Toggle SGML Header (+)


Section 1: 8-K (FORM 8-K)

Form 8-K

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 8-K

 

 

Current Report

Pursuant to Section 13 or 15(d)

of the Securities Exchange Act of 1934

Date of Report (Date of earliest event reported): August 6, 2018

 

 

WellCare Health Plans, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   001-32209   47-0937650

(State or Other Jurisdiction

of Incorporation)

 

(Commission

File Number)

 

(IRS Employer

Identification No.)

8735 Henderson Road, Renaissance One

Tampa, Florida 33634

(Address of Principal Executive Offices, including Zip Code)

(813) 290-6200

(Registrant’s Telephone Number, including Area Code)

Not Applicable

(Former Name or Former Address, if Changed Since Last Report)

 

 

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):

 

Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

 

Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

 

Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

 

Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).

Emerging growth company  ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

 

 

 


On May 28, 2018, The WellCare Management Group, Inc. (the “Acquiror”), a wholly-owned subsidiary of WellCare Health Plans, Inc. (the “Company”), entered into a definitive Transaction Agreement (the “Transaction Agreement”) with Caidan Management Company, LLC (“Caidan Management”), MeridianRx, LLC (“MeridianRx”), Caidan Holding Company (“Holdings” and, together with Caidan Management and MeridianRx, the “Meridian Group”), and Caidan Enterprises, Inc. (the “Seller”). As previously disclosed in its Current Report on Form 8-K, filed on May 29, 2018, on the terms and subject to the conditions set forth in the Transaction Agreement, the Company will acquire the Meridian Group (including Meridian Health Plan of Illinois, Inc., Meridian Health Plan of Michigan, Inc. and MeridianRx) from Seller for an aggregate purchase price of approximately $2.5 billion in cash, subject to a possible purchase price reduction of up to $100 million and other customary purchase price adjustments (the “Transaction”).

Item 7.01 Regulation FD Disclosure.

On August 6, 2018, the Company issued a press release announcing the offering of the Notes described in the first paragraph of Item 8.01 below. A copy of the press release is attached hereto as Exhibit 99.1 and incorporated herein by reference.

Also on August 6, 2018, the Company issued a press release announcing the offering of its common stock described in the second paragraph of Item 8.01 below. A copy of the press release is attached hereto as Exhibit 99.2 and incorporated herein by reference. Additional information relating to the offering is included in the Investor Presentation attached to this Current Report on Form 8-K as Exhibit 99.3.

The information under this Item 7.01 along with Exhibit 99.1, Exhibit 99.2 and Exhibit 99.3 attached hereto are being furnished and shall not be deemed to be “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), nor shall it be incorporated by reference in any filing under the Securities Act of 1933, as amended (the “Securities Act”), or the Exchange Act, except as shall be expressly set forth by specific reference in such a filing. The furnishing of Exhibit 99.1, Exhibit 99.2 and Exhibit 99.3 attached hereto is not intended to constitute a determination by the Company that the information is material or that the dissemination of the information is required by Regulation FD.

Item 8.01. Other Events.

On August 6, 2018, the Company announced the offering of $700.0 million aggregate principal amount of senior notes due 2026 (the “Notes”). The Notes have not been registered under the Securities Act and may not be offered or sold in the United States without registration or an applicable exemption from the registration requirements.

Also on August 6, 2018, the Company announced the offering of 3,990,712 shares of its common stock pursuant to a registration statement and a related prospectus supplement filed by the Company with the U.S. Securities and Exchange Commission (the “SEC”).

Included in this Current Report on Form 8-K as Exhibit 99.4 are the audited consolidated financial statements of the Seller for the periods described in the first paragraph of Item 9.01(a) below, the notes related thereto and the related Report of Independent Registered Public Accounting Firm. Included in this Current Report on Form 8-K as Exhibit 99.5 are the unaudited condensed consolidated financial statements of the Seller for the periods described in the second paragraph of Item 9.01(a) below and the notes related thereto.

Also included in this Current Report on Form 8-K as Exhibit 99.6 is the pro forma financial information described in Item 9.01(b) below.

Cautionary Statement Regarding Forward-Looking Statements

These materials contain “forward-looking” statements that are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Statements that are predictive in nature, that depend upon or refer to future events or conditions, or that include words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “estimates,” “will” and similar expressions are forward-looking statements. For example, statements regarding the Company’s financial outlook, and the timing, closing, manner of payment and financial impact of the pending transaction contain forward-looking statements. Forward-looking statements involve known and unknown risks and uncertainties that may cause the Company’s actual future results to differ materially from those projected or contemplated in the forward-looking statements. These risks and uncertainties include, but are not limited to, the ability to complete the transaction in a timely manner or at all (which may adversely affect the Company’s business and the price of the common stock of the Company), the failure to satisfy the conditions to the consummation of the transaction (including the receipt of certain governmental and regulatory approvals), any requirements that may be imposed by governmental or regulatory authorities as a condition to approving the transaction, adjustments to the purchase price, the ability to achieve expected synergies within the expected time frames or at all, the ability to achieve accretion to the Company’s earnings, revenues or other benefits expected, disruption to business relationships, operating results, and business generally of the Company and/or the Meridian Group and the ability to retain Meridian Group employees, the availability of debt and equity financing, the Company’s progress on top priorities such as improving healthcare quality and access, ensuring a competitive cost position, and delivering prudent, profitable growth, the Company’s ability to effectively estimate and manage growth, the Company’s ability to effectively execute and integrate acquisitions, potential reductions in Medicaid and Medicare revenue, the Company’s ability to estimate and manage medical benefits expense effectively, including through its vendors, its ability to negotiate actuarially sound rates, especially in new programs with limited experience, the appropriation and payment by state governments of Medicaid premiums receivable, the outcome of any protests and litigation related to Medicaid awards, the approval of Medicaid contracts by CMS, any changes to the programs or contracts, the Company’s ability to address operational challenges related to new business, and the Company’s ability to meet the requirements of readiness reviews. Given the risks and uncertainties inherent in forward-looking statements, any of the Company’s forward-looking statements could be incorrect and investors are cautioned not to place undue reliance on any of our forward-looking statements.

Additional information concerning these and other important risks and uncertainties can be found in the Company’s filings with the SEC, included under the captions “Forward-Looking Statements” and “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017, and in the Company’s Quarterly Reports on Form 10-Q for the quarter ended March 31, 2018 and June 30, 2018, which contain discussions of the Company’s business and the various factors that may affect it. Subsequent events and developments may cause actual results to differ, perhaps materially, from the Company’s forward-looking statements. The Company’s forward-looking statements speak only as of the date on which the statements are made. The Company undertakes no duty, and expressly disclaims any obligation, to update these forward-looking statements to reflect any future events, developments or otherwise.

Item 9.01. Financial Statements and Exhibits.

(a) Financial statements.

The historical audited consolidated financial statements and related notes of the Seller as of and for the years ended December 31, 2017 and 2016 are filed herewith as Exhibit 99.4 and incorporated herein by reference.

The historical unaudited condensed consolidated financial statements and related notes of the Seller as of and for the three months ended March 31, 2018 and 2017 are filed herewith as Exhibit 99.5 and incorporated herein by reference.

(b) Pro forma financial information.

Unaudited pro forma condensed combined financial statements and related notes of the Company, giving effect to the Transaction, as of and for the three and twelve months ended March 31, 2018 and for the year ended December 31, 2017, are filed herewith as Exhibit 99.6 and incorporated herein by reference.

(d) Exhibits.

The following exhibits are filed or furnished, as applicable, as part of this current report:

 

Exhibit No.    Description of Exhibit
23.1    Consent of Plante Moran, PLLC, independent registered public accounting firm to Caidan Enterprises, Inc.
99.1    Press Release of Wellcare Health Plans, Inc., dated August 6, 2018, announcing offering of senior notes due 2026.*
99.2    Press Release of Wellcare Health Plans, Inc., dated August 6, 2018, announcing offering of common stock.*
99.3    Investor Presentation, dated August 6, 2018.*
99.4    The historical audited consolidated financial statements and related notes of the Seller as of and for the years ended December 31, 2017 and 2016.
99.5    The historical unaudited condensed consolidated financial statements and related notes of the Seller as of and for the three months ended March 31, 2018 and 2017.
99.6    Unaudited pro forma condensed combined financial statements and related notes of the Company, giving effect to the Transaction, as of and for the three and twelve months ended March  31, 2018 and for the year ended December 31, 2017.
*    Furnished and not filed.


SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

 

    WELLCARE HEALTH PLANS, INC.
Date: August 6, 2018     By:   /s/ Andrew L. Asher
      Name: Andrew L. Asher
     

Title: Executive Vice President and Chief Financial

Officer

(Back To Top)

Section 2: EX-23.1 (EX-23.1)

EX-23.1

Exhibit 23.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We hereby consent to the incorporation by reference in Registration Statement No. 333-207839 on Form S-3 and Registration Statement Nos. 333-188798, 333-160275, 333-166640, 333-140753, 333-131908, and 333-120257 on Form S-8 of WellCare Health Plans, Inc. (“WellCare”) of our report dated July 10, 2018, relating to the consolidated financial statements of Caidan Enterprises, Inc. and its subsidiaries appearing in this Current Report on Form 8-K of WellCare.

/s/ Plante Moran, PLLC

Detroit, Michigan

August 6, 2018

(Back To Top)

Section 3: EX-99.1 (EX-99.1)

EX-99.1

Exhibit 99.1

 

LOGO

WellCare Announces Offering of $700 Million Senior Notes

TAMPA, Fla. (Aug. 6, 2018) — WellCare Health Plans, Inc. (NYSE: WCG) (“WellCare” or the “Company”) announced today that it intends to offer for sale $700 million aggregate principal amount of senior notes due 2026 (the “notes”).

WellCare intends to use the net proceeds from the offering to fund a portion of the cash consideration for the Company’s previously announced acquisition (the “Acquisition”) of Meridian Health Plan of Michigan, Inc., Meridian Health Plan of Illinois, Inc. and MeridianRx, a pharmacy benefit manager, (collectively, “Meridian”) to pay related fees and expenses and for general corporate purposes. If the Acquisition is not completed for any reason, WellCare will be required to redeem the notes, in whole, at a redemption price equal to 100% of the aggregate principal amount of the notes, plus accrued and unpaid interest. The offering is not contingent upon the consummation of the Acquisition, which the Company expects to close in the next few months, subject to the satisfaction of certain closing conditions, including the receipt of regulatory approvals.

The notes will be offered and sold only to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended (the “Securities Act”), and outside the United States pursuant to Regulation S under the Securities Act. The notes have not been and will not be registered under the Securities Act and may not be offered or sold in the United States absent registration or an applicable exemption from the registration requirements. This press release does not constitute an offer to sell the notes nor a solicitation for an offer to purchase the notes.

About WellCare Health Plans, Inc.

Headquartered in Tampa, Fla., WellCare Health Plans, Inc. (NYSE: WCG) focuses exclusively on providing government-sponsored managed care services, primarily through Medicaid, Medicare Advantage and Medicare Prescription Drug Plans, to families, children, seniors and individuals with complex medical needs. The company served approximately 4.4 million members nationwide as of June 30, 2018. For more information about WellCare, please visit the Company’s website at www.wellcare.com.

Cautionary Statement Regarding Forward-Looking Statements

This news release contains “forward-looking” statements that are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Statements that are predictive in nature, that depend upon or refer to future events or conditions, or that include words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “estimates,” “will” and similar expressions are forward-looking statements. Statements regarding the offering and the Acquisition contain forward-looking statements. Forward-looking statements involve known and unknown risks and uncertainties that may cause actual future results to differ materially from those projected or contemplated in the forward-looking statements. These risks and uncertainties include, but are not limited to, the ability to complete the offering and the Acquisition in a timely manner or at all (which may adversely


affect WellCare’s business), the failure to satisfy the conditions to the consummation of the Acquisition (including the receipt of certain governmental and regulatory approvals) and any requirements that may be imposed by governmental or regulatory authorities as a condition to approving the Acquisition. Given the risks and uncertainties inherent in forward-looking statements, any of WellCare’s forward-looking statements could be incorrect and investors are cautioned not to place undue reliance on any of our forward-looking statements.

Additional information concerning these and other important risks and uncertainties can be found in the Company’s filings with the U.S. Securities and Exchange Commission, included under the captions “Forward-Looking Statements” and “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017 and in the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2018, which contain discussions of WellCare’s business and the various factors that may affect it. Subsequent events and developments may cause actual results to differ, perhaps materially, from WellCare’s forward-looking statements. WellCare’s forward-looking statements speak only as of the date on which the statements are made. WellCare undertakes no duty, and expressly disclaims any obligation, to update these forward-looking statements to reflect any future events, developments or otherwise.

 

CONTACTS:      
Investors    Media   
Beau Garverick    Chris Curran   
813-206-2329    813-206-5428   
beau.garverick@wellcare.com    chris.curran@wellcare.com   

Matt Humphries

813-206-6096

matt.humphries@wellcare.com

     
(Back To Top)

Section 4: EX-99.2 (EX-99.2)

EX-99.2

Exhibit 99.2

 

LOGO

WellCare Announces Offering of Common Stock

TAMPA, Fla. (Aug. 6, 2018) — WellCare Health Plans, Inc. (NYSE: WCG) (the “Company” or “WellCare”) announced today that it intends to offer for sale 3,990,712 shares of its common stock (the “common stock”). SunTrust Robinson Humphrey and J.P. Morgan will serve as joint book-running managers and as representatives of the underwriters for the offering. Goldman Sachs & Co. LLC and Wells Fargo Securities will also serve as joint book-running managers for the offering. The Company will grant the underwriters an option for 30 days to purchase up to an additional 598,606 shares of common stock.

WellCare intends to use the net proceeds from the offering to fund a portion of the cash consideration for the Company’s previously announced acquisition (the “Acquisition”) of Meridian Health Plan of Michigan, Inc., Meridian Health Plan of Illinois, Inc. and MeridianRx, a pharmacy benefit manager, (collectively, “Meridian”) to pay related fees and expenses and for general corporate purposes. If the Acquisition is not completed for any reason, WellCare will use the net proceeds from the offering for general corporate purposes. The offering is not contingent upon the consummation of the Acquisition, which the Company expects to close in the next few months, subject to the satisfaction of certain closing conditions, including the receipt of regulatory approvals.

The common stock will be issued pursuant to a prospectus supplement and an accompanying prospectus filed as part of an effective shelf registration statement filed with the Securities and Exchange Commission (the “SEC”) on Form S-3. Copies of the prospectus supplement and the accompanying prospectus may be obtained by contacting any joint book-running manager using the information provided below. An electronic copy of the prospectus supplement, together with the accompanying prospectus, is also available on the SEC’s website, www.sec.gov.

This press release shall not constitute an offer to sell or the solicitation of an offer to buy, nor shall there be any sale of these securities in any jurisdiction in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such jurisdiction.

About WellCare Health Plans, Inc.

Headquartered in Tampa, Fla., WellCare Health Plans, Inc. (NYSE: WCG) focuses exclusively on providing government-sponsored managed care services, primarily through Medicaid, Medicare Advantage and Medicare Prescription Drug Plans, to families, children, seniors and individuals with complex medical needs. The company served approximately 4.4 million members nationwide as of June 30, 2018. For more information about WellCare, please visit the Company’s website at www.wellcare.com.


Joint Book-Running Managers Contact Information

 

SunTrust Robinson Humphrey, Inc.

3333 Peachtree Road NE

9th Floor

Atlanta, GA 30326

Attn: Prospectus Department

Toll-free: 404-926-5744

Email: strh.prospectus@suntrust.com

  

J.P. Morgan Securities LLC

c/o Broadridge Financial Solutions

1155 Long Island Avenue

Edgewater, NY 11717

Toll-free: 866-803-9204

Goldman Sachs & Co. LLC

200 West Street

New York, NY 10282

Attn: prospectus-ny@ny.email.gs.com

Toll-free: 866-471-2526

Email: prospectus-ny@ny.email.gs.com

  

Wells Fargo Securities

375 Park Avenue

New York, NY 10152

Attn: Equity Syndicate Department

Toll-free: 800-326-5897

Email: cmclientsupport@wellsfargo.com

Cautionary Statement Regarding Forward-Looking Statements

This news release contains “forward-looking” statements that are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Statements that are predictive in nature, that depend upon or refer to future events or conditions, or that include words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “estimates,” “will” and similar expressions are forward-looking statements. Statements regarding the offering and the Acquisition contain forward-looking statements. Forward-looking statements involve known and unknown risks and uncertainties that may cause actual future results to differ materially from those projected or contemplated in the forward-looking statements. These risks and uncertainties include, but are not limited to, the ability to complete the offering and the Acquisition in a timely manner or at all (which may adversely affect WellCare’s business), the failure to satisfy the conditions to the consummation of the Acquisition (including the receipt of certain governmental and regulatory approvals) and any requirements that may be imposed by governmental or regulatory authorities as a condition to approving the Acquisition. Given the risks and uncertainties inherent in forward-looking statements, any of WellCare’s forward-looking statements could be incorrect and investors are cautioned not to place undue reliance on any of our forward-looking statements.

Additional information concerning these and other important risks and uncertainties can be found in the Company’s filings with the U.S. Securities and Exchange Commission, included under the captions “Forward-Looking Statements” and “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017 and in the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2018, which contain discussions of WellCare’s business and the various factors that may affect it. Subsequent events and developments may cause actual results to differ, perhaps materially, from WellCare’s forward-looking statements. WellCare’s forward-looking statements speak only as of the date on which the statements are made. WellCare undertakes no duty, and expressly disclaims any obligation, to update these forward-looking statements to reflect any future events, developments or otherwise.


CONTACTS:

 

Investors    Media
Beau Garverick    Chris Curran
813-206-2329    813-206-5428
beau.garverick@wellcare.com    chris.curran@wellcare.com

Matt Humphries

813-206-6096

matt.humphries@wellcare.com

  
(Back To Top)

Section 5: EX-99.3 (EX-99.3)

EX-99.3

Exhibit 99.3 Investor Presentation WellCare Equity Offering for Meridian Transaction August 2018Exhibit 99.3 Investor Presentation WellCare Equity Offering for Meridian Transaction August 2018


Cautionary Statement This presentation contains forward-looking statements that are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Statements that are predictive in nature, that depend upon or refer to future events or conditions, or that include words such as expects, anticipates, intends, plans, believes, estimates, will, and similar expressions are forward-looking statements. For example, statements regarding the company's financial outlook, and the timing, closing, manner of payment and financial impact of the pending transaction contain forward-looking statements. Forward-looking statements involve known and unknown risks and uncertainties that may cause WellCare Health Plans, Inc. (“WellCare”) actual future results to differ materially from those projected or contemplated in the forward-looking statements. These risks and uncertainties include, but are not limited to, the ability to complete the transaction in a timely manner or at all (which may adversely affect WellCare’s business and the price of the common stock of WellCare), the failure to satisfy the conditions to the consummation of the transaction (including the receipt of certain governmental and regulatory approvals), any requirements that may be imposed by governmental or regulatory authorities as a condition to approving the transaction, adjustments to the purchase price, the ability to achieve expected synergies within the expected time frames or at all, the ability to achieve accretion to WellCare’s earnings, revenues or other benefits expected, disruption to business relationships, operating results, and business generally of WellCare and/or Meridian and the ability to retain WellCare and Meridian employees, the availability of debt and equity financing, WellCare's progress on top priorities such as improving health care quality and access, ensuring a competitive cost position, and delivering prudent, profitable growth, WellCare's ability to effectively estimate and manage growth, WellCare's ability to effectively execute and integrate acquisitions, potential reductions in Medicaid and Medicare revenue, WellCare's ability to estimate and manage medical benefits expense effectively, including through its vendors, its ability to negotiate actuarially sound rates, especially in new programs with limited experience, the appropriation and payment by state governments of Medicaid premiums receivable, the outcome of any protests and litigation related to Medicaid awards, the approval of Medicaid contracts by CMS, any changes to the programs or contracts, WellCare's ability to address operational challenges related to new business, and WellCare's ability to meet the requirements of readiness reviews. Given the risks and uncertainties inherent in forward-looking statements, any of WellCare's forward-looking statements could be materially incorrect and investors are cautioned not to place undue reliance on any of our forward- looking statements. Additional information concerning these and other important risks and uncertainties can be found in the company's filings with the U.S. Securities and Exchange Commission, included under the captions Forward-Looking Statements and Risk Factors in the company's Annual Report on Form 10-K for the year ended December 31, 2017, and in the company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2018, which contain discussions of WellCare's business and the various factors that may affect it. Subsequent events and developments may cause actual results to differ, perhaps materially, from WellCare's forward- looking statements. WellCare's forward-looking statements speak only as of the date on which the statements are made. WellCare undertakes no duty, and expressly disclaims any obligation, to update these forward-looking statements to reflect any future events, developments or otherwise. Our 2018 estimated premium revenue metrics are as of July 31, 2018 and are not being updated in conjunction with this presentation. Please refer to the press release and presentation announcing the Meridian transaction dated May 29, 2018. The aforementioned press release is available on WellCare’s website via the following link: http://ir.wellcare.com/News/. 2Cautionary Statement This presentation contains forward-looking statements that are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Statements that are predictive in nature, that depend upon or refer to future events or conditions, or that include words such as expects, anticipates, intends, plans, believes, estimates, will, and similar expressions are forward-looking statements. For example, statements regarding the company's financial outlook, and the timing, closing, manner of payment and financial impact of the pending transaction contain forward-looking statements. Forward-looking statements involve known and unknown risks and uncertainties that may cause WellCare Health Plans, Inc. (“WellCare”) actual future results to differ materially from those projected or contemplated in the forward-looking statements. These risks and uncertainties include, but are not limited to, the ability to complete the transaction in a timely manner or at all (which may adversely affect WellCare’s business and the price of the common stock of WellCare), the failure to satisfy the conditions to the consummation of the transaction (including the receipt of certain governmental and regulatory approvals), any requirements that may be imposed by governmental or regulatory authorities as a condition to approving the transaction, adjustments to the purchase price, the ability to achieve expected synergies within the expected time frames or at all, the ability to achieve accretion to WellCare’s earnings, revenues or other benefits expected, disruption to business relationships, operating results, and business generally of WellCare and/or Meridian and the ability to retain WellCare and Meridian employees, the availability of debt and equity financing, WellCare's progress on top priorities such as improving health care quality and access, ensuring a competitive cost position, and delivering prudent, profitable growth, WellCare's ability to effectively estimate and manage growth, WellCare's ability to effectively execute and integrate acquisitions, potential reductions in Medicaid and Medicare revenue, WellCare's ability to estimate and manage medical benefits expense effectively, including through its vendors, its ability to negotiate actuarially sound rates, especially in new programs with limited experience, the appropriation and payment by state governments of Medicaid premiums receivable, the outcome of any protests and litigation related to Medicaid awards, the approval of Medicaid contracts by CMS, any changes to the programs or contracts, WellCare's ability to address operational challenges related to new business, and WellCare's ability to meet the requirements of readiness reviews. Given the risks and uncertainties inherent in forward-looking statements, any of WellCare's forward-looking statements could be materially incorrect and investors are cautioned not to place undue reliance on any of our forward- looking statements. Additional information concerning these and other important risks and uncertainties can be found in the company's filings with the U.S. Securities and Exchange Commission, included under the captions Forward-Looking Statements and Risk Factors in the company's Annual Report on Form 10-K for the year ended December 31, 2017, and in the company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2018, which contain discussions of WellCare's business and the various factors that may affect it. Subsequent events and developments may cause actual results to differ, perhaps materially, from WellCare's forward- looking statements. WellCare's forward-looking statements speak only as of the date on which the statements are made. WellCare undertakes no duty, and expressly disclaims any obligation, to update these forward-looking statements to reflect any future events, developments or otherwise. Our 2018 estimated premium revenue metrics are as of July 31, 2018 and are not being updated in conjunction with this presentation. Please refer to the press release and presentation announcing the Meridian transaction dated May 29, 2018. The aforementioned press release is available on WellCare’s website via the following link: http://ir.wellcare.com/News/. 2


Meridian: Advancing WellCare’s Strategy Strategically aligns with focus on government-sponsored health plans ü and related core capabilities Grows and diversifies Medicaid and Medicare Advantage businesses and adds substantial revenue ü + Adds integrated PBM capability and enhances dual-eligible and Individual Marketplace capabilities ü Financially attractive and accretive to adjusted earnings with opportunities for growth ü 3Meridian: Advancing WellCare’s Strategy Strategically aligns with focus on government-sponsored health plans ü and related core capabilities Grows and diversifies Medicaid and Medicare Advantage businesses and adds substantial revenue ü + Adds integrated PBM capability and enhances dual-eligible and Individual Marketplace capabilities ü Financially attractive and accretive to adjusted earnings with opportunities for growth ü 3


WellCare OverviewWellCare Overview


Solely Focused on Government-Sponsored Programs (1) $18.5B in total premium revenue in 2018 Medicaid Medicare Advantage Medicare Part D th th § 5 largest Medicaid plan§ 6th largest Medicare § 5 largest Individual Medicare in the U.S. Advantage (MA) plan in Part D Plan in the U.S. the U.S. ‒ 2.8 million members ‒ 1.1 million members (2) in 12 states ‒ 510,000 members in nationwide 18 states ‒ $11.4B in total premium ‒ $0.9B in total premium (1) revenue in 2018E (1) ‒ $6.2B in total premium revenue in 2018E (1) revenue in 2018E § #1 membership market share in Florida, Georgia, Kentucky and Missouri (1) 2018 premium revenue based on midpoint of WellCare’s 2018 total revenue guidance as of July 31, 2018; does not include the effect of the company’s pending acquisition of Meridian (2) Includes states where WellCare receives Medicaid premium revenues associated with dually eligible special needs plans 5 Note: WellCare membership numbers as of June 30, 2018Solely Focused on Government-Sponsored Programs (1) $18.5B in total premium revenue in 2018 Medicaid Medicare Advantage Medicare Part D th th § 5 largest Medicaid plan§ 6th largest Medicare § 5 largest Individual Medicare in the U.S. Advantage (MA) plan in Part D Plan in the U.S. the U.S. ‒ 2.8 million members ‒ 1.1 million members (2) in 12 states ‒ 510,000 members in nationwide 18 states ‒ $11.4B in total premium ‒ $0.9B in total premium (1) revenue in 2018E (1) ‒ $6.2B in total premium revenue in 2018E (1) revenue in 2018E § #1 membership market share in Florida, Georgia, Kentucky and Missouri (1) 2018 premium revenue based on midpoint of WellCare’s 2018 total revenue guidance as of July 31, 2018; does not include the effect of the company’s pending acquisition of Meridian (2) Includes states where WellCare receives Medicaid premium revenues associated with dually eligible special needs plans 5 Note: WellCare membership numbers as of June 30, 2018


