (the LLC Agreement),
membership interests in Holdings were represented by issued and
outstanding Units, which were classified into Class A
Common Units, Class B Common Units and Class C Common
Units.
Upon the execution of the LLC Agreement as of September 5,
2002, Holdings effected a unit split, pursuant to which each
common unit then issued and outstanding was automatically
converted into
3331/3 units
of the same class of common unit.
Each Class A Common Unit issued accrued, on a quarterly
basis, an amount, referred to as the Class A Common
Yield, equal to 8% per annum on the sum of
(i) the Class A Common Capital Value of $3.00 per
Class A Common Unit, less any portion of such amount
previously distributed to the holder thereof pursuant to the
terms of the LLC Agreement, and (ii) the accrued but unpaid
portion of the Class A Common Yield for all prior quarterly
periods.
Class A Common Units and Class C Common Units were
voting units, and entitled the holders thereof to one vote for
each such Common Unit on all matters voted upon by members of
the Company. Class B Common Units were non-voting units.
Pursuant to the terms of the LLC Agreement, any distribution of
cash or assets of the Company was required to be made in the
following order and priority:
First, to the holders of Class A Common Units, in
proportion to and to the extent of the accrued but unpaid
Class A Common Yield on all outstanding Class A Common
Units at the time of the distribution, until the entire amount
of the accrued but unpaid Class A Common Yield on all
outstanding Class A Common Units has been paid in full;
Second, to the holders of Class A Common Units, in
proportion to and to the extent of the Class A Common
Capital Value of $3.00 per Class A Common Unit not
distributed to the holders prior to the time of the
distribution, until the entire amount of the Class A Common
Capital Value on all outstanding Class A Common Units has
been paid in full;
Third, to the holders of Class B Common Units, in
proportion to and to the extent of the Class B Common
Capital Value per Class B Common Unit not distributed to
the holders prior to the time of the distribution, until the
entire amount of the Class B Common Capital Value on all
outstanding Class B Common Units has been paid in
full; and
Fourth, pro rata, based on the total number of common units of
all classes outstanding, to the holders of all common units of
all classes.
Holdings did not make any distributions during the year ended
December 31, 2003. The aggregate amount of cumulative
distribution preference, Class A Common Yield, in arrears
at December 31, 2003 was $8,353. A cumulative yield of
$11,525 was distributed as common shares pursuant to the
Reorganization.
Prior to the Reorganization, Holdings entered into agreements
with certain members of management and others providing for the
sale and issuance of Class A Common Units and Class C
Common Units. The Class C Common Units issued to management
are subject to certain vesting restrictions, as set forth in the
applicable agreements. As of December 31, 2003, a
receivable has been recorded as a reduction of units outstanding
and paid in capital for the amount of units issued to one of the
Companys board members. The receivable was collected in
2004.
In September 2002, the Company adopted two equity plans, the
2002 Senior Executive Equity Plan (the Executive
Plan) and the 2002 Employee Option Plan (the
Employee Plan). Both plans permit senior executives
and other key employees selected to participate to acquire
ownership interests in the Company. The
F-34
WELLCARE HEALTH PLANS, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL
STATEMENTS (Continued)
Board of Directors reserved an aggregate of 4,432,693 Common
Units for issuance under the Executive Plan and the Employee
Plan.
Under the Executive Plan, participants were given the
opportunity to purchase a specified number of Class A
Common Units. As a result of such purchase, participants were
granted a specified number of Class C Common Units, which
are subject to vesting over time. During the six months ended
June 30, 2004 (prior to the Companys initial public
offering), year ended December 31, 2003 and the five-month
period ending December 31, 2002, the Company sold 7,386,
98,333 and 0 Class A Common Units, respectively, pursuant
to the plan, for net proceeds of $50, $295 and $0, respectively.
Under the Employee Plan, participants were granted options to
purchase Class A Common Units, at an exercise price
specified in each individual option grant agreement.
In general, Class A Common Units sold and Class C
Common Units granted under the Executive Plan, and all
Class A Common Units issued upon exercise of options
granted under the Employee Plan, are subject to the
Companys right of repurchase upon the termination of the
participants employment with the Company or any of its
subsidiaries. During the years ended December 31, 2004 and
2003, 0 and 3,333 Class A Common Units and 0 and
36,925 Class C Common Units, respectively, were repurchased
at the then fair market value at date of repurchase.
