WELLCHOICE INC - 10-Q Quarterly Report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period ended March 31, 2004

¨	TRANSITIONAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 001-31513

WELLCHOICE, INC.

(Exact name of registrant as specified in its charter)


DELAWARE		71-0901607
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification Number)

11 WEST 42^ND STREET
NEW YORK, NEW YORK		10036
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code: (212) 476-7800

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes x No ¨

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. There were 83,673,822 shares of common stock, $0.01 par value, and one share of Class B common stock, $0.01 par value per share, outstanding as of April 14, 2004.

WellChoice, Inc and Subsidiaries

INDEX TO FORM 10-Q


		Page
PART I FINANCIAL INFORMATION		3

Item 1.	Financial Statements	3

	Consolidated Balance Sheets at March 31, 2004 (Unaudited) and December 31, 2003	3

	Consolidated Income Statements for the Three Months Ended March 31, 2004 and 2003 (Unaudited)	5

	Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2004 and 2003 (Unaudited)	6

	Notes to Consolidated Financial Statements (Unaudited)	7

	Report of Independent Accountants	19

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	20

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	38

Item 4.	Controls and Procedures	39

PART II OTHER INFORMATION		40

Item 1.	Legal Proceedings	40

Item 5.	Other Information	41

Item 6.	Exhibits and Reports on Form 8-K	42

SIGNATURES		43

INDEX TO EXHIBITS		44

WellChoice, Inc. and Subsidiaries

Consolidated Balance Sheets


	March 31, 2004		December 31, 2003
	*(Unaudited)*
	(In thousands, except share and per share data)
Assets
Investments:
Fixed maturities, at fair value (amortized cost: $900,247 and $1,036,747)	$	909,864	$	1,037,255
Marketable equity securities, at fair value (cost: $41,014 and $52,890)		45,026		60,414
Short-term investments		232,726		232,474
Other long-term equity investments		33,603		31,686

Total investments		1,221,219		1,361,829
Cash and cash equivalents		959,200		697,518

Total investments and cash and cash equivalents		2,180,419		2,059,347
Receivables:
Billed premiums, net		95,175		92,399
Accrued premiums		304,725		285,773
Other amounts due from customers, net		91,913		107,062
Notes receivable, net		12,268		12,410
Advances to hospitals, net		15,870		10,788
Accrued investment income		6,797		9,613
Miscellaneous, net		54,998		51,333

Total receivables		581,746		569,378
Property, equipment and information systems, net of accumulated depreciation		112,658		113,526
Prepaid pension expense		55,156		53,515
Deferred taxes, net		197,797		216,534
Other		34,898		30,693

Total assets	$	3,162,674	$	3,042,993

See notes to consolidated financial statements.

WellChoice, Inc. and Subsidiaries

Consolidated Balance Sheets


	March 31, 2004			December 31, 2003
	*(Unaudited)*
	(In thousands, except share and per share data)
Liabilities and stockholders’ equity
Liabilities:
Unpaid claims and claims adjustment expense	$	625,674		$	609,491
Unearned premium income		106,177			134,174
Managed cash overdrafts		165,571			197,995
Accounts payable and accrued expenses		119,632			104,526
Advance deposits		153,566			113,843
Group and other contract liabilities		148,070			112,204
Postretirement benefits other than pensions		142,539			142,743
Obligations under capital lease		47,328			48,345
Other		155,946			147,315

Total liabilities		1,664,503			1,610,636
Stockholders’ equity:
Class A common stock, $0.01 par value, 225,000,000 shares authorized; shares issued and outstanding 2004—83,673,822; 2003—83,676,446		837			837
Class B common stock, $0.01 per share value, one share authorized; one share issued and outstanding		—			—
Preferred stock, $0.01 per share value, 25,000,000 shares authorized; none issued and outstanding		—			—
Additional paid-in capital		1,262,099			1,262,222
Retained earnings		221,820			162,584
Unearned restricted stock compensation		(4,761	)		(6,027	)
Accumulated other comprehensive income		18,176			12,741

Total stockholders’ equity		1,498,171			1,432,357

Total liabilities and stockholders’ equity	$	3,162,674		$	3,042,993

See notes to consolidated financial statements.

WellChoice, Inc. and Subsidiaries

Consolidated Statements of Income

(Unaudited)


	Three months ended March 31
	2004		2003
	*(In thousands, except share* *and per share date)*
Revenue:
Premiums earned	$	1,245,499	$	1,166,541
Administrative service fees		121,209		108,924
Investment income, net		14,104		13,355
Net realized investment gains		3,527		3,114
Other income, net		203		144

Total revenue		1,384,542		1,292,078
Expenses:
Cost of benefits provided		1,062,865		999,253
Administrative expenses		224,499		209,842

Total expenses		1,287,364		1,209,095

Income before income taxes		97,178		82,983
Income tax expense		37,942		35,242

Net income	$	59,236	$	47,741

Basic earnings per common share	$	0.71	$	0.57
Diluted earnings per common share	$	0.71	$	0.57
Shares used to compute basic earnings per common share based on weighted average shares outstanding January 1, 2004 to March 31, 2004		83,491,767
Shares used to compute diluted earnings per common share based on weighted average shares outstanding January 1, 2004 to March 31, 2004		83,753,744
Shares used to compute basic and diluted earnings per common share based on weighted average shares outstanding January 1, 2003 to March 31, 2003				83,490,478

See notes to consolidated financial statements.