Medicaid: An Attractive Growth Market Managed Medicaid spending growing at over 10% CAGR Medicaid Market Size Growth Opportunity Spending Enrollment § Managed Medicaid spending penetration expected to grow from 50% in 2017 to more than ~$600B ~74M 62% in 2022 ~$290B ~55M § Higher acuity populations moving to managed care § More states adopting managed care as a solution ~$800B ~80M ~$480B ~62M § Total Medicaid Numbers are approximations § Managed Medicaid Relative opportunity not to scale 6 Source: CMS: 2016 Actuarial Report on the Financial Outlook for Medicaid; HMA Managed Medicaid Enrollment Update 4Q17; Internal company projections 2022F 2017FMedicaid: An Attractive Growth Market Managed Medicaid spending growing at over 10% CAGR Medicaid Market Size Growth Opportunity Spending Enrollment § Managed Medicaid spending penetration expected to grow from 50% in 2017 to more than ~$600B ~74M 62% in 2022 ~$290B ~55M § Higher acuity populations moving to managed care § More states adopting managed care as a solution ~$800B ~80M ~$480B ~62M § Total Medicaid Numbers are approximations § Managed Medicaid Relative opportunity not to scale 6 Source: CMS: 2016 Actuarial Report on the Financial Outlook for Medicaid; HMA Managed Medicaid Enrollment Update 4Q17; Internal company projections 2022F 2017F


Medicare Advantage: An Attractive Growth Market Medicare spending and Medicare Advantage penetration continue to grow Medicare Market Size Growth Opportunity Spending Enrollment § Medicare Advantage enrollment growth in high-single digits over past five years ~$700B ~58M ~$240B ~20M § Continued growth driven by “baby boomer” age-ins and more familiarity with managed care § Medicare Advantage penetration rate is over 34% and expected ~$1T ~67M ~$460B to rise to more than 50% by 2025 ~30M § Total Medicare Numbers are approximations § Medicare Advantage Relative opportunity not to scale 7 Sources: CMS 2018 Medicare Board of Trustees Report; CMS Monthly Enrollment by State Report; Nephron research; Internal company projections 2022F 2017FMedicare Advantage: An Attractive Growth Market Medicare spending and Medicare Advantage penetration continue to grow Medicare Market Size Growth Opportunity Spending Enrollment § Medicare Advantage enrollment growth in high-single digits over past five years ~$700B ~58M ~$240B ~20M § Continued growth driven by “baby boomer” age-ins and more familiarity with managed care § Medicare Advantage penetration rate is over 34% and expected ~$1T ~67M ~$460B to rise to more than 50% by 2025 ~30M § Total Medicare Numbers are approximations § Medicare Advantage Relative opportunity not to scale 7 Sources: CMS 2018 Medicare Board of Trustees Report; CMS Monthly Enrollment by State Report; Nephron research; Internal company projections 2022F 2017F


Medicaid Health Plans Overview (1) Serving more than 2.8 million members in 12 states across a broad spectrum of eligibility groups (2) § 2018E premium revenue of $11.4B § Selected to serve Florida’s Managed Medical Assistance, Long-Term Care, Serious Mental Illness and Children’s Medical Assistance populations ‒ Expands geographic footprint and adds new populations § Reprocured Arizona contract, expanded geographically and added behavioral health WellCare Medicaid States § Announced Meridian acquisition on May 29, 2018 § Awarded statewide contract in Illinois, including ABD and LTC (1) Includes states where WellCare receives Medicaid premium revenues associated with § Rank #1 in three states and #2 in dually eligible special needs plans four states for NCQA accreditation (2) 2018 premium revenue based on midpoint of WellCare’s 2018 total revenue guidance as of July 31, 2018; does not include the effect of the company’s pending acquisition of Meridian Note: Membership as of June 30, 2018 8Medicaid Health Plans Overview (1) Serving more than 2.8 million members in 12 states across a broad spectrum of eligibility groups (2) § 2018E premium revenue of $11.4B § Selected to serve Florida’s Managed Medical Assistance, Long-Term Care, Serious Mental Illness and Children’s Medical Assistance populations ‒ Expands geographic footprint and adds new populations § Reprocured Arizona contract, expanded geographically and added behavioral health WellCare Medicaid States § Announced Meridian acquisition on May 29, 2018 § Awarded statewide contract in Illinois, including ABD and LTC (1) Includes states where WellCare receives Medicaid premium revenues associated with § Rank #1 in three states and #2 in dually eligible special needs plans four states for NCQA accreditation (2) 2018 premium revenue based on midpoint of WellCare’s 2018 total revenue guidance as of July 31, 2018; does not include the effect of the company’s pending acquisition of Meridian Note: Membership as of June 30, 2018 8


Medicare Health Plans Overview Serving approximately 510,000 members in 18 states (1) § 2018E premium revenue of $6.2B § On track for mid-single digit membership growth in 2018 § Enterprisewide focus on CMS Star Ratings measures producing positive results ̶ Improved Star Ratings in Florida, California and New Jersey, provides meaningful revenue tailwind in 2019 WellCare Medicare States § Continued clinical and operational execution § Goal to achieve margin expansion and growth via 2019 bid strategy (1) 2018 premium revenue based on midpoint of WellCare’s 2018 total revenue guidance as of July 31, 2018; does not include the effect of the company’s pending acquisition of Meridian Note: Membership as of June 30, 2018 9Medicare Health Plans Overview Serving approximately 510,000 members in 18 states (1) § 2018E premium revenue of $6.2B § On track for mid-single digit membership growth in 2018 § Enterprisewide focus on CMS Star Ratings measures producing positive results ̶ Improved Star Ratings in Florida, California and New Jersey, provides meaningful revenue tailwind in 2019 WellCare Medicare States § Continued clinical and operational execution § Goal to achieve margin expansion and growth via 2019 bid strategy (1) 2018 premium revenue based on midpoint of WellCare’s 2018 total revenue guidance as of July 31, 2018; does not include the effect of the company’s pending acquisition of Meridian Note: Membership as of June 30, 2018 9


Medicare PDP Health Plans Overview Serving approximately 1.1 million members across all 50 states (1) § 2018E premium revenue of $0.9B § Fifth largest individual Medicare PDP health plan in U.S. § Strong margin business § Enterprise total pharmacy spend of ~$9B, including PDP, helps drive cost structure in Medicaid and Medicare Advantage WCG Medicare PDP States ̶ Improved cost structure benefits members and federal and state customers § Preliminary 2019 auto-assign footprint at 21 regions under the benchmark and 10 regions in the de minimus range as a (1) 2018 premium revenue based on midpoint of WellCare’s 2018 total revenue guidance as of July 31, 2018; does not include the effect of the company’s pending acquisition result of 2019 bid strategy of Meridian Note: Membership as of June 30, 2018 10Medicare PDP Health Plans Overview Serving approximately 1.1 million members across all 50 states (1) § 2018E premium revenue of $0.9B § Fifth largest individual Medicare PDP health plan in U.S. § Strong margin business § Enterprise total pharmacy spend of ~$9B, including PDP, helps drive cost structure in Medicaid and Medicare Advantage WCG Medicare PDP States ̶ Improved cost structure benefits members and federal and state customers § Preliminary 2019 auto-assign footprint at 21 regions under the benchmark and 10 regions in the de minimus range as a (1) 2018 premium revenue based on midpoint of WellCare’s 2018 total revenue guidance as of July 31, 2018; does not include the effect of the company’s pending acquisition result of 2019 bid strategy of Meridian Note: Membership as of June 30, 2018 10


Driving Earnings Growth and Margin Expansion Adjusted Earnings Per Share and Adjusted Net Income Margin Growth $8.52 $5.96 $3.59 $2.06 2014A 2015A 2016A 2017A 2.3% 1.9% 1.2% 0.7% 2014A 2015A 2016A 2017A (1) Refer to the Basis of Presentation and Supplemental Information in the Appendix for a discussion and reconciliation of these adjusted (non-GAAP) financial measures 11Driving Earnings Growth and Margin Expansion Adjusted Earnings Per Share and Adjusted Net Income Margin Growth $8.52 $5.96 $3.59 $2.06 2014A 2015A 2016A 2017A 2.3% 1.9% 1.2% 0.7% 2014A 2015A 2016A 2017A (1) Refer to the Basis of Presentation and Supplemental Information in the Appendix for a discussion and reconciliation of these adjusted (non-GAAP) financial measures 11


Executing on Our Growth Strategy Strong revenue CAGR of more than 10%...and growing ($ Billions) $18.5 $17.0 $14.2 $13.9 2015A 2016A 2017A 2018E Medicare Advantage Medicaid Organic M&A Organic M&A § Nebraska Medicaid § Advicare assets§ 9.3% organic § Universal American launch membership growth Corp. § Care1st Arizona in 2017 § Illinois and Missouri § Care1st Arizona D-SNP geographic expansion§ New state and county § PHP assets expansions and product § Meridian (pending) § Recent Florida, offerings in 2018 § Meridian (pending) Arizona and Hawaii contract wins 12 Note: 2018 premium revenue based on the midpoint of WellCare’s total revenue guidance as of July 31, 2018Executing on Our Growth Strategy Strong revenue CAGR of more than 10%...and growing ($ Billions) $18.5 $17.0 $14.2 $13.9 2015A 2016A 2017A 2018E Medicare Advantage Medicaid Organic M&A Organic M&A § Nebraska Medicaid § Advicare assets§ 9.3% organic § Universal American launch membership growth Corp. § Care1st Arizona in 2017 § Illinois and Missouri § Care1st Arizona D-SNP geographic expansion§ New state and county § PHP assets expansions and product § Meridian (pending) § Recent Florida, offerings in 2018 § Meridian (pending) Arizona and Hawaii contract wins 12 Note: 2018 premium revenue based on the midpoint of WellCare’s total revenue guidance as of July 31, 2018


Meridian Overview and Strategic RationaleMeridian Overview and Strategic Rationale


Meridian at a Glance Executive Summary: For-profit, multi-state managed care organization Meridian At A Glance focused on government-sponsored health programs § For-profit, privately held managed care organization § Headquartered in Detroit, Michigan with ~2,000 associates Organization § Founded in 1997 (1) § Largest Medicaid health plan in Michigan and Illinois (2) § 1.1 million members Medicaid § 4.0 NCQA rating in both states (3) § 27,000 Medicare Advantage members in Michigan, Illinois, Indiana and Ohio Medicare § Experience with integrated-dual demonstrations § Fully integrated, proprietary PBM platform PBM (2) § Serves 1.1 million members as well as third-party customers § 5,000 Health Insurance Exchange members in Michigan Individual (1) Michigan Medicaid contract effective through December 31, 2020, with three 1-year renewal options (through 2023); Illinois Medicaid contract effective through December 31, 2021 and can be renewed up to four years (through 2025) 14 (2) Based on Meridian’s membership as of June 30, 2018 (3) Includes approximately 13,000 integrated dual-eligible membersMeridian at a Glance Executive Summary: For-profit, multi-state managed care organization Meridian At A Glance focused on government-sponsored health programs § For-profit, privately held managed care organization § Headquartered in Detroit, Michigan with ~2,000 associates Organization § Founded in 1997 (1) § Largest Medicaid health plan in Michigan and Illinois (2) § 1.1 million members Medicaid § 4.0 NCQA rating in both states (3) § 27,000 Medicare Advantage members in Michigan, Illinois, Indiana and Ohio Medicare § Experience with integrated-dual demonstrations § Fully integrated, proprietary PBM platform PBM (2) § Serves 1.1 million members as well as third-party customers § 5,000 Health Insurance Exchange members in Michigan Individual (1) Michigan Medicaid contract effective through December 31, 2020, with three 1-year renewal options (through 2023); Illinois Medicaid contract effective through December 31, 2021 and can be renewed up to four years (through 2025) 14 (2) Based on Meridian’s membership as of June 30, 2018 (3) Includes approximately 13,000 integrated dual-eligible members


Strategic Rationale Strengthens existing business and positions WellCare for future growth § Adds substantial revenue (1) § Adds 1.1 million Medicaid members Well-positioned for additional growth § Grows and diversifies WellCare’s opportunities in ü Medicaid portfolio Meridian’s footprint § Increases #1 Medicaid membership (1) market position from four to six states Adds new and § Grows Medicare Advantage business enhances existing (2) by 27,000 members and adds three capabilities ü new states to business portfolio § Adds fully integrated, proprietary Accretive to PBM platform adjusted earnings ü § Enhances integrated dual-eligible and Marketplace capabilities (1) Based on Meridian’s membership as of June 30, 2018 (2) Includes approximately 13,000 integrated dual-eligible members 15Strategic Rationale Strengthens existing business and positions WellCare for future growth § Adds substantial revenue (1) § Adds 1.1 million Medicaid members Well-positioned for additional growth § Grows and diversifies WellCare’s opportunities in ü Medicaid portfolio Meridian’s footprint § Increases #1 Medicaid membership (1) market position from four to six states Adds new and § Grows Medicare Advantage business enhances existing (2) by 27,000 members and adds three capabilities ü new states to business portfolio § Adds fully integrated, proprietary Accretive to PBM platform adjusted earnings ü § Enhances integrated dual-eligible and Marketplace capabilities (1) Based on Meridian’s membership as of June 30, 2018 (2) Includes approximately 13,000 integrated dual-eligible members 15


Transaction Details § $2.5 billion purchase price § Expected funding through: Consideration ̶ Available cash on hand and $1.3 billion revolving credit facility (1) ̶ New debt issuance of approximately $700 million and Financing (1) ̶ New equity issuance of $1.1 billion § Pro forma debt-to-capital ratio post-transaction expected to be at or below ~40% § Expected to close within the next few months Closing § Subject to customary closing conditions, including regulatory approvals § One-time transaction-related expenses of $75 million to $85 million Transaction and § Cumulative integration-related expenses of $50 million to $60 million Integration Costs § Includes $30 million to $40 million of Accretive to Adjusted EPS synergies, ramping up over next few years Accretion Adjusted EPS § Excludes transaction and integration costs (1) Final amounts are subject to market conditions 16Transaction Details § $2.5 billion purchase price § Expected funding through: Consideration ̶ Available cash on hand and $1.3 billion revolving credit facility (1) ̶ New debt issuance of approximately $700 million and Financing (1) ̶ New equity issuance of $1.1 billion § Pro forma debt-to-capital ratio post-transaction expected to be at or below ~40% § Expected to close within the next few months Closing § Subject to customary closing conditions, including regulatory approvals § One-time transaction-related expenses of $75 million to $85 million Transaction and § Cumulative integration-related expenses of $50 million to $60 million Integration Costs § Includes $30 million to $40 million of Accretive to Adjusted EPS synergies, ramping up over next few years Accretion Adjusted EPS § Excludes transaction and integration costs (1) Final amounts are subject to market conditions 16


Our Value Proposition Solely focused on growth “sweet spot” ü of managed care Strong momentum from both organic and acquired growth as well as margin strength ü Well-positioned through capabilities and experience for additional attractive, long-term ü growth opportunities Disciplined focus on operational and financial execution to drive further revenue and EPS growth ü 17Our Value Proposition Solely focused on growth “sweet spot” ü of managed care Strong momentum from both organic and acquired growth as well as margin strength ü Well-positioned through capabilities and experience for additional attractive, long-term ü growth opportunities Disciplined focus on operational and financial execution to drive further revenue and EPS growth ü 17


AppendixAppendix


Basis of Presentation Non-GAAP Financial Measures In addition to results determined under GAAP, we provide certain non-GAAP financial measures that management believes are useful in assessing our performance. Non-GAAP financial measures should be considered in addition to, but not as a substitute for, or superior to, financial measures prepared in accordance with GAAP. We have provided a reconciliation of the historical non-GAAP financial measures with the most directly comparable financial measure calculated in accordance with GAAP. Earnings per share, net income and, as noted below, other specific operating and financial measures have been adjusted for the effect of certain expenses and, as appropriate, the related tax effect for: • previously disclosed government investigations and related litigation and resolution costs (“investigation costs”) (2014-2018); • amortization expense associated with acquisitions (“acquisition-related amortization expenses”) (2015-2018); • certain one-time transaction and integration costs associated with the acquisition of Universal American and the pending acquisition of Meridian (“transaction and integration costs”) (2017-2018); • transitory costs related to the company’s decision to change its pharmacy benefit manager (“PBM”) as of January 1, 2016 (“PBM transitory costs”) (2015-2016); • certain nonrecurring Iowa-related SG&A expenses relating to readiness costs, certain wind-down costs of WellCare's Iowa operations and certain legal costs (“Iowa SG&A costs”) (2015-2016); • costs related to the divestiture of Sterling (“Sterling divestiture costs”) (2015-2016); • the effect of a gain on the divestiture of Sterling and changes to the gain (“Sterling gain”) (2015); • the costs associated with the redemption of the company’s 2020 notes, including the early redemption premium, write-off of associated deferred financing costs and write-off of associated premiums paid on the 2020 notes (“loss on extinguishment of debt”) (2017); and • the tax effect of the deferred tax revaluation after the Tax Cuts and Jobs Act of 2017 was enacted in December 2017 (“deferred tax revaluation”) (2017). Although the excluded items may recur, we believe that by providing non-GAAP measures exclusive of these items, it facilitates period-over-period comparisons and provides additional clarity about events and trends affecting our core operating performance, as well as providing comparability to competitor results. The investigation costs are related to a discrete incident which management does not expect to reoccur. We have adjusted for acquisition-related amortization expenses as these transactions do not directly relate to the servicing of products for our customers and are not directly related to the core performance of our business operations. The other costs mentioned above are related to specific events, which do not reflect the underlying ongoing performance of the business. In addition, because reimbursements for Medicaid premium tax and the ACA industry fee are both included in the premium rates or reimbursement established in certain Medicaid contracts and also recognized separately as a component of expense, we exclude these reimbursements from premium revenue when calculating key ratios as we believe that these components are not indicative of operating performance. Following is a description of the adjustments made to GAAP measures used to calculate the non-GAAP measures used in this presentation. Adjusted premium revenue (non-GAAP) = Total premium revenue (GAAP) less Medicaid premium taxes revenue and Medicaid reimbursements of the ACA industry fee. The company’s adjusted Medicaid Health Plans segment premium revenue uses this non-GAAP definition of adjusted premium revenue. MBR (GAAP) = medical benefits expense divided by total premium revenue (GAAP). Adjusted MBR (non-GAAP) = medical benefits expense divided by adjusted premium revenue. The company’s adjusted Medicaid Health Plans segment MBR uses this non-GAAP definition of adjusted MBR. SG&A expense ratio (GAAP) = SG&A expense (GAAP) divided by total premium revenue (GAAP). Adjusted SG&A expense (non-GAAP) = SG&A expense (GAAP) less investigation costs, transaction and integration costs, PBM transitory costs, Iowa SG&A costs, and Sterling divestiture costs. Adjusted SG&A ratio (non-GAAP) = adjusted SG&A expense divided by adjusted premium revenue. Adjusted depreciation & amortization (non-GAAP) = depreciation & amortization expense (GAAP) less acquisition-related amortization expenses. Adjusted income before taxes (non-GAAP) = income before income taxes (GAAP) less investigation costs, acquisition-related amortization expenses, transaction and integration costs, PBM transitory costs, Iowa SG&A costs, Sterling divestiture costs, Sterling gain, and loss on extinguishment of debt. Adjusted income tax expense (non-GAAP) = income tax associated with the applicable adjusted income before taxes, based on the applicable effective income tax rate, and the deferred tax revaluation. Adjusted effective income tax rate (non-GAAP) = adjusted income tax expense divided by adjusted income before taxes. Adjusted net income (non-GAAP) = adjusted income before taxes less adjusted income tax expense. Net income margin (GAAP) = net income (GAAP) divided by total premium revenue (GAAP). Adjusted net income margin (non-GAAP) = adjusted net income divided by adjusted premium revenue. Adjusted earnings per diluted share (non-GAAP) = Adjusted net income divided by weighted average common shares outstanding on a fully diluted basis. 19Basis of Presentation Non-GAAP Financial Measures In addition to results determined under GAAP, we provide certain non-GAAP financial measures that management believes are useful in assessing our performance. Non-GAAP financial measures should be considered in addition to, but not as a substitute for, or superior to, financial measures prepared in accordance with GAAP. We have provided a reconciliation of the historical non-GAAP financial measures with the most directly comparable financial measure calculated in accordance with GAAP. Earnings per share, net income and, as noted below, other specific operating and financial measures have been adjusted for the effect of certain expenses and, as appropriate, the related tax effect for: • previously disclosed government investigations and related litigation and resolution costs (“investigation costs”) (2014-2018); • amortization expense associated with acquisitions (“acquisition-related amortization expenses”) (2015-2018); • certain one-time transaction and integration costs associated with the acquisition of Universal American and the pending acquisition of Meridian (“transaction and integration costs”) (2017-2018); • transitory costs related to the company’s decision to change its pharmacy benefit manager (“PBM”) as of January 1, 2016 (“PBM transitory costs”) (2015-2016); • certain nonrecurring Iowa-related SG&A expenses relating to readiness costs, certain wind-down costs of WellCare's Iowa operations and certain legal costs (“Iowa SG&A costs”) (2015-2016); • costs related to the divestiture of Sterling (“Sterling divestiture costs”) (2015-2016); • the effect of a gain on the divestiture of Sterling and changes to the gain (“Sterling gain”) (2015); • the costs associated with the redemption of the company’s 2020 notes, including the early redemption premium, write-off of associated deferred financing costs and write-off of associated premiums paid on the 2020 notes (“loss on extinguishment of debt”) (2017); and • the tax effect of the deferred tax revaluation after the Tax Cuts and Jobs Act of 2017 was enacted in December 2017 (“deferred tax revaluation”) (2017). Although the excluded items may recur, we believe that by providing non-GAAP measures exclusive of these items, it facilitates period-over-period comparisons and provides additional clarity about events and trends affecting our core operating performance, as well as providing comparability to competitor results. The investigation costs are related to a discrete incident which management does not expect to reoccur. We have adjusted for acquisition-related amortization expenses as these transactions do not directly relate to the servicing of products for our customers and are not directly related to the core performance of our business operations. The other costs mentioned above are related to specific events, which do not reflect the underlying ongoing performance of the business. In addition, because reimbursements for Medicaid premium tax and the ACA industry fee are both included in the premium rates or reimbursement established in certain Medicaid contracts and also recognized separately as a component of expense, we exclude these reimbursements from premium revenue when calculating key ratios as we believe that these components are not indicative of operating performance. Following is a description of the adjustments made to GAAP measures used to calculate the non-GAAP measures used in this presentation. Adjusted premium revenue (non-GAAP) = Total premium revenue (GAAP) less Medicaid premium taxes revenue and Medicaid reimbursements of the ACA industry fee. The company’s adjusted Medicaid Health Plans segment premium revenue uses this non-GAAP definition of adjusted premium revenue. MBR (GAAP) = medical benefits expense divided by total premium revenue (GAAP). Adjusted MBR (non-GAAP) = medical benefits expense divided by adjusted premium revenue. The company’s adjusted Medicaid Health Plans segment MBR uses this non-GAAP definition of adjusted MBR. SG&A expense ratio (GAAP) = SG&A expense (GAAP) divided by total premium revenue (GAAP). Adjusted SG&A expense (non-GAAP) = SG&A expense (GAAP) less investigation costs, transaction and integration costs, PBM transitory costs, Iowa SG&A costs, and Sterling divestiture costs. Adjusted SG&A ratio (non-GAAP) = adjusted SG&A expense divided by adjusted premium revenue. Adjusted depreciation & amortization (non-GAAP) = depreciation & amortization expense (GAAP) less acquisition-related amortization expenses. Adjusted income before taxes (non-GAAP) = income before income taxes (GAAP) less investigation costs, acquisition-related amortization expenses, transaction and integration costs, PBM transitory costs, Iowa SG&A costs, Sterling divestiture costs, Sterling gain, and loss on extinguishment of debt. Adjusted income tax expense (non-GAAP) = income tax associated with the applicable adjusted income before taxes, based on the applicable effective income tax rate, and the deferred tax revaluation. Adjusted effective income tax rate (non-GAAP) = adjusted income tax expense divided by adjusted income before taxes. Adjusted net income (non-GAAP) = adjusted income before taxes less adjusted income tax expense. Net income margin (GAAP) = net income (GAAP) divided by total premium revenue (GAAP). Adjusted net income margin (non-GAAP) = adjusted net income divided by adjusted premium revenue. Adjusted earnings per diluted share (non-GAAP) = Adjusted net income divided by weighted average common shares outstanding on a fully diluted basis. 19