Upon the closing of the Reorganization, the Class A Common
Units and Class C Common Units issued and granted under the
Senior Executive Equity Plan were converted automatically into
shares of common stock and the options granted under the
Employee Option Plan were converted automatically into
equivalent options to purchase the Companys common stock.
Each granted share and option is subject to the same vesting
terms as in each holders original subscription or option
agreement, as applicable. The number of shares subject to each
option and their exercise price were adjusted to reflect the
effect of the restructuring. The Company does not intend to
issue any additional securities under the Executive Plan or the
Employee Plan.
Based on the initial public offering price of $17.00 per
share, holders of common units received an aggregate of
29,735,757 shares of common stock in connection with the
merger, reflecting (1) a conversion ratio equivalent to
0.813 shares of common stock for each common unit and
(2) a distribution of the Class A Common Yield as
4,833,244 common shares.
In July 2004, the Companys board of directors approved and
its shareholders adopted the Companys 2004 Equity
Incentive Plan. Subject to certain discretionary increases by
the Companys board of directors, a maximum of
4,688,532 shares of common stock is reserved for issuance
to the Companys directors, associates and others under
this plan.
In November 2004, the Companys board of directors approved
the Companys 2005 Employee Stock Purchase Plan. A maximum
of 387,714 shares of common stock is reserved for issuance
under the plan.
On July 31, 2002, in conjunction with the acquisition of
the Florida Companies, Holdings issued to WCG warrants to
purchase 2,287,037 Class B Common Units at an exercise
price of $3.00 per Class B Common Unit. On the same
date, in connection with WCGs acquisition of the Florida
Companies, WCG transferred the warrants to certain of the former
stockholders of the Florida Companies as part of the purchase
price paid by WCG for the Florida Companies. The warrants had a
10-year term and were nontransferable during a restricted period
from the date of issuance until the closing of a public offering
registered with the Securities and Exchange Commission under the
Securities Act of 1933. Management believes the warrants were
issued at the then fair market value. The warrants were
exercised in December 2003 by the former stockholders. The
former stockholders issued a non-recourse note for the aggregate
purchase price of $6,861
F-35
WELLCARE HEALTH PLANS, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL
STATEMENTS (Continued)
for the units; accordingly, the note has been shown as an offset
to the number of units issued and outstanding and paid in
capital at December 31, 2003.
|
|
|
Restricted Common Share Activity |
All equity amounts hereafter reflect the conversion to common
stock.
The following table summarizes information with respect to
restricted common share activity:
|
|
|
|
|
Restricted common shares granted in 2003
|
|
|
2,366,360 |
|
Restricted common shares granted in 2004
|
|
|
|
|
Equity-based compensation for year ended December 31, 2003
|
|
$ |
168 |
|
Equity-based compensation for year ended December 31, 2004
|
|
$ |
474 |
|
Restricted common shares subject to repurchase at
December 31, 2003
|
|
|
1,384,776 |
|
Restricted common shares subject to repurchase at
December 31, 2004
|
|
|
2,432,280 |
|
Restricted common shares forfeited in 2003
|
|
|
100,995 |
|
Restricted common shares forfeited in 2004
|
|
|
28,460 |
|
Equity Option Activity
The following table summarizes equity option activity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended | |
|
Year Ended | |
|
|
December 31, 2004 | |
|
December 31, 2003 | |
|
|
| |
|
| |
|
|
|
|
Weighted | |
|
|
|
Weighted | |
|
|
|
|
Average | |
|
|
|
Average | |
|
|
|
|
Exercise | |
|
|
|
Exercise | |
|
|
Options | |
|
Price | |
|
Options | |
|
Price | |
|
|
| |
|
| |
|
| |
|
| |
Outstanding at beginning of year
|
|
|
894,058 |
|
|
$ |
4.54 |
