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, 2005
OR
| ¨ | 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 Incorporation or Organization) |
(I.R.S. Employer Identification Number) |
| 11 WEST 42ND 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. 84,061,328 shares of common stock, $0.01 par value, and one share of Class B common stock, $0.01 par value per share, as of March 31, 2005.
Confidential draft dated 04-19-05
WellChoice, Inc and Subsidiaries
| Page | ||||
| PART I FINANCIAL INFORMATION |
3 | |||
| Item 1. |
Financial Statements |
3 | ||
| Consolidated Balance Sheets at March 31, 2005 (Unaudited) and December 31, 2004 | 3 | |||
| Consolidated Statements of Income for the Three Months Ended March 31, 2005 and 2004 (Unaudited) | 5 | |||
| Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2005 and 2004 (Unaudited) | 6 | |||
| Notes to Consolidated Financial Statements (Unaudited) | 7 | |||
| Report of Independent Registered Public Accounting Firm | 22 | |||
| Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
23 | ||
| Item 3. |
42 | |||
| Item 4. |
43 | |||
| PART II OTHER INFORMATION |
44 | |||
| Item 1. |
44 | |||
| Item 2. |
47 | |||
| Item 6. |
48 | |||
| 50 | ||||
| 51 | ||||
2
WellChoice, Inc. and Subsidiaries
Consolidated Balance Sheets
| March 31, 2005 |
December 31, 2004 | |||||
| (Unaudited) | ||||||
| (In thousands, except share and per share data) | ||||||
| Assets |
||||||
| Investments: |
||||||
| Fixed maturities, at fair value (amortized cost: $1,470,127 and $1,374,592) |
$ | 1,442,276 | $ | 1,361,832 | ||
| Marketable equity securities, at fair value (cost: $43,545 and $43,774) |
52,801 | 53,430 | ||||
| Short-term investments |
202,686 | 170,577 | ||||
| Other long-term equity investments |
19,102 | 18,624 | ||||
| Total investments |
1,716,865 | 1,604,463 | ||||
| Cash and cash equivalents |
773,276 | 758,518 | ||||
| Total investments and cash and cash equivalents |
2,490,141 | 2,362,981 | ||||
| Receivables: |
||||||
| Billed premiums, net |
105,944 | 107,575 | ||||
| Accrued premiums |
331,674 | 340,838 | ||||
| Other amounts due from customers, net |
118,196 | 117,180 | ||||
| Notes receivable, net |
12,867 | 12,665 | ||||
| Accrued investment income |
13,411 | 10,763 | ||||
| Miscellaneous, net |
51,802 | 73,195 | ||||
| Total receivables |
633,894 | 662,216 | ||||
| Property, equipment and information systems, net of accumulated depreciation |
105,101 | 107,120 | ||||
| Prepaid pension expense |
61,767 | 60,682 | ||||
| Deferred taxes, net |
146,285 | 157,723 | ||||
| Other |
46,475 | 39,377 | ||||
| Total assets |
$ | 3,483,663 | $ | 3,390,099 | ||
See notes to consolidated financial statements.
3
WellChoice, Inc. and Subsidiaries
Consolidated Balance Sheets
| March 31, 2005 |
December 31, 2004 |
|||||||
| (Unaudited) | ||||||||
| (In thousands, except share and per share data) |
||||||||
| Liabilities and stockholders’ equity |
||||||||
| Liabilities: |
||||||||
| Unpaid claims and claims adjustment expense |
$ | 711,564 | $ | 678,814 | ||||
| Unearned premium income |
103,506 | 138,722 | ||||||
| Managed cash overdrafts |
192,578 | 215,357 | ||||||
| Accounts payable and accrued expenses |
80,394 | 67,405 | ||||||
| Advance deposits |
196,970 | 160,553 | ||||||
| Group and other contract liabilities |
93,624 | 99,349 | ||||||
| Postretirement benefits other than pensions |
144,539 | 144,577 | ||||||
| Obligations under capital lease |
42,791 | 44,004 | ||||||
| Other |
171,744 | 158,993 | ||||||
| Total liabilities |
1,737,710 | 1,707,774 | ||||||
| Stockholders’ equity: |
||||||||
| Common stock, $0.01 par value, 225,000,000 shares authorized; shares issued and outstanding 2005— 84,061,328; 2004—84,047,152 |
841 | 840 | ||||||
| Class B common stock, $0.01 par value, one share authorized, issued and outstanding |
— | — | ||||||
| Preferred stock, $0.01 par value, 25,000,000 shares authorized; none issued and outstanding |
— | — | ||||||
| Additional paid-in capital |
1,275,496 | 1,275,160 | ||||||
| Retained earnings |
479,638 | 408,759 | ||||||
| Unearned restricted stock compensation |
(7,559 | ) | (9,904 | ) | ||||
| Accumulated other comprehensive (loss) income |
(2,463 | ) | 7,470 | |||||
| Total stockholders’ equity |
1,745,953 | 1,682,325 | ||||||
| Total liabilities and stockholders’ equity |
$ | 3,483,663 | $ | 3,390,099 | ||||
See notes to consolidated financial statements.