Supplemental Information Reconciliation of GAAP to Adjusted (non-GAAP) Financials (Unaudited; dollars in millions, except per share data) The Company reports adjusted operating results on a non-GAAP basis to exclude certain expenses and other items that management believes are not indicative of longer-term business trends and operations. The following table presents applicable financial information presented herein, as determined under GAAP, reconciled to the adjusted financial information for the same periods. Refer to the basis of presentation for a discussion of non-GAAP financial measures. For the Year Ended December 31, 2014 2015 2016 2017 Premium Revenue: As determined under GAAP $ 12,915.5 $ 13,874.8 $ 14,220.9 $ 16,960.3 Medicaid premium taxes (76.5) (94.7) (110.0) (119.8) ACA industry fee reimbursement (124.6) (219.2) (244.9) — Adjusted premium revenue (non-GAAP) $ 12,714.4 $ 13,560.9 $ 13,866.0 $ 16,840.5 For the Year Ended December 31, 2014 2015 2016 2017 $$ Per Diluted Share $$ Per Diluted Share $$ Per Diluted Share $$ Per Diluted Share Net Income and Diluted Earnings Per Share: As determined under GAAP $ 63.7 $ 1.44 $ 118.6 $ 2.67 $ 242.1 $ 5.43 $ 373.7 $ 8.31 Adjustments: Investigation costs 37.6 0.86 30.4 0.68 16.0 0.36 7.9 0.18 Transaction and integration costs — — — — — — 37.5 0.83 Sterling divestiture costs — — 2.0 0.05 1.7 0.04 — — PBM transitory costs — — 18.1 0.41 4.9 0.11 — — Iowa SG&A costs — — 11.9 0.27 5.2 0.12 — — Acquisition-related amortization — — 10.6 0.24 10.4 0.22 32.7 0.73 Gain on divestiture of business — — (6.1) (0.14) — — — — Loss on extinguishment of debt — — — — — — 26.1 0.58 Tax benefit due to TCJA (a) — — — — — — (56.1) (1.25) Tax effect of adjustments (b) (10.4) (0.24) (26.2) (0.59) (14.3) (0.32) (38.6) (0.86) Adjusted net income (non-GAAP) $ 90.9 $ 2.06 $ 159.3 $ 3.59 $ 266.0 $ 5.96 $ 383.2 $ 8.52 2014 2015 2016 2017 Net Income Margin: As determined under GAAP 0.5% 0.9% 1.7% 2.2% Adjustments 0.2% 0.3% 0.2% 0.1% Adjusted net income margin (non-GAAP) 0.7% 1.2% 1.9% 2.3% (a) Income tax expense and the effective tax rate for the year ended December 31, 2017 was adjusted by $56.1 million, or $1.25 per diluted share, due to the one-time revaluation of the Company’s net deferred tax liability associated with the enactment of the Tax Cuts and Jobs Act of 2017 ( TCJA ). (b) Based on the effective income tax rates applicable to adjusted (non-GAAP) results, the company estimated the effect on income tax expense and the effective tax rate associated with the non-GAAP adjustments. Refer to the basis of presentation for a discussion of non-GAAP financial measures. * WellCare is not able to estimate amounts associated with investigation costs, transaction and integration costs, or the associated tax effect of such adjustments expected to be incurred in 2018; therefore, the company cannot reconcile these metrics to total projected GAAP metrics. 20Supplemental Information Reconciliation of GAAP to Adjusted (non-GAAP) Financials (Unaudited; dollars in millions, except per share data) The Company reports adjusted operating results on a non-GAAP basis to exclude certain expenses and other items that management believes are not indicative of longer-term business trends and operations. The following table presents applicable financial information presented herein, as determined under GAAP, reconciled to the adjusted financial information for the same periods. Refer to the basis of presentation for a discussion of non-GAAP financial measures. For the Year Ended December 31, 2014 2015 2016 2017 Premium Revenue: As determined under GAAP $ 12,915.5 $ 13,874.8 $ 14,220.9 $ 16,960.3 Medicaid premium taxes (76.5) (94.7) (110.0) (119.8) ACA industry fee reimbursement (124.6) (219.2) (244.9) — Adjusted premium revenue (non-GAAP) $ 12,714.4 $ 13,560.9 $ 13,866.0 $ 16,840.5 For the Year Ended December 31, 2014 2015 2016 2017 $$ Per Diluted Share $$ Per Diluted Share $$ Per Diluted Share $$ Per Diluted Share Net Income and Diluted Earnings Per Share: As determined under GAAP $ 63.7 $ 1.44 $ 118.6 $ 2.67 $ 242.1 $ 5.43 $ 373.7 $ 8.31 Adjustments: Investigation costs 37.6 0.86 30.4 0.68 16.0 0.36 7.9 0.18 Transaction and integration costs — — — — — — 37.5 0.83 Sterling divestiture costs — — 2.0 0.05 1.7 0.04 — — PBM transitory costs — — 18.1 0.41 4.9 0.11 — — Iowa SG&A costs — — 11.9 0.27 5.2 0.12 — — Acquisition-related amortization — — 10.6 0.24 10.4 0.22 32.7 0.73 Gain on divestiture of business — — (6.1) (0.14) — — — — Loss on extinguishment of debt — — — — — — 26.1 0.58 Tax benefit due to TCJA (a) — — — — — — (56.1) (1.25) Tax effect of adjustments (b) (10.4) (0.24) (26.2) (0.59) (14.3) (0.32) (38.6) (0.86) Adjusted net income (non-GAAP) $ 90.9 $ 2.06 $ 159.3 $ 3.59 $ 266.0 $ 5.96 $ 383.2 $ 8.52 2014 2015 2016 2017 Net Income Margin: As determined under GAAP 0.5% 0.9% 1.7% 2.2% Adjustments 0.2% 0.3% 0.2% 0.1% Adjusted net income margin (non-GAAP) 0.7% 1.2% 1.9% 2.3% (a) Income tax expense and the effective tax rate for the year ended December 31, 2017 was adjusted by $56.1 million, or $1.25 per diluted share, due to the one-time revaluation of the Company’s net deferred tax liability associated with the enactment of the Tax Cuts and Jobs Act of 2017 ( TCJA ). (b) Based on the effective income tax rates applicable to adjusted (non-GAAP) results, the company estimated the effect on income tax expense and the effective tax rate associated with the non-GAAP adjustments. Refer to the basis of presentation for a discussion of non-GAAP financial measures. * WellCare is not able to estimate amounts associated with investigation costs, transaction and integration costs, or the associated tax effect of such adjustments expected to be incurred in 2018; therefore, the company cannot reconcile these metrics to total projected GAAP metrics. 20

(Back To Top)

Section 6: EX-99.4 (EX-99.4)

EX-99.4

Exhibit 99.4

Caidan Enterprises, Inc. and Subsidiaries

Consolidated Financial Report

December 31, 2017


Caidan Enterprises, Inc. and Subsidiaries

Contents

 

Consolidated Financial Statements

  

Balance Sheet

     1-2  

Statement of Operations

     3  

Statement of Comprehensive Income

     4  

Statement of Stockholders’ Equity

     5  

Statement of Cash Flows

     6  

Notes to Consolidated Financial Statements

     7-32  


Caidan Enterprises, Inc. and Subsidiaries

 

Consolidated Balance Sheet

December 31, 2017 and 2016

 

     2017      2016  
Assets  

Current Assets

     

Cash and cash equivalents

   $ 430,253,280      $ 429,069,699  

Investments at fair value (Notes 3 and 4)

     90,812,846        99,101,510  

Accounts receivable:

     

Uncollected premiums

     339,508,336        315,477,816  

Healthcare receivables (Note 18)

     50,656,031        48,379,801  

Uninsured plans (Note 17)

     11,000,688        11,943,580  

Accrued retrospective premiums (Note 16)

     14,004,028        10,792,527  

Pharmacy rebates and other receivables

     8,218,635        5,600,809  

Related party receivable

     497,861        —    

Note receivable (Note 6)

     47,897        44,764  

Other current assets:

     

Prepaid expenses

     8,685,570        9,330,677  

Accrued interest income (Note 2)

     28,776,299        1,686,336  

Reinsurance receivable (Note 10)

     7,814,420        7,552,457  

Taxes receivable

     5,275,916        9,620,790  

Other current assets

     1,016,147        1,555,428  
  

 

 

    

 

 

 

Total current assets

     996,567,954        950,156,194  

Property and Equipment - Net (Note 7)

     51,462,985        48,708,917  

Internally Developed Software - Net (Note 2)

     15,214,087        8,501,954  

Funds Maintained Under Statutory Requirements (Note 2)

     2,649,509        2,642,237  

Investments at Equity (Note 5)

     17,410,462        17,857,242  

Investments at Fair Value (Notes 3 and 4)

     121,484,961        110,088,442  

Other Assets

     

Related party note receivable (Note 6)

     2,712,266        2,712,266  

Deferred tax asset (Note 12)

     970,437        1,576,511  

Notes receivable - Net of current portion (Note 6)

     1,155,715        1,203,611  

Deposits and other assets

     590,923        778,590  
  

 

 

    

 

 

 

Total assets

   $ 1,210,219,299      $ 1,144,225,964  
  

 

 

    

 

 

 

 

See notes to consolidated financial statements.   1    


Caidan Enterprises, Inc. and Subsidiaries

 

Consolidated Balance Sheet (Continued)

December 31, 2017 and 2016

 

     2017      2016  
Liabilities and Stockholders’ Equity  

Current Liabilities

     

Accounts payable

   $ 73,851,820      $ 61,877,332  

Line of credit payable (Note 11)

     82,091,073        127,157,681  

Accrued healthcare costs payable (Note 8)

     425,759,600        369,325,069  

Aggregate health policy reserves (Note 16)

     12,021,510        7,763,582  

Liabilities for amounts held under uninsured plans (Note 17)

     90,684,095        141,162,329  

Related party payable (Note 5)

     236,217        1,866,035  

Capital lease obligation

     182,230        180,892  

Note payable (Note 11)

     17,968,144        19,564,275  

Accrued and other current liabilities:

     

Accrued compensation

     11,279,188        9,625,608  

Stock redemption obligation - Current portion (Note 22)

     3,207,345        2,788,883  

Unearned premiums

     553,748        359,247  

Taxes payable

     62,358        —    

Deferred rent (Note 2)

     33,623        33,623  

Other accrued liabilities

     22,615,049        11,464,060  
  

 

 

    

 

 

 

Total current liabilities

     740,546,000        753,168,616  

Capital Lease Obligation - Net of current portion

     378,007        576,064  

Stock Redemption Obligation - Net of current portion (Note 22)

     —          3,207,345  

Long-term Notes Payable - Net of current portion (Note 11)

     122,456,315        73,838,067  

Long-term Deferred Rent - Net of current portion (Note 2)

     4,029,418        3,607,380  

Other Long-term Liabilities

     1,398,727        901,721  

Stockholders’ Equity

     341,410,832        308,926,771  
  

 

 

    

 

 

 

Total liabilities and stockholders’ equity

   $ 1,210,219,299      $ 1,144,225,964  
  

 

 

    

 

 

 

 

See notes to consolidated financial statements.   2    


Caidan Enterprises, Inc. and Subsidiaries

 

Consolidated Statement of Operations

Years Ended December 31, 2017 and 2016

 

     2017     2016  

Revenue

    

Net premiums earned

   $ 3,209,273,922     $ 3,026,895,454  

Pharmacy revenue

     227,302,160       183,256,579  

Miscellaneous

     4,277,846       3,887,043  
  

 

 

   

 

 

 

Total revenue

     3,440,853,928       3,214,039,076  

Operating Expenses

    

Program expenses - Healthcare delivery (Note 8)

     2,383,864,878       2,113,102,504  

Pharmacy expense

     689,771,593       571,606,141  

General and administrative

     275,317,729       413,902,466  
  

 

 

   

 

 

 

Total operating expenses

     3,348,954,200       3,098,611,111  
  

 

 

   

 

 

 

Operating Income

     91,899,728       115,427,965  

Nonoperating Income (Expense)

    

Interest and dividend income from investments

     4,360,911       3,481,526  

Other interest income (Note 2)

     26,991,091       —    

Income (loss) from equity method investments

     1,337,184       7,627,728  

Realized gains (losses) on sale of investments (Note 3)

     327,223       (99,909

Interest expense on unpaid claims (Note 2)

     (15,802,983     —    

Interest expense

     (12,967,918     (5,190,084
  

 

 

   

 

 

 

Total nonoperating income

     4,245,508       5,819,261  
  

 

 

   

 

 

 

Income - Before income taxes

     96,145,236       121,247,226  

Income Tax (Recovery) Expense (Note 12)

     (990,699     18,488,061  
  

 

 

   

 

 

 

Consolidated Net Income

   $ 97,135,935     $ 102,759,165  
  

 

 

   

 

 

 

 

See notes to consolidated financial statements.   3    


Caidan Enterprises, Inc. and Subsidiaries

 

Consolidated Statement of Comprehensive Income

Years Ended December 31, 2017 and 2016

 

     2017     2016  

Consolidated Net Income

   $ 97,135,935     $ 102,759,165  

Other Comprehensive Income - Net of tax

    

Unrealized gain (loss) on securities:

    

Arising during the year

     1,360,349       178,255  

Reclassification adjustment

     (327,223     99,909  
  

 

 

   

 

 

 

Total other comprehensive income

     1,033,126       278,164  
  

 

 

   

 

 

 

Comprehensive Income

   $ 98,169,061     $ 103,037,329  
  

 

 

   

 

 

 

 

See notes to consolidated financial statements.   4    


Caidan Enterprises, Inc. and Subsidiaries

 

Consolidated Statement of Stockholders’ Equity

Years Ended December 31, 2017 and 2016

 

     Common Stock      Additional
Paid-in Capital
     Retained
Earnings
    Accumulated
Other
Comprehensive
(Loss) Income
    Total  

Balance - January 1, 2016

   $ 278,300      $ 2,000      $ 265,375,984     $ (48,842   $ 265,607,442  

Comprehensive income:

            

Consolidated net income

     —          —          102,759,165       —         102,759,165  

Other comprehensive income

     —          —          —         278,164       278,164  

Dividends declared

     —          —          (59,718,000     —         (59,718,000
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Balance - December 31, 2016

     278,300        2,000        308,417,149       229,322       308,926,771  

Comprehensive income:

            

Consolidated net income

     —          —          97,135,935       —         97,135,935  

Other comprehensive income

     —          —          —         1,033,126       1,033,126  

Dividends declared

     —          —          (65,685,000     —         (65,685,000
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Balance - December 31, 2017

   $ 278,300      $ 2,000      $ 339,868,084     $ 1,262,448     $ 341,410,832  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

 

See notes to consolidated financial statements.   5    


Caidan Enterprises, Inc. and Subsidiaries

 

Consolidated Statement of Cash Flows

Years Ended December 31, 2017 and 2016

 

     2017     2016  

Cash Flows from Operating Activities

    

Consolidated net income

   $ 97,135,935     $ 102,759,165  

Adjustments to reconcile consolidated net income to net cash from operating activities:

    

Depreciation and amortization

     12,391,420       11,051,828  

Bad debt expense (recovery)

     3,304,610       (1,604,096

Amortization of internally developed software

     696,728       —    

Amortization of investment discounts

     3,423,888       2,740,568  

Amortization of loan acquisition costs

     3,646,949       435,725  

(Gain) loss on sale of investments

     (327,223     99,909  

Loss (gain) on equity method investments, net of distributions

     446,780       (4,864,192

Loss on disposal of property and equipment

     1,312,051       369,491  

Deferred income taxes

     606,074       579,192  

Changes in operating assets and liabilities which (used) provided cash:

    

Accounts receivable

     (34,995,656     (193,594,593

Reinsurance receivable

     (261,963     (2,742,722

Other assets

     (25,650,713     (7,013,183

Accounts payable

     11,909,197       6,072,236  

Accrued and other current liabilities

     11,866,258       (1,194,829

Accrued healthcare costs payable

     10,214,225       74,740,356  

Deferred rent

     422,038       24,426  

Taxes payable

     (557,920     (6,983,837

Taxes receivable

     4,344,874       (9,620,790
  

 

 

   

 

 

 

Net cash provided by (used in) operating activities

     99,927,552       (28,745,346

Cash Flows from Investing Activities

    

Purchases of property and equipment

     (11,511,177     (22,114,154

Proceeds from sale of property and equipment

     18,930       59,160  

Payments for internally developed software

     (7,408,861     (8,501,954

Purchases of investments

     (69,615,392     (238,356,392

Proceeds from sales and maturities of investments

     64,989,808       171,550,195  

Payments received on notes receivable

     44,763       41,836  
  

 

 

   

 

 

 

Net cash used in investing activities

     (23,481,929     (97,321,309

Cash Flows from Financing Activities

    

Net (repayments on) borrowings from line of credit

     (45,086,792     60,000,000  

Proceeds from issuance of long-term debt

     144,745,352       —    

Payments on long-term debt

     (106,250,000     (5,000,000

Payments on stockholder’s liability

     (2,788,883     (2,716,826

Payments on capital lease obligations

     (196,719     (1,376,620

Dividends paid

     (65,685,000     (59,718,000
  

 

 

   

 

 

 

Net cash used in financing activities

     (75,262,042     (8,811,446
  

 

 

   

 

 

 

Net Increase (Decrease) in Cash and Cash Equivalents

     1,183,581       (134,878,101

Cash and Cash Equivalents - Beginning of year

     429,069,699       563,947,800  
  

 

 

   

 

 

 

Cash and Cash Equivalents - End of year

   $ 430,253,280     $ 429,069,699  
  

 

 

   

 

 

 

 

See notes to consolidated financial statements.   6    


Caidan Enterprises, Inc. and Subsidiaries

 

Notes to Consolidated Financial Statements

December 31, 2017 and 2016

Note 1 - Nature of Business

Caidan Enterprises, Inc.’s wholly owned subsidiaries consist of Caidan Management Company, LLC (Caidan Management Company), MeridianRx, LLC (MeridianRx), and Caidan Holding Company, Inc.; Caidan Management Company’s wholly owned subsidiaries consist of Building Amenities Cafeteria, LLC, Building Amenities Wellness Center, LLC, and Building Amenities Day Care, LLC; Caidan Holding Company, Inc.’s wholly owned subsidiaries consist of Meridian Health Plan of Michigan, Inc., Meridian Health Plan of Illinois, Inc., and Meridian Health Plan of Iowa, Inc. (collectively, the “Company”). The Meridian Health Plan entities cited above operate as state-licensed health maintenance organizations, which provide medical services to persons in the respective states who subscribe as recipients of state and federal health benefits under various Medicaid and Medicare plans. Caidan Management Company is a licensed third-party administrator. Caidan Management Company provides management and administrative services to Meridian Health Plan of Michigan, Inc., Meridian Health Plan of Illinois, Inc., Meridian Health Plan of Iowa, Inc., and MeridianRx, LLC. MeridianRx provides management and administrative services for prescription drug benefits to Meridian Health Plan of Michigan, Inc., Meridian Health Plan of Illinois, Inc., Meridian Health Plan of Iowa, Inc., and Caidan Management Company, LLC, in addition to unrelated companies.

Effective January 1, 2016, Meridian Health Plan of Iowa, Inc. ceased underwriting activities; however, the company will remain in operation to continue to service claims.

Note 2 - Significant Accounting Policies

Principles of Consolidation

The consolidated financial statements include the accounts of Caidan Enterprises, Inc. and its wholly owned subsidiaries, Caidan Holding Company, Inc., Meridian Health Plan of Michigan, Inc., Meridian Health Plan of Illinois, Inc., Meridian Health Plan of Iowa, Inc., MeridianRx, LLC, and Caidan Management Company, LLC and subsidiaries. All material intercompany accounts and transactions have been eliminated.

Cash and Cash Equivalents

The Company considers all investments with an original maturity of three months or less when purchased to be cash equivalents. The Company maintains its cash and cash equivalent balances at seven financial institutions. Cash balances at both December 31, 2017 and 2016 are in excess of FDIC limits, resulting in amounts being uninsured and uncollateralized. The Company has not experienced any losses in such accounts. Management believes the Company is not exposed to any significant credit risk on cash.

Uncollected Premiums

Health capitation premiums are recognized in the period members are entitled to related healthcare services. Uncollected capitation balances are due from the states of Michigan, Illinois, and Iowa at year end. Since 2015, the State of Illinois has experienced a budget impasse which was resolved in 2017 but has impacted the timeliness of funding for state programs. The Illinois Department of Human Services consented to a court decree ordering operation and fulfillment of provisions under the federal Medicaid act. The court order required the State of Illinois to pay all Medicaid providers as if there were no state budget impasse. The Company believes all uncollected premiums will be realized, therefore, no allowance for doubtful accounts has been recorded.

 

7


Caidan Enterprises, Inc. and Subsidiaries

 

Notes to Consolidated Financial Statements

December 31, 2017 and 2016

Note 2 - Significant Accounting Policies (Continued)

Healthcare Receivables

The allowance for doubtful accounts is determined based on management’s assessment of amounts that remain unpaid as of year end. Balances are evaluated on an on-going basis to determine amounts that may not be collectible based on a specific assessment of each outstanding balance and the customer or provider from which it’s due. Amounts deemed to be uncollectible are charged to the allowance for doubtful accounts in the period that such determination is made. At December 31, 2017, management recorded an allowance for doubtful accounts of $3,304,610 related to a healthcare receivable balance on a shared-savings arrangement effective as of January 1, 2017. Management believes all receivables are fully collectible at December 31, 2016; accordingly, no allowance for doubtful accounts has been established. The year-end receivable is comprised of the ACA fee reimbursements, shared savings from risk-sharing provisions, trade accounts receivable, and other receivables (see Note 18).

In 2017, the Company’s subsidiary, Meridian Health Plan of Michigan, Inc., is entitled to shared-savings compensation based on targeted medical loss ratio percentages specified within certain contracts. If the providers do not meet prescribed medical loss ratios, they share in the excess costs, and a healthcare receivable is recorded if deemed collectible by management. The Company estimates an amount receivable related to these risk-sharing provisions, which is recorded as a healthcare receivable at December 31, 2017.

The Company recorded accounts receivable related to pharmaceutical benefit management services provided to unaffiliated customers. Accounts receivable are stated at net invoice amounts. All amounts are considered fully collectible at December 31, 2017 and 2016.

Accrued Interest

The Company’s subsidiary, Meridian Health Plan of Illinois, Inc. records interest income in accordance with the Illinois State Prompt Payment Act. At December 31, 2017, interest receivable of $26,894,536 is due from the State of Illinois based on overdue capitation premiums. Interest of 1.0 percent of any amount approved and unpaid after a 90-day period from the due date shall be added for each month, or 0.033 percent of any amount approved and unpaid for each day after the end of this 90-day period until final payment is made, commensurate with the Illinois State Prompt Payment Act. The Illinois Prompt Pay Law requires the Company to pay providers within a specified time period. Due to delayed capitation receipts from the State of Illinois, the Company incurred interest expense for amounts owed to providers on unpaid claims. At December 31, 2017, the Company reported a liability within other accrued liabilities on the consolidated balance sheet of $15,078,157 for interest due to providers on unpaid claims.

The Company reports other accrued interest income at December 31, 2017 and 2016 of $1,881,763 and $1,686,336, respectively.

Investments

Investments in debt and equity securities are classified as available-for-sale securities and are measured at fair value.

Unrealized holding gains and losses net of the related tax effect are reported as a separate component of other comprehensive income in stockholders’ equity until realized. Impairment losses due to a decline in the value of the investment that is other than temporary are recognized when incurred. There were no other-than-temporary impairment losses in 2017 and 2016 on debt and equity securities.

Investments in limited partnerships and limited liability companies are recorded at fair value, measured at net asset value. Net asset value is provided by the general partners and managers of the companies. The general partners and managers of these companies may at times use estimates in determining the fair value of the underlying assets, and actual results could differ from those estimates. These investments consist primarily of hedge fund limited partnerships and real estate limited liability companies.

 

8


Caidan Enterprises, Inc. and Subsidiaries

 

Notes to Consolidated Financial Statements

December 31, 2017 and 2016

Note 2 - Significant Accounting Policies (Continued)

Cost is determined on the specific identification method for computing realized gains and losses on the sale of investments.

Property and Equipment

Property and equipment are recorded at cost. Depreciation and amortization are recognized on a straight-line basis over the estimated useful lives of the assets. Amortization of assets under capital lease is computed using the straight-line method over the term of the lease and is included in depreciation and amortization expense. Costs of maintenance and repairs are charged to expense when incurred.

Internally Developed Software

The Company capitalizes costs incurred in the development of claims processing software for internal use, including the costs of materials, contractors, payroll, and payroll-related costs for employees. Amortization of the capitalized software costs for modules placed in service in 2017 was $696,728. There was no amortization of the capitalized software costs in 2016 as the software was not placed in service. The net book value of internally developed software at December 31, 2017 and 2016 was $15,214,087 and $8,501,954, respectively. The Company assigned an estimated useful life of 10 years for the internally developed software.

Deferred Rent

The Company received a parking incentive related to one of its office leases and has leases with scheduled increases in monthly rents over the lease terms. Rent expense is recorded on a straight-line basis over the terms of the respective leases, taking into account the parking incentive and escalating lease payments. As a result of the recognition of rent on a straight-line basis, the Company has recorded a deferred rent liability on the accompanying consolidated balance sheet. At December 31, 2017, the deferred rent liability is composed of $268,986 related to the parking incentive and $3,794,055 related to escalating lease payments. At December 31, 2016, the deferred rent liability is composed of $302,610 related to the parking incentive and $3,338,393 related to escalating lease payments.

Income Taxes

A current tax liability or asset is recognized for the estimated taxes payable or refundable on tax returns for the year. Deferred tax liabilities or assets are recognized for the estimated future tax effects of temporary differences between book and tax accounting methods. Differences between statutory tax rates applied to pretax book income and current tax expense are attributable to nondeductible expenses and net unrealized gains and losses included in other comprehensive income.

Caidan Management Company and MeridianRx are single-member limited liability companies (LLCs), wholly owned by Caidan Enterprises, Inc. Caidan Enterprises, Inc., pursuant to provisions of the Internal Revenue Code, is an S corporation. Generally, the income of LLCs and S corporations is not subject to federal income tax at the corporate level, but rather the stockholders are required to include a pro rata share of the corporation’s taxable income or loss in their personal income tax returns, irrespective of whether dividends have been paid. Accordingly, the Company does not incur or reflect federal tax expense attributable to Caidan Enterprises, Inc., Caidan Management Company, LLC, or MeridianRx, LLC.

Caidan Holding Company, Inc. files a consolidated federal tax return with wholly owned subsidiaries Meridian Health Plan of Michigan, Inc., Meridian Health Plan of Illinois, Inc., and Meridian Health Plan of Iowa, Inc., all of which are C corporations.