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
1,709,150 |
|
|
$ |
16.93 |
|
|
|
894,058 |
|
|
$ |
4.54 |
|
|
Exercised
|
|
|
(21,565 |
) |
|
$ |
3.83 |
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(166,568 |
) |
|
$ |
7.30 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at end of period
|
|
|
2,415,075 |
|
|
$ |
13.12 |
|
|
|
894,058 |
|
|
$ |
4.54 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at end of period
|
|
|
358,674 |
|
|
$ |
4.76 |
|
|
|
61,326 |
|
|
$ |
3.69 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-36
WELLCARE HEALTH PLANS, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL
STATEMENTS (Continued)
The following table summarizes information regarding options
outstanding and exercisable:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding | |
|
Options Exercisable | |
|
|
| |
|
| |
|
|
|
|
Weighted | |
|
|
|
|
|
|
|
|
Average | |
|
|
|
|
|
|
|
|
Remaining | |
|
Weighted | |
|
|
|
Weighted | |
Range of |
|
|
|
Contractual | |
|
Average | |
|
|
|
Average | |
Exercise |
|
Number | |
|
Life | |
|
Exercise | |
|
Number | |
|
Exercise | |
Prices |
|
Outstanding | |
|
(Years) | |
|
Price | |
|
Exercisable | |
|
Price | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
December 31, 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ 3.69
|
|
|
544,623 |
|
|
|
8.7 |
|
|
$ |
3.69 |
|
|
|
254,735 |
|
|
$ |
3.69 |
|
$ 6.47 $ 8.33
|
|
|
690,684 |
|
|
|
9.1 |
|
|
$ |
7.73 |
|
|
|
98,731 |
|
|
$ |
6.88 |
|
$17.00 $23.80
|
|
|
1,116,768 |
|
|
|
9.7 |
|
|
$ |
20.02 |
|
|
|
5,208 |
|
|
$ |
17.00 |
|
$26.38 $33.66
|
|
|
63,000 |
|
|
|
9.9 |
|
|
$ |
31.37 |
|
|
|
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,415,075 |
|
|
|
9.3 |
|
|
$ |
13.12 |
|
|
|
358,674 |
|
|
$ |
4.76 |
|
December 31, 2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ 3.69 $ 6.47
|
|
|
894,058 |
|
|
|
9.5 |
|
|
$ |
4.54 |
|
|
|
61,326 |
|
|
$ |
3.69 |
|
The minimum fair value of each option grant is estimated on the
date of grant using the Black-Scholes option pricing model with
the following assumptions used for the grants during the period:
|
|
|
|
|
|
|
|
|
|
|
Year Ended | |
|
Year Ended | |
|
|
December 31, | |
|
December 31, | |
|
|
2004 | |
|
2003 | |
|
|
| |
|
| |
Weighted average risk-free interest rate
|
|
|
4.30% |
|
|
|
3.98% |
|
Range of risk-free interest rates
|
|
|
3.89% 4.85% |
|
|
|
3.37% 4.52% |
|
Term
|
|
|
6.69 |
|
|
|
6.75 |
|
Expected dividend yield
|
|
|
0% |
|
|
|
0% |
|
Volatility
|
|
|
50.2% |
|
|
|
50.2% |
|
Weighted average fair value for options granted
|
|
|
$14.98 |
|
|
|
$4.54 |
|
|
|
11. |
STATUTORY CAPITAL AND DIVIDEND RESTRICTIONS |
State insurance laws and regulations prescribe accounting
practices for determining statutory net income and surplus for
HMOs and require, among other matters, the filing of financial
statements prepared in accordance with statutory accounting
practices prescribed or permitted for HMOs. State insurance
regulations also require the maintenance of a minimum compulsory
surplus based on various factors. At December 31, 2004, the
Companys HMO subsidiaries were in compliance with these
minimum compulsory surplus requirements. The combined statutory
capital and surplus of the Companys HMO subsidiaries was
$116,725 and $59,534 at December 31, 2004 and 2003,
respectively, compared to the required surplus of $53,204 and
$34,544 at December 31, 2004 and 2003, respectively.
Dividends paid by the Companys HMO subsidiaries are
limited by state insurance regulations. The insurance regulator
in each state of domicile may disapprove any dividend that,
together with other dividends paid by a subsidiary in the prior
twelve months, exceeds the regulatory maximum as computed for
the HMO based on its statutory surplus and net income.
F-37
WELLCARE HEALTH PLANS, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL
STATEMENTS (Continued)
The Company and its subsidiaries file a consolidated federal
income tax return. The Company and the subsidiaries file
separate state franchise, income and premium tax returns as
applicable.