WellChoice, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(Unaudited)


	Three months ended March 31
	2004			2003
	*(In thousands)*
Cash flows from operating activities
Net income	$	59,236		$	47,741
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		9,604			9,041
Net realized gain on sales of investments		(3,526	)		(3,114	)
Credit for doubtful accounts		(1,009	)		(182	)
Accretion of discount, net		112			207
Equity in earnings of other long-term equity investments		(556	)		(773	)
Deferred income tax expense		15,539			15,644
Other		(1,640	)		(1,243	)
Changes in assets and liabilities:
Billed and accrued premiums receivables		(21,834	)		(8,938	)
Other customer receivable		14,987			21,224
Notes receivable		142			(79	)
Advances to hospitals		(4,432	)		52
Accrued investment income		2,815			2,541
Miscellaneous receivables		(2,896	)		5,616
Other assets		(4,205	)		2,106
Unpaid claims and claims adjustment expenses		16,183			19,575
Unearned premium income		(27,996	)		(21,676	)
Managed cash overdrafts		(32,424	)		(20,939	)
Accounts payable and accrued expenses		17,967			3,287
Advance deposits		39,723			19,763
Group and other contract liabilities		35,866			35,333
Postretirement benefits other than pensions		(204	)		621
Other liabilities		8,038			(489	)

Net cash provided by operating activities		119,490			125,318

Cash flows from investment activities
Purchases of property, equipment and information systems		(10,456	)		(7,326	)
Proceeds from sale of property, equity and information systems		—			217
Purchases of available for sale investments		(242,673	)		(503,162	)
Proceeds from sales and maturities of available for sale investments		396,338			509,128

Net cash provided by (used in) investing activities		143,209			(1,143	)

Cash flows from financing activities
Decrease in capital lease obligations		(1,017	)		(788	)

Net cash used in financing activities		(1,017	)		(788	)

Net change in cash and cash equivalents		261,682			123,387
Cash and cash equivalents at beginning of period		697,518			487,431

Cash and cash equivalents at end of period	$	959,200		$	610,818

Supplemental disclosure:
Income taxes paid	$	3,848		$	9,522

See notes to consolidated financial statements.

WellChoice, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

March 31, 2004

(Dollars in Thousands)

1. For-Profit Conversion and Initial Public Offering

WellChoice, Inc. (“WellChoice” or the “Company”) was formed in August 2002 as a Delaware Corporation to be the for-profit parent holding company for Empire HealthChoice, Inc. (“EHC”) following the conversion discussed below. WellChoice owns a Health Maintenance Organization (“HMO”) and two health insurance companies through its investment in WellChoice Holdings of New York, Inc. (“WellChoice Holdings”).

On November 7, 2002, EHC converted from a not-for-profit health service corporation to a for-profit accident and health insurer under the New York State insurance laws and the converted EHC issued all its authorized capital stock to the New York Public Asset Fund (the “Fund”) and The New York Charitable Asset Foundation (the “Foundation”). The Fund and the Foundation then received their respective shares of WellChoice common stock in exchange for the transfer of all the outstanding shares of EHC to WellChoice Holdings. Pursuant to the plan of conversion, WellChoice issued 82,300,000 shares to the Fund and the Foundation and completed an initial public offering of 19,199,000 shares of common stock, consisting of 18,008,523 shares that were sold by the Fund and Foundation and 1,190,477 newly issued shares of common stock sold by WellChoice. After deducting the underwriting discount, net proceeds to WellChoice were approximately $27,990.

2. Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for fair presentation have been included. Operating results for the three month period ended March 31, 2004 are not necessarily indicative of results that may be expected for the year ending December 31, 2004.

WellChoice, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Unaudited)

(Dollars in Thousands)

2. Basis of Presentation (continued)

For further information, refer to the consolidated financial statements and footnotes thereto included in the WellChoice’s Annual Report on Form 10-K for the year ended December 31, 2003 (File No. 001-31513), on file with the Securities and Exchange Commission.

Certain 2003 amounts have been reclassified to conform to the 2004 presentation.

The following table represents total other comprehensive income for the three months ended March 31, 2004 and 2003:


	Three months ended March 31
	2004		2003
Net income	$	59,236	$	47,741
Other comprehensive income (loss), net of tax:
Unrealized gain (loss) on securities available-for-sale during the three months ended March 31, net of tax of $3,918 and $(473), respectively		6,772		(877	)

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