 

9


Caidan Enterprises, Inc. and Subsidiaries

 

Notes to Consolidated Financial Statements

December 31, 2017 and 2016

Note 2 - Significant Accounting Policies (Continued)

The effects of tax positions are generally recognized in the consolidated financial statements consistent with amounts reflected in returns filed, or expected to be filed, with taxing authorities. Management evaluates the Company’s exposure for uncertain tax positions at each reporting period. As of December 31, 2017 and 2016, management believes the Company has no material uncertain tax positions and, therefore, no such liabilities have been recorded. As of December 31, 2017 and 2016, the Company’s unrecognized tax benefits were not significant. There were no significant penalties or interest recognized during the year or accrued at year end.

Other Comprehensive Income

Accounting principles generally require that recognized revenue, expenses, gains, and losses be included in net income. Certain changes in assets and liabilities, however, such as unrealized gains and losses on available-for-sale securities are reported as a direct adjustment to the equity section of the consolidated balance sheet. Such items, along with net income, are considered components of comprehensive income.

Accumulated other comprehensive income at December 31, 2017 and 2016 is composed of unrealized gains or losses, net of federal income tax, on available-for-sale securities. Reclassification adjustments out of other comprehensive income are composed of realized gains (losses) on available-for-sale securities in the amount of $327,223 and $(99,909), the tax impact of which is approximately $106,000 and $(44,000) for 2017 and 2016, respectively.

Reclassification

Certain 2016 amounts in the consolidated financial statements have been reclassified in order to conform to the 2017 presentation. The reclassifications had no impact on consolidated net income or stockholders’ equity.

Premium Revenue Recognition and Uncollected Premiums

Capitation premium revenue is recognized in the period members are entitled to related healthcare services. Premium revenue is earned through the Company’s various Medicaid and Medicare contracts with the Centers for Medicare and Medicaid Services (CMS) and the states of Michigan, Illinois, and Iowa. The Medicare and Medicaid contracts establish fixed, monthly premium rates per member, which are generally determined at the beginning of each new contract renewal period. However, premiums may be adjusted by CMS and the state agencies throughout the term of the contracts in certain cases. Premium rate changes are recognized in the period the change becomes effective, when the effect of the change is reasonably estimable, and collection is assured. The Company also earns supplemental premium revenue (maternity case rate) for each newborn birth. This revenue is recognized in the period the services are provided to the member.

Expected premium revenue is based on membership files received from CMS and state agencies with which the Company has Medicaid contracts, and the contracted premium rates per member. These membership files are compared to payments received to determine whether the Company has been paid the correct premium category and program. Uncollected Premiums are recorded for the difference between expected revenue and amounts collected. The effects of member retroactivity is recorded in the period the changes in membership are identified.

Certain Medicaid and Medicare premiums are subject to a risk adjustment arrangement whereby premiums will be retroactively risk adjusted based on the risk scores of the members. The Company recognizes changes to risk-adjusted premiums as revenue in the period amounts are determinable. See Note 16 for additional information on retrospectively rated contracts and contracts subject to redetermination.

Pharmacy Revenue and Cost of Revenue Recognition

Pharmacy expense is recognized at the time prescriptions are dispensed by pharmacies in the Company’s network to eligible members and consists primarily of ingredient costs and dispensing fees paid to retail pharmacies with which the Company has contracted.

 

10


Caidan Enterprises, Inc. and Subsidiaries

 

Notes to Consolidated Financial Statements

December 31, 2017 and 2016

Note 2 - Significant Accounting Policies (Continued)

Pharmacy revenue from unaffiliated entities consists of the prescription price (ingredient cost plus dispensing fee) negotiated with the retail pharmacies with which the Company has contracted, including the portion to be settled directly by the member (co-payment), plus any associated administrative fees. This revenue is recognized when the claim is processed. The Company has the contractual obligation to pay network pharmacies for benefits provided to participating members and, therefore, acts as principal in the arrangement and reflects the total prescription price as revenue in accordance with applicable accounting guidance.

Rebate Accounting

The Company receives certain rebates from pharmaceutical manufacturers, which are recorded as a reduction of pharmacy expense. The Company records rebates and administrative fees receivable from the manufacturer when the prescriptions covered under contractual agreements with the manufacturers are dispensed; these amounts are not dependent upon future pharmaceutical sales.

Concentration Risk - Revenue

The majority of the Company’s revenue is derived under the various Medicaid programs in Michigan and Illinois, the Medicare-Medicaid Alignment Initiative Plan in Illinois, and MI Health Link Plan in Michigan. The Company’s current Medicaid contract with the State of Michigan is in effect through December 31, 2020 with three one-year extensions. The Company’s MI Health Link Plan contract with the State of Michigan is in effect through December 31, 2018 with one-year renewal options for an additional two years. The Company’s Medicaid contract with the State of Illinois expires on January 1, 2022 with renewal options for an additional four years. The Medicare-Medicaid Alignment Initiative Plan contract expires on December 31, 2019.

Recognition of Healthcare Service Costs

Healthcare service costs and related liabilities are recorded when medical services are provided to eligible members. The accrued healthcare costs payable include an actuarially determined estimate of the ultimate cost of settling claims.

Direct medical expenses include amounts paid or payable to hospitals, physicians, and providers of ancillary services. Recorded direct medical expenses are reduced by the amount of pharmacy rebates earned, subrogation recoveries, member co-pays, other cost-sharing amounts, and amounts due from contracted providers under risk-sharing and/or value-based arrangements. Certain administrative costs provided by outside service providers, including utilization review services, care coordination, and case management, are recorded in general and administrative expense.

The Company uses actuarial principles and assumptions that are consistently applied each reporting period and recognizes the actuarial best estimate of the ultimate accrued healthcare costs payable along with a margin for adverse deviation. When actual experience differs from prior estimates, accrued healthcare costs are adjusted through current year program expenses.

Accrued healthcare costs payable are developed using a combination of development (i.e., “completion factors”) approach and projection approach. The Company calculates total projected claims for each month by multiplying the projected per member per month (PMPM) costs for each month by the total members for that month. The Company then calculates the outstanding incurred claims by subtracting the claims paid for incurral month from the total projected claims. The Company applies the projection method for recent months where lag completion data is particularly volatile.

The development method estimates the portion of claims that have been paid to date for each incurral month based on past claim lag data, which reflects historic time lags in medical claim data between the month of service and the month of claim processing. This approach was used for months with sufficient claim runout.

 

11


Caidan Enterprises, Inc. and Subsidiaries

 

Notes to Consolidated Financial Statements

December 31, 2017 and 2016

Note 2 - Significant Accounting Policies (Continued)

The Company evaluated both the level and the trend in incurred claims PMPM. The completion factors reflect the Company’s best estimates for the current pattern of incurred claim emergence and deemed consistent with observed patterns of seasonal claim variation and current PMPM claim cost trends.

Physician and Hospital Contracts

Meridian Health Plan of Michigan, Inc., Meridian Health Plan of Illinois, Inc., and Meridian Health Plan of Iowa, Inc. contract directly with physicians, physician groups, and hospitals for the provision of medical care and compensate the providers on either a capitation or fee-for-service basis.

The Company participates in transfer payment programs with the states of Michigan and Illinois. Amounts paid and received from these programs are recognized as agency transactions under deposit accounting for uninsured activity.

Funds Maintained Under Statutory Requirements

Meridian Health Plan of Michigan, Inc., Meridian Health Plan of Illinois, Inc., and Meridian Health Plan of Iowa, Inc. maintain segregated funds under statutory or contractual requirements to protect members and healthcare providers in the event the Company is unable to meet its contractual obligations. These funds can be used only at the direction of the State of Michigan, State of Illinois, and State of Iowa, respectively, in accordance with statutory provisions. At December 31, 2017 and 2016, $2,649,509 and $2,642,237, respectively, was held in cash equivalents, municipal obligations, and U.S. Treasury bills to fulfill these requirements.

Fair Value of Financial Instruments

Financial instruments consist of cash equivalents, investments, accounts receivable, loans receivable, accounts payable, line of credit, stock redemption payable, notes payable, and capital lease obligations. The carrying amount of all significant financial instruments approximates fair value due to either the short maturity or the existence of variable interest rates that approximate prevailing market rates.

Adoption of New Accounting Pronouncement

In May 2015, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2015-09, Disclosures about Short-Duration Contracts, which expands disclosures for the Company’s insurance contracts. The disclosures required by this update increase transparency of significant estimates made in measuring the liability for unpaid claims and claim adjustment expenses, improve comparability by requiring consistent disclosure of information, and provide financial statement users with information to facilitate analysis of the amount, timing, and uncertainty of cash flows arising from insurance contracts and the development of claim reserve estimates. The new guidance was adopted as of December 31, 2017 as disclosed within Note 8.

 

12


Caidan Enterprises, Inc. and Subsidiaries

 

Notes to Consolidated Financial Statements

December 31, 2017 and 2016

Note 2 - Significant Accounting Policies (Continued)

Upcoming Accounting Pronouncements

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), which will supersede the current revenue recognition requirements in Topic 605, Revenue Recognition. The ASU is based on the principle that revenue is recognized to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The ASU also requires additional disclosure about the nature, amount, timing, and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. The new guidance will be effective for the Company’s year ending December 31, 2019. The ASU permits application of the new revenue recognition guidance to be applied using one of two retrospective application methods. The majority of the Company’s consolidated revenue is derived from insurance contracts, which are specifically excluded from the scope of ASU No. 2014-09. Therefore, the new guidance will primarily impact the Company’s pharmacy revenue. Performance obligations associated with customer contracts of the Company are completed within one year. Consideration received for performance obligations is fixed based on ingredient costs, dispensing fees, and administrative fees for claims processing, all of which relate to the pharmacy revenue. The Company has not completed its analysis; however, it does not foresee significant revisions to contracts based on adoption of the new standard, and a full retrospective method will be applied. The adoption of this guidance is not anticipated to have a material effect on the Company’s results of operations, financial condition, or cash flows.

In January 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2016-01, Financial Instruments, which requires equity investments, other than those accounted for under the equity method of accounting or those that result in consolidation of the investee, to be measured at fair value with changes in fair value recognized in net income. This amendment also simplifies the impairment test of equity investments without readily determinable fair values. The Company anticipates adoption in its fiscal year ending December 31, 2018; however, it does not foresee a material impact on its consolidated results of operations, financial condition or cash flows.

The FASB issued ASU No. 2016-02, Leases, that is expected to significantly change the accounting for both operating and capital lease contracts. The standard introduces a “right-to-use” approach to lease accounting. In essence, the proposed standard eliminates the off-balance-sheet accounting currently used for operating leases. This model would result in the recognition of a liability for payments due under the lease contract and a corresponding asset representing the right to use the underlying asset. Under U.S. GAAP, most leases currently classified as capital/financing leases would recognize amortization expense related to the “right-to-use” asset separately from interest expense related to the lease liability. Conversely, most leases currently classified as operating leases would not separate amortization expense from interest expense and would rather recognize a single “total lease expense.” The new guidance will be effective for the Company’s year ending December 31, 2020. The Company anticipates adoption in its fiscal year ending December 31, 2020 and expects leased items, as disclosed in Note 13, to be reported as long-term assets with a corresponding liability for the lease commitments using a modified retrospective transition method to the beginning of the earliest period presented. The new lease standard is expected to have a significant effect on the Company’s consolidated balance sheet as a result of the leases classified as operating leases. The effects on the results of operations are not expected to be significant as recognition and measurement of expenses and cash flows for leases will be substantially the same under the new standard.

 

13


Caidan Enterprises, Inc. and Subsidiaries

 

Notes to Consolidated Financial Statements

December 31, 2017 and 2016

Note 2 - Significant Accounting Policies (Continued)

In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326), which requires entities to use a current expected credit loss model, which is a new impairment model based on expected losses rather than incurred losses. Under this model, companies would recognize an impairment allowance equal to its current estimate of all contractual cash flows that the entity does not expect to collect from financial assets measured at amortized cost. The estimate would consider relevant information about past events, current conditions, and reasonable and supportable forecasts, which will result in recognition of lifetime expected credit losses upon loan origination. This guidance is effective for fiscal years beginning after December 15, 2020. The adoption of this guidance is not anticipated to have a material effect on the Company’s results of operations, financial condition, or cash flows.

In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230) Restricted Cash. This update requires entities to reconcile, on the statement of cash flows, changes in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. The new guidance will be effective for the Company’s year ending December 31, 2019. The adoption of this guidance is not anticipated to have a material effect on the Company’s consolidated results of operations, financial condition, or cash flows.

In March 2017, the FASB issued ASU 2017-08, Receivables-Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities. This guidance shortens the amortization period for certain callable debt securities held at a premium, requiring the premium to be amortized to the earliest call date. Under current GAAP, premiums and discounts on callable debt securities are generally amortized to the maturity date. The new guidance does not change the accounting for purchased callable debt securities held at a discount. The guidance will be effective for the Company’s year ending December 31, 2020. The Company is currently assessing the effect this guidance will have on our consolidated results of operations, financial condition and cash flows, but the effect is not expected to be material.

In February 2018, the FASB issued ASU 2018-02, Income Statement – Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, which allows entities to reclassify stranded tax effects resulting from the Tax Cuts and Jobs Act of 2017 from accumulated other comprehensive income to retained earnings. The guidance is effective for interim and annual periods beginning after December 15, 2018. Early adoption is permitted. The Company is currently assessing the effect this guidance will have on our consolidated results of operations, financial condition and cash flows.

Use of Estimates

The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.

Significant estimates exist relating to the accrual for healthcare costs and fair value of investments. It is at least reasonably possible that these estimates will be materially revised in the near term.

 

14


Caidan Enterprises, Inc. and Subsidiaries

 

Notes to Consolidated Financial Statements

December 31, 2017 and 2016

Note 3 - Investments in Debt and Equity Securities - Fair Value

Available for sale securities consist of consist of debt and equity securities. The estimated fair values of available for sale securities at December 31 are as follows:

 

     2017  
     Cost/Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Estimated Fair
Value
 

Equity securities:

           

Common stocks

   $ 15,028,728      $ 2,246,199      $ (53,091    $ 17,221,836  

Mutual funds

     2,513,452        4,536        (10,342      2,507,646  

Bonds:

           

Mortgage-backed securities

     73,611,348        239,363        (725,365      73,125,346  

Corporate securities

     79,406,575        358,522        (232,752      79,532,345  

Debt securities issued by the U.S. Treasury

     7,755,348        1,615        (4,577      7,752,386  

Debt securities issued by the states of the U.S.

     27,933,350        156,121        (87,871      28,001,600  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 206,248,801      $ 3,006,356      $ (1,113,998    $ 208,141,159  
  

 

 

    

 

 

    

 

 

    

 

 

 
     2016  
     Cost/Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Estimated Fair
Value
 

Equity securities:

           

Common stock

   $ 11,044,626      $ 559,004      $ (125,494    $ 11,478,136  

Mutual funds

     1,992,048        —          —          1,992,048  

Bonds:

           

Mortgage-backed securities

     58,309,013        223,386        (452,209      58,080,190  

Corporate securities

     83,792,554        269,516        (88,123      83,973,947  

Debt securities issued by the U.S. Treasury

     9,544,553        —          (20,969      9,523,584  

Debt securities issued by the states of the U.S.

     40,027,044        101,279        (219,383      39,908,940  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 204,709,838      $ 1,153,185      $ (906,178    $ 204,956,845  
  

 

 

    

 

 

    

 

 

    

 

 

 

Included in the 2017 and 2016 tables above are investments totaling $714,467 and $640,000, respectively, that are included in the funds maintained under statutory reserve requirements on the consolidated balance sheet at December 31, 2017 and 2016.

The amortized costs and estimated fair values of debt securities available for sale at December 31, 2017, by contractual maturity, are shown below. Actual maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

 

     Cost/Amortized
Cost
     Estimated Fair
Value
 

Due in one year or less

   $ 88,791,319      $ 88,709,667  

Due in one year through five years

     24,855,457        24,986,866  

Due after five years through ten years

     11,542,337        11,649,073  

Due after ten years

     63,517,508        63,066,071  
  

 

 

    

 

 

 

Total

   $ 188,706,621      $ 188,411,677  
  

 

 

    

 

 

 

 

15


Caidan Enterprises, Inc. and Subsidiaries

 

Notes to Consolidated Financial Statements

December 31, 2017 and 2016

Note 3 - Investments in Debt and Equity Securities - Fair Value (Continued)

During 2017 and 2016, sales proceeds and gross realized gains and losses on securities classified as available for sale were as follows:

 

     2017      2016  

Sales proceeds - Debt securities

   $ 15,244,322      $ 39,339,422  

Sales proceeds - Equity securities

     2,473,382        2,613,190  

Gross realized gains

     425,857        363,403  

Gross realized losses

     98,634        463,312  

Available for sale investments with a decline in value below cost or amortized cost at December 31 are as follows:

 

     2017  
     Less than 12 Months     12 Months or Greater     Total  
     Fair Value      Gross
Unrealized
Losses
    Fair Value      Gross
Unrealized
Losses
    Fair Value      Gross
Unrealized
Losses
 

Equity securities:

               

Common stock

   $ 701,099      $ (14,361   $ 608,933      $ (38,730   $ 1,310,032      $ (53,091

Mutual funds

     500,787        (10,342     —          —         500,787        (10,342
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total equity securities

     1,201,886        (24,703     608,933        (38,730     1,810,819        (63,433

Bonds:

               

Mortgage-backed securities

     40,070,146        (434,097     16,812,495        (291,268     56,882,641        (725,365

Corporate securities

     58,202,421        (232,752     —          —         58,202,421        (232,752

Debt securities issued by the U.S. Treasury

     2,868,351        (4,081     1,874,756        (496     4,743,107        (4,577

Debt securities issued by states of the U.S.

     6,819,501        (36,571     1,610,249        (51,300     8,429,750        (87,871
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total bonds

     107,960,419        (707,501     20,297,500        (343,064     128,257,919        (1,050,565
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 109,162,305      $ (732,204   $ 20,906,433      $ (381,794   $ 130,068,738      $ (1,113,998
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 
     2016  
     Less than 12 Months     12 Months or Greater     Total  
     Fair Value      Gross
Unrealized
Losses
    Fair Value      Gross
Unrealized
Losses
    Fair Value      Gross
Unrealized
Losses
 

Equity securities - Common stocks

   $ 1,440,526      $ (12,277   $ 1,272,402      $ (113,217   $ 2,712,928      $ (125,494

Bonds:

               

Mortgage-backed securities

     41,325,498        (427,388     1,487,058        (24,821     42,812,556        (452,209

Corporate securities

     64,395,929        (88,123     —          —         64,395,929        (88,123

Debt securities issued by the U.S. Treasury

     7,017,959        (17,427     1,865,625        (3,542     8,883,584        (20,969

Debt securities issued by states of the U.S.

     29,404,924        (219,383     —          —         29,404,924        (219,383
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total bonds

     142,144,310        (752,321     3,352,683        (28,363     145,496,993        (780,684
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 143,584,836      $ (764,598   $ 4,625,085      $ (141,580   $ 148,209,921      $ (906,178
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

16


Caidan Enterprises, Inc. and Subsidiaries

 

Notes to Consolidated Financial Statements

December 31, 2017 and 2016

Note 3 - Investments in Debt and Equity Securities - Fair Value (Continued)

As of December 31, 2017 and 2016, the portfolio had 133 and 152 securities, respectively, in an unrealized loss position. The Company evaluated its investments with unrealized losses for impairment at December 31, 2017 and 2016. Based on the evaluation and the Company’s ability and intent to hold those investments for a reasonable period of time sufficient for a forecasted recovery of fair value, the Company does not consider those investments to be other-than-temporarily impaired at December 31, 2017 and 2016.

Note 4 - Fair Value Measurements

Accounting standards require certain assets and liabilities be reported at fair value in the consolidated financial statements and provide a framework for establishing that fair value. The framework for determining fair value is based on a hierarchy that prioritizes the inputs and valuation techniques used to measure fair value.

The following tables present information about the Company’s assets measured at fair value on a recurring basis at December 31, 2017 and 2016 and the valuation techniques used by the Company to determine those fair values.

In general, fair values determined by Level 1 inputs use quoted prices in active markets for identical assets that the Company has the ability to access.

Fair values determined by Level 2 inputs use other inputs that are observable either directly or indirectly. These Level 2 inputs include quoted prices for similar assets in active markets and other inputs such as interest rates and yield curves that are observable at commonly quoted intervals.

Level 3 inputs are unobservable inputs, including inputs that are available in situations where there is little, if any, market activity for the related asset or liability.

In instances whereby inputs used to measure fair value fall into different levels in the above fair value hierarchy, fair value measurements in their entirety are categorized based on the lowest level input that is significant to the valuation. The Company’s assessment of the significance of particular inputs to these fair value measurements requires judgment and considers factors specific to each asset.

 

17


Caidan Enterprises, Inc. and Subsidiaries

 

Notes to Consolidated Financial Statements

December 31, 2017 and 2016

Note 4 - Fair Value Measurements (Continued)

 

     2017  
     Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
     Significant Other
Observable Inputs
(Level 2)
     Significant
Unobservable
Inputs
(Level 3)
     Total  

Equity securities:

           

Common stocks

   $ 17,221,836      $ —        $ —        $ 17,221,836  

Mutual funds

     2,507,646        —          —          2,507,646  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total equity securities

     19,729,482        —          —          19,729,482  

Bonds:

           

Mortgage-backed securities

     —          73,125,346        —          73,125,346  

Corporate securities

     —          79,532,345        —          79,532,345  

Debt securities issued by the U.S. Treasury

     —          7,752,386        —          7,752,386  

Debt securities issued by states of the U.S.

     —          28,001,600        —          28,001,600  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total bonds

     —          188,411,677        —          188,411,677  

Limited Partnerships and Limited Liability Companies

     —          —          4,871,115        4,871,115  

Cash equivalents - Money market mutual funds

     34,925,102        —          —          34,925,102  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 54,654,584      $ 188,411,677      $ 4,871,115      $ 247,937,376  
  

 

 

    

 

 

    

 

 

    

 

 

 
     2016  
     Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
     Significant Other
Observable Inputs
(Level 2)
     Significant
Unobservable
Inputs
(Level 3)
     Total  

Equity securities:

           

Common stocks

   $ 11,478,136      $ —        $ —        $ 11,478,136  

Mutual funds

     1,992,048        —          —          1,992,048  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total equity securities

     13,470,184        —          —          13,470,184  

Bonds:

           

Mortgage-backed securities

     —          58,080,190        —          58,080,190  

Corporate securities

     —          83,973,947        —          83,973,947  

Debt securities issued by the U.S. Treasury

     —          9,523,584        —          9,523,584  

Debt securities issued by the states of the U.S.

     —          39,908,940        —          39,908,940  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total bonds

     —          191,486,661        —          191,486,661  

Limited Partnerships and Limited Liability Companies

     —          —          4,873,107        4,873,107  

Cash equivalents - Money market mutual funds

     14,437,675        —          —          14,437,675  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 27,907,859      $ 191,486,661      $ 4,873,107      $ 224,267,627  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

18


Caidan Enterprises, Inc. and Subsidiaries

 

Notes to Consolidated Financial Statements

December 31, 2017 and 2016

Note 4 - Fair Value Measurements (Continued)

The following summarizes the valuation methodology used in determining fair value measurements of the significant classes of the Company’s assets measured at fair value on a recurring basis:

Level 1 Measurements

 

    Common Stocks - The fair value of these funds is based upon the unadjusted quoted prices for the identical security in active markets that the Company can access.

 

    Mutual Funds and Money Market Mutual Funds - The Company values its mutual funds and money market funds using net asset value of the funds. The net asset value of the funds is determined and published as a basis for current transactions and considered fair value.

Level 2 Measurements

 

    Debt Securities - U.S. Government and States - The primary inputs to the valuation include quoted prices for identical or similar assets in markets that are not active, contractual cash flows, benchmark yields, and credit spreads

 

    Debt Securities - Corporate - The primary inputs to the valuation include quoted prices for identical or similar assets in markets that are not active, contractual cash flows, benchmark yields, and credit spreads.

 

    Debt Securities - Residential Mortgage-backed - The primary inputs to the valuation include quoted prices for identical or similar assets in markets that are not active, contractual cash flows, benchmark yields, prepayment speeds, collateral performance, and credit spreads.

Level 3 Measurements

 

    Limited Partnerships and Limited Liability Companies - The Company values its investments in limited partnerships and limited liability companies using net asset values that are provided by the general partners and managers of the companies. The net asset value is determined based on the fair value of the underlying assets, and is considered fair value.

Note 5 - Investment in Joint Ventures

The Company is a member of a joint venture, 1000 Webward LLC, which was established for the sole purpose of purchasing an office building in Detroit, Michigan. The investment in the joint venture is recorded using the equity method. The Company has a 50 percent membership percentage and a 50 percent profit and loss sharing percentage.

Financial information of 1000 Webward LLC for the years ended December 31 is summarized below:

 

     2017      2016  

Total assets

   $ 164,034,468      $ 165,620,651  
  

 

 

    

 

 

 

Total liabilities

   $ 129,213,544      $ 129,906,166  
  

 

 

    

 

 

 

Members’ equity

   $ 34,820,924      $ 35,714,485  
  

 

 

    

 

 

 

Net income

   $ 2,674,368      $ 5,826,058  
  

 

 

    

 

 

 

Share of adjusted income

   $ 1,337,184      $ 7,627,730  
  

 

 

    

 

 

 

Investment in joint venture

   $ 17,410,462      $ 17,857,242  
  

 

 

    

 

 

 

 

19


Caidan Enterprises, Inc. and Subsidiaries

 

Notes to Consolidated Financial Statements

December 31, 2017 and 2016

Note 5 - Investment in Joint Ventures (Continued)

The Company leases office space from 1000 Webward LLC through December 2024 (see Note 13). The Company incurred rent expense of $11,894,702 and $11,129,619 related to the lease agreements in 2017 and 2016, respectively. At December 31, 2017 and 2016, the Company has net receivables from (payables to) the joint venture of $261,644 and $(1,866,035), respectively, related to the lease agreements.