The following table provides components of income tax expense
for the following periods:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Five-Month | |
|
|
Year Ended | |
|
Year Ended | |
|
Period Ended | |
|
|
December 31, | |
|
December 31, | |
|
December 31, | |
|
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$ |
23,411 |
|
|
$ |
13,465 |
|
|
$ |
8,705 |
|
|
State
|
|
|
4,065 |
|
|
|
1,906 |
|
|
|
1,820 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27,476 |
|
|
|
15,371 |
|
|
|
10,525 |
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
3,335 |
|
|
|
1,398 |
|
|
|
(4,980 |
) |
|
State
|
|
|
445 |
|
|
|
186 |
|
|
|
(740 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
3,780 |
|
|
|
1,584 |
|
|
|
(5,720 |
) |
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
31,256 |
|
|
$ |
16,955 |
|
|
$ |
4,805 |
|
|
|
|
|
|
|
|
|
|
|
A reconciliation of income tax at the effective rate to income
tax at the statutory federal rate is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Five-Month | |
|
|
Year Ended | |
|
Year Ended | |
|
Period Ended | |
|
|
December 31, | |
|
December 31, | |
|
December 31, | |
|
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
Income tax expense at statutory rate
|
|
$ |
28,176 |
|
|
$ |
14,256 |
|
|
$ |
3,312 |
|
Increase (reduction) resulting from:
|
|
|
|
|
|
|
|
|
|
|
|
|
State income tax, net of federal benefit
|
|
|
2,932 |
|
|
|
1,611 |
|
|
|
708 |
|
Provision to return differences
|
|
|
|
|
|
|
403 |
|
|
|
|
|
Effect of non-deductible expenses and other, net
|
|
|
148 |
|
|
|
685 |
|
|
|
785 |
|
|
|
|
|
|
|
|
|
|
|
Total income tax expense
|
|
$ |
31,256 |
|
|
$ |
16,955 |
|
|
$ |
4,805 |
|
|
|
|
|
|
|
|
|
|
|
The significant components of the Companys deferred tax
assets and liabilities are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
Deferred tax assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medical and other benefits discounting
|
|
$ |
6,215 |
|
|
$ |
2,178 |
|
|
$ |
1,890 |
|
|
Unearned premium discounting
|
|
|
4,964 |
|
|
|
5,968 |
|
|
|
1,809 |
|
|
Accrued expenses and other
|
|
|
4,183 |
|
|
|
3,890 |
|
|
|
5,198 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,362 |
|
|
|
12,036 |
|
|
|
8,897 |
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill, other intangibles and other
|
|
|
14,818 |
|
|
|
4,155 |
|
|
|
99 |
|
|
Prepaid liabilities
|
|
|
|
|
|
|
1,068 |
|
|
|
421 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,818 |
|
|
|
5,223 |
|
|
|
520 |
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax asset
|
|
$ |
544 |
|
|
$ |
6,813 |
|
|
$ |
8,377 |
|
|
|
|
|
|
|
|
|
|
|
F-38
WELLCARE HEALTH PLANS, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL
STATEMENTS (Continued)
|
|
13. |
RELATED-PARTY TRANSACTIONS |
The Company reimbursed expenses and paid transaction fees of $0,
$83 and $3,668, for the years ended December 31, 2004, 2003
and the five-month period ended December 31, 2002,
respectively, to the majority stockholder of the Company. These
reimbursed expenses have been included within selling, general
and administrative expenses.
The Seller Note described in Note 8 related to the
acquisition of the Acquired Subsidiaries are due to the former
stockholders of the Florida Companies, one of whom also serves
as a director of WC and HE and one of whom is an executive
officer of the Company. The Seller Note is secured by a portion
of WCGs common stock, had an initial principal amount of
$53,000 plus earnouts and other purchase price adjustments that
were subject to certain balance sheet amounts and operating
results during 2002, as determined in accordance with the
purchase agreement, bears interest at the rate of 5.25% per
annum, and is payable from September 15, 2003 through
September 15, 2005. The Company entered into a settlement
agreement on February 12, 2004 that fixed the amount of the
purchase price and Seller Note. Concurrently, upon entering into
the Credit Agreement as described in Note 8, the Company
entered into an agreement with the former stockholders to prepay
$85,000 of the principal balance on the Seller Note. In
addition, $3,000 of the principal balance of the Seller Note was
forgiven in consideration for that prepayment which was netted
off against interest expense. In August 2004, the Company
entered into an agreement with the former stockholders to prepay
an additional $3,241 of the principal balance of the Seller
Note. The remaining principal balance of the Seller Note,
$25,000, is due on September 15, 2006 and would be due
immediately upon sale of the Company.