4
WellChoice, Inc. and Subsidiaries
Consolidated Statements of Income
(Unaudited)
| Three months ended March 31 | |||||||
| 2005 |
2004 | ||||||
| (In thousands, except share and per share date) | |||||||
| Revenue: |
|||||||
| Premiums earned |
$ | 1,385,050 | $ | 1,245,499 | |||
| Administrative service fees |
141,355 | 121,209 | |||||
| Investment income, net |
17,799 | 14,104 | |||||
| Net realized investment gains |
617 | 3,527 | |||||
| Other (expense) income, net |
(104 | ) | 203 | ||||
| Total revenue |
1,544,717 | 1,384,542 | |||||
| Expenses: |
|||||||
| Cost of benefits provided |
1,197,241 | 1,062,865 | |||||
| Administrative expenses |
233,155 | 224,499 | |||||
| Total expenses |
1,430,396 | 1,287,364 | |||||
| Income before income taxes |
114,321 | 97,178 | |||||
| Income tax expense |
43,442 | 37,942 | |||||
| Net income |
$ | 70,879 | $ | 59,236 | |||
| Basic net income per common share |
$ | 0.85 | $ | 0.71 | |||
| Diluted net income per common share |
$ | 0.84 | $ | 0.71 | |||
| Shares used to compute basic net income per common share based on weighted average shares outstanding |
83,675,327 | 83,491,767 | |||||
| Shares used to compute diluted net income per common share based on weighted average shares outstanding |
84,633,825 | 83,753,744 | |||||
See notes to consolidated financial statements.
5
WellChoice, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
| Three months ended March 31 |
||||||||
| 2005 |
2004 |
|||||||
| (In thousands) | ||||||||
| Cash flows from operating activities |
||||||||
| Net income |
$ | 70,879 | $ | 59,236 | ||||
| Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||
| Depreciation and amortization |
9,750 | 9,604 | ||||||
| Net realized gain on sales of investments |
(617 | ) | (3,526 | ) | ||||
| Provision (credit) for doubtful accounts |
2,422 | (1,009 | ) | |||||
| Accretion of discount, net |
1,157 | 112 | ||||||
| Equity in earnings of other long-term equity investments |
(251 | ) | (556 | ) | ||||
| Deferred income tax expense |
16,786 | 15,539 | ||||||
| Other |
(1,084 | ) | (1,640 | ) | ||||
| Changes in assets and liabilities: |
||||||||
| Billed and accrued premiums receivables |
8,752 | (21,834 | ) | |||||
| Other customer receivable |
(1,169 | ) | 14,987 | |||||
| Notes receivable |
(202 | ) | 142 | |||||
| Accrued investment income |
(2,648 | ) | 2,815 | |||||
| Miscellaneous receivables |
20,741 | (7,328 | ) | |||||
| Other assets |
(7,098 | ) | (4,205 | ) | ||||
| Unpaid claims and claims adjustment expenses |
32,750 | 16,183 | ||||||
| Unearned premium income |
(35,216 | ) | (27,996 | ) | ||||
| Managed cash overdrafts |
(22,779 | ) | (32,424 | ) | ||||
| Accounts payable and accrued expenses |
14,171 | 17,967 | ||||||
| Advance deposits |
36,417 | 39,723 | ||||||
| Group and other contract liabilities |
(5,726 | ) | 35,866 | |||||
| Postretirement benefits other than pensions |
(38 | ) | (204 | ) | ||||
| Other liabilities |
12,596 | 8,038 | ||||||
| Net cash provided by operating activities |
149,593 | 119,490 | ||||||
| Cash flows from investment activities |
||||||||
| Purchases of property, equipment and information systems |
(6,803 | ) | (10,456 | ) | ||||
| Purchases of available for sale investments |
(316,690 | ) | (242,673 | ) | ||||
| Proceeds from sales and maturities of available for sale investments |
189,299 | 396,338 | ||||||
| Net cash (used in) provided by investing activities |
(134,194 | ) | 143,209 | |||||
| Cash flows from financing activities |
||||||||
| Decrease in capital lease obligations |
(1,213 | ) | (1,017 | ) | ||||
| Proceeds from exercise of stock options and employee stock purchase plan, net of treasury stock repurchases |
125 | — | ||||||
| Excess tax benefits on stock compensation |
447 | — | ||||||
| Net cash used in financing activities |
(641 | ) | (1,017 | ) | ||||
| Net change in cash and cash equivalents |
14,758 | 261,682 | ||||||