During 2017 and 2016, the Company received distributions from 1000 Webward LLC of $3,650,000 and $897,500, respectively. During 2016, 1000 Webward LLC restated its 2015 financial statements to correctly account for an amended lease. The Company’s share of adjusted income in 2016 includes its share of the adjustment related to the restatement for the amended lease.

Note 6 - Notes Receivable

The Company has a note receivable with an unrelated third party with a balance of $1,203,612 and $1,248,375 at December 31, 2017 and 2016, respectively. The note is collateralized by the third party’s ownership interest in two companies, a Michigan corporation and a Wyoming limited liability company. The note bears interest at 7 percent, is payable in annual installments including interest of $132,150, and is due in full on May 31, 2019.

The Company financed two unsecured notes during 2013, each in the amount of $1,356,133, issued by trusts controlled by two stockholders of the Company. The notes bear interest at 1 percent compounded annually and mature on May 25, 2020. Interest shall be due and paid annually. Any amounts unpaid will be capitalized and added to the principal of the notes. The total amount outstanding on these notes at December 31, 2017 and 2016 is $2,712,266.

Note 7 - Property and Equipment

Property and equipment are summarized as follows:

 

     2017      2016      Depreciable
Life - Years
 

Land

   $ 2,838,659      $ 738,659         

Buildings and building improvements

     8,569,162        3,200,930        39  

Equipment

     7,673,202        7,475,638        3  

Furniture and fixtures

     12,078,200        11,252,832        5  

Computer equipment and software

     33,771,220        32,359,031        3-5  

Leasehold improvements

     20,777,150        26,107,909        10  

Construction in progress

     5,587,366        2,504,403         
  

 

 

    

 

 

    

Total cost

     91,294,959        83,639,402     

Accumulated depreciation and amortization

     39,831,974        34,930,485     
  

 

 

    

 

 

    

Net property and equipment

   $ 51,462,985      $ 48,708,917     
  

 

 

    

 

 

    

Depreciation and amortization expense was $12,391,420 in 2017 and $11,051,828 in 2016.

 

20


Caidan Enterprises, Inc. and Subsidiaries

 

Notes to Consolidated Financial Statements

December 31, 2017 and 2016

Note 8 - Accrued Healthcare Costs Payable

The estimated reserve for claims incurred but not reported has been determined by an independent actuary. Although management believes that the provision for accrued healthcare costs payable is adequate, no assurance can be given that the ultimate settlements of these liabilities may not be greater or less than such estimates. Any future adjustments to these amounts will affect the reported results of future periods.

 

     2017      2016  

Accrued healthcare costs payable - Beginning of year

   $ 428,952,619      $ 373,192,020  

Incurred claim:

     

Provision for claims incurred in current year

     2,956,594,392        2,576,151,699  

(Decrease) increase in provision for claims incurred in prior years

     (22,536,703      3,273,764  
  

 

 

    

 

 

 

Total incurred

     2,934,057,689        2,579,425,463  

Payments related to:

     

Current year

     2,401,955,851        2,183,357,364  

Prior years

     503,421,855        340,307,500  
  

 

 

    

 

 

 

Total paid

     2,905,377,706        2,523,664,864  
  

 

 

    

 

 

 

Accrued healthcare costs payable - End of year

   $ 457,632,602      $ 428,952,619  
  

 

 

    

 

 

 

For the purpose of the table above, accrued healthcare costs payable at year end apply a balance gross of eliminations of $31,873,002 and $59,627,550 at December 31, 2017 and 2016, respectively, for amounts due from the health plans to MeridianRx, LLC. Total incurred amounts relating to amounts administered by MeridianRx, LLC for pharmacy costs totaling $550,192,811 and $466,322,979 for 2017 and 2016, respectively, are eliminated upon consolidation. Therefore, the balances in the table above are representative of the amounts incurred by the Meridian Health Plans and payable to hospitals and medical providers, as well as MeridianRx, LLC, and will not reflect accrued healthcare costs payable on the consolidated balance sheet or program expenses for healthcare delivery on the consolidated statement of operations as of December 31, 2017 or 2016 due to the eliminations noted above.

Reserves for incurred claims and claims adjustment expenses attributable to insured events of prior years changed in 2017 and 2016 as a result of claims development patterns emerging differently than originally estimated. The favorable development recognized in 2017 of $22.5 million is largely related to Meridian Health Plan of Michigan, Inc.’s MI Health Link and Medicaid program and the costs and claim submissions for a subset of membership within those programs not developing at the rate assumed when establishing the accrued healthcare costs payable. The unfavorable development in 2016 of $3.3 million was a combination of favorable development within the Michigan Medicaid populations resulting from lower than expected utilization and unfavorable development within the Illinois Medicaid populations as a result of completion factors and claim submission and payment patterns not developing as originally assumed. Original estimates are increased or decreased as additional information becomes known regarding individual claims.

 

21


Caidan Enterprises, Inc. and Subsidiaries

 

Notes to Consolidated Financial Statements

December 31, 2017 and 2016

Note 8 - Accrued Healthcare Costs Payable (Continued)

The following is information about incurred and paid claims development as of December 31, 2017 as well as IBNR and cumulative reported claims by loss year. The information related to incurred and paid claims development for the years ended December 31, 2016 to 2017 is presented below. The 2016 information is unaudited. Information regarding incurred and paid claims development represents medical health claims only. Other components of the program expenses do not incur significant change in estimates and development for the purpose of this disclosure. Development in 2017 for medical health claims represented $15,738,683 of the decrease in the provision for claims incurred for prior years with the remaining decrease of $6,798,020 relating to other claim types.

 

     Cumulative Incurred Claims for the
Years Ended December 31
     As of December 31, 2017  

Service Year

   2016      2017      Total IBNR and
Bulk Reserves
     Cumulative
Number of
Reported Claims
 

2016

   $ 1,933,828,330      $ 1,918,772,229      $ 11,927,673        11,410,894  

2017

        2,236,853,056        366,944,871        11,363,109  
     

 

 

       

Total

      $ 4,155,625,285        
  

 

 

       
     Cumulative Paid Claims for the
Years Ended December 31
               

Service Year

   2016      2017                

2016

   $ 1,595,775,390      $ 1,906,844,556        

2017

        1,869,908,185        
     

 

 

       

Total

      $ 3,776,752,741        
  

 

 

       

Accrued healthcare costs payable - Medical health claims

 

   $ 378,872,544        
  

 

 

       

 

22


Caidan Enterprises, Inc. and Subsidiaries

 

Notes to Consolidated Financial Statements

December 31, 2017 and 2016

Note 8 - Accrued Healthcare Costs Payable (Continued)

The significant components of incurred program expenses are as follows:

 

     2017      2016  
     Incurred Expenses
Including Loss
Adjustment
Expenses
     Accrued Health
Care Cost
Payable
     Incurred Expenses
Including Loss
Adjustment
Expenses
     Accrued Health
Care Cost
Payable
 

Medical health claims

   $ 2,221,796,955      $ 378,872,544      $ 1,947,717,032      $ 338,052,940  

Pharmacy

     551,383,217        32,034,922        468,145,343        59,645,049  

Dental

     75,840,883        10,929,327        97,398,445        1,712,903  

Transportation

     26,874,268        —          21,142,804        168,989  

Medical other

     58,162,366        35,795,809        45,021,839        29,372,738  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 2,934,057,689      $ 457,632,602      $ 2,579,425,463      $ 428,952,619  
  

 

 

    

 

 

    

 

 

    

 

 

 

Note 9 - Premium Deficiency Reserves

As of December 31, 2017 and 2016, the Company has no liabilities related to premium deficiency reserves as determined by an independent actuary. The Company did not consider investment income in its evaluation of premium deficiency reserves.

Note 10 - Reinsurance

The Company’s subsidiary, Meridian Health Plan of Michigan, Inc., maintains a reinsurance policy to provide coverage on an annual per member basis after a deductible for eligible services is reached. For the period from January 1, 2016 through December 31, 2016, the Company had two reinsurance policies in effect. The first agreement was with a related party through common ownership and management, and the deductible is $1,000,000. In 2016, this reinsurance agreement will cover 10 percent of losses incurred per member between $1,000,000 and $2,000,000 and 100 percent of losses incurred per member between $2,000,000 to $3,000,000, excess of $300,000 self-insured retention. The second agreement has a deductible of $300,000 from January 1, 2016 through June 30, 2017. The deductible for the period from July 1, 2017 through December 31, 2017 is $400,000. The maximum agreement period reinsurance indemnity payable is $2,000,000 per member for the period from January 1, 2016 through June 30, 2017. The maximum agreement period reinsurance indemnity payable is $5,000,000 per member for the period from July 1, 2017 through December 31, 2017. In 2017, the Company also maintained a reinsurance policy to provide coverage for a separate covered population on an annual per member basis after a deductible for eligible services is reached. The agreement has a deductible of $250,000 and a maximum agreement period reinsurance indemnity payable of $2,000,000 per member for the period from January 1, 2017 through December 31, 2017. The Company has reported premiums net of reinsurance ceded of $2,435,684 and $2,150,942 as of December 31, 2017 and 2016, respectively. Losses recovered by the Company totaled approximately $2,524,000 and $4,672,000 in 2017 and 2016, respectively. At December 31, 2017 and 2016, the Company has a reinsurance receivable recorded of $3,264,841 and $4,122,280, respectively.

 

23


Caidan Enterprises, Inc. and Subsidiaries

 

Notes to Consolidated Financial Statements

December 31, 2017 and 2016

Note 10 - Reinsurance (Continued)

The Company’s subsidiary, Meridian Health Plan of Illinois, Inc., maintains a noncancelable reinsurance policy with a nonaffiliated reinsurer to provide coverage on an annual per member basis after a deductible for eligible services is reached. The deductible for the period from January 1, 2016 through June 30, 2017 is $350,000. The deductible for the period from July 1, 2017 through December 31, 2017 is $450,000. The maximum annual reinsurance coverage payable under the agreement from January 1, 2016 through June 30, 2017 is $2,000,000 per member. The maximum annual reinsurance coverage payable under the agreement from July 1, 2017 through December 31, 2017 is $5,000,000 per member. The Company has reported premiums net of reinsurance ceded of $4,146,484 and $3,303,996 during the years ended December 31, 2017 and 2016, respectively. Losses recovered by the Company totaled $4,131,694 and $3,071,586 for the years ended December 31, 2017 and 2016, respectively. At December 31, 2017 and 2016, the Company has a reinsurance receivable recorded of $4,549,579 and $3,253,656, respectively.

At December 31, 2017 and 2016, the Company has other reinsurance receivable recorded of $0 and $176,521, respectively.

The Company does not have assumed reinsurance, uncollectible reinsurance, or retroactive reinsurance.

These reinsurance agreements permit recovery of a portion of losses from the reinsurance carrier, although it does not discharge the primary liability of the Company as direct insurer of the risks reinsured.

Note 11 - Notes Payable and Lines of Credit

In August 2015, Caidan Enterprises, Inc., Caidan Holding Company, Inc., Caidan Management Company, LLC, and MeridianRx, LLC, collectively as co-borrowers, entered into a revolving credit and draw to term loan agreement that expires on August 25, 2020. The credit facility is collateralized by substantially all of the assets of the co-borrowers, and the obligation is joint and several between these parties. The revolving credit facility allows maximum borrowings of $150,000,000 with interest at the base rate plus 0.50 percent or Eurodollar base rate plus 1.50 percent, as elected by management. The draw to term loan allows maximum borrowing of $100,000,000. Borrowings bear interest at the base rate plus 1.25 percent or Eurodollar base rate of 2.25 percent, as elected by management. At December 31, 2016, the outstanding amount on the revolving credit facility and draw to term loan was $127,157,681 and $95,000,000, respectively.

In May 2017 the co-borrowers entered into a new credit agreement and terminated the aforementioned agreement. The new credit agreement expires on August 25, 2020 with automatic extensions through May 2, 2022 that are contingent upon renewal of the Medicaid contract between Meridian Health Plan of Michigan, Inc. and the Michigan Department of Health and Human Services. The new revolving credit facility allows maximum borrowings of $175,000,000 with interest at the base rate plus 0.50 to 1.50 percent or the Eurodollar base rate plus 1.00 to 2.50 percent, as elected by management and determined by the net funded debt to EBITDA ratio and a facility fee of 0.75 percent per annum. At December 31, 2017, the outstanding amount on the revolving credit facility was $82,112,006, with an available balance of $92,887,994. The credit facility is collateralized by substantially all assets of the co-borrowers, and the obligation is joint and several between these parties.

The new draw to term loan allows maximum aggregate borrowings of $150,000,000. Borrowings bear interest at the base rate plus 0.75 to 2.25 percent or the Eurodollar base rate plus 1.75 to 3.25 percent, as elected by management and determined by the net funded debt to EBITDA ratio. Monthly interest payments and quarterly principal payments commence in June 2017. At December 31, 2017, the outstanding amount on the draw to term loan was $138,750,000.

 

24


Caidan Enterprises, Inc. and Subsidiaries

 

Notes to Consolidated Financial Statements

December 31, 2017 and 2016

Note 11 - Notes Payable and Lines of Credit (Continued)

The revolving credit and draw to term loan agreement contains covenants, the most restrictive of which are fixed-charge coverage ratio, minimum consolidated net income, funded debt to capitalization ratio, and funded debt to EBITDA ratio. Compliance with those covenants is calculated on a combined basis including the co-borrowers. The agreement also limits the amount of annual shareholder distributions to 60 percent or 45 percent of S-Corporation taxable income for the Company’s fiscal year based on whether the net funded debt to EBITDA ratio is less than 2.50 to 1.00 or greater than or equal to 2.50 to 1.00, respectively. As of December 31, 2017 the Company’s net funded debt to EBITDA ratio is less than 2.50 to 1.00.

The new credit agreement also extended additional credit to Meridian Health Plan of Illinois through an ABL credit facility of $150,000,000, which is collateralized by all eligible receivables due from the State of Illinois. In November 2017, the credit facility was amended to release MHP–IL as a borrower and remove the provision of the ABL credit facility. The amendment also consented to MHP-IL’s separate financing agreement while also releasing the collateralized eligible accounts of MHP-IL.

Effective November 3, 2017, the Company’s subsidiary, Meridian Health Plan of Illinois, Inc., entered into a revolving loan credit facility which allows maximum borrowings of $600,000,000. The commitment termination date is the earlier of November 3, 2019 or the date on which the State of Illinois rating is downgraded to a Ba1, BB+, or BB+ by Moody’s, S&P, or Fitch, respectively. Outstanding balances are due on October 31, 2067. At December 31, 2017, $208,883 was outstanding under the facility which is offset by unamortized loan acquisition costs of $229,816. Additional unpaid accrued interest of $542,814 is outstanding at December 31, 2017. Repayments of outstanding balances are applied as state capitation payments are received on eligible accounts receivable that are included in the borrowing base for amounts outstanding at date of receipt. Interest of 1.0 percent of any amount approved and unpaid after a 90-day period from the due date shall be added for each month, or 0.033 percent of any amount approved and unpaid for each day after the end of this 90-day period until final payment is made, commensurate with the Illinois State Prompt Payment Act, and is paid only upon receipt of such prompt payment penalties from the State of Illinois. The revolving loan credit facility is also subject to certain financial covenants including a risk-based capital ratio and minimum net worth requirements. The revolving credit facility is collateralized by all eligible receivables due from the State.

The Company entered into a promissory note for $4,900,000 in 2017 for the purchase of property. Interest accrues at a fixed rate of 4.0 percent, with interest payments due in monthly installments beginning in January 2017. Final principal payment, along within any outstanding accrued interest, shall be due in January 2021. The note is secured by a security agreement and mortgage. The outstanding balance at December 31, 2017 is $4,900,000.

At December 31, 2017, future minimum payments on the term loan and promissory note are as follows:

 

Years Ending

   Principal
Payments
     Debt Issuance
Costs
     Total Note
Payable
 

2018

   $ 18,712,500      $ (744,356    $ 17,968,144  

2019

     19,950,000        (744,356      19,205,644  

2020

     23,741,250        (744,356      22,996,894  

2021

     29,905,000        (744,356      29,160,644  

2022

     51,341,250        (248,117      51,093,133  
  

 

 

    

 

 

    

 

 

 

Total

   $ 143,650,000      $ (3,225,541    $ 140,424,459  
  

 

 

    

 

 

    

 

 

 

 

25


Caidan Enterprises, Inc. and Subsidiaries

 

Notes to Consolidated Financial Statements

December 31, 2017 and 2016

Note 12 - Income Taxes

The components of the income tax provision included in the consolidated statement of operations are all attributable to continuing operations and are detailed as follows:

 

     2017      2016  

Current (recovery) expense - Federal

   $ (3,726,017    $ 13,355,443  

Current expense - State and local

     2,636,700        4,553,426  

Net deferred expense - Federal

     13,185        497,810  

Net deferred expense - State

     85,433        81,382  
  

 

 

    

 

 

 

Net income tax (recovery) expense

   $ (990,699    $ 18,488,061  
  

 

 

    

 

 

 

A reconciliation of income tax at the statutory federal rate (currently 35 percent for the tax years presented) to income tax at the effective rate is as follows:

 

     2017      2016  

Income tax expense at statutory federal rate

   $ 33,650,833      $ 42,436,529  

Income not subject to tax

     (38,329,683      (45,606,818

State income tax, net of federal benefit

     2,644,706        3,547,460  

Tax-exempt income deduction

     (202,369      (207,160

Impact of rate change

     765,804        —    

Nondeductible expenses

     26,250        46,355  

Nondeductible health insurer fee

     —          18,609,330  

Other

     453,760        (337,635
  

 

 

    

 

 

 

Net income tax (recovery) expense

   $ (990,699    $ 18,488,061  
  

 

 

    

 

 

 

The details of the net deferred tax asset at December 31 are as follows:

 

     2017      2016  

Gross deferred tax liabilities - Federal

   $ (515,227    $ (291,533

Gross deferred tax assets - Federal

     1,330,395        1,692,633  

Gross deferred tax liabilities - State

     (98,139      (33,318

Gross deferred tax assets - State

     253,408        208,729  
  

 

 

    

 

 

 

Net deferred tax asset

   $ 970,437      $ 1,576,511  
  

 

 

    

 

 

 

Federal deferred tax liabilities result principally from unrealized investment gains and basis differences in equity method investments. Federal and state deferred tax assets result from recognition of expenses for financial reporting purposes that are not deductible for tax purposes until paid, discounting of claims reserves, and unrealized investment losses. No valuation allowance has been recognized for deferred tax assets in 2017 and 2016.

On December 22, 2017, the Tax Cuts and Jobs Act (TCJA) was signed into law. Among other changes, the TCJA reduces the corporate federal income tax rate to 21 percent effective January 1, 2018. As a result, the Company was required to revalue its deferred tax assets and liabilities as of the enactment date based on the new tax rate. The revision resulted in a reduction to the carried net deferred tax asset on December 22, 2017 with a corresponding increase to income tax expense.

 

26


Caidan Enterprises, Inc. and Subsidiaries

 

Notes to Consolidated Financial Statements

December 31, 2017 and 2016

Note 13 - Operating Leases

The Company leases its office spaces under operating leases through December 2025. Total rent expense was $15,874,318 and $15,425,582 for the years ended December 31, 2017 and 2016, respectively. The Company has lease agreements with a related party as disclosed in Note 5.

The Company also leases office equipment under various noncancelable operating lease agreements that expire through November 2021. Rental expense for office equipment was $317,244 and $234,185 for the years ended December 31, 2017 and 2016, respectively.

Future minimum rental commitments under these operating leases are as follows:

 

Years Ending

   Related Party      Unrelated      Total  

2018

   $ 11,178,769      $ 5,456,434      $ 16,635,203  

2019

     11,407,571        5,521,821        16,929,392  

2020

     11,637,205        5,572,718        17,209,923  

2021

     11,867,696        5,659,780        17,527,476  

2022

     12,099,070        5,651,982        17,751,052  

Thereafter

     24,895,929        13,013,680        37,909,609  
  

 

 

    

 

 

    

 

 

 

Total

   $ 83,086,240      $ 40,876,415      $ 123,962,655  
  

 

 

    

 

 

    

 

 

 

Note 14 - Retirement Plans

The Company’s subsidiary, Caidan Management Company, LLC, sponsors a 401(k) plan for substantially all employees. The plan provides for the Company to make a discretionary employer matching contribution. Contributions to the plan totaled $3,792,808 and $2,959,485 for the years ended December 31, 2017 and 2016, respectively.

Note 15 - Guarantees

At December 31, 2017, the Company guarantees three separate loan agreements obtained by a company in which it owns a 33 percent interest. The loan agreements are also guaranteed by five other companies that have an ownership interest in the entity, and the obligation under the guarantee is joint and several between these six parties. The three notes allow borrowings up to $5,150,726, $16,135,947, and $973,500. Each guarantor’s obligation is limited to 50 percent of the amount outstanding on the loans, times its ownership percentage in the company, of which the Company’s is 33 percent.

At December 31, 2017, Caidan Enterprises, Inc. guarantees two loans obtained by a company in which its subsidiary, Caidan Management Company, owns a 50 percent interest. The loans are also guaranteed by the other 50 percent owner and the obligation under the guarantees are joint and several between these two parties. In the event of default, and only if certain conditions exist, Caidan Enterprises, Inc. and the other unrelated entity would be obligated, jointly and severally, under the terms of the guarantee to settle the debt. The total outstanding balance on the loans is $125,000,000 at December 31, 2017. This guarantee agreement requires Caidan Enterprises, Inc. to maintain certain financial covenants, including maintaining a minimum amount of liquid assets, as well meeting certain net worth requirements.

In the event of default on the loans, the Company could be obligated to repay its share of the amounts outstanding on the loan agreements. As of December 31, 2017, the maximum potential future obligations under these guarantees total $128,672,928. In the event the Company is required to make payments under these guarantees, the Company could seek to recover those amounts from the primary obligors of the debt; however, the Company does not hold specific recourse or collateral rights in connection with these guarantees. As of December 31, 2017, the Company is unaware of any circumstances that would require performance under these guarantees.

 

27


Caidan Enterprises, Inc. and Subsidiaries

 

Notes to Consolidated Financial Statements

December 31, 2017 and 2016

Note 16 - Retrospectively Rated Contracts and Contracts Subject to Redetermination

As part of the Company’s subsidiaries’ (Meridian Health Plan of Michigan, Inc. and Meridian Health Plan of Illinois, Inc.) contract for services under various Medicare plans with CMS under Medicare Part D, the parties have agreed to a risk-sharing arrangement whereby the amount the Company receives in premiums from members and CMS is compared to actual drug costs incurred during the contract year. Based on the risk-sharing provision and activity to date, an estimated risk-sharing payable or receivable is recorded as an adjustment to premium revenue. An estimate for accrued retrospective premiums receivable of $3,435,283 and $2,397,259 has been recorded at December 31, 2017 and 2016, respectively. Actual amounts could differ from these estimates upon final determination.

As part of the Company’s subsidiaries’ (Meridian Health Plan of Michigan, Inc. and Meridian Health Plan of Illinois, Inc.) contract for services under the MI Health Link Plan, Medicare-Medicaid Alignment Initiative Plans, Medicare Advantage Plans, and Medicare Part D Prescription Drug Plan with CMS, the parties have agreed to a risk adjustment arrangement whereby premiums will be retroactively risk adjusted based on the risk scores of the members. At December 31, 2017 and 2016, the Company has recorded a risk adjustment receivable of $10,532,763 and $8,225,325, respectively, from CMS, which is recorded in accrued retrospective premiums on the consolidated balance sheet.

As part of the Company’s subsidiary’s (Meridian Health Plan of Illinois, Inc.) contract for Medicaid services under the Family Health Plan, Affordable Care Act, and Integrated Care Programs with the Illinois Department of Healthcare and Family Services (HFS), the parties have agreed to a risk adjustment arrangement whereby premiums will be retroactively risk adjusted based on the risk scores of the members. The risk adjustment factor is estimated based on experience to date and determinations of the Company’s risk score versus the overall geographical market risk score. The risk adjustment factor is a component of the monthly capitation premiums received from HFS and, therefore, any receivable or payable balance is recorded within uncollected premiums on the consolidated balance sheet.

The Company’s subsidiary (Meridian Health Plan of Michigan, Inc.) is subject to components of the risk-sharing provisions of the Affordable Care Act (ACA). At December 31, 2017 and 2016, a risk-sharing payable of $8,400,000 and $3,541,000, respectively, was recorded in aggregate health policy reserves on the consolidated balance sheet for the ACA risk-sharing provisions. Risk adjustment user fees included in general administrative expenses were $795,088 and $325,955 in 2017 and 2016, respectively. The final determination of 2017 program payables and receivables will be determined no earlier than June 30, 2018 by the federal government. The final determination of the 2016 program resulted in a $2,543,153 payment and a favorable adjustment of $997,847 compared to the estimate reported at December 31, 2016. Although management believes the amount recorded at December 31, 2017 to be reasonable in light of the quality and availability of the data, management also believes the ultimate settlement of these amounts could be significantly different from the estimate.

As part of the Company’s subsidiary’s (Meridian Health Plan of Iowa, Inc.) contract for services under the Iowa Health and Wellness Plan with the Iowa Department of Human Services (DHS), the parties have agreed to a risk-corridor arrangement based on the medical loss ratio for this population. The Company is required to refund premiums to DHS to the extent that the medical loss ratio falls below 85 percent in 2016 and prior years. DHS will reimburse the Company for medical costs resulting in the medical loss ratio being in excess of 87.5 percent in 2016 and prior years. At December 31, 2016, the Company has recorded an amount due to DHS of $1,292,576. There was no amount reported at December 31, 2017. While management believes these estimates are accurate, it is reasonably possible that a change in estimate will occur in the near term as a result of actual loss experience differing from projected loss experience.