For the years ended December 31, 2004, 2003 and the
five-month period ended December 31, 2002, the Company
incurred consulting fees of $0, $35 and $190, respectively, to
former stockholders of the Acquired Subsidiaries.
In March 2003, the Company entered into an agreement with
IntelliClaim, Inc. pursuant to which the Company licenses
software and purchases maintenance, support and related services
from IntelliClaim. A member of the Companys board of
directors is the Chairman and Chief Executive Officer of
IntelliClaim. In 2004 and 2003, the Company purchased $219 and
$263 of services in the aggregate from IntelliClaim,
respectively.
|
|
|
Bay Area Primary Care and Bay Area Multi Specialty
Group |
The Company conducts business with Bay Area Primary Care and Bay
Area Multi Specialty Group, which provide medical and
professional services to a portion of the Companys
membership base. These entities are owned and controlled by a
former stockholder of the Florida Companies, who also serves as
a director of WC and HE. In 2004, 2003 and 2002, the
Company purchased $1,104, $1,131 and $2,280 in services,
respectively, in the aggregate from Bay Area Primary Care and
Bay Multi Specialty Group.
|
|
|
WellCare Healthy Communities Foundation |
During 2004, the Company contributed $500 to its newly created
charitable foundation, WellCare Healthy Communities Foundation.
F-39
WELLCARE HEALTH PLANS, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL
STATEMENTS (Continued)
|
|
14. |
EMPLOYEE BENEFIT PLAN |
The Company, through its subsidiary, CHMI, began offering a
defined contribution 401(k) in December 2002. The amount of
matching contribution expense incurred in the years ended
December 31, 2004 and 2003 and the five-month period ended
December 31, 2002 was $266, $241 and $14, respectively. The
Predecessor had a separate defined contribution 401(k) plan and
made matching contributions of $127 for the Predecessor
seven-month period ended July 31, 2002.
The Company has two reportable segments: Medicaid and Medicare.
The segments were determined based upon the type of governmental
administration and funding of the health plans. Segment
performance is evaluated based upon earnings from operations
without corporate allocations. Accounting policies of the
segments are the same as those described in Note 1.
The Medicaid segment includes operations to provide healthcare
services to recipients that are eligible for state supported
programs including Medicaid and childrens health programs.
The Medicare segment includes operations to provide healthcare
services to recipients who are eligible for the federally
supported Medicare program. The Company no longer operates a
commercial line of business.
Assets and equity details by segment have not been disclosed, as
they are not reported internally by the Company.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor | |
|
Predecessor | |
|
|
| |
|
| |
|
|
|
|
Five-Month | |
|
Seven-Month | |
|
|
Year Ended | |
|
Year Ended | |
|
Period Ended | |
|
Period Ended | |
|
|
December 31, | |
|
December 31, | |
|
December 31, | |
|
July 31, | |
|
|
2004 | |
|
2003 | |
|
2002 | |
|
2002 | |
|
|
| |
|
| |
|
| |
|
| |
Premium Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medicaid
|
|
$ |
1,055,000 |
|
|
$ |
740,078 |
|
|
$ |
267,911 |
|
|
$ |
329,164 |
|
Medicare
|
|
|
334,760 |
|
|
|
288,330 |
|
|
|
120,814 |
|
|
|
170,073 |
|
Corporate and other
|
|
|
1,136 |
|
|
|
14,444 |
|
|
|
9,928 |
|
|
|
17,976 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,390,896 |
|
|
|
1,042,852 |
|
|
|
398,653 |
|
|
|
517,213 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medical benefits expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medicaid
|
|
|
851,153 |
|
|
|
609,233 |