| Cash and cash equivalents at beginning of period |
758,518 | 697,518 | ||||||
| Cash and cash equivalents at end of period |
$ | 773,276 | $ | 959,200 | ||||
| Supplemental disclosure: |
||||||||
| Income taxes paid |
$ | 4,755 | $ | 3,848 | ||||
See notes to consolidated financial statements.
6
WellChoice, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Unaudited)
(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 parent holding company for Empire HealthChoice, Inc. (“EHC”) following its conversion to a for-profit company. 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.
On June 21, 2004, the Fund sold 9,075,000 shares of common stock in a secondary public offering. The Company did not receive any proceeds from the offering. At March 31, 2005, the Fund owned 52,001,903, or 61.9%, of the shares of common stock issued and outstanding.
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, 2005 are not necessarily indicative of results that may be expected for the year ending December 31, 2005.
For further information, refer to the consolidated financial statements and footnotes thereto included in the WellChoice’s Annual Report on Form 10-K (File No. 001-31513), filed with the SEC for the fiscal year ended December 31, 2004.
7
WellChoice, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Unaudited)
(Dollars in Thousands)
2. Basis of Presentation
Certain 2004 amounts have been reclassified to conform to the 2005 presentation.
Total comprehensive income for the three months ended March 31, 2005 and 2004 is $60,946 and $64,671, respectively.
3. Recent Accounting Pronouncements
In December 2004, the FASB issued SFAS No. 123 (revised 2004), “Share-Based Payment” (“SFAS 123R”), which replaces SFAS No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”) and supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees.” SFAS 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values, beginning with the first interim or annual period after June 15, 2005, with early adoption encouraged. The pro forma disclosures previously permitted under SFAS 123 will no longer be an alternative to financial statement recognition. In April 2005, the SEC adopted a new rule amending the compliance dates to phase-in the implementation of SFAS 123R. The SEC requires the fair value method of accounting for share-based payments to employees no later than the beginning of the first fiscal year beginning after June 15, 2005. The Company is required to adopt SFAS 123R in the first quarter 2006, beginning January 1, 2006. The Company anticipates adopting the prospective method and expects that the adoption of SFAS 123R will have an impact similar to the current pro forma disclosure for existing options under SFAS 123. In addition, the Company does not expect that the expense associated with the future grants derived from the fair value model selected, will have a material adverse effect on the Company’s financial position, results of operations or cash flows.
4. Capital Stock
Stock Incentive Plan
The Company’s incentive plan provides for the grant of stock options, stock appreciation rights, restricted stock awards, restricted stock unit awards and cash awards. On March 26, 2003, the Company’s Board of Directors adopted the 2003 Omnibus Incentive Plan (the “2003 Incentive Plan”). In accordance with the 2003 Incentive Plan, the maximum of 6,250,000 shares of common stock may be issued, of which, no more than 1,875,000 shares may be issued under grants of restricted stock awards and restricted stock unit awards. A maximum of 500,000 shares may be issued to non-employee directors. Awards are granted by the Compensation Committee of the Board of Directors. Options vest and expire over terms set by the Committee at the time of grant.
8
WellChoice, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Unaudited)
(Dollars in Thousands)
4. Capital Stock (continued)