The Company has miscellaneous risk-sharing receivables of $35,982 and $169,943 recorded in accrued retrospective premiums on the consolidated balance sheet at December 31, 2017 and 2016, respectively. Miscellaneous payables recorded in aggregate health policy reserves related to other risk-sharing provisions within effective contracts amount to $3,621,510 and $2,930,006 at December 31, 2017 and 2016, respectively.

 

28


Caidan Enterprises, Inc. and Subsidiaries

 

Notes to Consolidated Financial Statements

December 31, 2017 and 2016

Note 17 - Uninsured Plans

The Company’s subsidiaries (Meridian Health Plan of Michigan, Inc., Meridian Health Plan of Illinois, Inc., and Meridian Health Plan of Iowa, Inc.) serve as plan sponsors offering Medicare Part D prescription drug coverage under various contracts with CMS. Under the Medicare Part D program, several elements of payments received by the Company, including the reinsurance subsidy and the low-income cost-sharing subsidy, represent cost reimbursements under the Medicare Part D program. Amounts owing or received for these subsidies are not reflected as premiums, but rather are accounted for as a receivable and/or deposit. Total reimbursements for pharmacy benefit costs were $64,337,038 and $59,603,616 for the years ended December 31, 2017 and 2016, respectively. These amounts represent pharmacy benefit cost reimbursements for the reinsurance subsidy and the low-income cost-sharing subsidy elements of the Medicare Part D program.

The Company estimated amounts receivable (payable) between state contracts in connection with the Company’s Medicare Part D prescription drug coverage of $11,000,688 and $(69,306), respectively, at December 31, 2017, and $11,943,580 and $(45,518), respectively, at December 31, 2016. Subsequent to the end of the plan year, a settlement payment will be made between CMS and the Company based on actual claims and premium experience.

The Company’s subsidiaries (Meridian Health Plan of Michigan, Inc. and Meridian Health Plan of Illinois, Inc.) participate in transfer payment programs with the states of Michigan and Illinois, whereby pass-through payments are paid first to the Company’s subsidiaries and then are passed on to various hospitals and providers. Payments received from the states of Michigan and Illinois during the years ended December 31, 2017 and 2016 totaled approximately $755,865,000 and $819,080,000, respectively. As of December 31, 2017 and 2016, the Company recorded total liabilities of $90,614,789 and $141,116,811, respectively, related to these programs. The Company did not reflect any administrative expenses, reimbursement for such expenses, or a net gain or loss related to these programs for the years ended December 31, 2017 and 2016.

Note 18 - Healthcare Receivables

At December 31, 2017 and 2016, the Company recorded healthcare receivables totaling $50,656,031 and $48,379,801, respectively, which include ACA fee reimbursements, risk-sharing receivables, trade accounts receivable, and other miscellaneous amounts. The ACA fee reimbursements receivable totaling $9,510,154 and $38,511,514 as of December 31, 2017 and 2016, respectively, relate to a reimbursement for amounts paid by the Company in 2016 for the ACA Health Insurer Fee as well as for the increased federal tax incurred as a result of the additional premium revenue to cover the health insurer fee due from the Michigan Department of Health and Human Services and the Illinois Department of Healthcare and Family Services.

The Company estimates that it is owed a net amount of $24,486,122 related to shared savings from risk-sharing contract provisions, which is recorded as a healthcare receivable at December 31, 2017 and related to services provided for the year ended December 31, 2017. As of the report date, net amounts receivable related to these risk-sharing provisions have not been invoiced or collected.

At December 31, 2017 and 2016, the Company’s accounts receivable balance due from unaffiliated customers totals $15,597,707 and $9,033,847, respectively.

At December 31, 2017 and 2016, the Company recorded other receivables of $1,062,048 and $834,440, respectively.

 

29


Caidan Enterprises, Inc. and Subsidiaries

 

Notes to Consolidated Financial Statements

December 31, 2017 and 2016

Note 19 - Regulatory Matters

Under Michigan statutes, Meridian Health Plan of Michigan, Inc. is required to maintain a minimum net worth of $7,500,000 or an amount determined adequate by the insurance commissioner in accordance with MCL 500.410(2) and (3) at December 31, 2017. As of December 31, 2017, Meridian Health Plan of Michigan, Inc. had a statutory net worth of approximately $186,800,000. Meridian Health Plan of Michigan, Inc. is limited by statute to paying dividends no greater than 100 percent of annual income or 10 percent of surplus without prior approval of the Michigan Department of Insurance and Financial Services.

Under Illinois statutes, Meridian Health Plan of Illinois, Inc. is required to maintain a minimum net worth of $500,000 at December 31, 2017. As of December 31, 2017, Meridian Health Plan of Illinois, Inc. had a statutory net worth of approximately $128,800,000. Meridian Health Plan of Illinois, Inc. is subject to dividend limitations and prior notification requirements for dividends per 215 Chapter 5 Section 131.20a(2) of the Illinois Insurance Code.

Under Iowa statutes, Meridian Health Plan of Iowa, Inc. is required to maintain a minimum net worth of $5,000,000 at December 31, 2017. As of December 31, 2017, Meridian Health Plan of Iowa, Inc. had a statutory net worth of approximately $2,000,000 following state-approved dividend distributions. Meridian Health Plan of Iowa, Inc. is subject to dividend limitations and prior notification requirements for dividends per 191 Chapter 45 Section 45.10(521A) of the Iowa Insurance Code.

The Company’s subsidiary, Meridian Health Plan of Illinois, Inc., issued a surplus note to Caidan Holding Company, Inc. on December 26, 2017 in the amount of $35,000,000, which is fully eliminated upon consolidation.

Meridian Health Plan of Michigan, Inc., Meridian Health Plan of Illinois, Inc., and Meridian Health Plan of Iowa, Inc. are also subject to certain risk-based capital (RBC) requirements as specified by the National Association of Insurance Commissioners (NAIC). The NAIC requires insurance companies to submit annual RBC filings. The intent of this requirement is to help regulators identify insurers that are in financial difficulty by establishing minimum capital needs based on risks applicable to a specific insurer. The calculations for determining the amount of RBC utilize a series of dynamic formulas containing a variety of weighting factors that are applied to financial balances or levels of activity. As of December 31, 2017 and 2016, Meridian Health Plan of Michigan, Inc., Meridian Health Plan of Illinois, Inc., and Meridian Health Plan of Iowa, Inc.’s levels exceeded the minimum requirements.

Note 20 - ACA/HIP Fee

The Company is subject to an annual fee under Section 9010 of the Patient Protection and Affordable Care Act (PPACA). A health insurance entity’s portion of the annual fee becomes payable once the entity provides health insurance for any U.S. health risk for each calendar year beginning on or after January 1, 2014. Each health insurance entity’s annual fee is based on the ratio of the amount of the entity’s subject net premiums written during the preceding calendar year (data year) compared to the aggregate amount of subject net health premiums written by all subject U.S. health insurance providers and is payable to the U.S. Treasury on September 30 of the applicable calendar year. The liability recognition is not required as of December 31, 2017 for the upcoming year’s assessment. During 2017, the United States Treasury and Internal Revenue Service issued Moratorium on Annual Fee on Health Insurance Providers, which suspends the collection of the health insurance provider fee for the 2017 calendar year. Thus, health insurance issuers, which includes the Company, are not required to pay these fees for 2017. This moratorium did not affect the filing requirement and payment of these fees for 2016. The moratorium has no effect on the fee amount for the 2018 fee year.

The Company is considered a controlled group under the provisions of the PPACA. Each member of the controlled group is considered jointly and severally liable for the aggregate liability of the controlled group. The Company paid PPACA fees during 2016 of approximately $53.2 million.

 

30


Caidan Enterprises, Inc. and Subsidiaries

 

Notes to Consolidated Financial Statements

December 31, 2017 and 2016

Note 20 - ACA/HIP Fee (Continued)

The Michigan Department of Health and Human Services and the State of Illinois Department of Healthcare and Family Services have indicated that Meridian Health Plan of Michigan, Inc. and Meridian Health Plan of Illinois, Inc. will be reimbursed for amounts paid in 2016 related to the PPACA fee as well as for the increased federal tax incurred as a result of the additional premium revenue to cover the health insurer fee. The amounts recorded are disclosed in Note 18.

Note 21 - Commitments and Contingencies

The Company’s subsidiary, Caidan Management Company, LLC, is a defendant in lawsuits in the normal course of business. Management is of the opinion that no litigation matters are outstanding or pending that will have a material effect on its financial position or results of operations.

The revolving credit facility obtained by Meridian Health Plan of Illinois, Inc. during 2017 (see Note 11) contains an early termination fee provision that requires the borrower to pay the lender a fee of $40,000,000 in the event of a major corporate action such as a merger, consolidation, or change in control. The planned acquisition by WellCare Health Plan, Inc. (“WellCare”) (see Note 24) will trigger the early termination fee due under the change in control provision, to be paid from the proceeds of the sale.

The Company engaged a financial services firm to assist throughout the negotiation process on the pending acquisition by WellCare (see Note 24). Once the acquisition by WellCare has been finalized it will trigger a fee payable to the financial services firm of $20,000,000, to be paid from the proceeds of the sale.

The Company has a phantom stock agreement with a key employee. Based on the terms of the agreement, the pending acquisition by WellCare will trigger the required payout of $25 million under the change in control provision.

Note 22 - Common Stock

Common stock at December 31, 2017 and 2016 is as follows:

 

     2017      2016  

Class A - Voting stock - No par value:

     

Authorized - 20,000 shares

Issued and outstanding - 940 shares

   $ 27,830      $ 27,830  

Class B - Nonvoting stock - No par value:

     

Authorized - 80,000 shares

Issued and outstanding - 8,460 shares

     250,470        250,470  
  

 

 

    

 

 

 

Total

   $ 278,300      $ 278,300  
  

 

 

    

 

 

 

In August 2014, the Company and a minority stockholder entered into a new Assignment, Redemption, and Employment Agreement whereby upon termination or retirement, the Company would be required to redeem the stockholder at an agreed-upon amount based on the book value of the Company. The stockholder terminated employment with the Company effective December 31, 2014. In accordance with the terms of the aforementioned agreement, the redemption occurred on January 1, 2015; however, generally accepted accounting principles require the Company to recognize the liability associated with the redemption in 2014 at adjusted fair value based upon the settlement amount. The redemption amount of $11,766,574 at December 31, 2014 was recorded in the consolidated financial statements as a liability, with an offsetting stock to be redeemed as a component of stockholders’ equity. The stock was redeemed on January 1, 2015. The terms of the agreement require payments, inclusive of interest at 3.25 percent, of $3,000,000 on January 31, 2015, 2016, and 2017, with the remaining balance due on January 31, 2018. The stock redemption obligation balance is $3,207,345 and $5,996,228 at December 31, 2017 and 2016, respectively. The obligation was paid in full subsequent to year end.

 

31


Caidan Enterprises, Inc. and Subsidiaries

 

Notes to Consolidated Financial Statements

December 31, 2017 and 2016

Note 23 - Cash Flows

Cash paid for interest and income taxes was as follows:

 

     2017      2016  

Interest

   $ 10,375,355      $ 4,162,225  

Income taxes

     1,123,000        22,435,000  

In 2017, the Company financed the purchase of property totaling $4,900,000. In addition, the Company had noncash investing activity related to the purchase of equipment that had not yet been paid at year end in the amount of $828,730 included in accounts payable at December 31, 2017.

In 2016, the Company had noncash investing activity related to the purchase of property and equipment that had not yet been paid at year end in the amount of $763,438 included in accounts payable at December 31, 2016.

Note 24 - Subsequent Events

Subsequent to December 31, 2017, the Company declared and paid dividends to stockholders of $44,483,000.

On May 28th, 2018 the Company entered into a purchase agreement with WellCare Health Plans, Inc. (“WellCare”) whereby WellCare has agreed to purchase, for approximately $2.5 billion, all shares of stock of Caidan Holding Company, Inc. and Subsidiaries, as well as all assets of MeridianRx, LLC and Caidan Management Company, LLC, with the exception of certain items which will be carved out. The transaction calls for payment of the estimated purchase price in cash, less an escrow of $125,000,000 at closing, subject to a potential closing working capital adjustment. The acquisition of these entities by WellCare is pending regulatory approval, but is anticipated to close during the fourth quarter of 2018.

The consolidated financial statements and related disclosures include evaluation of events up through and including July 10, 2018, which is the date the consolidated financial statements were available to be issued.

 

32


LOGO    LOGO

Independent Auditor’s Report

To the Board of Directors

Caidan Enterprises, Inc. and Subsidiaries

We have audited the accompanying consolidated financial statements of Caidan Enterprises, Inc. and Subsidiaries (the “Company”), which comprise the consolidated balance sheet as of December 31, 2017 and 2016 and the related consolidated statements of operations, comprehensive income, stockholders’ equity, and cash flows for the years then ended, and the related notes to the consolidated financial statements.

Management’s Responsibility for the Consolidated Financial Statements

Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.

Auditor’s Responsibility

Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit

opinion.

Opinion

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Caidan Enterprises, Inc. and Subsidiaries as of December 31, 2017 and 2016 and the results of its operations and its cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America.

 

LOGO

July 10, 2018

 

LOGO

(Back To Top)

Section 7: EX-99.5 (EX-99.5)

EX-99.5

Exhibit 99.5

Caidan Enterprises, Inc. and Subsidiaries

Consolidated Financial Report

March 31, 2018

(Unaudited)


Caidan Enterprises, Inc. and Subsidiaries

Contents

 

Consolidated Financial Statements

  

Balance Sheet as of March 31, 2018 (unaudited) and December  31, 2017

     1-2  

Statement of Operations for the three months ended March  31, 2018 and 2017 (unaudited)

     3  

Statement of Comprehensive Income for the three months ended March 31, 2018 and 2017 (unaudited)

     4  

Statement of Stockholders’ Equity for the three months ended March 31, 2018 and 2017 (unaudited)

     5  

Statement of Cash Flows for the three months ended March  31, 2018 and 2017 (unaudited)

     6  

Notes to Consolidated Financial Statements

     7-19  


Caidan Enterprises, Inc. and Subsidiaries

 

Consolidated Balance Sheet

 

     March 31,
2018
(Unaudited)
     December 31,
2017
 
Assets  

Current Assets

     

Cash and cash equivalents

   $ 463,887,112      $ 430,253,280  

Investments at fair value (Notes 3 and 4)

     88,447,634        90,812,846  

Accounts receivable:

     

Uncollected premiums

     391,223,912        339,508,336  

Healthcare receivables

     72,221,628        50,656,031  

Uninsured plans (Note 10)

     3,637,502        11,000,688  

Accrued retrospective premiums (Note 9)

     19,545,103        14,004,028  

Pharmacy rebates and other receivables

     12,945,016        8,218,635  

Related party receivable (Note 5)

     497,861        497,861  

Note receivable

     47,897        47,897  

Other current assets:

     

Prepaid expenses

     11,143,887        8,685,570  

Deferred health insurer fee (Note 11)

     48,896,836        —    

Accrued interest income

     28,830,419        28,776,299  

Reinsurance receivable

     7,912,254        7,814,420  

Taxes receivable

     2,792,595        5,275,916  

Other current assets

     424,241        1,016,147  
  

 

 

    

 

 

 

Total current assets

     1,152,453,897        996,567,954  

Property and Equipment - Net

     48,869,194        51,462,985  

Internally Developed Software - Net

     15,696,751        15,214,087  

Funds Maintained Under Statutory Requirements

     2,650,723        2,649,509  

Investments at Equity (Note 5)

     17,619,872        17,410,462  

Investments at Fair Value (Notes 3 and 4)

     118,918,350        121,484,961  

Other Assets

     

Related party note receivable

     2,712,266        2,712,266  

Deferred tax asset

     970,437        970,437  

Notes receivable - Net of current portion

     1,155,715        1,155,715  

Acquired membership - Net (Note 2)

     4,020,685        —    

Deposits and other assets

     573,122        590,923  
  

 

 

    

 

 

 

Total assets

   $ 1,365,641,012      $ 1,210,219,299  
  

 

 

    

 

 

 

 

See notes to unaudited consolidated financial statements.   1    


Caidan Enterprises, Inc. and Subsidiaries

 

Consolidated Balance Sheet (Unaudited) (Continued)

 

     March 31,
2018
(Unaudited)
     December 31,
2017
 
Liabilities and Stockholders’ Equity  

Current Liabilities

     

Accounts payable

   $ 82,393,950      $ 73,851,820  

Line of credit payable (Note 7)

     81,912,998        82,091,073  

Accrued healthcare costs payable (Note 6)

     455,100,333        425,759,600  

Aggregate health policy reserves (Note 9)

     11,688,780        12,021,510  

Liabilities for amounts held under uninsured plans (Note 10)

     109,846,305        90,684,095  

Related party payable (Note 5)

     236,217        236,217  

Capital lease obligation

     186,407        182,230  

Note payable (Note 7)

     22,955,644        17,968,144  

Accrued and other current liabilities:

     

Accrued compensation and employee-related obligations

     12,793,372        11,279,188  

Stock redemption obligation

     —          3,207,345  

Unearned premiums

     26,571,259        553,748  

Taxes payable

     —          62,358  

Deferred rent

     33,623        33,623  

Accrued health insurer fee (Note 11)

     65,195,781        —    

Other accrued liabilities

     27,542,319        22,615,049  
  

 

 

    

 

 

 

Total current liabilities

     896,456,988        740,546,000  

Capital Lease Obligation - Net of current portion

     325,623        378,007  

Long-term Notes Payable - Net of current portion (Note 7)

     117,654,904        122,456,315  

Long-term Deferred Rent - Net of current portion

     4,088,470        4,029,418  

Other Long-term Liabilities

     1,531,023        1,398,727  

Stockholders’ Equity

     345,584,004        341,410,832  
  

 

 

    

 

 

 

Total liabilities and stockholders’ equity

   $ 1,365,641,012      $ 1,210,219,299  
  

 

 

    

 

 

 

 

See notes to unaudited consolidated financial statements.   2    


Caidan Enterprises, Inc. and Subsidiaries

 

Consolidated Statement of Operations (Unaudited)

 

     For the Three Months Ended
March 31,
 
     2018     2017  

Revenue

    

Net premiums earned

   $ 947,752,778     $ 785,692,985  

Pharmacy revenue

     78,364,435       48,195,276  

Miscellaneous

     714,019       1,018,510  
  

 

 

   

 

 

 

Total revenue

     1,026,831,232       834,906,771  

Operating Expenses

    

Program expenses - Healthcare delivery (Note 6)

     691,109,976       584,044,551  

Pharmacy expense

     223,549,513       160,095,293  

General and administrative

     89,860,357       65,392,242  
  

 

 

   

 

 

 

Total operating expenses

     1,004,519,846       809,532,086  
  

 

 

   

 

 

 

Operating Income

     22,311,386       25,374,685  

Nonoperating Income (Expense)

    

Interest and dividend income from investments

     1,374,046       835,168  

Income from equity method investments (Note 5)

     209,410       313,599  

Realized gains (losses) on sale of investments

     19,287       (5,395

Interest expense on unpaid claims

     (1,482     (8,714

Interest expense

     (2,244,212     (1,592,935
  

 

 

   

 

 

 

Total nonoperating income (expense)

     (642,951     (458,277
  

 

 

   

 

 

 

Income - Before income taxes

     21,668,435       24,916,408  

Income Tax Expense (Recovery)

     3,650,429       81,748  
  

 

 

   

 

 

 

Consolidated Net Income

   $ 18,018,006     $ 24,834,660  
  

 

 

   

 

 

 

 

See notes to unaudited consolidated financial statements.   3    


Caidan Enterprises, Inc. and Subsidiaries

 

Consolidated Statement of Comprehensive Income (Unaudited)

 

     For the Three Months Ended
March 31,
 
     2018     2017  

Consolidated Net Income

   $ 18,018,006     $ 24,834,660  

Other Comprehensive (Loss) Income - Net of tax

    

Unrealized (loss) gain on debt securities:

    

Arising during the year

     (1,055,020     1,012,198  

Reclassification adjustment

     (6,814     5,395  
  

 

 

   

 

 

 

Total other comprehensive (loss) income

     (1,061,834     1,017,593  
  

 

 

   

 

 

 

Comprehensive Income

   $ 16,956,172     $ 25,852,253  
  

 

 

   

 

 

 

 

See notes to unaudited consolidated financial statements.   4    


Caidan Enterprises, Inc. and Subsidiaries

 

Consolidated Statement of Stockholders’ Equity (Unaudited)

Three Months Ended March 31, 2018 and 2017

 

     Common
Stock
     Additional
Paid-in Capital
     Retained
Earnings
    Accumulated
Other
Comprehensive
Income (Loss)
    Total  

Balance - January 1, 2017

   $ 278,300      $ 2,000      $ 308,417,149     $ 229,322     $ 308,926,771  

Comprehensive income:

            

Consolidated net income

     —          —          24,834,660       —         24,834,660  

Other comprehensive income

     —          —          —         1,017,593       1,017,593  

Dividends declared

     —          —          (27,685,000     —         (27,685,000
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Balance - March 31, 2017

   $ 278,300      $ 2,000      $ 305,566,809     $ 1,246,915     $ 307,094,024  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Balance - January 1, 2018

   $ 278,300      $ 2,000      $ 339,868,084     $ 1,262,448     $ 341,410,832  

Reclassification adjustment:

            

Unrealized gain on equity securities (Note 2)

     —          —          2,193,108       (2,193,108     —    

Comprehensive income:

            

Consolidated net income

     —          —          18,018,006       —         18,018,006  

Other comprehensive income (loss)

     —          —          —         (1,061,834     (1,061,834

Dividends declared

     —          —          (12,783,000     —         (12,783,000
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Balance - March 31, 2018

   $ 278,300      $ 2,000      $ 347,296,198     $ (1,992,494   $ 345,584,004  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

 

See notes to unaudited consolidated financial statements.   5    


Caidan Enterprises, Inc. and Subsidiaries

 

Consolidated Statement of Cash Flows (Unaudited)

 

     For the Three Months Ended
March 31,
 
     2018     2017  

Cash Flows from Operating Activities

    

Consolidated net income

   $ 18,018,006     $ 24,834,660  

Adjustments to reconcile consolidated net income to net cash from operating activities:

    

Depreciation and amortization

     3,147,123       2,990,580  

Amortization of internally developed software

     236,417       —    

Amortization of investment discounts

     743,878       881,539  

Amortization of loan acquisition costs

     216,897       108,931  

Amortization of acquired membership costs

     211,615       —    

(Gain) loss on sale of investments

     (19,287     5,395  

(Gain) loss on equity method investments, net of distributions

     (239,275     (129,635

Loss on disposal of property and equipment

     —         4,536  

Changes in operating assets and liabilities which (used) provided cash:

    

Accounts receivable

     (76,185,443     (183,840,167

Reinsurance receivable

     (97,834     285,363  

Other assets

     (1,908,371     1,114,805  

Accounts payable

     9,319,472       5,029,271  

Accrued and other current liabilities

     32,591,261       13,330,175  

Accrued healthcare costs payable

     48,170,213       113,054,404  

Health insurer fee - net

     16,298,945       —    

Deferred rent

     59,052       93,053  

Taxes payable

     (62,358     —    

Taxes receivable

     2,483,321       79,003  
  

 

 

   

 

 

 

Net cash provided by (used in) operating activities

     52,983,632       (22,158,087

Cash Flows from Investing Activities

    

Purchases of property and equipment

     (1,330,675     (3,875,432

Payments for internally developed software

     (719,081     (2,760,654

Purchases of investments

     (22,702,906     (10,807,728

Proceeds from sales and maturities of investments

     25,882,597       10,224,943  

Purchase of acquired membership

     (4,232,300     —    
  

 

 

   

 

 

 

Net cash used in investing activities

     (3,102,365     (7,218,871

Cash Flows from Financing Activities

    

Net repayments on line of credit

     (208,883     —    

Payments on long-term debt

     —         (5,000,000

Payments on stockholder’s liability

     (3,207,345     (2,788,883

Payments on capital lease obligations

     (48,207     (58,484

Dividends paid

     (12,783,000     (27,685,000
  

 

 

   

 

 

 

Net cash used in financing activities

     (16,247,435     (35,532,367
  

 

 

   

 

 

 

Net Increase (Decrease) in Cash and Cash Equivalents

     33,633,832       (64,909,325

Cash and Cash Equivalents - Beginning of year

     430,253,280       429,069,699  
  

 

 

   

 

 

 

Cash and Cash Equivalents - End of year

   $ 463,887,112     $ 364,160,374  
  

 

 

   

 

 

 

 

See notes to unaudited consolidated financial statements.   6    


Caidan Enterprises, Inc. and Subsidiaries

 

Notes to Unaudited Consolidated Financial Statements

Note 1 - Nature of Business

Caidan Enterprises, Inc.’s wholly owned subsidiaries consist of Caidan Management Company, LLC (Caidan Management Company), MeridianRx, LLC (MeridianRx), and Caidan Holding Company, Inc.; Caidan Management Company’s wholly owned subsidiaries consist of Building Amenities Cafeteria, LLC, Building Amenities Wellness Center, LLC, and Building Amenities Day Care, LLC; Caidan Holding Company, Inc.’s wholly owned subsidiaries consist of Meridian Health Plan of Michigan, Inc., Meridian Health Plan of Illinois, Inc., and Meridian Health Plan of Iowa, Inc. (collectively, the “Company”). The Meridian Health Plan entities cited above operate as state-licensed health maintenance organizations, which provide medical services to persons in the respective states who subscribe as recipients of state and federal health benefits under various Medicaid and Medicare plans. Caidan Management Company is a licensed third-party administrator. Caidan Management Company provides management and administrative services to Meridian Health Plan of Michigan, Inc., Meridian Health Plan of Illinois, Inc., Meridian Health Plan of Iowa, Inc., and MeridianRx, LLC. MeridianRx provides management and administrative services for prescription drug benefits to Meridian Health Plan of Michigan, Inc., Meridian Health Plan of Illinois, Inc., Meridian Health Plan of Iowa, Inc., and Caidan Management Company, LLC, in addition to unrelated companies.