|
|
|
222,007 |
|
|
|
274,672 |
|
Medicare
|
|
|
275,348 |
|
|
|
238,933 |
|
|
|
107,384 |
|
|
|
145,768 |
|
Corporate and other
|
|
|
(941 |
) |
|
|
12,887 |
|
|
|
12,372 |
|
|
|
14,484 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,125,560 |
|
|
|
861,053 |
|
|
|
341,763 |
|
|
|
434,924 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Margin:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medicaid
|
|
|
203,847 |
|
|
|
130,845 |
|
|
|
45,904 |
|
|
|
54,492 |
|
Medicare
|
|
|
59,412 |
|
|
|
49,397 |
|
|
|
13,430 |
|
|
|
24,305 |
|
Corporate and other
|
|
|
2,077 |
|
|
|
1,557 |
|
|
|
(2,444 |
) |
|
|
3,492 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
265,336 |
|
|
$ |
181,799 |
|
|
$ |
56,890 |
|
|
$ |
82,289 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-40
WELLCARE HEALTH PLANS, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL
STATEMENTS (Continued)
|
|
16. |
QUARTERLY FINANCIAL INFORMATION (unaudited) |
Selected unaudited quarterly financial data in 2004 and 2003 are
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three-Month Period Ended | |
|
|
| |
|
|
March 31, | |
|
June 30, | |
|
September 30, | |
|
December 31, | |
|
|
2004 | |
|
2004 | |
|
2004 | |
|
2004 | |
|
|
| |
|
| |
|
| |
|
| |
Total revenues
|
|
$ |
301,836 |
|
|
$ |
321,431 |
|
|
$ |
374,644 |
|
|
$ |
397,292 |
|
Income before income taxes
|
|
|
9,686 |
|
|
|
14,654 |
|
|
|
26,912 |
|
|
|
29,254 |
|
Net income
|
|
|
5,822 |
|
|
|
8,936 |
|
|
$ |
16,793 |
|
|
$ |
17,699 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A common unit yield
|
|
|
(1,571 |
) |
|
|
(1,601 |
) |
|
|
|
|
|
|
|
|
Net income attributable to common units
|
|
$ |
4,251 |
|
|
$ |
7,335 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income per unit basic
|
|
$ |
0.15 |
|
|
$ |
0.26 |
|
|
|
|
|
|
|
|
|
Income per unit diluted
|
|
$ |
0.13 |
|
|
$ |
0.23 |
|
|
|
|
|
|
|
|
|
Net income attributable per common unit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable per common unit basic
|
|
|
|
|
|
|
|
|
|
$ |
0.48 |
|
|
$ |
0.50 |
|
Net income attributable per common unit diluted
|
|
|
|
|
|
|
|
|
|
$ |
0.45 |
|
|
$ |
0.46 |
|
Pro forma net income per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net income per common share basic
|
|
$ |
0.19 |
|
|
$ |
0.32 |
|
|
|
|
|
|
|
|
|
Pro forma net income per common share diluted
|
|
$ |
0.16 |
|
|
$ |
0.28 |
|
|
|
|
|
|
|
|
|
Period end membership
|
|
|
581,000 |
|
|
|
695,000 |
|
|
|
734,000 |
|
|
|
747,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three-Month Period Ended | |
|
|
| |
|
|
March 31, | |
|
June 30, | |
|
September 30, | |
|
December 31, | |
|
|
2003 | |
|
2003 | |
|
2003 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
| |
Total revenues
|
|
$ |
251,557 |
|
|
$ |
254,157 |
|
|
$ |
260,548 |
|
|
$ |
279,720 |
|
Income before income taxes
|
|
|
5,910 |
|
|
|
11,221 |
|
|
|
15,713 |
|
|
|
7,648 |
|
Net income
|
|
|
3,428 |
|
|
|
6,508 |
|
|
|
7,687 |
|
|
|
5,914 |
|
Class A common unit yield
|
|
|
(1,448 |
) |
|
|
(1,478 |
) |
|
|
(1,511 |
) |
|
|
(1,560 |
) |
Net income attributable to common units
|
|
$ |
1,980 |
|
|
$ |
5,030 |
|
|
$ |
6,176 |
|
|
$ |
4,354 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income per unit basic
|
|
$ |
0.07 |
|
|
$ |
0.19 |
|
|
$ |
0.23 |
|
|
$ |
0.16 |
|
Income per unit diluted
|
|
$ |
0.07 |
|
|
$ |
0.17 |
|
|
$ |
0.20 |
|
|
$ |
0.14 |
|
Period end membership
|
|
|
482,000 |
|
|
|
489,000 |
|
|
|
497,000 |
|
|
|
555,000 |
|
The sum of the quarterly earnings per unit amounts do not equal
the amount reported since per unit amounts are computed
independently for each quarter and for the full year based on
respective weighted-average units outstanding and other dilutive
potential units.
F-41
WELLCARE HEALTH PLANS, INC. PRO FORMA
PRO FORMA UNAUDITED STATEMENTS OF INCOME
The pro forma unaudited statements of income presented below
give effect to the acquisition of Harmony Health Systems, Inc.
(Harmony), an Illinois Corporation, by WCG Health
Management, Inc, a subsidiary of WellCare Health Plans, Inc.
(the Company). The pro forma unaudited financial
statements assume the merger had occurred as of January 1 for
purposes of the pro forma unaudited income statements for the
three months ended March 31, 2004 and the year ended
December 31, 2004. The pro forma unaudited financial
statements include the historical amounts of the Company and
Harmony adjusted to reflect the effects of the Companys
acquisition of Harmony.
The Company has accounted for the acquisition using the purchase
method of accounting. Therefore, the Company recorded the assets
(including identifiable intangible assets) and liabilities of
Harmony at their estimated fair value. The difference between
the purchase price and the estimated fair value of the net
assets and liabilities will result in goodwill. The effects of
the acquisition have been recorded in the Companys
consolidated balance sheet as of December 31, 2004.
The pro forma information, while helpful in illustrating the
financial characteristics of the combined Company under one set
of assumptions, should not be relied upon as being indicative of
the results that would actually have been obtained if the merger
had been in effect for the periods described above or the future
results of the combined Company.
The pro forma information should be read in conjunction with the
historical consolidated financial statements of the Company.
F-42
WELLCARE HEALTH PLANS, INC. PRO FORMA
UNAUDITED PRO FORMA STATEMENT OF INCOME
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2004 | |
|
|
| |
|
|
|
|
Harmony | |
|
|
|
WellCare Health | |
|
|
WellCare Health | |
|
Health | |
|
Pro Forma | |
|
Plans, Inc. | |
|
|
Plans, Inc. | |
|
Systems, Inc. | |
|
Adjustments | |
|
Pro Forma | |
|
|
| |
|
| |
|
| |
|
| |
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premium
|
|
$ |
301,250 |
|
|
$ |
31,685 |
|
|
|
|
|
|
$ |
332,935 |
|
Investment and other income
|
|
|
586 |
|
|
|
36 |
|
|
$ |
(13 |
)(A) |
|
|
609 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
301,836 |
|
|
|
31,721 |
|
|
|
(13 |
) |
|
|
333,544 |
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medical benefits
|
|
|
251,435 |
|
|
|
24,027 |
|
|
|
|
|
|
|
275,462 |
|
Selling, general and administrative
|
|
|
38,450 |
|
|
|
5,826 |
|
|
|
750 |
(B) |
|
|
45,026 |
|
Interest
|
|
|
2,265 |
|
|
|
2 |
|
|
|
550 |
(D) |
|
|
2,817 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
292,150 |
|
|
|
29,855 |
|
|
|
1,300 |
|
|
|
323,305 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income/(loss) before income taxes
|
|
|
9,686 |
|
|
|
1,866 |
|
|
|
(1,313 |
) |
|
|
10,239 |
|
Income tax expense (benefit)
|
|
|
3,864 |
|
|
|
726 |
|
|
|
(512 |
)(E) |
|
|
4,078 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
5,822 |
|
|
$ |
1,140 |
|
|
$ |
(801 |
) |
|
$ |
6,161 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income Per Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
0.16 |
|
|
|
|
|
|
|
|
|
|
$ |
0.17 |
(F) |
|
Diluted
|
|
$ |
0.15 |
|
|
|
|
|
|
|
|
|
|
$ |
0.16 |
(F) |
Number of Shares Outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
37,069,090 |
|
|
|
|
|
|
|
|
|
|
|
37,069,090 |
|
|
Diluted
|
|
|
38,871,400 |
|
|
|
|
|
|
|
|
|
|
|
38,871,400 |
|
See notes to the unaudited pro forma financial statements.