Effective January 1, 2016, Meridian Health Plan of Iowa, Inc. ceased underwriting activities; however, the company will remain in operation to continue to service claims.

Basis of Presentation

The accompanying unaudited consolidated financial statements include the accounts of Caidan Enterprises, Inc. and its wholly owned subsidiaries, Caidan Holding Company, Inc., Meridian Health Plan of Michigan, Inc., Meridian Health Plan of Illinois, Inc., Meridian Health Plan of Iowa, Inc., MeridianRx, LLC, and Caidan Management Company, LLC and subsidiaries. All material intercompany accounts and transactions have been eliminated.

The accompanying unaudited consolidated interim financial statements have been prepared by the Company in accordance with accounting principles generally accepted in the United States of America and the rules and regulations of the Securities and Exchange Commission’s Regulation S-X. Certain information and note disclosures normally included in annual financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to those rules and regulations, although the Company believes that the disclosures made are adequate to make the information not misleading. The results of operations and cash flows for the three months ended March 31, 2018 and 2017 are not necessarily indicative of the results for the Company’s entire fiscal year. These financial statements should be read in conjunction with the annual consolidated financial report and notes thereto for the years ended December 31, 2017 and 2016.

Note 2 - Significant Accounting Policies

Below is a discussion of the Company’s significant accounting policies which affected the comparability of our consolidated results of operation, financial condition or cash flows for the periods presented. Refer to Note 2 - Significant Accounting Policies to the Consolidated Financial Statements included in the annual consolidated financial report for the years ended December 31, 2017 and 2016 for the full descriptions of the Company’s accounting policies.

 

7


Caidan Enterprises, Inc. and Subsidiaries

 

Notes to Unaudited Consolidated Financial Statements

Note 2 - Significant Accounting Policies (Continued)

Premium Revenue, Unearned Premiums and Uncollected Premiums

Health capitation premiums are recognized in the period members are entitled to related healthcare services. Premiums earned but not yet received are recorded as uncollected premiums and premiums received in advance of the period of service as unearned premiums in the consolidated balance sheet. Uncollected capitation balances are due primarily from the states of Michigan, Illinois, and Iowa, and total $391,223,912 and $339,508,336 at March 31, 2018 and December 31, 2017, respectively. Medicaid rate changes are recognized in the period the change becomes effective and the effect of the change is reasonably estimable. Certain Medicaid and Medicare premiums are subject to a risk adjustment arrangement whereby premiums will be retroactively risk adjusted based on the risk scores of the members. The Company recognizes changes to risk-adjusted premiums as revenue in the period amounts are determinable. See Note 9 for additional information on retrospectively rated contracts and contracts subject to redetermination. Unearned premiums at March 31, 2018 consist primarily of the April 2018 CMS Medicare premium advance of approximately $26,000,000. Unearned premiums at December 31, 2017 were not significant.

Healthcare Receivables

Healthcare receivables are comprised of the ACA fee reimbursements, shared savings from risk-sharing provisions, trade accounts receivable, accounts receivable related to pharmaceutical benefit management services provided to unaffiliated customers, and other receivables. Balances are evaluated on an on-going basis to determine amounts that may not be collectible based on a specific analysis of each outstanding balance and the customer or provider from which it’s due. Amounts deemed to be uncollectible are charged to the allowance for doubtful accounts in the period that such determination is made. Healthcare receivables are reported net of an allowance for doubtful accounts of $3,304,610 as of March 31, 2018 and December 31, 2017.

Acquired Membership

The Company purchased Medicaid membership within the State of Illinois during the first quarter of 2018 for approximately $4.2 million. The Company amortizes the cost of the purchased membership on a straight-line basis over 5 years. The recorded amount of the acquired membership is based on management’s best estimate of the fair value of the asset acquired. The useful life of the acquired membership is based on management’s best estimate of the period over which the asset is expected to contribute directly or indirectly to the future cash flows of the Company. Management annually evaluates the remaining useful life to determine whether events or circumstances warrant a revision to the remaining amortization periods. Amortization expense related to the acquired membership totaled $211,615 as of March 31, 2018.

Adoption of New Accounting Pronouncement

In January 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2016-01, Financial Instruments, which requires equity investments, other than those accounted for under the equity method of accounting or those that result in consolidation of the investee, to be measured at fair value with changes in fair value recognized in net income. This amendment also simplifies the impairment test of equity investments without readily determinable fair values. The new guidance was adopted prospectively as of January 1, 2018. The adoption of this guidance did not have a material impact on our consolidated results of operations, financial condition or cash flows for the three months ended March 31, 2018.

 

8


Caidan Enterprises, Inc. and Subsidiaries

 

Notes to Unaudited Consolidated Financial Statements

Note 2 - Significant Accounting Policies (Continued)

Upcoming Accounting Pronouncements

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), which will supersede the current revenue recognition requirements in Topic 605, Revenue Recognition. The ASU is based on the principle that revenue is recognized to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The ASU also requires additional disclosure about the nature, amount, timing, and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. The new guidance will be effective for the Company’s year ending December 31, 2019. The ASU permits application of the new revenue recognition guidance to be applied using one of two retrospective application methods. The majority of the Company’s consolidated revenue is derived from insurance contracts, which are specifically excluded from the scope of ASU No. 2014-09. Therefore, the new guidance will primarily impact the Company’s pharmacy revenue. Performance obligations associated with customer contracts of the Company are completed within one year. Consideration received for performance obligations is fixed based on ingredient costs, dispensing fees, and administrative fees for claims processing, all of which relate to the pharmacy revenue. The Company has completed its preliminary analysis and does not foresee significant revisions to contracts based on adoption of the new standard, and a full retrospective method will be applied. The adoption of this guidance is not anticipated to have a material effect on the Company’s results of operation, financial condition, or cash flows.

The FASB issued ASU No. 2016-02, Leases, that is expected to significantly change the accounting for both operating and capital lease contracts. The standard introduces a “right-to-use” approach to lease accounting. In essence, the proposed standard eliminates the off-balance-sheet accounting currently used for operating leases. This model would result in the recognition of a liability for payments due under the lease contract and a corresponding asset representing the right to use the underlying asset. Under U.S. GAAP, most leases currently classified as capital/financing leases would recognize amortization expense related to the “right-to-use” asset separately from interest expense related to the lease liability. Conversely, most leases currently classified as operating leases would not separate amortization expense from interest expense and would rather recognize a single “total lease expense.” The new guidance will be effective for the Company’s year ending December 31, 2020. The Company anticipates adoption in its fiscal year ending December 31, 2020 and expects leased items, as disclosed in in the annual consolidated financial report, to be reported as long-term assets with a corresponding liability for the lease commitments using a modified retrospective transition method to the beginning of the earliest period presented. The new lease standard is expected to have a significant effect on the Company’s consolidated balance sheet as a result of the leases classified as operating leases. The effects on the results of operations are not expected to be significant as recognition and measurement of expenses and cash flows for leases will be substantially the same under the new standard.

In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230) Restricted Cash. This update requires entities to reconcile, on the statement of cash flows, changes in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. The new guidance will be effective for the Company’s year ending December 31, 2019.

 

9


Caidan Enterprises, Inc. and Subsidiaries

 

Notes to Unaudited Consolidated Financial Statements

Note 2 - Significant Accounting Policies (Continued)

In March 2017, the FASB issued ASU 2017-08, Receivables-Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities. This guidance shortens the amortization period for certain callable debt securities held at a premium, requiring the premium to be amortized to the earliest call date. Under current GAAP, premiums and discounts on callable debt securities are generally amortized to the maturity date. The new guidance does not change the accounting for purchased callable debt securities held at a discount. The guidance will be effective for the Company’s year ending December 31, 2020. The Company is currently assessing the effect this guidance will have on our consolidated results of operation, financial condition and cash flows, but the effect is not expected to be material.

In February 2018, the FASB issued ASU 2018-02, Income Statement – Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, which allows entities to reclassify stranded tax effects resulting from the Tax Cuts and Jobs Act of 2017 from accumulated other comprehensive income to retained earnings. The guidance is effective for interim and annual periods beginning after December 15, 2018. Early adoption is permitted. The Company is currently assessing the effect this guidance will have on our consolidated results of operation, financial condition and cash flows.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326), which requires entities to use a current expected credit loss model, which is a new impairment model based on expected losses rather than incurred losses. Under this model, companies would recognize an impairment allowance equal to its current estimate of all contractual cash flows that the entity does not expect to collect from financial assets measured at amortized cost. The estimate would consider relevant information about past events, current conditions, and reasonable and supportable forecasts, which will result in recognition of lifetime expected credit losses upon loan origination. This guidance is effective for fiscal years beginning after December 15, 2020. The adoption of this guidance is not anticipated to have a material effect on the Company’s results of operations, financial condition, or cash flows.

 

10


Caidan Enterprises, Inc. and Subsidiaries

 

Notes to Unaudited Consolidated Financial Statements

Note 3 - Investments in Debt and Equity Securities - Fair Value

Investments at fair value consist of debt and equity securities. The estimated fair values of investments at March 31, 2018 and December 31, 2017 are as follows:

 

     March 31, 2018  
     Cost/Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Estimated Fair
Value
 

Equity securities:

           

Common stocks

   $ 15,011,147      $ 2,268,316      $ (45,344    $ 17,234,119  

Mutual funds

     2,526,938        4,523        (6,819      2,524,642  

Bonds:

           

Mortgage-backed securities

     74,770,276        118,878        (1,233,284      73,655,870  

Corporate securities

     80,236,209        108,734        (226,905      80,118,038  

Debt securities issued by the U.S. Treasury

     8,542,668        —          (27,436      8,515,232  

Debt securities issued by the states of the U.S.

     21,364,847        32,045        (132,345      21,264,547  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 202,452,085      $ 2,532,496      $ (1,672,133    $ 203,312,448  
  

 

 

    

 

 

    

 

 

    

 

 

 
     December 31, 2017  
     Cost/Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Estimated Fair
Value
 

Equity securities:

           

Common stocks

   $ 15,028,728      $ 2,246,199      $ (53,091    $ 17,221,836  

Mutual funds

     2,513,452        4,536        (10,342      2,507,646  

Bonds:

           

Mortgage-backed securities

     73,611,348        239,363        (725,365      73,125,346  

Corporate securities

     79,406,575        358,522        (232,752      79,532,345  

Debt securities issued by the U.S. Treasury

     7,755,348        1,615        (4,577      7,752,386  

Debt securities issued by the states of the U.S.

     27,933,350        156,121        (87,871      28,001,600  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 206,248,801      $ 3,006,356      $ (1,113,998    $ 208,141,159  
  

 

 

    

 

 

    

 

 

    

 

 

 

Included in the tables above are investments totaling $710,040 and $714,467, respectively, that are included in the funds maintained under statutory reserve requirements on the consolidated balance sheet at March 31, 2018 and December 31, 2017.

 

11


Caidan Enterprises, Inc. and Subsidiaries

 

Notes to Consolidated Financial Statements

Note 3 - Investments in Debt and Equity Securities - Fair Value (Continued)

The amortized costs and estimated fair values of debt securities available for sale at March 31, 2018, by contractual maturity, are shown below. Actual maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

 

     Cost/Amortized
Cost
     Estimated Fair
Value
 

Due in one year or less

   $ 86,528,495      $ 86,327,488  

Due in one year through five years

     26,637,471        26,610,104  

Due after five years through ten years

     10,646,547        10,558,405  

Due after ten years

     61,101,487        60,057,690  
  

 

 

    

 

 

 

Total

   $ 184,914,000      $ 183,553,687  
  

 

 

    

 

 

 

Note 4 - Fair Value Measurements

Accounting standards require certain assets and liabilities be reported at fair value in the consolidated financial statements and provide a framework for establishing that fair value. The framework for determining fair value is based on a hierarchy that prioritizes the inputs and valuation techniques used to measure fair value.

The following tables present information about the Company’s assets measured at fair value on a recurring basis at March 31, 2018 and December 31, 2017. For a description of the valuation techniques used by the Company to determine those fair values see the annual consolidated financial report as of December 31, 2017.

 

12


Caidan Enterprises, Inc. and Subsidiaries

 

Notes to Consolidated Financial Statements

 

     March 31, 2018  
     Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
     Significant Other
Observable
Inputs
(Level 2)
     Significant
Unobservable
Inputs
(Level 3)
     Total  

Equity securities:

           

Common stocks

   $ 17,234,119      $ —        $ —        $ 17,234,119  

Mutual funds

     2,524,642        —          —          2,524,642  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total equity securities

     19,758,761        —          —          19,758,761  

Bonds:

           

Mortgage-backed securities

     —          73,655,870        —          73,655,870  

Corporate securities

     —          80,118,038        —          80,118,038  

Debt securities issued by the U.S. Treasury

     —          8,515,232        —          8,515,232  

Debt securities issued by states of the U.S.

     —          21,264,547        —          21,264,547  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total bonds

     —          183,553,687        —          183,553,687  

Limited Partnerships and Limited Liability Companies

     —          —          4,763,576        4,763,576  

Cash equivalents - Money market mutual funds

     49,659,312        —          —          49,659,312  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 69,418,073      $ 183,553,687      $ 4,763,576      $ 257,735,336  
  

 

 

    

 

 

    

 

 

    

 

 

 
     December 31, 2017  
     Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
     Significant Other
Observable
Inputs
(Level 2)
     Significant
Unobservable
Inputs
(Level 3)
     Total  

Equity securities:

           

Common stocks

   $ 17,221,836      $ —        $ —        $ 17,221,836  

Mutual funds

     2,507,646        —          —          2,507,646  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total equity securities

     19,729,482        —          —          19,729,482  

Bonds:

           

Mortgage-backed securities

     —          73,125,346        —          73,125,346  

Corporate securities

     —          79,532,345        —          79,532,345  

Debt securities issued by the U.S. Treasury

     —          7,752,386        —          7,752,386  

Debt securities issued by states of the U.S.

     —          28,001,600        —          28,001,600  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total bonds

     —          188,411,677        —          188,411,677  

Limited Partnerships and Limited Liability Companies

     —          —          4,871,115        4,871,115  

Cash equivalents - Money market mutual funds

     34,925,102        —          —          34,925,102  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 54,654,584      $ 188,411,677      $ 4,871,115      $ 247,937,376  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

13


Caidan Enterprises, Inc. and Subsidiaries

 

Notes to Consolidated Financial Statements

Note 5 - Investment in Joint Ventures

The Company is a member of a joint venture, 1000 Webward LLC, which was established for the sole purpose of purchasing an office building in Detroit, Michigan. The investment in the joint venture is recorded using the equity method. The Company has a 50 percent membership percentage and a 50 percent profit and loss sharing percentage.

Financial information of 1000 Webward LLC is summarized below:

 

     For the Three Months Ended
March 31,
 
     2018      2017  

Gross Revenue

   $ 9,171,893      $ 9,105,269  
  

 

 

    

 

 

 

Gross Profit

   $ 4,428,957      $ 4,306,264  
  

 

 

    

 

 

 

Net income

   $ 418,820      $ 627,197  
  

 

 

    

 

 

 

Share of adjusted income

   $ 209,410      $ 313,599  
  

 

 

    

 

 

 

The Company leases office space from 1000 Webward LLC through December 2024. The Company incurred rent expense of $2,477,435 and $2,783,079 related to the lease agreements for the three months ended March 31, 2018 and 2017, respectively. At March 31, 2018 and December 31, 2017, the Company had net receivables from the joint venture of $261,644 related to the lease agreements.

During the period ended March 31, 2018 and 2017, the Company received distributions from 1000 Webward LLC of $0 and $2,050,000, respectively.

Note 6 - Accrued Healthcare Costs Payable

A reconciliation of the beginning and ending balances of accrued healthcare costs payable is as follows:

 

     For the Three Months Ended
March 31,
 
     2018      2017  

Accrued healthcare costs payable - Beginning of period

   $ 457,632,602      $ 428,952,619  

Incurred claim:

     

Provision for claims incurred in current year

     856,279,106        726,329,835  

Increase (decrease) in provision for claims incurred in prior years

     4,049,288        (9,078,305
  

 

 

    

 

 

 

Total incurred

     860,328,394        717,251,530  

Payments related to:

     

Current year

     432,985,655        252,522,564  

Prior years

     379,286,805        337,416,101  
  

 

 

    

 

 

 

Total paid

     812,272,460        589,938,665  
  

 

 

    

 

 

 

Accrued healthcare costs payable - End of period

   $ 505,688,536      $ 556,265,484  
  

 

 

    

 

 

 

 

14


Caidan Enterprises, Inc. and Subsidiaries

 

Notes to Consolidated Financial Statements

Note 6 - Accrued Healthcare Costs Payable (Continued)

Healthcare service costs and related liabilities are recorded when medical services are provided to eligible members, including management’s best estimate of the ultimate cost of healthcare costs incurred but not reported (“IBNR”), along with a margin for adverse deviation. When actual experience differs from prior estimates, accrued healthcare costs are adjusted through current period program expenses.

For the purpose of the table above, accrued healthcare costs payable at year end apply a balance gross of eliminations of $50,588,203 and $60,778,660 at March 31, 2018 and 2017, respectively, for amounts due from the health plans to MeridianRx, LLC. Total incurred amounts relating to amounts administered by MeridianRx, LLC for pharmacy costs totaling $169,218,418 and $133,206,979 for March 31, 2018 and 2017, respectively, are eliminated upon consolidation. Therefore, the balances in the table above are representative of the amounts incurred by the Meridian Health Plans and payable to hospitals and medical providers, as well as MeridianRx, LLC, and will not reflect accrued healthcare costs payable on the consolidated balance sheet or program expenses for healthcare delivery on the consolidated statement of operations as of December 31, 2017 or 2016 due to the eliminations noted above.

Reserves for incurred claims and claims adjustment expenses attributable to insured events of prior years changed in 2018 and 2017 as a result of claims development patterns emerging differently than originally estimated. The unfavorable development of approximately $4,000,000 for the three month period ended March 31, 2018 is primarily the result of unfavorable development and utilization trends within the Michigan Medicaid populations. The favorable development of approximately $9,100,000 million for the three month period ended March 31, 2017 is largely related to Meridian Health Plan of Michigan, Inc.’s MI Health Link and Medicaid programs and the costs and claim submissions for a subset of membership within those programs not developing at the rate assumed when establishing the accrued healthcare costs payable. Original estimates are increased or decreased as additional information becomes known regarding individual claims.    

Note 7 - Notes Payable and Lines of Credit

The following table summarizes the Company’s outstanding debt obligations reported in the consolidated balance sheet:

 

     March 31, 2018      December 31, 2017  

Line of credit payable:

     

Revolving credit facility, due August 25, 2020

   $ 82,112,006      $ 82,112,006  

Revolving credit facility, due October 31, 2067

     —          208,883  

Debt issuance costs

     (199,008      (229,816
  

 

 

    

 

 

 

Total line of credit payable, net

   $ 81,912,998      $ 82,091,073  
  

 

 

    

 

 

 

Long-term debt, net:

     

Draw to Term Loan, due August 25, 2020

   $ 138,750,000      $ 138,750,000  

4% Promissory Note, due January 26, 2021

     4,900,000        4,900,000  

Debt issuance costs

     (3,039,452      (3,225,541
  

 

 

    

 

 

 

Total long-term debt, net

   $ 140,610,548      $ 140,424,459  
  

 

 

    

 

 

 

 

15


Caidan Enterprises, Inc. and Subsidiaries

 

Notes to Consolidated Financial Statements

Note 7 - Notes Payable and Lines of Credit (Continued)

In May 2017, Caidan Enterprises, Inc., Caidan Holding Company, Inc., Caidan Management Company, LLC, and MeridianRx, LLC, collectively as co-borrowers entered into a new revolving credit and draw to term loan agreement. The credit agreement expires on August 25, 2020 with automatic extensions through May 2, 2022 that are contingent upon renewal of the Medicaid contract between Meridian Health Plan of Michigan, Inc. and the Michigan Department of Health and Human Services. The new revolving credit facility allows maximum borrowings of $175,000,000 with interest at the base rate plus 0.50 to 1.50 percent or the Eurodollar base rate plus 1.00 to 2.50 percent, as elected by management and determined by the net funded debt to EBITDA ratio and a facility fee of 0.75 percent per annum. At March 31, 2018 and December 31, 2017, the outstanding amount on the revolving credit facility was $82,112,006, with an available balance of $92,887,994. The credit facility is collateralized by substantially all assets of the co-borrowers, and the obligation is joint and several between these parties.

The new draw to term loan allows maximum aggregate borrowings of $150,000,000. Borrowings bear interest at the base rate plus 0.75 to 2.25 percent or the Eurodollar base rate plus 1.75 to 3.25 percent, as elected by management and determined by the net funded debt to EBITDA ratio. Monthly interest payments and quarterly principal payments commenced in June 2017. At March 31, 2018 and December 31, 2017, the outstanding amount on the draw to term loan was $138,750,000.

The agreement limits the amount of annual shareholder distributions to 60 percent or 45 percent of S-Corporation taxable income for the Company’s fiscal year based on whether the net funded debt to EBITDA ratio is less than 2.50 to 1.00 or greater than or equal to 2.50 to 1.00, respectively. As of March 31, 2018 and December 31, 2017 the Company’s net funded debt to EBITDA ratio is less than 2.50 to 1.00.

Effective November 3, 2017, the Company’s subsidiary, Meridian Health Plan of Illinois, Inc., entered into a revolving loan credit facility which allows maximum borrowings of $600,000,000. The commitment termination date is the earlier of November 3, 2019 or the date on which the State of Illinois rating is downgraded to a Ba1, BB+, or BB+ by Moody’s, S&P, or Fitch, respectively. Outstanding balances are due on October 31, 2067. At March 31, 2018 and December 31, 2017 there was no outstanding balance on the facility. Repayments of outstanding balances are applied as state capitation payments are received on eligible accounts receivable that are included in the borrowing base for amounts outstanding at date of receipt. Interest of 1.0 percent of any amount approved and unpaid after a 90-day period from the due date shall be added for each month, or 0.033 percent of any amount approved and unpaid for each day after the end of this 90-day period until final payment is made, commensurate with the Illinois State Prompt Payment Act, and is paid only upon receipt of such prompt payment penalties from the State of Illinois. The revolving loan credit facility is also subject to certain financial covenants including a risk-based capital ratio and minimum net worth requirements. The revolving credit facility is collateralized by all eligible receivables due from the State.

At March 31, 2018 and December 31, 2017 the Company is in compliance with all covenants pertaining to debt agreements.

The Company entered into a promissory note for $4,900,000 in January 2017 for the purchase of property. Interest accrues at a fixed rate of 4.0 percent, with interest payments due in monthly installments beginning in January 2017. Final principal payment, along within any outstanding accrued interest, shall be due in January 2021. The note is secured by a security agreement and mortgage. The outstanding balance at March 31, 2018 and December 31, 2017 is $4,900,000.

 

16


Caidan Enterprises, Inc. and Subsidiaries

 

Notes to Consolidated Financial Statements

Note 8 - Income Taxes

Deferred tax assets and deferred tax liabilities totaled $1,583,803 and $613,366, respectively at March 31, 2018 and December 31, 2017. The Company’s effective tax rates of 16.8 percent and (1.2) percent for the three months ended March 31, 2018 and 2017, respectively, differed from statutory rates due to an ACA fee moratorium in place in 2017 which expired in 2018.

Note 9 - Retrospectively Rated Contracts and Contracts Subject to Redetermination

As part of the Company’s subsidiaries’ (Meridian Health Plan of Michigan, Inc. and Meridian Health Plan of Illinois, Inc.) contract for services under various Medicare plans with the Centers for Medicare and Medicaid Services (CMS) under Medicare Part D, the parties have agreed to a risk-sharing arrangement whereby the amount the Company receives in premiums from members and CMS is compared to actual drug costs incurred during the contract year. Based on the risk-sharing provision and activity to date, an estimated risk-sharing payable or receivable is recorded as an adjustment to premium revenue. An estimate for accrued retrospective premiums receivable of $7,281,522 and $3,435,283 has been recorded at March 31, 2018 and December 31, 2017, respectively. Actual amounts could differ from these estimates upon final determination.

As part of the Company’s subsidiaries’ (Meridian Health Plan of Michigan, Inc., Meridian Health Plan of Illinois, Inc., and Meridian Health Plan of Iowa, Inc.) contract for services under various Medicare Plans (see annual consolidated financial report as of December 31, 2017 for additional details), the parties have agreed to a risk adjustment arrangement whereby premiums will be retroactively risk adjusted based on the risk scores of the members. At March 31, 2018 and December 31, 2017, the Company has recorded a risk adjustment receivable of $12,263,581 and $10,568,745, respectively, from CMS, which is recorded in accrued retrospective premiums on the consolidated balance sheet.

As part of the Company’s subsidiary’s (Meridian Health Plan of Illinois, Inc.) contract for Medicaid services under the Family Health Plan, Affordable Care Act, and Integrated Care Programs with the Illinois Department of Healthcare and Family Services (HFS), the parties have agreed to a risk adjustment arrangement whereby premiums will be retroactively risk adjusted based on the risk scores of the members. The risk adjustment factor is estimated based on experience to date and determinations of the Company’s risk score versus the overall geographical market risk score. The risk adjustment factor is a component of the monthly capitation premiums received from HFS and, therefore, any receivable or payable balance is recorded within uncollected premiums on the consolidated balance sheet.

The Company’s subsidiary (Meridian Health Plan of Michigan, Inc.) is subject to components of the risk-sharing provisions of the Affordable Care Act (ACA). At March 31, 2018 and December 31, 2017, a risk-sharing payable of $8,400,000 was recorded in aggregate health policy reserves on the consolidated balance sheet for the ACA risk-sharing provisions. Although management believes the amount recorded at March 31, 2018 and December 31, 2017 to be reasonable in light of the quality and availability of the data, management also believes the ultimate settlement of these amounts could be significantly different from the estimate.

Miscellaneous payables recorded in aggregate health policy reserves related to other risk-sharing provisions within effective contracts amount to $3,288,780 and $3,621,510 at March 31, 2018 and December 31, 2017, respectively.