F-43
WELLCARE HEALTH PLANS, INC. PRO FORMA
UNAUDITED PRO FORMA STATEMENT OF INCOME
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2004 | |
|
|
| |
|
|
|
|
Harmony | |
|
|
|
WellCare Health | |
|
|
WellCare Health | |
|
Health | |
|
Pro Forma | |
|
Plans, Inc. Pro | |
|
|
Plans, Inc. | |
|
Systems, Inc. | |
|
Adjustments | |
|
Forma | |
|
|
| |
|
| |
|
| |
|
| |
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premium
|
|
$ |
1,390,896 |
|
|
$ |
52,976 |
|
|
|
|
|
|
$ |
1,443,872 |
|
Investment and other income
|
|
|
4,307 |
|
|
|
66 |
|
|
$ |
(64 |
)(A) |
|
|
4,309 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
1,395,203 |
|
|
|
53,042 |
|
|
|
(64 |
) |
|
|
1,448,181 |
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medical benefits
|
|
|
1,125,560 |
|
|
|
39,924 |
|
|
|
|
|
|
|
1,165,484 |
|
Selling, general and administrative
|
|
|
171,257 |
|
|
|
16,157 |
|
|
|
(5,470 |
)(B)(C) |
|
|
181,944 |
|
Depreciation and amortization
|
|
|
7,715 |
|
|
|
304 |
|
|
|
|
|
|
|
8,019 |
|
Interest
|
|
|
10,165 |
|
|
|
14 |
|
|
|
927 |
(D) |
|
|
11,106 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
1,314,697 |
|
|
|
56,399 |
|
|
|
(4,543 |
) |
|
|
1,366,553 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income/(loss) before income taxes
|
|
|
80,506 |
|
|
|
(3,357 |
) |
|
|
4,479 |
|
|
|
81,628 |
|
Income tax expense (benefit)
|
|
|
31,256 |
|
|
|
(1,665 |
) |
|
|
1,738 |
(E) |
|
|
31,329 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
49,250 |
|
|
$ |
(1,692 |
) |
|
$ |
2,741 |
|
|
$ |
50,299 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income Per Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
1.70 |
|
|
|
|
|
|
|
|
|
|
$ |
1.73 |
(F) |
|
Diluted
|
|
$ |
1.56 |
|
|
|
|
|
|
|
|
|
|
$ |
1.59 |
(F) |
Number of Shares Outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
29,011,115 |
|
|
|
|
|
|
|
|
|
|
|
29,011,115 |
|
|
Diluted
|
|
|
31,595,180 |
|
|
|
|
|
|
|
|
|
|
|
31,595,180 |
|
See notes to the unaudited pro forma financial statements.
F-44
WELLCARE HEALTH PLANS, INC. PRO FORMA
NOTES TO PRO FORMA UNAUDITED STATEMENTS OF INCOME
(Dollars in thousands)
|
|
|
(A) |
|
Represents the estimated loss of investment income earned on the
$10,291 cash paid to Harmonys equityholders of $13 and $64
for the three months and the five months ended March 31,
2004 and May 31, 2004, respectively. |
|
(B) |
|
Represents the amortization expense recorded related to
managements estimation of the identifiable intangible
assets of $750 and $1,329 for the three month ended
March 31, 2004 and the five months ended May 31, 2004,
respectively. |
|
(C) |
|
Represents one time expenses relating to the purchase of
Harmony, including termination of preferred stock of
approximately $5,199 and legal and transaction fees of
approximately $1,600. |
|
(D) |
|
Represents interest expense for the $40,000 additional borrowing
of $550 and $927 for the three months ended March 31, 2004
and the five months ended May 31, 2004, respectively. |
|
(E) |
|
The income tax expense/benefit related to all adjustments is
projected at the Companys effective tax rate of 38.8%. The
income tax expense calculated using the effective tax rates was
$1,738 for the five months ended May 31, 2004 and the
income tax benefit was $512 for the three month period ended
March 31, 2004. |
|
(F) |
|
The unaudited pro forma earnings per share is calculated using
outstanding common stock and common stock options, as
applicable, on December 31, 2004. The March 31, 2004
unaudited pro forma earnings per share is calculated using
outstanding common stock and common stock options, as
applicable, at the initial public offering plus common stock
options issued contemporaneously with the offering, as
applicable, and common stock sold in the initial public offering. |
F-45