 

17


Caidan Enterprises, Inc. and Subsidiaries

 

Notes to Consolidated Financial Statements

Note 10 - Uninsured Plans

The Company’s subsidiaries (Meridian Health Plan of Michigan, Inc., Meridian Health Plan of Illinois, Inc., and Meridian Health Plan of Iowa, Inc.) serve as plan sponsors offering Medicare Part D prescription drug coverage under various contracts with CMS. Under the Medicare Part D program, several elements of payments received by the Company, including the reinsurance subsidy and the low-income cost-sharing subsidy, represent cost reimbursements under the Medicare Part D program. Amounts owing or received for these subsidies are not reflected as premiums, but rather are accounted for as a receivable and/or deposit. The Company estimated amounts receivable (payable) between state contracts in connection with the Company’s Medicare Part D prescription drug coverage of $3,637,502 and $(114,489), respectively, at March 31, 2018, and $11,000,688 and $(69,306), respectively, at December 31, 2017. Subsequent to the end of the plan year, a settlement payment will be made between CMS and the Company based on actual claims and premium experience.

The Company’s subsidiaries (Meridian Health Plan of Michigan, Inc. and Meridian Health Plan of Illinois, Inc.) participate in transfer payment programs with the states of Michigan and Illinois, whereby pass-through payments are paid first to the Company’s subsidiaries and then are passed on to various hospitals and providers. As of March 31, 2018 and December 31, 2017, the Company recorded total liabilities of $109,731,816 and $90,614,789, respectively, related to these programs. The Company did not reflect any administrative expenses, reimbursement for such expenses, or a net gain or loss related to these programs for the years ended December 31, 2017 and 2016.

Note 11 - ACA/Health Insurer Fee

The Company is subject to an annual fee under Section 9010 of the Patient Protection and Affordable Care Act (PPACA), see the annual consolidated financial report for additional details. During 2017, the United States Treasury and Internal Revenue Service issued Moratorium on Annual Fee on Health Insurance Providers, which suspends the collection of the health insurance provider fee for the 2017 calendar year. Therefore, the Company was not required to pay these fees in 2017 and no amounts have been recognized as of December 31, 2017 for the ACA fee expense or the reimbursement revenue from the states of Michigan and Illinois as part of the Medicaid contracts. The moratorium has no effect on the fee amount for the 2018 fee year. For 2018 the Company has recorded a liability of $65,195,781 as of January 1, 2018, with a corresponding Deferred health insurer fee on the consolidated balance sheet that is being amortized to expense on a straight line basis, the balance of which is $48,896,836 as of March 31, 2018. For the three month period ended March 31, 2018, the Company recorded health insurer fee expense of $16,298,945, as well as $20,233,417 of health insurer fee reimbursement revenue.

 

18


Caidan Enterprises, Inc. and Subsidiaries

 

Notes to Consolidated Financial Statements

Note 12 - Commitments and Contingencies

The Company’s subsidiary, Caidan Management Company, LLC, is a defendant in lawsuits in the normal course of business. Management is of the opinion that no litigation matters are outstanding or pending that will have a material effect on its financial position or results of operations.

The revolving credit facility obtained by Meridian Health Plan of Illinois, Inc. during 2017 (see Note 7) contains an early termination fee provision that requires the borrower to pay the lender a fee of $40,000,000 in the event of a major corporate action such as a merger, consolidation, or change in control. The planned acquisition by WellCare Health Plan, Inc. (“WellCare”) (see Note 13) will trigger the early termination fee due under the change in control provision, to be paid from the proceeds of the sale.

The Company engaged a financial services firm to assist throughout the negotiation process on the pending acquisition by Wellcare (see Note 13). Once the acquisition by WellCare has been finalized it will trigger a fee payable to the financial services firm of $20,000,000, to be paid from the proceeds of the sale.

The Company has a phantom stock agreement with a key employee. Based on the terms of the agreement the pending acquisition by WellCare will trigger the required payout of $25,000,000 under the change in control provision.

Note 13 - Subsequent Events

Subsequent to March 31, 2018, the Company declared and paid dividends to stockholders of $31,700,000.

On May 28th, 2018 the Company entered into a purchase agreement with WellCare Health Plans, Inc. (“WellCare”) whereby WellCare has agreed to purchase, for $2.5 billion, all shares of stock of Caidan Holding Company, Inc. and Subsidiaries, as well as all assets of MeridianRx, LLC and Caidan Management Company, LLC, with the exception of certain items which will be carved out. The transaction calls for payment of the estimated purchase price in cash, less an escrow of $125,000,000 at closing, subject to a potential closing working capital adjustment. The acquisition of these entities by WellCare is pending regulatory approval, but is anticipated to close prior to December 31, 2018.

The consolidated financial statements and related disclosures include evaluation of events up through and including July 18, 2018, which is the date the consolidated financial statements were available to be issued.

 

19

(Back To Top)

Section 8: EX-99.6 (EX-99.6)

EX-99.6

Exhibit 99.6

UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION

The unaudited pro forma condensed combined statements of operations for the year ended December 31, 2017 and the three and twelve months ended March 31, 2018 combine the historical consolidated statements of operations of WellCare and the Meridian Group, giving effect to the Meridian Acquisition and the Acquisition Financing Transactions, each as more fully described in Note 1 below, as if they each had occurred on January 1, 2017. The unaudited pro forma condensed combined balance sheet as of March 31, 2018 combines the historical consolidated balance sheets of the Company and the Meridian Group, giving effect to the Acquisition Financing Transactions and the Meridian Acquisition, each as more fully described in Note 1 below, as if they each had occurred on March 31, 2018. The historical consolidated financial information has been adjusted in the unaudited pro forma condensed combined financial statements to give effect to pro forma events that are (i) directly attributable to the Meridian Acquisition and the Acquisition Financing Transactions, (ii) factually supportable and (iii) with respect to the statements of operations, expected to have a continuing impact on the combined results. The unaudited pro forma condensed combined financial information should be read in conjunction with the accompanying notes to the unaudited pro forma condensed combined financial statements. In addition, the unaudited pro forma condensed combined financial information was derived from and should be read in conjunction with the following historical consolidated financial statements and accompanying notes:

 

   

historical audited consolidated financial statements of the Company as of and for the year ended December 31, 2017, and the related notes, included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017;

 

   

historical audited consolidated financial statements of Meridian Consolidated as of and for the year ended December 31, 2017, and the related notes, included in the Company’s Current Report on Form 8-K filed on August 6, 2018;

 

   

historical unaudited interim consolidated financial statements of the Company as of and for the three months ended March 31, 2018, and the related notes, included in the Company’s Quarterly Report on Form 10-Q for the period ended March 31, 2018; and

 

   

historical unaudited interim consolidated financial statements of Meridian Consolidated as of and for the three months ended March 31, 2018, and the related notes, included in the Company’s Current Report on this Form 8-K filed on August 6, 2018.

The unaudited pro forma consolidated financial information for the twelve months ended March 31, 2018 (the “LTM data”) was derived by adding the audited consolidated financial information for each of WellCare and the Meridian Group for the year ended December 31, 2017 to the unaudited consolidated financial information for each of WellCare and the Meridian Group for the three months ended March 31, 2018 and subtracting the unaudited consolidated financial information for each of WellCare and the Meridian Group for the three months ended March 31, 2017 and making certain adjustments thereto giving effect to the Meridian Acquisition and the Acquisition Financing Transactions. The LTM data has been prepared solely for the purpose of this prospectus supplement, is not prepared in the ordinary course of our financial reporting and has not been audited or reviewed by our independent registered public accounting firm.

The unaudited pro forma condensed combined financial information has been prepared by the Company using the acquisition method of accounting in accordance with GAAP. The Company has been treated as the acquirer in the Meridian Acquisition for accounting purposes. The acquisition accounting is dependent upon certain valuation and other studies that have yet to commence or progress to a stage where there is sufficient information for a definitive measurement. The consummation of the Meridian Acquisition remains subject to the satisfaction of customary closing conditions, including the receipt of regulatory approval, and there can be no assurance that the Meridian Acquisition will occur on or before a certain time, on the terms described herein, or at all. The Meridian Acquisition is not conditioned on the Acquisition Financing Transactions or any other financing transaction, and the terms of any financing we may obtain for the Meridian Acquisition may differ from the assumptions set forth herein. Furthermore, we are not acquiring all of the assets or operations, or assuming all of the liabilities, of the Meridian Group in the Meridian Acquisition and, as a result, the unaudited pro forma condensed combined financial information reflect certain estimates regarding such assets, operations and liabilities. In addition, under certain relevant laws and regulations, before completion of the Meridian Acquisition, there are certain limitations regarding


what we can learn about the Meridian Group. As a result, until the Meridian Acquisition is completed, we will not have complete access to all relevant information about the Meridian Group. The acquired assets and assumed liabilities of the Meridian Group have been measured based on various preliminary estimates using assumptions that we believe are reasonable based on information that is currently available. Differences between these preliminary estimates and the final acquisition accounting may occur, and those differences could have a material effect on the accompanying unaudited pro forma condensed combined financial statements and the combined company’s future results of operations and financial position. The pro forma adjustments are preliminary and have been made solely for informational purposes.

We expect to commence the necessary valuation and other studies required to complete the acquisition accounting promptly upon completion of the Meridian Acquisition and will finalize the acquisition accounting as soon as practicable within the required measurement period in accordance with ASC 805, but in no event later than one year following completion of the Meridian Acquisition.

The unaudited pro forma adjustments are based upon available information and certain assumptions that our management believes are reasonable. The unaudited pro forma condensed combined financial information has been presented for informational purposes only and is based on assumptions and estimates considered appropriate by our management; however, it is not necessarily indicative of our financial position or results of operations that would have been achieved had the pro forma events taken place on the dates indicated, or of the future consolidated results of operations or of the financial position of the combined company. You should not place undue reliance on the summary unaudited pro forma condensed combined financial information in deciding whether or not to purchase our common stock.

Management expects that the strategic and financial benefits of the Meridian Acquisition will result in certain synergies and cost savings opportunities. However, given the preliminary nature of those cost savings, they have not been reflected in the accompanying unaudited pro forma condensed combined statements of operations. For a discussion of risks related to the Meridian Acquisition, see Item 1A. of Part II of our Quarterly Report on Form 10-Q for the three and six months ended June 30, 2018.


Unaudited Pro Forma Condensed Combined Statement of Operations

For the Year Ended December 31, 2017

(In millions, except per share data in dollars and shares)

 

     WellCare      Meridian
Consolidated(1)
    Pro Forma
Adjustments
(Note 6)
    Pro Forma
Combined
 

Revenues:

         

Premium

   $ 16,960.3      $ 3,433.3     $ —       $ 20,393.6  

Investment and other income

     46.9        37.3       (5.8 )  (a)      78.4  
  

 

 

    

 

 

   

 

 

   

 

 

 

Total revenues

     17,007.2        3,470.6       (5.8     20,472.0  

Expenses:

         

Medical benefits

     14,744.8        3,089.5       (0.2 )  (a)      17,834.1  

Selling, general and administrative

     1,484.7        258.9       (10.3 )  (a)      1,733.3  

Medicaid premium taxes

     119.8        —            —         119.8  

Depreciation and amortization

     120.4        13.1       88.3   (a),(b)      221.8  

Interest

     68.5        13.0       45.1   (a),(c)      126.6  
  

 

 

    

 

 

   

 

 

   

 

 

 

Total expenses

     16,538.2        3,374.5       122.9       20,035.6  
  

 

 

    

 

 

   

 

 

   

 

 

 

Income from operations

     469.0        96.1       (128.7     436.4  

Loss on extinguishment of debt

     26.1        —         —         26.1  
  

 

 

    

 

 

   

 

 

   

 

 

 

Income before income taxes and equity in earnings of unconsolidated subsidiaries

     442.9        96.1       (128.7     410.3  

Equity in earnings of unconsolidated subsidiaries

     18.7        —         —         18.7  
  

 

 

    

 

 

   

 

 

   

 

 

 

Income before income taxes

   $ 461.6      $ 96.1     $ (128.7   $ 429.0  

Income taxes

     87.9        (1.0     (11.1 )  (a),(d)      75.8  
  

 

 

    

 

 

   

 

 

   

 

 

 

Net income

   $ 373.7      $ 97.1     $ (117.6   $ 353.2  
  

 

 

    

 

 

   

 

 

   

 

 

 

Earnings per common share:

         

Basic

   $ 8.40          $ 7.29  

Diluted

   $ 8.31          $ 7.22  

Weighted average common shares outstanding:

         

Basic

     44,474,016          3,950,014   (e)      48,424,030  

Diluted

     44,967,061          3,950,014   (e)      48,917,075  

 

(1)-

Certain reclassifications have been made to conform to WellCare’s financial statement classifications.

See the accompanying notes to the unaudited pro forma condensed combined financial statements, which are an integral part of this statement. The pro forma adjustments are explained in Note 6 - Income Statement Pro Forma Adjustments.


Unaudited Pro Forma Condensed Combined Statement of Operations

For the Three Months Ended March 31, 2018

(In millions, except per share data in dollars and shares)

 

     WellCare     Meridian
Consolidated (1)
     Pro Forma
Adjustments
(Note 6)
    Pro Forma
Combined
 

Revenues:

         

Premium

   $ 4,626.3     $ 1,026.1      $ —       $ 5,652.4  

Investment and other income

     19.9       2.3        (1.0 )  (a)      21.2  
  

 

 

   

 

 

    

 

 

   

 

 

 

Total revenues

     4,646.2       1,028.4        (1.0     5,673.6  

Expenses:

         

Medical benefits

     3,962.0       914.6        —         4,876.6  

Selling, general and administrative

     355.9       86.3        (2.1 )  (a)      440.1  

ACA industry fee

     81.5       —          —         81.5  

Medicaid premium taxes

     32.1       —          —         32.1  

Depreciation and amortization

     36.4       3.6        22.0   (a),(b)      62.0  

Interest

     17.1       2.2        12.7   (a),(c)      32.0  
  

 

 

   

 

 

    

 

 

   

 

 

 

Total expenses

     4,485.0       1,006.7        32.6       5,524.3  
  

 

 

   

 

 

    

 

 

   

 

 

 

Income from operations

     161.2       21.7        (33.6     149.3  

Loss on extinguishment of debt

     —         —          —         —    
  

 

 

   

 

 

    

 

 

   

 

 

 

Income before income taxes and equity in losses of unconsolidated subsidiaries

     161.2       21.7        (33.6     149.3  

Equity in losses of unconsolidated subsidiaries

     (2.7     —          —         (2.7
  

 

 

   

 

 

    

 

 

   

 

 

 

Income before income taxes

     158.5       21.7        (33.6     146.6  

Income taxes

     56.8       3.7        (7.9 )  (a),(d)      52.6  
  

 

 

   

 

 

    

 

 

   

 

 

 

Net income

   $ 101.7     $ 18.0      $ (25.7   $ 94.0  
  

 

 

   

 

 

    

 

 

   

 

 

 

Earnings per common share:

         

Basic

   $ 2.28          $ 1.94  

Diluted

   $ 2.25          $ 1.91  

Weighted average common shares outstanding:

         

Basic

     44,605,892          3,950,014   (e)      48,555,906  

Diluted

     45,196,127          3,950,014   (e)      49,146,141  

 

(1)-

Certain reclassifications have been made to conform to WellCare’s financial statement classifications.

See the accompanying notes to the unaudited pro forma condensed combined financial statements, which are an integral part of this statement. The pro forma adjustments are explained in Note 6 - Income Statement Pro Forma Adjustments.


Unaudited Pro Forma Condensed Combined Summary Information

For the Last Twelve Months (“LTM”) Ended March 31, 2018

(In millions, except per share data in dollars and shares)

 

     WellCare      Meridian
Consolidated (1)
     Pro Forma
Adjustments
(Note 6)
    Pro Forma
Combined
 

Revenues:

          

Premium

   $ 17,639.6      $ 3,628.8      $ —       $ 21,268.4  

Investment and other income

     59.6        37.4        (5.6 )  (a)      91.4  
  

 

 

    

 

 

    

 

 

   

 

 

 

Total revenues

     17,699.2        3,666.2        (5.6     21,359.8  

Expenses:

           —      

Medical benefits

     15,228.2        3,259.9        (0.1     18,488.0  

Selling, general and administrative

     1,538.2        286.1        (10.4 )  (a)      1,813.9  

ACA industry fee

     81.5        —          —         81.5  

Medicaid premium taxes

     122.0        —          —         122.0  

Depreciation and amortization

     132.9        13.7        88.0   (a),(b)      234.6  

Interest

     69.4        13.6        45.5   (a),(c)      128.5  
  

 

 

    

 

 

    

 

 

   

 

 

 

Total expenses

     17,172.2        3,573.3        123.0       20,868.5  
  

 

 

    

 

 

    

 

 

   

 

 

 

Income from operations

     527.0        92.9        (128.6     491.3  

Loss on extinguishment of debt

     26.1        —          —         26.1  
  

 

 

    

 

 

    

 

 

   

 

 

 

Income before income taxes and equity in losses of unconsolidated subsidiaries

     500.9        92.9        (128.6     465.2  

Equity in losses of unconsolidated subsidiaries

     16.0        —          —         16.0  
  

 

 

    

 

 

    

 

 

   

 

 

 

Income before income taxes

     516.9        92.9        (128.6     481.2  

Income taxes

     108.8        2.6        (15.8 )  (a),(d)      95.6  
  

 

 

    

 

 

    

 

 

   

 

 

 

Net income

   $ 408.1      $ 90.3      $ (112.8   $ 385.6  
  

 

 

    

 

 

    

 

 

   

 

 

 

Earnings per common share:

          

Basic

   $ 9.16           $ 7.95  

Diluted

   $ 9.06           $ 7.87  

Weighted average common shares outstanding:

          

Basic

     44,533,993           3,950,014   (e)      48,484,007  

Diluted

     45,059,427           3,950,014   (e)      49,009,441  

 

(1)-

Certain reclassifications have been made to conform to WellCare’s financial statement classifications.

See the accompanying notes to the unaudited pro forma condensed combined financial statements, which are an integral part of this statement. The pro forma adjustments are explained in Note 6 - Income Statement Pro Forma Adjustments.


Unaudited Pro Forma Condensed Combined Balance Sheet

As of March 31, 2018

(In millions, except shares)

 

     WellCare      Meridian
Consolidated (1)
     Pro Forma
Adjustments
(Note 6)
    Pro Forma
Combined
 

Assets

          

Current Assets:

          

Cash and cash equivalents

   $ 4,824.1      $ 463.9      $ (233.9 )  (a),(b)    $ 5,054.1  

Short-term investments

     708.6        88.5        (7.9 )  (a)      789.2  

Premiums receivable, net

     638.9        486.6        (0.4 )  (a)      1,125.1  

Pharmacy rebates receivable, net

     380.6        13.0        —         393.6  

Receivables from government partners

     81.2        —          —         81.2  

Funds receivable for the benefit of members

     28.8        —          —         28.8  

Deferred ACA industry fee

     244.6        48.9        —         293.5  

Prepaid expenses and other current assets, net

     270.4        51.6        9.2   (a),(f)      331.2  
  

 

 

    

 

 

    

 

 

   

 

 

 

Total current assets

     7,177.2        1,152.5        (233.0     8,096.7  

Property, equipment and capitalized software, net

     317.1        64.6        (12.7 )  (a)      369.0  

Goodwill

     661.8        —          996.3   (c)      1,658.1  

Other intangible assets, net

     357.3        4.0        996.0   (c)      1,357.3  

Long-term investments

     725.8        136.5        (25.4 )  (a)      836.9  

Restricted cash, cash equivalents and investments

     213.3        2.6        (0.2 )  (a)      215.7  

Other assets

     4.4        5.4        (2.7 )  (a)      7.1  

Assets of discontinued operations

     214.5        —          —         214.5  
  

 

 

    

 

 

    

 

 

   

 

 

 

Total Assets

   $ 9,671.4      $ 1,365.6      $ 1,718.3     $ 12,755.3  
  

 

 

    

 

 

    

 

 

   

 

 

 

Liabilities and Stockholders’ Equity

          

Current Liabilities:

          

Medical benefits payable

   $ 2,210.3      $ 466.8      $ —       $ 2,677.1  

Unearned premiums

     592.9        26.6        —         619.5  

ACA industry fee liability

     326.1        65.2        —         391.3  

Accounts payable and accrued expenses

     550.1        123.1        76.9   (a),(f)      750.1  

Funds payable for the benefit of members

     1,612.2        109.9        —         1,722.1  

Other payables to government partners

     388.2        —          —         388.2  

Short-term debt

     —          104.9        (104.9 )  (a)      —    
  

 

 

    

 

 

    

 

 

   

 

 

 

Total current liabilities

     5,679.8        896.5        (28.0     6,548.3  

Deferred income tax liability, net

     71.5        —          —         71.5  

Long-term debt, net

     1,183.0        117.7        1,047.2   (a),(d),(e)      2,347.9  

Other liabilities

     20.2        5.8        (2.2 )  (a)      23.8  

Liabilities of discontinued operations

     214.5        —          —         214.5  
  

 

 

    

 

 

    

 

 

   

 

 

 

Total Liabilities

     7,169.0        1,020.0        1,017.0       9,206.0  

Commitments and contingencies (2)

          


Unaudited Pro Forma Condensed Combined Balance Sheet (continued)

As of March 31, 2018

(In millions, except shares)

 

     WellCare     Meridian
Consolidated (1)
     Pro Forma
Adjustments
(Note 6)
    Pro Forma
Combined
 

Stockholders’ Equity:

         

Preferred stock, $0.01 par value (20,000,000 authorized, no shares issued or outstanding)

     —         —          —         —    

Common stock, $0.01 par value (3)

     0.4       —          0.1       0.5  

Paid-in capital

     583.4       —          1,066.9   (e)      1,650.3  

Retained earnings

     1,929.2       —          (20.1 )  (f)      1,909.1  

Accumulated other comprehensive loss

     (10.6     —          —         (10.6
  

 

 

   

 

 

    

 

 

   

 

 

 

Total Stockholders’ Equity

     2,502.4       —          1,046.9       3,549.3  
  

 

 

   

 

 

    

 

 

   

 

 

 

Net Assets

     $ 345.6      $ (345.6 )  (g)   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 9,671.4     $ 1,365.6      $ 1,718.3     $ 12,755.3  
  

 

 

   

 

 

    

 

 

   

 

 

 

 

(1)-

Certain reclassifications have been made to conform to WellCare’s financial statement classifications.

(2)-

Refer to Note 13 - Commitments and Contingencies to the consolidated financial statements included in our Quarterly Report on Form 10-Q for the fiscal period ended June 30, 2018.

(3)-

On a historical basis, common stock information of the Company is as follows: 100,000,000 shares authorized, 44,753,235 shares issued and outstanding at March 31, 2018. On a pro forma combined basis, common stock information is as follows: 100,000,000 shares authorized; 48,703,249 shares issued and outstanding.

See the accompanying notes to the unaudited pro forma condensed combined financial statements, which are an integral part of this statement. The pro forma adjustments are explained in Note 7 - Balance Sheet Pro Forma Adjustments.


NOTES TO THE PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS

(DOLLARS IN MILLIONS, EXCEPT SHARE DATA)

(UNAUDITED)

1. Description of Transaction

Meridian Acquisition

In May 2018, our subsidiary, WellCare Management, entered into a definitive transaction agreement (the “Acquisition Agreement”) with Caidan Management Company, LLC, MeridianRx, LLC, Caidan Holding Company (collectively, the “Meridian Group”), and Caidan Enterprises, Inc. (the “Seller”). On the terms and subject to the conditions set forth in the Acquisition Agreement, we will acquire the Meridian Group (including Meridian Health Plan of Illinois, Inc. and Meridian Health Plan of Michigan, Inc.) from the Seller for an aggregate purchase price of $2.5 billion in cash, subject to a possible purchase price reduction of up to $100 million and other customary purchase price adjustments (the “Meridian Acquisition”). The Meridian Acquisition is expected to close in the next few months.

The consummation of the Meridian Acquisition is subject to customary conditions, including (i) the absence of a material adverse effect on the Meridian Group, (ii) the receipt of specified approvals under state insurance and healthcare laws and regulations, in each case, without imposing a burdensome condition, (iii) the accuracy of the representations and warranties of the parties (generally subject to a customary material adverse effect standard), (iv) the absence of governmental restrictions on the consummation of the Meridian Acquisition, (v) material compliance by the parties with their respective covenants and agreements under the Acquisition Agreement and (vi) completion of a pre-closing restructuring by the Seller to exclude certain assets and liabilities unrelated to the Meridian Group’s pharmacy benefits management and health care plans.

The Acquisition Agreement contains certain termination rights, including the right of either party to terminate the Acquisition Agreement if the consummation of the Meridian Acquisition has not occurred on or before January 31, 2019, subject to an approximately 90 day extension if all conditions to closing of the Meridian Acquisition have been satisfied or waived other than the conditions relating to antitrust or regulatory approvals (the “Termination Date”). If the Acquisition Agreement is terminated because the Meridian Acquisition has not been consummated by the Termination Date and all conditions precedent to our obligation to consummate the Meridian Acquisition have otherwise been satisfied except for obtaining certain of the required antitrust or regulatory approvals, then we will be required to pay the Seller a termination fee of $50 million. If the Acquisition Agreement is terminated by the Seller because we have failed to consummate the Meridian Acquisition within five business days of being required to do so, then we will be required to pay the Seller a termination fee of $100 million.

Acquisition Financing Transactions

In connection with the Meridian Acquisition, (i) we are offering 3,990,712 shares of common stock, (ii) we are offering $700.0 million aggregate principal amount of new senior unsecured notes (the “New Notes”) in a private placement to certain qualified institutional investors and non-U.S. persons, (iii) we increased our borrowing capacity under our revolving credit facility from $1.0 billion to $1.3 billion (the “New Revolving Credit Facility”) and extended the maturity date for borrowings thereunder from January 2021 to Ju